Spinouts are growing apace, with companies such as Durham University’s Applied Graphene Materials and Edinburgh University’s PureLiFi hitting mainstream news. In the past few years we have witnessed a surge in the number of spinouts coming to market.

In the UK alone between 2012 and 2013, intellectual property (IP) developed by academic institutions brought in a total of £87m ($110m) and 955 patents were granted. As well as benefiting universities, businesses and investors, the success of spinouts is making an impact on regional and economic development too. On the back of this success, more and more universities and investors are looking into the possibility of spinouts of their own. 

When a spinout is successful the results can be spectacular. Only a couple of years ago, Oxford University Innovation sold its computer games company, NaturalMotion for £338m. But as all those in the spinout industry know, the path to success can be hard work and fraught with pitfalls. As such, many potentially promising companies fail.

One of the main difficulties many young spinouts can face is an unrealistic expectation as to the precise deal that is on offer. This is because the three main players within a spinout – the university, the academic founders and the investors – invariably approach the commercial negotiations with different objectives and expectations. Agreeing common objectives at the outset is crucial to help avoid serious problems down the line. Just as crucial is an understanding of the differing pressures and perspectives of each party.

Universities often find themselves having to balance conflicting objectives – on the one hand wanting to exploit the commercial opportunities their research offers, research that, in many cases, will have been publicly funded, while on the other maintaining their commitment to further research and education.  

The marriage between business and academia is not always an easy one and can too easily break down, so finding the right match between investors and university is of paramount importance if a new spinout is both to survive and thrive.

Universities, whose primary focus is teaching and the dissemination of ideas, might not always be in a position to grant the type of rights a company might want. Spinouts are established to develop a new technique or technology. The IP involved is usually a patent, associated know-how and, in some cases, data – for example clinical trial information that is not public. Where the technology includes software, the IP may include copyright.

Even if some of the technology is patented or the subject of patent applications, the spinout may still wish to keep much of the IP secret, both to protect unpatented know-how and to reduce the risk of competitors stealing ideas before the product is launched. The founders and investors will, therefore, want robust confidentiality commitments from the university, which are key if their new business is to succeed. However, a university may resist strong confidentiality obligations, arguing that it needs the right to use the technology for teaching and research.  

The academics find themselves with conflicting interests too. There is often a divergence between the academic’s need to publish, and the company’s need to keep patentable know-how secret in order to secure patent protection. A new product could take years to come to market, during which time the academics may not want to be prevented from publishing research papers that relate to the new business.

The manner in which the IP is transferred to the new company can also be the subject of disagreement. The new company and its founders are likely to want either an outright assignment of the IP or an exclusive licence to use the IP. Both these options offer obvious attractions to would-be investors and distributors, as well as potentially allowing the new company to charge higher prices for its product, which can help recoup initial financial outlay. Conversely, an assignment or exclusive licence can limit the university’s ability both to carry out research on the technology and to share that technology. From the outset, the commercialisation needs to be handled in a way that manages these conflicting demands.

Disagreements can also arise between the academic founders and the other owners of the business. Business owners are typically focused on getting the product to market as quickly as possible, whereas academics can be more focused on perfecting the product itself. Or, indeed, they may want to take the product in a different direction. Should this cause a split, the investors and other business owners not only risk losing the academic founders who have the expert knowledge on which their spinout depends, but also run the risk of the academic founders setting up a competing business.

For this reason, investors will often secure a promise from academic founders that they will not compete with the spinout company. Like so much concerning setting up a spinout, this is another area which has to be handled with care if it is not to become a major issue as the young business starts to progress.

A non-compete restriction which prevents academic founders from having competing interests can lead to some academics feeling that their academic freedoms are being curtailed. Moreover, the covenants do not apply to founders only while they are involved in the business, they often extend for months or even years after a founder leaves the business, preventing them from setting up or being involved in a competing business in that time. The reason for this is that the founder’s knowledge of the technology and the market and other skills developed through running the spinout puts them in a good position to compete with the company.

Business owners need to tread carefully here. A non-compete restriction should apply only for a limited time and should be no wider than is necessary to protect the legitimate business interests of the spinout. If it is too broad it will be an unlawful restraint of trade. As with all else, finding a balance that reflects the interests and ambitions of all parties is key.

Another common problem is the founders’ lack of business expertise. Last year the UK’s Enterprise Research Centre (ERC) reported that in 20% of spinouts, the founders had no business expertise. As long as the right advice and guidance is on offer, this lack of experience should not become an issue. What, perhaps, is more worrisome was their finding that the average time commitment for founders was 20%. As the ERC itself pointed out, it is impossible for a new venture to establish itself on the effort of one day a week. There is often an underestimation as to the amount of time and effort it takes to get a spinout off the ground. Andrea Alunni, seed investment manager of Oxford University Innovation, freely admits that “the amount of work that goes into setting up a new company to flourish and succeed is enormous”. 

When it comes to the launch of any company, spinout or not, everyone wants to do a good deal. Plainly, no one sets out on this challenging path wanting a bad deal in place, but the excitement and enthusiasm that often accompanies the launch of a new spinout can cause people to rush into something that, with considered thought, may not be best practice. Some seasoned investors, such as IP Group’s chief financial officer Greg Smith, who last year raised £128m for its investments, have learnt to fail well. “We fail early, fail cheaply and fail professionally,” he admitted. 

But with detailed and considered planning at the earliest stage with an understanding among all parties as to the deal that is on offer, there is no reason why ground-breaking research cannot be transformed into a ground-brea
king company with global appeal.   

Action list:

  • Agree the long-term direction of the business.
  • Secure IP transfer that suits the needs of the spinout, investors and founder academics.
  • Obtain appropriate confidentiality commitments from the academic institution.
  • Secure appropriate non-compete covenants from the founders.
  • Ensure sufficient business expertise is available.