Spinouts managed to raise substantial amounts in the first quarter before the global crisis hit
The world may have found itself in the most unusual times, but when it came to university venturing even March – when lockdowns started to be implemented in countries across Europe and US states such as California and New York issued shelter in place orders – none of the effects of the pandemic and stock market crash appear to have made a dent.
In fact, the amount of money that was put into spinouts actually continued its month-on-month increase from $834m in January and $1.1bn in February to nearly $1.6bn in March. The number of deals may have dropped slightly between February and March – from 73 to 62 – but this was actually still at a comparative level to March 2019.
Total investments in the first quarter were up nearly 30% year-on-year, from $2.7bn in the first quarter of last year to $3.5bn in the three months just gone. Similarly, there was a 10% increase in dealflow, from 169 in the first quarter of 2019 to 186 in the first quarter of 2020.
It remains to be seen whether this momentum can be maintained through the second quarter, when lockdowns will start to bite properly. Many of the transactions closed towards the end of March and even early April will have been deals near completion of the due diligence process. It is much less certain what will happen now that entrepreneurs and investors alike are working from home, with no networking events to attend (a gap we are aiming to fill through the GCV Digital Forum on June 3 and 4) and with potential customers also tightening their purses or simply not having access to products anymore because stores have closed.
There are a few areas we can reasonably expect to come out well out of the current crisis: healthcare, where many spinouts are working on potential vaccines and tests, media, a sector that has seen a boom as consumers are stuck at home around-the-clock, and education, as school are closed and teachers and parents are looking for ways to keep children engaged.
The spinouts raising the three largest rounds in the first quarter have loftier ambitions, however. SambaNova Systems, a US-based artificial intelligence system developer co-founded by Stanford University faculty, received $250m in series C funding in late February led by funds and accounts managed by investment firm BlackRock.
Intel Capital and GV, respective subsidiaries of chipmaker Intel and conglomerate Alphabet, also took part in the round, as did venture capital firms Walden International, WRVI Capital and Redline Capital.
SambaNova was formed to bring cutting-edge AI technology to products that can be utilised by a wider range of organisations. Its lead product is an optimisable platform that combines hardware and software to run compute and data-intensive applications across a range of systems.
Lilium Aviation was luckier than most to close its $240m funding round in March: the Technical University of Munich spinout is working on technology that is somewhat useless right now and may have struggled to attract capital in a few weeks’ time. The company is working on a five-seater vertical take-off and landing vehicle called the Lilium Jet which is intended for urban mobility. The $240m investment was led by internet group Tencent, and also included venture capital firm Atomico, investment firm Freigeist Capital and asset management group LGT.
And UK-based machine intelligence technology developer Graphcore raised $150m in February to lift a series D round already backed by Ahren Innovation Capital, a patient capital fund backed by University of Cambridge researchers, to $350m. The capital was supplied by Baillie Gifford, M&G Investments and Merian Chrysalis, Mayfair Equity Partners and unnamed existing backers, increasing the company’s valuation from $1.7bn to $1.95bn in the process. The company was spun out of Xmos, itself a semiconductor technology spinout of University of Bristol, in 2016. Its intelligence processing unit is specifically designed for AI. It has also built a software platform, Poplar, to facilitate machine learning applications.
When it came to exits, there was a noteworthy 122% increase year-on-year, from $599m in the first quarter of last year to $1.3bn generated in the first quarter of 2020. That is despite a relatively small increase of 11 exits to 14 exits.
The largest exit belonged to PvP Biologics, a US-based coeliac disease drug developer spun out of University of Washington (UW), that was acquired by pharmaceutical firm Takeda in a deal sized at up to $330m. PvP was founded in 2011 out of a project submitted for UW’s Genetically Engineered Machine contest that involved it using software designed by professor of biochemistry David Baker to find an enzyme able to break down gluten in the stomach before it damages the intestine. Takeda’s decision to buy the spinout followed a $35m investment in 2017 that gave it such an option.
Amid the market turmoil, it is easy to forget that not so long ago companies were still celebrating initial public offerings.
The biggest of the past quarter was that of Revolution Medicines, a US-based cancer therapy developer based on research from multiple institutions, which raised $238m when it listed on Nasdaq Global Market in February. Investors achieving an exit through the listing included pharmaceutical company Sanofi.
Revolution Medicines’ IPO was already a success on the morning it happened: the company priced its shares at the top of a $15 to $17 range that had been upsized from the IPO’s original $14 to $16 range. The company also increased the number of shares in the offering from 10 million to 14 million. The shares rose 70% to close at $28.90 on their first day of trading, valuing Revolution at just under $1.65bn. At one point, shares hit a $37.08 high, but even at the time of writing shares are trading at $23.40 – more than the IPO price even as everything around the spinout has been crashing. In fact, even its lowest price to date has still been $17.34.
Passage Bio, a US-based genetic medicines developer commercialising University of Pennsylvania research, also had a successfully opening on the public market in March when the spinout increased its initial public offering to more than $248m after underwriters exercised their over-allotment option in full. The company had raised an initial $216m in proceeds after issuing 12 million shares priced at $18 at the end of February, an increase on the $125m it had originally hoped to raise. It listed on the Nasdaq Select Global Market under the symbol PASG. Passage Bio’s shares dropped as far as $8.09 during the crash, but it is trading again at $16.99 as of the time of writing as shares recover.
Will we see many IPOs during the second quarter? That is doubtful. However, the ecosystem may experience a pick-up in mergers and acquisitions as companies try to find ways to stay relevant and cope with an economic downturn the scale of which the world has not seen in a century.
And yet, as the world suddenly wakes up to the importance of listening to the experts, spinouts may be the companies to do best. They may very well find themselves keen to push their link to academic institutions in a bid to underline that there are years of scientific research behind their products and services.
It may seem weird to predict a golden age of spinouts to come out of a crisis such as this one, but if a global upheaval is not the time to dream of a better world we are truly wasting an opportunity.
