A new report conducted by Library House on behalf of the BVCA, called Creating Success from University Spin-outs, looked at how a technology can spin out and survive commercially, something that a significant number of them fail to do. A lack of commercial nous, lack of experienced entrepreneurs and managers, a self-interested motivation on behalf of the universities; all are reasons said to be behind the high number of spin-outs failing.
Numerous press reports came out following the report’s release, with the attention being focused on the observation by the BVCA that some technology was being spun out too early, thereby leading to headlines like the Telegraph’s ‘University spin-outs “wasting money”‘. No one in the article is quoted as saying “wasting money”, nor was it said at the press conference or the report, so the more important points were overlooked, important points such as the need for spin-outs to have good quality managers in place with experienced entrepreneurs.
Much is made of a funding gap at the early end of the venture market, but many are now arguing that too much is being made of this and that it might not actually even be true. Andrew Newland, founder of Angle, says the major issue is a “management gap” and argues this is significantly more of a factor in failing spin-outs than the perceived equity gap, which he believes doesn’t exist. “There are not enough good, high-calibre management teams around. There’s a need for managers who understand the language of both science and business.”
The BVCA report’s respondents included 25 technology transfer offices (TTO), 42 VCs and a random sample of 60 tech spin-outs, and at the top of the list of what they found the most challenging to deliver was hiring “exceptional management to execute the business plan.” The second was “identifying management with the required skills and level of experience.”
The question is do they exist and, if so, how can university spin-outs attract and retain them? Newland says: “There are quite a lot of these people around but they can’t work on university spin-outs because the said individuals will be in a job where they are earning good money and will have a number of financial commitments, mortgage etc, and therefore to leave their job to go and join a university spin-out is a potentially very risky thing to do. A sensible person would ask to see the business plan, the market research and the intellectual property rights, but all this often isn’t available because they lack a good management team.”
This vicious circle also includes VC funding. Spin-outs can’t attract the best managers because they don’t have the money, and VCs won’t give them money because they lack a good management team. The chances of a company succeeding are around one in three. Angle reviewed 105 possible investments last year and set up just four companies.
How Angle addresses this risk gap is by employing high-quality managers to the firm itself, so they are guaranteed a salary, and then they are put to work, initially, on three spin-outs. This way their expertise is put to use but the risk for them, personally, is absent.
One possible criticism of the report is that it places most of the responsibility for hiring managers on the shoulders of the TTOs, which, as Simon Acland, managing director of Quester, says, should be the job of the VC. “We spend a lot of time reviewing managers,” he says. “We have an alliance with a headhunter, and we have a database of entrepreneurs that we have interviewed who we know are interested in doing something else.”
The argument here is that it is up to the venture capitalist to identify which technology is both innovative and can fill a space in the market, and then help that technology to spin out by not only supplying it with capital but also by installing an expert management team, something which Acland says is what Quester aims to do on its companies.
Quester has three university dedicated funds, ISIS College Fund, which is a six-year-old fund investing in Oxford University spin-outs; Sulis Seedcorn Fund, also six years old, targets companies spun out of Bath, Bristol and Southampton Universities; and Lachesis Fund, a five-year-old fund investing in companies spun out from the Universities of Nottingham, Leicester, Loughborough, De Montfort and Nottingham Trent. This is nine universities in all, and the funds represent approximately 20% of the UK academic sector by research expenditure.
Venture capitalists do need to take more responsibility for the failures of spin-outs. A trend over the last year has been that of more and more VC firms shying away from early stage/seed investing and focusing on later stage investments. While this may be a perfectly natural development, on the basis that VCs need to make money quickly and the fact that firms need to do the same amount of due diligence whether they are making a £500,000 investment or a £5m one, it is rather short-sighted. Without early stage investment eventually they are going to run out of later stage companies to back.