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Turning university research into a viable company requires a unique idea, time and an ability to traverse the “valley of death”.
The “valley of death” – or the point when a product or idea requires a jump in the level of investment in order to become viable – is the make-or-break moment when spinning companies out of university research.
Academic institutions are trying to make the journey a little less treacherous. In May, Cambridge became the first university to announce plans for a £1m investment fund backed by the government’s Seed Enterprise Investment Scheme, which provides investors with a large tax break.
Meanwhile earlier this year, the technology transfer arms of Edinburgh, Manchester and University College London combined with the venture capital group MTI to set up the Orion Fund, which aims to raise £150m to fund spinouts.
The funding of spinout companies in the UK inspires much hand-wringing from government. “The government is keen to focus on spinout activity as it gives you numbers,” said Anne Dobrée, head of seed funds at Cambridge Enterprise, the university’s technology transfer arm. “It’s something they can point to that’s having an impact.”
However, the number of spinouts from higher education institutions fell to 233 in 2011 from 273 the previous year, according to the latest HE Business and Community Interaction Survey, although the quality of these small companies is better, according to investors, as management is more aware of the need for a strict business plan and clear exit strategy for early investors.
“People underestimate what it takes to turn an idea into something useful,” says Eric Yeatman, the chief executive of Microsaic, a manufacturer of miniature mass spectrometers, which was spun out of Imperial College in 2001.
It took five years from Microsaic’s first fundraising round in 2006 before it had a product ready to take to market. “We’ve been through that deathly valley and come out the other side,” says Professor Yeatman.
Once the “valley of death” has been traversed, however, things can look up quickly: Microsaic announced a deal to provide 100 units to an international supplier of laboratory equipment in May.
Microsaic is one of many companies to have received early support from Imperial College’s former enterprise arm, Imperial Innovations. Now independent from the university, the technology investment group was listed on London’s Aim index in 2006 and currently has an investment war chest of more than £100m.
“Ten years ago, universities were spinning out companies, but there was an absence of experienced entrepreneurial management,” says Susan Searle, chief executive at Imperial Innovations. “What has happened over the past 10 years is that the management talent pool has grown.”
While the management pool has increased considerably, the investment pool still remains tight and the competition for funding has grown more fierce. “The IPO avenue for exiting has pretty much gone,” says Alastair Kilgour, partner at Parkwalk Advisors, the technology investment group.
“Companies have had to have more robust business plans to make themselves attractive [to investors]. They are having to run themselves as real businesses,” explains Mr Kilgour.
Some UK universities are, however, looking at other options to get their research into the commercial sector.
Universities including Glasgow, Bristol and King’s College, are sidestepping the spinout process by leasing out innovative but difficult to develop intellectual property to companies for free, through programmes such as Easy Access IP.
“There’s a proportion of intellectual property that might be quite early stage and risky and frankly won’t make it through the ‘valley of death’, but is still useful and still has value,” says Alison Campbell, who works as an ambassador for Easy Access IP, which manages free-to-access portfolios of intellectual property.
“Universities will keep the ones that have a very obvious route to market or where they’re able to put some more resources in to move it further forward – but they can’t do that for everything,” explains Dr Campbell. There is an easy way of surviving the “valley of death”, then: don’t cross it.