Spun from bench to boardroom

Academics are making their mark on the business world, profiting from their ideas.

There is a new breed of chemistry entrepreneur on the scene, creating new jobs, providing money for cash-starved chemistry departments and bringing new products and services to the world. These adventurous scientists are developing the small, innovative companies that are increasingly being turned into business success stories. It can be a daunting pursuit, but as many have discovered, with the right idea, it’s well worth the effort.  

The spin-out of companies from universities is a relatively new phenomenon. There has long been a clear delimitation between industry and academia. If an academic researcher discovered something of industrial relevance they would send it out as a paper or patent, hoping that a company would pick up on it, and then move on to the next academic challenge.  

’The barriers started to break down in the 1980’s,’ explains Andrew Lockett, professor of strategy and entrepreneurship at Nottingham University Business School, UK. ’Government restrictions on funding meant universities increasingly looked to industry for research income. This brought the two groups together.’  

In 1993 the UK Government published Realising our potential: a strategy for science, engineering and technology, an ambitious program to harness science, engineering and technology to increase the competitiveness of the nation’s businesses. Similar reports were issued in other countries, and laws started to change. ’The social contract between universities and society was being redefined,’ says Lockett. ’Universities began to recognise the opportunity to create wealth through spin-out companies.’ He adds, ’there has been a real cultural change over the last 10 to 15 years. There is an increasing acceptance that the commercialisation of intellectual property (IP) is a part of the university mission. Policy makers are starting to view universities as engines of economic and industrial growth in their regions.’ 

In the 1990s, business author Vijay Jolly and others described a pattern of funding for a typical young company (see graph). Initially an innovator develops his or her idea using their savings, or with the support of friends and family. The idea may catch the attention of a business angel - an individual who provides capital, usually in exchange for ownership equity. The angel helps the fledgling company to turn the corner and head towards the black. As the company approaches profitability it becomes attractive to the somewhat more risk-averse venture capital (VC) funds, and to traditional sources of financing such as banks. Finally the company is floated on the stock market, raising capital from an initial public offering (IPO) for its shares, or is purchased by a larger company. Everyone makes a lot of money.  

Bridging the gaps 

There are problems with this model - one of the most fundamental being the significant gap between the ’three Fs’ (friends, families and fools), and even the bravest members of the investment community. This is a knowledge gap as well as a financial gap - the would-be entrepreneur must learn to communicate their vision to potential investors.  

John Goodger is the director of the Great Eastern Investment Forum, a UK business angel network based in Cambridge. ’It’s critical that someone approaching an angel has a good business plan,’ he says. ’The story matters more than the numbers. You need to be able to convey your idea in the first two sentences and bring a solution to an identified problem.’ He advises care when selecting your business angel. ’Find smart money, money with expertise,’ he says. ’Someone with business experience who can be your champion - that’s a real angel.’ 

Attracting the support of a VC requires more time, effort, and money. You need to obtain a management team with business experience, ideally including someone with prior spin-out and sales experience. The team needs to be honest, open to coaching, and passionate about their business. David Bott, an advisor to the FirstVentures VC fund, UK, has sat through many pitches. ’You soon learn to look the team in the eyes and work out if they have it,’ he says. ’Then you get into the product and the market need it addresses. Only then do you think about the technology.’ To be attractive, a company should look towards a profitable exit for investors in the 3-5 year time scale (an IPO or sale). 

Many university spin-out companies don’t make it across the gap. They never develop a convincing business plan or catch the eye of an angel or VC group. A plethora of government, regional, and university-based organisations has sprung up in recent years to provide advice, and sometimes more tangible assistance such as money or space in an industry incubator. 

Malcolm Butler is the Micro- and Nano- Technology manager at Yorkshire Forward, UK. ’We have a strong university base, with Sheffield, Leeds and York universities,’ he explains. ’Yorkshire Forward provides development money for spin-outs through our White Rose Technology seed fund. We also provide business education to academic researchers.’ A particular example is their Bioscience Enterprise Fellows scheme, which buys out part of the academic’s salary, enabling them to spend half a day per week learning how to create business plans and form effective management teams.  

But training, advice and seed funding, will not carry a spin-out to success unless the initial idea is good, and meets a real need at a realistic price. As pointed out in the March 2005 RSC report Chemical science spin-outs from UK universities - review of critical success factors, there may be an element of ’spin’ about some spin-outs. ’Some are vehicles on which to focus further research rather than genuine attempts to set up companies,’ conclude David Fyfe and Rodney Townsend, the authors of the report.  

Material success 

Sheila MacNeil, professor of cell and tissue engineering at Sheffield University, UK, and her colleague Robert Short, professor of material and biomaterial chemistry, had a good idea. They created a new product for treatment of burns and chronic wounds. A small skin biopsy is taken from the patient and the cells are cultured in a special polymer film that promotes cell growth and subsequent release when exposed to the wound. A flexible backing polymer provides mechanical stability. The resulting product, Myskin, has been successful in clinical trials, and their spin-out company, CellTran, has recently raised ?2.7 million in VC funding.  

CellTran’s initial funding came from the White Rose Technology seed fund. ’It was a great start to the company,’ says MacNeil. ’If you have IP, research creativity and energy the regional development funds can provide enough money to get you through the first year to 18 months. But that isn’t enough to take you to a place where you have a full time CEO and are attractive to the VC community. There is still a gap,’ she explains. CellTran was expecting follow-on funding from Yorkshire Forward, but it never materialised. ’We were very grateful when the Wellcome Fund provided mid-phase funding. We received half a million from them, which we stretched like crazy to survive until we received VC funding,’ she recalls. ’This is something we wanted to do. We developed a better way to heal wounds which, if it had stayed in the university laboratory, could have benefited a few patients. In the commercial world it will benefit far more.’ 

’It’s been a positive experience, but a white knuckle ride at times,’ she admits. ’It requires very different skills to those you use in an academic career. You need to build the business team and learn how to make business presentations. I made so many presentations to VC funds before we got funding - they weren’t prepared to fund us until we had clinical trial results and a full time CEO.’ 

One of MacNeil’s challenges in creating her team was identifying people with the commercial expertise to grow a young company. The 2005 RSC report identified the same problem, concluding that this skills shortage leads to a lack of experienced business management in spin-outs, significantly undermining their prospects of success. The RSC is currently working on a study aimed at identifying the drivers for success in small and medium chemical companies. ’Well over a third of companies are growing (as measured by an increase in net assets), which is in contrast to the commonly held view that the chemical sector is in decline,’ notes Melanie Washington, a RSC Industry Specialist. ’However, a third of the population is in decline, which is a great cause for concern.’  

Some spin-outs depend on university technology transfer offices and regional development agencies to introduce them to potential investors, but there are other options.  

’Pitch fests’ provide a forum for young companies to pitch business plans. One of the largest in the materials science and nanotechnology area is the international NSTI Nanotech Ventures event held annually in the US. Matthew Laudon is one of the organisers. ’We receive submissions from all over the world,’ he explains. The audience includes business angels and representatives of VC funds, including those from the venture arms of companies such as BASF and Intel. ’Sometimes corporate organisations want to take a new technology in-house,’ says Laudon. ’But they are also keen to invest in new companies, even those that seem to be competitors. It’s a way for them to keep an eye on the technology and puts them in a good position to purchase the spin-out company if it is successful,’ Pitch fests are also an opportunity for would-be entrepreneurs to see how business plans are presented to potential investors.  

Industrial strength 

Although the majority of spin-outs are from universities, companies can also spin out new companies, large and small. Elizabeth Colbourn’s industrial chemistry career was thriving: in 1990 she became one of the first two women to be appointed to the prestigious ICI, scientific ladder, but in 1993 she jumped at the chance to spin out her own company. By commercialising some of the modelling techniques she had developed, Colbourn hoped to broaden the industrial application of computational chemistry. ICI were able to continue using the tools, without supporting the full cost of their development. Twelve years later, and after a merger with Intelligensys, UK, Colbourn has succeeded in her aims, particularly in the area of computer-aided formulation design. 

’It is different starting a new venture as an industrialist rather than an academic,’ she says. ’There is no academic salary or career to fall back on. A University spin-out benefits from access to libraries and related university facilities. That can be hard for a little company to arrange, so helpful academic friends are useful.’ Colbourn has been struck by the variety of her work, ’It certainly extends your range of capabilities, albeit occasionally with a steep learning curve!’  

In 2000 the department of chemistry at the University of Oxford, UK, made a pioneering agreement with the city of London institution, Beeson-Gregory. The investment group provided ?20 million of funding up front in exchange for half the university’s equity stake in any chemistry spin-out for 15 years. The arrangement eventually formed a separate company, IP Group, which is now listed on the London Stock Exchange and has similar arrangements with ten universities in the UK.  

’It must be emphasised that Oxford did not forward sell its IP which is, in general, licensed to the spin-out company,’ explains Graham Richards, chairman of the chemistry department at Oxford and one of the architects of the plan. The money provides funding for Oxford chemistry spin-outs, removing the need to dilute ownership to obtain angel or VC investment. ’The chemistry department has, over the past few years contributed some ?80 million to the central university as a result of creating spin-out companies,’ says Richards. ’We also funded the construction of the new ?64 million chemistry research laboratory without any financial input from the University.’  

’Crucial to this success has been the ownership of the IP by the University, coupled with generous returns to the academic researcher and a helpful technology transfer office, in Oxford’s case, Isis Innovation,’ says Richards. ’At a time when governments and vice-chancellors need to be convinced of the value of chemistry, it’s worth recounting just how rewarding the subject can be,’ he adds.  

A few spin-out companies are unaffected by funding issues. ’Molecular Profiles was profitable from day one.- we have an organic business model and have never needed external funding,’ explains Nikin Patel, chief executive of the company. The Nottingham University, UK, spin-out was founded in 1997 by a group at the school of pharmacy. ’I was a PhD student coming to the end of my studies,’ explains Patel. ’For a while companies had been coming to the research group seeking assistance with solid state characterisation. We knew there was a business there,’ he says. ’We took on our first contract and with the profits we started our company.’ The University has a stake and they allow the academics to spend a day a week on company business. ’I was initially the only full-time employee,’ says Patel. ’So I guess the risk was on me, but I didn’t think twice.’ His advice to others who might like to follow this path: ’surround yourself with advisors, people who have experience in setting up and running a business. Find a mentor, someone who can guide you in the right direction.’ Molecular Profiles is certainly heading the right way. The company recently received a Queen’s Award for Enterprise, distinguishing it as one of the UK’s most innovative during 2007.  

’I’d recommend this to anyone - if you have a good idea then start a company. It’s an extremely rewarding thing to do,’ says Patel. Spoken like a true entrepreneur.  

Fiona Case is a freelance science writer based in Vermont, US