From labs to riches – How to ensure spin-out success

The difficulty of raising venture capital in recent years has made things much tougher for the entrepreneurial academic looking to turn a scientific breakthrough into a commercial business. However, for a research team that is really convinced that it has a world-beating product on its hands, it is possible to make the transition, but several success factors have to be in place.

Ernst & Young partner William Powlett Smith discusses what it takes for an academic to be an entrepreneur.

The first thing is for every entrepreneurial academic to be convinced that there really is a product there. This means more than just having world-leading science, although that is clearly necessary. It means having specific revenues in sight from commercially exploitable applications. Unless these can be made explicit, it will be near-impossible to compile a business plan that will attract backing.

Venture capital is far more cautious nowadays, so research projects often run for much longer inside academic institutions. It is only too common for research projects to run out of funds before they have reached the point of demonstrating commercial viability.

A persuasive business plan will carry some endorsement of the concept by potential customers. This is easier when it is a physical product rather than just a compound in a test tube – a new way of tackling a disease, for example, will need funding a long way before it reaches its test stage. A key question for the team is: how far and how fast can they go? Many promising spinouts have failed to survive because they have either run out of cash or the science has not progressed fast enough. At this stage the investors may either take the business for themselves or insist on a trade sale.

This is not to say that investors are rapacious, but venture capital is far more risk-aware than in the early stages of the ‘genome gold rush’. That said, there are a number of experienced and knowledgeable investors who can add a great deal of value in the early stages of technology plays, either from their own experience of the issues or their ability to make introductions to other businesses and potential partners.

All this underlines the importance of having a management team that can manage these issues and the expectations of the various stakeholders. There has to be a leader who is able to inspire staff and customers, who can communicate effectively with investors – as they may well be asked to add to their initial investment – and who has a clear vision of how to develop the business in the short- to medium-term. However, this person may not necessarily be the leader for the long-term. The qualities required to effect a spin-out are quite different from those needed to keep investors on board, and different again from those needed to grow the company.

It’s possible, indeed sometimes necessary, for the academic entrepreneur to assume responsibility for the execution of marketing as well as scientific strategy in the initial stages of a spin-out. However, it’s rare to find someone who, having straddled the gap – sometimes referred to as a chasm – between the academic and commercial worlds, remains as chief executive. It depends on personalities as much as the type of business. Some academic entrepreneurs have taken their companies public and remain highly successful players in the commercial world. Others are clear from the outset that they have no interest in running the company once it has achieved viability; they return to their roots in academia, often to create more spin-outs.

In all cases, growing businesses continually change and develop; even if the same people run it, they may need to change themselves in order to control events. And even if they have carefully worked-out blueprints, they must remember that things will happen which are outside their control. Ultimately, the academic who wants to turn into an entrepreneur and contemplate a spin-out must understand the need for quality of management as well as quality of science – both will be needed to create a successful business.

Three key questions

  1. Is management clear about where they are right now? Because if they want to tell where they are going, they must know where they are starting from.
  2. Do they know what they could do to succeed? Because only by continuously re-evaluating strategic options will they focus the business and its limited resources.
  3. Are they clear about what they must do to succeed? Because commitment to the clearly defined, selected option is the best way to reach viable sustainability.

Article by William Powlett Smith, leader of Ernst & Young’s UK biotech team and a member of Ernst & Young’s global health sciences steering committee.

See also: Do universities take too big a stake in spinouts?

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.

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University Spinouts