When Dr Mark Moloney, a senior lecturer in organic chemistry at the University of Oxford, discovered a process to prevent dye migration in plastics, it generated a great deal of excitement in the research laboratory. Slowly, as the range of commercial applications became apparent, from anti-reflective coatings for eyewear to more powerful adhesives, the buzz around the discovery emanated beyond the milieu of white coats and Bunsen burners.

Modification of plastic surfaces is not an area that attracts a high degree of research council funding, so Dr Moloney contacted the Oxford University Challenge Seed Fund. The money provided was sufficient to employ his post-doctoral researcher, Dr Jon-Paul Griffiths, to further investigate the surface modification chemistry.

ISIS Innovation (the University of Oxford technology transfer office) worked with the two men to evaluate the commercial value of the business, bringing in an initial angel investor, Marcelo Bravo, and seed funding worth around £500,000. Bravo and Dr Griffiths then formed Oxford Advanced Surfaces (Oxeco).

Payback time

In 2007, the company conducted a reverse takeover onto AIM and has since raised £13 million. OAS is looking to secure its first commercial licence deals with partners this year, says managing director Dr Mike Eason. ‘In the medium term the aim is to convert initial licence deals in the anti-reflective coating and adhesion sectors to generate commercial products for our customers and profitability for OAS.’

He describes the early money received from the Oxford University Challenge Seed Fund as crucial to the development of the company. ‘Without that, the chemistry development would never have been given the critical mass and attention to detail required to secure the key patent applications and to build a business case.’

In Cardiff, biopharmaceutical spin-out Q Chip is developing a pipeline of generic products for the treatment of cancer and seeking collaborations with pharmaceutical and biotechnology companies.

The initial microfluidics technology was developed by professor David Barrow at Cardiff University’s School of Engineering. ‘We are not a true spin-out since the founding directors, who were not from the university, formed the company and had the intellectual property (IP) assigned at the time of our first equity investment,’ explains Dr Jo MacPherson, chief scientific officer and founding director.

‘We have been an independent entity since incorporation and developed the technology through our own R&D programmes,’ she adds. ‘However, we have collaborated extensively with the university over the past seven years and the initial investment from the University’s Challenge Fund, which helped establish the company and secure our first equity investment round in May 2004, was crucial.’ Q Chip’s long-term strategy is to license its products after pivotal clinical trial studies and generate revenues from collaborative programmes.

High ideals

OAS and Q Chip are products of a slow commercialisation process that earned higher education institutions in the UK £56.5 million during the last academic year. This income was derived from licensing fees and royalties and was up 24 per cent year-on-year.

A survey from the Higher Education Statistics Agency shows spin-out activity dipped as the recession kicked in, with 191 spin-outs recorded in the past academic year compared with 221 in 2007/8. Encouragingly, the UK higher education patent portfolio grew, income from the sale of shares in these companies was higher and the number of ventures that have survived three or more years was up 12 per cent from 2007/08.

Over the next few years, the challenge is to maintain this growth in the face of savage public spending cuts. Professor Philip Cooke, director of the Centre for Advanced Studies in Social Sciences at Cardiff University, says he is concerned that the abolition of the regional development agencies will lead to the loss of some pockets of seed funding and says the UK is without a ‘cookie cutter’ model for funding spin-outs.

‘There is no central agency supporting innovation, although the Technology Strategy Board supports many related activities. In England there have been various initiatives since the mid-1990s to establish seed funding for university start-ups, whereas in Scotland and Wales the development agencies drive commercialisation initiatives.’

The competitive edge

The previous government put a lot of funding into commercial resources in the university sector over the past dozen years, adds Mark Thompson, head of market development at University of Manchester Intellectual Property (UMIP). He suggests that the level of support available to spin-outs in the UK compares favourably to other leading economies and that this translates into positive results.

‘We form about five spin-outs a year and, out of that, one will become a success story, such as achieving an AIM listing, while one or two will fail over a five-year period and the others will be relatively successful.’

Mark Rahn, investment manager for MTI, an investor in technology companies across Europe and the US, says that university spin-outs usually have a stronger technology asset than entrepreneurial start-ups, but the task for the venture capital firm is to build a management infrastructure around it.

He suggests that there are plenty of high-calibre people willing to fill these roles, although it helps if the technology is internationally class-leading. The problem is, the more revolutionary the technology, the further removed it is from where the market is today. The answer is to demonstrate that the idea has a tangible, realistic value proposition. ‘Then you need a business development function to persuade customers to part with their cash and a marketing function to get the message out,’ says Rahn.

Some of the key areas that Advent Venture Partners focuses on during the development period include capital efficiency and a defined exit strategy, explains principal Kaasim Mahmood. ‘We have employed the “virtual company” approach to keep capital spend as low as possible and have found that this works particularly well with university spin-outs as there is often not a large pre-existing team.’

Because the firm’s investments in spin-outs come from the same pool of cash as all its other investments, they must compete directly on risk and reward. ‘Technology in university spin-outs is often at an earlier stage, but the best opportunities have a clear route through to exit just like all venture capital investments,’ he says.

The recession has not dented the confidence of Michael Edelman, CEO of University of Manchester spin-out Nanoco, which manufactures the semiconductor nanoparticles increasingly used in the development of solar cells and solid state lighting. This is down in part to the fact that the company was assigned all the IP when it formally separated from the university in 2005 – a policy he describes as progressive and not typical of UK universities.

‘Clean ownership of all that early-stage IP has been key to our success,’ says Edelman. ‘As people invest later on, who owns the IP is crucial to the value of the company.’ He adds that the university has done well from the deal, taking large chunks of equity out of Nanoco which it has been able to sell down.

Profitability has to be the goal for every business, and it is no secret that university spin-outs struggle in this department. Edelman’s ambition is to develop the company into a multibillion-pound enterprise. ‘We are working with the largest electronics companies in the world and will be highly profitable within the next three to five years.’

If these ambitions are realised, Nanoco will become the undisputed poster child for spin-out activity in the UK.

Top UK universities for spin-outs: 2008/9

(Number of spin-outs in brackets)

University of Liverpool (20)
University of Leicester (14)
Royal College of Art (7)
University of Hull (7)
University of the Arts, London (7)
Brunel University (6)
The Institute of Cancer Research* (6)
University of Ulster (5)
University of Glamorgan (5)
University of Aberdeen (4)
University of Hertfordshire (4)
University of Oxford (4)

* Part of the University of London

Source: Higher Education Statistics Agency (data for the academic year 2008/9)