During 2005, the university spin-out came of age. Two of the best-performing companies on the Stock Exchange – Wolfson Electronics and Cambridge Silicon Radio – were both originally developed from technology created at academic institutions. And several such concerns floated on AIM, including nanotech materials specialist Oxonica, whose shares have risen 80 per cent since it joined in July. In addition, plenty of funding deals were concluded by the Government’s University Challenge Funds, which cumulatively have more than £60 million to invest.

A recent study by the British Venture Capital Association (BVCA) showed that no less than 435 spin-out companies have been created from university research since 1999. However, two-thirds of these have only attracted seed funding so far, with just a handful taking the next step and raising significant sums to take their plans further.

Management demand

Many venture capitalists involved in the sector attribute the current state of affairs to the dearth of managerial talent with the necessary experience to turn early-stage ventures with huge potential into commercial successes.

Simon Acland, managing director of technology fund manager Quester, which runs three spin-out funds for nine UK universities, believes this experience is vital. ‘Having a skilful manager involved at an early stage can make a critical difference. We like to bring in a chief executive relatively early to manage the growth.’ This should put daring entrepreneurs in a strong position to negotiate an attractive equity-based deal to lead such spin-out businesses.

Acland has seen first-hand that the most successful spin-out enterprises are starting to attract proven entrepreneurs seeking fast-growing business opportunities. A recent Quester investment, Identum, has succeeded in attracting just such an individual to take the enterprise forward. The company was created at the University of Bristol, where two academics in the cryptography department have developed software to keep emails private when sent though the ether, which is far simpler than current techniques.

This product, called Private Post, could have mass-market appeal and Karl Feilder, who built up and sold two software businesses before the age of 35, saw immense potential. He joined Identum in July, renamed the group, rebranded the product and is now in the late stages of talks with major distributors.

‘The fact is there’s a shortage of people to run these kind of growing businesses,’ comments Feilder, who sold his first business to Microsoft after five years. ‘Fewer people in the UK have managed to do it than in the US, where embarking on such ventures is more commonplace.

‘It’s also the fact that everyone in the UK associates university inventions with what I call the “potting-shed syndrome”,’ he adds. ‘To get past these perceptions is hard, particularly as there is no “cookie-cutter” career path for those who want to become entrepreneurial chief executives of such early-stage businesses.’

Changing times

A decade ago it would have been rare to hear university academics and entrepreneurs mentioned in the same breath. Nowadays though, cash-strapped institutions are keen to exploit their wealth of intellectual property and are bringing in entrepreneurs to help.

‘Our founder shareholders [the academics] have been delighted with what they’ve seen achieved with their original technology,’ says Feilder. ‘They have a very high respect for what we’re doing – trying to put their ideas on machines around the world – and they realise business acumen and marketing is vital, not just a fluffy part of the process.’

Most universities now have a commercial exploitation department. Many also have funds managed by external third parties, generating extra capital to make investments in fledgling companies and help bring the ideas to market.

Related: A tale of two spin-outs

IP2IPO is perhaps the most high profile of the companies operating funds to commercialise university technology. The group was formed in 2001 by David Norwood, former chief executive of City stockbroker Beeson Gregory. The central idea behind launching IP2IPO was to streamline the creation of valuable companies from academic research.

A breakthrough deal came when Norwood agreed with the University of Oxford to invest £20 million in return for a 50 per cent stake in any company evolving from the University’s chemistry department until 2015. The agreement also covered any technology licensed from the university to third parties. Since then, IP2IPO has also struck similar deals with Southampton University, King’s College London, York University’s agricultural product development centre, Leeds University and, most recently, Bristol. Five spin-out companies from these agreements have so far been floated on AIM.

IP2IPO contends that universities are seeing their resources increasingly stretched, as numbers of students rise but central Government funding fails to keep pace. These institutions are therefore increasingly keen to raise revenues from other sources, such as companies generated from their research.

Building the team

Andrew Newland of technology business developer Angle echoes this approach, believing enterprises such as Wolfson Microelectronics and Cambridge Silicon Radio are examples of how installing the right management with an entrepreneurial background can bring new concepts to commercial fruition.

‘It’s rare to find an academic who also has strong business skills,’ he says. ‘This is where we come in. A core part of our business is finding appropriate management to turn intellectual property into a business.

‘University spin-outs are like three-legged stools, requiring academic theory behind the technology, sufficient capital or money to invest in the project and, most critically, commercial management. Plenty of the first two exist in the market, but little of the latter does at present.’

Nevertheless, Newland doesn’t think it surprising that this third leg is often missing. ‘There are a number of drawbacks that can discourage a suitably qualified manager from taking on such an entrepreneurial situation. There will probably be little or no salary for a start. Secondly, it is hard to find sufficient information on what new ideas are available to build into proper ventures.

‘We analyse more than a hundred such projects emerging from universities every quarter, and from that whittle down the ones we are prepared to advise and invest in to just five or six annually.’

A recent concern Angle has taken on is Geomerics. This was set up by several Cambridge mathematicians expert in geometric algebra, with the aim of applying theory commonly used in cosmology to more mundane processes, such as computer games graphics. Newlands says, ‘Our role is to take up a board position, advise on strategy and help appoint appropriate executives to drive the company’s commercial growth.’ Geomerics has just appointed a new technology director from Kuju Entertainment, a market-listed computer games company.

At some stage in the process, Angle usually recruits a chief executive for its ventures and then takes up an option to invest in the business. So what is Newland looking for in such an individual?

‘There are four criteria,’ he asserts. ‘The person must understand the science but need not be an expert. They must have passion and drive, as a lot of energy will be needed to get the company going. They also need to have the necessary financial and commercial skills. Finally, at Angle we don’t want to back entrepreneurs who are ‘one-man armies’ and think they can do everything. We like to build teams.’

Management matters

Patrick Reeve, managing director of Close Venture Management (CVM), has broken Angle’s rules while backing a spin-out company from York University called Xceleron, whose technology can show how a drug will behave in the body if administered in minute doses.

‘Professor Colin Garner, who developed this technology at the University, is now the full-time chief executive of the company, which is a rare situation,’ says Reeve. Xceleron is also unusual in that it already produces £2 million of revenues with strong demand from drug companies, since the process accelerates the time it takes to complete safety trials.

For most spin-outs, it’s a positive benefit for academics to retain their university positions, so they remain in touch with contacts and research in their field. For that reason, Dr Derek Fairhead, managing director of Getech, which has accumulated a mass of geological data to assist in oil exploration, maintains his position at Leeds University, despite the company, backed by IP2IPO, having listed on AIM last September. And Professor Chris Toumazou is in a similar position, adopting a dual role as head of Imperial College’s Institute of Biomedical Engineering and chairman of spin-out Toumaz Technology.

Reeve says management issues are fundamental to CVM’s approach to backing ventures through relationships with Brunel University. ‘Ideas for possible investments come to us once a month through the University’s internal enterprise department,’ he explains. Although Close has yet to complete its first deal under this relatively new arrangement, Reeve anticipates that, ‘We would like to put an experienced director we know on the board of any company we back, to lead the strategic direction of the venture.’

But Reeve also has a plan, at an embryonic stage, to link up with Brunel’s management school to find suitable MBA graduates to take on chief executive roles in these spin-out concerns, allowing the original academics to remain in the University.

As Identum’s Feilder says, ‘The business world runs at a faster pace than the academic world. The difference in heart rate is incredible.’