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Relationship reset: How spinouts can collaborate with their university | EU-Startups

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October 18-20, 2023 / Tucson, AZ
The annual summit for research institution gap fund and accelerator programs, including proof of concept programs, startup accelerators, and university venture funds

The Story

Amidst the abundance of innovation and talent within universities, a lack of collaboration among key stakeholders poses a significant obstacle to achieving this vision. Venture capitalists, once enthusiastic about investing in new companies, now exhibit a more cautious approach, spending more time on due diligence. Consequently, universities face the pressing need to adopt a founder-first attitude, embracing change and fostering an environment that nurtures entrepreneurship. Otherwise, universities run the risk of losing million-dollar companies to other destinations.

If the current climate has shown anything, it’s that there needs to be a reset on University licensing agreements between spinouts, their investors and universities. This is a legal document between parties and grants the spinout a licence under certain patents and other intellectual property rights to exploit the relevant technology. Put more simply, this is the golden ticket to commercialisation for spinouts, and if the terms are not founder-first, then spinouts risk missing out on further investment and opportunities to succeed.

The current state of play

It’s widely reported that European universities take what many deem to be an unfair stake in companies that spin out of the institutions compared to their US counterparts. Air Street Capital’s database, Spinout.fyi, found that European universities demand 7.3% equity from founders compared to the US figure of 5.9%. The UK’s universities are the worst ‘offenders’, demanding 19.8% on average. Furthermore, UK universities demand more control over the management of their spinouts. Of those surveyed, 37% of spinouts have positioned a member of their technology transfer offices (TTOs) on their board, compared to 13% for the US and the EU.

Additionally, Brexit has also triggered a drain of potential spinout talent, with the number of students from the EU enrolling in UK universities slashed in half post-Brexit, from 66,680 in 2020 to 31,000 in 2021. This loss of talent is damaging, as these students are the lifeblood of innovation, research and development, forming a crucial pipeline to scientific progress.

Challenges in commercialisation and implementation

TTOs and VC firms share one goal: to work with founders and entrepreneurs to bring about innovative technologies to drive forward technological advancement and economics. However, just because the two hold this aspiration in common, this alone does not make for successful commercialisation whilst satisfying all parties.

Negotiations between VC firms and TTOs are often long and complex, and when investment into a super early-stage business is involved where the only asset is the university-owned IP, the process and challenges are exacerbated. To be truly successful, all parties must work together and hold the same values, whilst being willing to make compromises along the way.

In addition, misaligned goals between TTOs and VCs on the ownership, prosecution and scope of licensing of IP can add another spanner into the works of the relationship. TTOs often look to maximise their return on investment, wanting to control the prosecution of any licensed patents and retain the ability to license the same patents to other commercial entities for use in different fields, as well as terminate the licence if need be. VCs on the other hand, generally prefer that the target has full control of prosecution of the relevant IP and owns the core patents needed to bring the relevant products or services to market, instead of those patents being licensed to third parties in other fields.

To manage expectations, heads of terms around the operation and management of the spinout’s IP need to be agreed as early as possible in the relationship, ideally before due diligence, to avoid expensive negotiations later in the process.

An alternative route forward? 

There is a notable gap between innovation and implementation, which TTOs and universities may be in a position to assist in resolving. One key adaptation to the existing system would be for universities to take a lower equity stake and allow the founders to retain a greater level of control of the company from a management perspective. This includes removing the need to seek university approval, whether at a board level or contractually. In some European countries such as Norway, universities are establishing technical specialist “hubs’ which encourage collaboration between innovators, providing the lab space and initial building blocks to allow early-stage companies and spinouts to scale up. This approach may allow universities to offer commercially valuable services to spinouts, rather than seeking revenue through high shareholdings and control instead of providing these free of charge (or on a discounted basis). These types of hubs could be an additional revenue stream for the University, allowing founder-led companies access to important expertise, which could be appealing to investors and founders alike.

However, we need more than lab space to support spinouts in scaling up and avoiding the “Valley of Death”. The UK’s Science and Technology Framework shows there is still a major need for upskilling in various sectors, including the ability (where financially viable) to have innovative products and components manufactured in the UK. If spinouts and startups are to upscale and contribute to the £1.2 trillion scaleups that have already added to the UK’s economy, facilities need to be accessible for innovations to turn from “academically exciting” to  “commercially viable”.

David Holt, Partner and IP Solicitor at Potter Clarkson addresses this issue. According to Holt, “The lack of standardised practices in university licensing agreements globally also poses challenges for spinouts and investors. In addition, the abolition of “Professor’s Privilege”, which grants students or academic staff the freedom to select their collaborators and investors, has resulted in a significant decline in patenting academic innovations. Constraining universities to a “standard” royalty and equity arrangement for IP generated by students and academics would likely face resistance for limiting commercial freedom.”

How can we solve this? Implementing a uniform policy across universities or empowering spinouts to select their investment partners could foster a more competitive market among TTOs and investors, encouraging collaborative efforts similar to investor syndicates with complementary skills. On the other hand, some experts argue that a return to “Professor’s Privilege” may incentivise TTOs to offer competitive equity arrangements to spinouts instead of using IP rights as leverage, encouraging VC involvement.

The case for collaboration

Clusters have sprouted over the years, and are a case-in-point of the success of the commercialisation of spinouts. The process starts with the entrepreneurs of the universities but is spurred on by private-public collaboration. It’s these clusters of innovation that feed companies and move them beyond the confines of academia to commercialisation and beyond.

Universities must reset the dial of royalty agreements and focus on fostering a collaborative ecosystem. By empowering spinouts, promoting standardised practices and encouraging collaborative efforts, universities can become hotbeds of innovative talent that drive technological advancement and economic growth.

 

Full story: Relationship reset: How spinouts can collaborate with their university | EU-Startups

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