There’s been a lot of discussion around university spinouts recently, and not always for the right reasons. Many of the companies we support at Capital Enterprise through our health and life science programmes are spinouts, and even our non-spinouts tend to include one or more founders with an academic background. Our programmes are specifically geared to support academic founders and the type of companies they create.
Prior to joining Capital Enterprise to work on the P4 Precision Medicine and Cancer Tech Accelerators, I spent several years at Post Urban Ventures, a deep tech venture builder. I also helped to set up UCL’s I/O Lab, which was created to help UCL academics commercialise their research. I’ve seen the world of university spinouts from both sides of the proverbial negotiating table, and in the process I’ve learned a few things that any academic founder would be well-served to understand from the outset.
First, venture capital is treated like the holy grail – but academic founders in particular should understand it can also be a poisoned chalice. Due to the time horizons they invest under, and the need to identify startups which can return enormous multiples, many VCs are often not a good match for life science and deep tech companies. Securing venture capital also represents an enormous amount of work and facetime for founders to put in which can cripple an early-stage company’s product development.
If you decide to go down the route of raising VC, it is critical that you start off with a realistic idea of how long the round will take. Six to twelve months isn’t unusual, and during that time at least one founder will do very little other than meet and pitch VCs. From the investor’s side, they could easily look at 300 deals a year and select 10 of them. You should expect to pitch 200-300 different investors before getting to yes.
Grant funding, on the other hand, is structured in a way that academics intuitively understand. It’s especially well-suited for deep tech with a healthcare or sustainability focus, both areas which governments and innovation agencies have prioritised. Grants come with some limitations, since they can be quite specific about the type of work they will support, but they have the key advantage of requiring no equity.
A recent alum from one of our programmes was so successful with grant funding, they were able to raise only a small equity funding round. That’s left 80% of the company in the founders’ hands, which is higher than any VC-backed startup. This company recently achieved an exit in the tens of millions of pounds, validating their decision not to seek a higher level of equity funding.
Second, if you plan to spin out from a university, it’s critical to find out what their terms will be before jumping in headfirst. If terms are lopsided, investors may regard the company as uninvestable – and you’re much better off making this discovery before putting months or years of work into the company.
The good news is that many universities have gotten the message that taking a 50% stake in a spinout most likely dooms it to failure. Not only are equity stakes coming down, but there is a new willingness to negotiate. We’ve heard of leading London universities proposing a 5-10% equity stake, non-dilutable up to £5 million. Whatever you are offered, don’t assume you have to take it or leave it. Even when dealing with your own employer, you can always go back and ask for something better.
Finally, and most importantly, there is a subtle shift in mindset that happens between the worlds of academia and industry. In the startup world, nobody thinks you are stupid – but they also won’t be impressed by displays of brilliance for the sake of brilliance.
Having worked with many academics-turned-founders, there are a few things many of them have in common. They are more cautious and risk-averse than necessary, aiming for a level of certainty that may not be possible when developing an early-stage product or service. They are also terrified of being wrong in front of their peers, which can lead to a type of perfectionism which isn’t helpful when building something brand-new.
The key thing to understand is that failure is judged much less harshly in the business world than in academia. For startups, failing is a necessary part of how they figure out what works and what doesn’t. Any hint of intellectual arrogance will be judged much more harshly than occasionally being wrong about something.
It’s a big jump to go from the world of research and teaching to founding and scaling a company, but if you have the appetite it can be tremendously rewarding in every way. For more on our health and life science programmes, why not follow the P4 Precision Medicine Accelerator and Cancer Tech Accelerator and be the first to hear when we call for new applications?
Lotus Qi is Operations Lead for Health and Life Science at Capital Enterprise. You can follow her on LinkedIn here.