In Part 1 of this article, we looked at the formation of biotechnology spin-outs from a broad economic perspective and the impact of the recent budget. Now we will consider the process in more detail from the spin-outs’ perspective.
The spin-out process can differ in each case, but typically follows the pathway of:
- Idea validation (pressure testing)
- Preparing for spin-out
- Spin-out
- Growth/Scaling
- Exit.
This pathway will vary depending on the extent to which the university is expected to play a continuing role in the future of the company, the sector involved, the period to reach profitability, or a cash positive position and the financing structure adopted. While the order of some of the stages may differ, the chart on the next page outlines some of the key actions typically required by the spin-out and associated external parties.
Phase 1: Idea pressure testing
Here, sometimes following decades of research, the innovation is disclosed to the university. An evaluation is made as to its viability in terms of commercialisation, its stage of development and whether additional work or funding is required to take the concept forward. An initial discussion will usually take place between the academics and the university regarding the sharing of revenues from the commercialisation of the idea.
Phase 2: Prepare for spin-out
A team should be created including academic staff plus external commercially and financially experienced members. The team should produce a business plan including operations, manufacturing, human resource (HR), sales and marketing strategies. Financial forecasts will also be prepared to determine the economic attractiveness of the project, the pre-money valuation, likely phased funding needs and the likely returns on investment, given the risks involved, for potential investors.
Phase 3: Spin-out
The team should now appoint legal advisors and receive initial tax advice. The company should be incorporated, and directors appointed.
The spin-out team negotiates with the university over buying/licensing the intellectual property (IP), the university’s equity in the new company and the role, if any, that the university will play in the future of the company. A Shareholders’ Agreement and Articles of Association for the new company will be negotiated that reflect the arrangement agreed between the founders and the university. Other key actions include: opening a bank account; appointing accountants; installing accounting systems and procedures; adopting HR policy frameworks and governance systems.
At the end of this process, the company will exchange shares for an initial investment from the university and the university will often require representation on the company’s Board of Directors
Read the article in full here.