Posted below are the thoughts of one of WaikatoLink’s commercial managers on some key things to be considered when determining whether to create a spin-off.
So you’ve been project managing a cool piece of technology at the University, and the time has come to decide whether you should license, sell, or form a spin-off company commercialise the technology.
How do you decide the best option?
Spin out companies are often the least preferred method for commercialising technology, and there are some good reasons for this.
- Spin outs are expensive to administer.
Public research organisations are rigorously audited, and so are the spin-off companies they hold stakes in. Add on to that the usual costs of accountancy, legal and management costs and forming a spin-off company particularly at an early stage where revenue may be some time away and budgets are tight is often discounted early on.
- Who’s driving the growth of the business?
In New Zealand technologies transferred into spin-off’s are usually managed by the public sector research organisations technology transfer office (TTO). Many TTO’s do not have the mandate, scale time or skill sets to properly manage a spin off.
- Securing Investment for the spin-off company is difficult.
In New Zealand many public sector research spin-off companies are formed quite early in the development if the technology, at a time when the technology may not have proven market potential or an established cash-flow. In today’s investment market, pre-revenue spin-off companies are less attractive than those with a proven market and cash-flow. Many investors are attracted to investing in a highly skilled proven entrepreneur and successful management team driving growth and having “skin in the game”. Public sector spin off companies often lack an entrepreneur, and the TTO as a management team is often not credited enough as having the skill, ambition and drive to develop company value to a point where a management team can be established.
Cash is king when developing technologies. If the spin-off company is not seen as an attractive investment opportunity early on, or the company cannot build sufficient value and investment potential within the cash runway available to it, it will likely see the spin-off fail or the technology not realise its full commercial value.
So on balance, in today’s market forming a spin-off is a risky option. Whilst having many risks associated with it, it should still be considered as an option to maximise value and returns for the effort, time and cash put into it by our researchers.
Darren Harpur – Venture Manager, WaikatoLink