How Can UK University Founders Flourish?
Having spoken to many founders running university spin-outs worldwide, Madelene, Principal at Giant, sees a new founder profile emerging: "The Angry Scientist”: founders who are frustrated by the lack of teamwork in academia and keen to use science to solve problems in the real world. In this piece, she explores how the UK spinout process can improve, the ‘university equity myth’ and her top tips for scientist founders leaving university to start up a company.
The Angry Scientist
Having spoken to many founders running university spin-outs worldwide, I see a new founder profile emerging: I call them “The Angry Scientist”. Frustrated by the lack of teamwork in academia, bored of fighting over publication credits rather than working towards a common goal, uninspired by the reliance on seniority that’s assumed to know best, and the years that are spent on science that never solves problems in the real world. These are founders eager to tackle some of the world’s biggest problems with technology.
Starting a company is not easy, but channelling this frustration into building impactful businesses is particularly important for climate tech, which has many thorny technical challenges to solve. University research will be imperative if we are to change the current trajectory, but we need that technology to leave the labs and meet the real world.
Spinning out
Most founders and VCs I speak to are not overly impressed with how most UK universities handle the spinout process. Tech Transfer Offices (TTOs) are viewed by some to torch much potential deeptech company value before they even really get started. Equity and royalties are high while non-dilutive clauses and short term licence exclusivity is common.
Meanwhile there are fears the UK is falling behind the US in channelling superior academic research into successful companies. While the UK continues to excel in academic research, the fear is that it’s not translating into big companies and exits originating from that research. This has become an even more pressing discussion, with the transformative AI boom underway, much of which originates in academic research.
The UK government has expressed a desire to become a ‘science superpower’, but achieving this will require significant updates to how academic spin-outs are handled.
Learning from the US
Spin-outs look different across the world. In the US, Stanford is often referred to as a leader. Not only do they take low equity, thus preserving the company's cap table and increasing the funding potential from VCs, but they also have standard deals that reduce bureaucracy, facilitating the speed founders need to get building quickly, arguably one of the key advantages of a startup. This becomes especially important when you compare the spin-out period - sometimes up to a 6-12 month process - with the speed of advancements currently seen in AI, every month lost is a fundamental business risk.
Approaches like Stanford’s of low equity requirements and standard terms not only fosters innovation but also attracts top talent who are eager to bring their ideas to market without unnecessary delays and bureaucracy.
In the US, you can also find non-profit organisations such as Activate. Their sole focus is to empower scientists to bring their research to market to reinvent our world. The program empowers technical founders to take the CEO role, something which is rarely seen in European incubator programs, even in those which are highly regarded, where scientist co-founders are often encouraged to partner with a commercial partner. Top of my wish list is to see similar initiatives to Activate in the UK.
The UK’s Biotech Legacy and Its Impact
I’ve done spin-outs across the US and UK. One thing that becomes pretty clear in the UK is how the UK’s biotech legacy influences its approach to spin outs. This great legacy unfortunately can translate into a lack of experience with companies that have different business models - and enforces terms that are suited to the biotech industry.
Let’s consider:
Company A has discovered a novel molecule and aims to take it to clinical trials with the goal of being acquired by a pharmaceutical company. They also receive access to lab space.
Company B has developed a novel AI technology that will be a small part of a broader product they will build out and sell to customers.
Is it fair for the university to take 20-40% of Company B and receive royalties? Arguably not, because in most startups, success depends not only on IP but also on execution. If you cannot continue to develop your technology into a product, sell it, and build an organisation to support it, you will not succeed despite the IP being really promising. Many ‘biotech signatories’ may not fully appriciate this, as they operate in a vastly different sector where IP is the key component. Universities should consider their legacy bias, and where this is inappropriate when evaluating new technologies. We should instead:
Optimise spin-out processes for speed
One of the main advantages of early-stage startups is speed. However, lengthy and cumbersome spin-out processes imposed by some university TTOs often significantly hamper this advantage. To truly support innovation, it’s essential to reduce this friction and enable founders to focus on building their companies. Standardised terms and processes can greatly enable this.
Optimise for what matters
Universities sometimes mention they want to ‘diversify revenues’ between equity, royalties and milestone payments. This approach either shows a lack of risk appetite, perhaps understandable for a large public institution, or a misunderstanding of the potential of equity. If you aim to develop the next ARM, today with a market cap over $130B, a $50k milestone payment is negligible. Equity is how incentives align for universities, founders and investors alike, leading to significant outcomes.
For VCs perhaps this may be obvious, but to put it in perspective, let’s consider a couple of different scenarios.
The University Equity Myth
The graph above illustrates four spin-out scenarios. In Scenario 4, the University uses its leverage to negotiate a higher stake at inception which ultimately leads to lower founder ownership. This might look good for the university in theory, but there are other factors that ultimately impact the likelihood success and securing follow on capital. For example, many VCs would see the lower founder ownership as a lack of incentive, thus reducing the probability of the very large outcomes. They therefore need to own a larger % of the company to meet their own return target which further dilutes the founder.
One can argue that enabling a quick and transparent process with a standard equity deal, increases the chance of attracting VC funding and large outcomes, which at exit leads to a significantly higher outcome for the university. A standard deal might also motivate more companies to spin-out, thus accumulating the value of universities and adding ‘diversification’ if so desired. For example, imagine what just 1% of ARM’s equity could have been worth today vs that milestone payment…
Sadly many UK startups become difficult for VCs to fund, before they even get started. Factors like >15% equity ownership, perpetual royalties (sometimes even on all revenue rather than just the portion tied to the IP), and undiluted clauses contribute to this problem. What’s worse, too many founders think this is normal and that they are getting a good deal. They are, after all, negotiating with the university where they spent most of their adult years.
VCs want founders to be incentivised to maximise their company’s potential. Why? A company with the same underlying technology can go in vastly different directions depending on the founder and their vision. Giving away too much of the company early reduces this incentive, which ultimately reduces the probability that VCs meet their returns.
Top tips for technical founders considering spinning out
Spinning out is one consideration, but there are many other pot-holes to avoid. As a VC you have the privilege of speaking to lots of founders and matching patterns. Here are my top tips if you are in academia and considering starting a company:
Obsess with your customer just as much as you obsess about your technology
I speak to too many companies who tell me “over the past 5 years we’ve been working on the technology and filing patents to protect the IP, we are now raising to hire a team to speak to customers”. Don’t get so concerned with protecting your innovation that you forget about the question that matters the most - are you building something customers want to buy? Products and problems need to be validated with customers in parallel to their development. Just because something ‘can’ be done, doesn’t mean that customers will buy it.
For those who don’t know where to start, don’t underestimate the potential of cold outreach or leaning into your network. If you are solving a painful enough problem for your customers, they want to talk about it. ‘Willingness to speak’ is a good early indication that you are onto something.
Find the right co-founders and decide on your role
Success in academia does not necessarily translate to success in startups. Academic institutions may value seniority and experience but for startups, this mindset can limit a startup’s growth potential. I often see that young technical founders carry the belief that they need to pair up with a ‘grey-haired’ general business or finance person to be taken seriously and ultimately succeed. This could not be further from the truth. In fact, data shows that founders with a science or engineering major or graduate degree have an outsized chance to build a unicorn business.
Source: Endeavour
Senior and experienced business leaders can be a great addition to your advisory board, but you should carefully consider if it’s the right thing for a co-founder. In many cases, it might be easier to find, or you might have a stronger personal fit with, a CTO/CSO in your network instead of an outsider CEO. After all, a co-founder relationship is in many ways a 10-year marriage. You are likely to spend more time with your co-founder than your partner over the next years. Grey hairs or not, what’s non-negotiable is speaking to customers.
Consider what you are good at, what you want to do and of course, who you sell to and embrace it. In many cases you are selling into other technical people so being able to ‘speak their language’ is an edge.
We’ve backed a fair few technical founders at Giant, and I would love to see more founders from UK universities feel empowered to start a company or take on the CEO role.
Consider non-dilutive opportunities to de-risk your technology
Some science is too early for VC funding. At the early stages, consider grants and other non-dilutive methods to de-risk your technology. It will make it easier to later attract the VC funding you need to accelerate your company and it naturally avoids overly punitive dilution for science risk early on.
Prioritise for Speed
One of the core edges of any startup is speed. Speed that does not compare to academia. You can solve hard technical problems and still have speed at the core of your organisation, you might just need to be intentional on the culture that you are creating early on.
If you’re an angry scientist with a big idea and would like to chat about the journey to start your own company (or can’t decide if you should be the CEO), get in touch on LinkedIn!