Harry Santamaki
Investing in university spinoffs is accompanied by well-founded aspirations. Unlike the myriad startups focusing on incremental product enhancements, university startups inherently possess the potential to achieve far greater breakthroughs.
During the last several years, the world has seen several successful university spinoffs. Companies like Google, Genentech, and Lycos were originally research-based spinoffs.
Sometimes, spinoffs can be very IPR-focused and be profitable for universities themselves. One example is the University of Pennsylvania, which recently earned $750 million in royalties from spearheading the development of the mRNA vaccine. – This may be a researcher’s dream: innovate something, get it patented, and then lay back and wait for the money to roll in while you can continue the interesting research work.
Since initiating our search for innovations within universities and investing in them in 2007, we've gathered several insightful examples. Below are a few key observations.
Medtech and health tech
Virtually every new product in the MedTech sector originates from research, positioning universities as the prime venues for uncovering innovation. The majority of these new solutions not only address genuine market needs but also possess significant commercial potential, often amounting to billions of Euros.
However, tapping into this avenue demands specialized skills, a network of experts, and a focused strategy from investors. Research projects may exhibit promising outcomes at preliminary stages, yet extensive testing with real human subjects remains essential, along with obtaining necessary permissions, CE markings, and FDA approvals.
Even when a product is finally developed and approved, securing customers, such as clinics and hospitals, presents its own set of challenges. Medical doctors (MDs), known for their pragmatic nature, often adhere to established processes. Convincing an early adopter MD to make a purchase is just the beginning; they must then navigate the internal hurdles to secure approval for the investment.
"The primary allure of exploring university spinoffs lies in their quest to develop something genuinely innovative and groundbreaking."
Alternatively, if the product is designed to reduce costs, identifying the key decision-maker for that investment becomes complex, particularly when the savings accrue to society and taxpayers rather than the purchasing hospital itself.
Despite these challenges, the MedTech sector remains a market ripe with potential and in need of innovation. In the USA, some investors view clinics and hospitals as prime candidates for AI advancements and other tech upgrades especially given their continued reliance on outdated technologies like fax machines.
Health tech innovations, distinct from purely medical ones, are a prominent theme in universities under the umbrella of 'applied research.' Many of these products do not require certification and can be marketed directly to consumers. Occasionally, some innovations strike the market's sweet spot and have the potential for significant success. However, the reality is that the market is saturated, with major companies like Apple already making substantial inroads into health tech. From an investor's perspective, this saturation could be advantageous, as it may facilitate mid-size exits that are more attainable in a competitive landscape.
Material Sciences
Universities naturally excel in developing new materials or discovering innovative methods for their production. When it comes to established markets, such as the cement market, introducing a new cement variant that offers lower costs or enhanced functionality translates into a relatively straightforward go-to-market strategy.
However, innovations at the material level can sometimes encounter prolonged routes to market. For example, in the electronics sector, an investor might need to commit €4 to €5 million to develop the initial chips based on a novel material innovation. Only after this significant investment can crucial questions be addressed, such as "Does it work?" or "Do customers want it?"
Information sciences
Beyond quantum computing, this domain within universities tends to be heavily focused on engineering.
Patenting new algorithms, signal processing techniques, and innovative software solutions is often challenging, if not impossible. Consequently, the expertise and knowledge tend to reside with the individuals themselves. This underscores the necessity for the core team, or at the very least, one or two founding members, to possess the requisite skills and dedication to sustain the venture over several years.
While aiming for unicorn status might be ambitious for spinoffs in this category, achieving
valuations in the range of €15 to €30 million is a realistic and attainable target.
Energy tech
The energy generation and storage sector offers a lucrative investment landscape with substantial returns. However, after initial innovation, these ventures quickly become execution-centric, requiring significant capital for scaling. Therefore, venture capital firms investing in early-stage spinoffs should enhance their support by introducing an executional team to assist the original founders, ensuring a seamless transition to commercial success and operational scalability.
The primary allure of exploring university spinoffs lies in their quest to develop something genuinely innovative and groundbreaking.
However, not every patented or showcased innovation merits the foundation of a startup. Many are more suitably licensed to established companies, or they may remain purely experimental.
Engaging with university researchers is immensely fulfilling. Their intelligence and rapid adaptation to the practical aspects of company formation, management, and decision-making are commendable. They confidently navigate bureaucratic processes, from filling out official forms to applying for grants. Yet, it's important to recognize that some may exhibit a 'PhD syndrome,' showing a preference for feedback from fellow PhD holders.
Cultivating relationships with staff in university innovation offices is beneficial. They can be invaluable allies, offering introductions to new projects and assisting in negotiating spinoff agreements. However, it's crucial not to view them merely as intermediaries; forging direct connections with researchers opens up the enriching world of deep tech innovations.
