One of the things that I have been spending a lot of time on these last couple of years is the subject of university research and how to transform the best of it into viable spinouts that can go on to solve real problems in the world.
There is no doubt that the potential within this space is huge. There is a lot of very good research coming out of universities, and there sure are enough big problems to creatively deploy that research towards.
However, there are various pitfalls that make it hard to create spinouts that are truly viable and have the potential to conquer the market and solve the problems that were envisioned at founding.
In a series of posts, I will be trying to address these, based on my experience. And what better way than to start out with one of the real kickers:
Ownership. Now and in the future.
Whenever you start a company, who gets what is always a solid discussion and potential point of contention. And it is no different when it comes to building spinouts.
Often the research team will have a pretty strong idea about what their research is worth, and of course that value assessment is going to skyrocket the more breakthrough the innovation is.
This self-valuation also leads to outsize demands on ownership, and you can argue it is a valid point. I mean, if a team has spent years doing great research, and outsiders only come in to take it to market, shouldn’t the original team get the brunt of the equity?
If the goal just is to create a spinout, get it registered and give it a go, sure. But if the goal is to build a viable company that will be here for long term, grow and deliver on the mission, it is by no means a sure thing.
Basically the reason for that is that you need ressources to grow and succeed. Ressources come in two main shapes and forms: People and funding.
People – great people you need to build your spinout and make it successful – will only join if they’re incentivized to do so. Especially if they are to have a key role in the early team. That means for founders – ie researchers – that they need to reallocate up front a sizeable portion of their equity for incentives, ex a warrant programme.
Failure to do so will leave you with a spinout that will have nothing but the original team, lack muscle and knowhow for important tasks and never go anywhere.
The other type of ressource is funding. And it is tied to the talent doing the actual work that will ultimately ensure commercial success and deliver the investors a sizeable return on the risk, they’re taking by investing.
If investors – especially sizable ones who can deliver the size of checks needed to make it big – see that early team members, ie researchers, are insisting on sitting on equity for doing nothing in the day-to-day business, while those who are supposed to do the work either get to little or get nothing at all and thus won’t join, it is a walk-away.
The spinouts run into a wall. It will be absent of needed talent and absent of funding. And its changes of converting promising, potentially breakthrough, research into market success and ultimate contribute to solving the core problem, the company was founded on, will be slim to none.
And it will be primarily because the founding team – predominantly the researchers – confused short term success with long term success.
The lesson here?
Think about the long term and think about what is needed to get to the success that you envision. Think about the things you will have to do to ensure you get to that point and make a decision:
Am I in this for the long haul to affect a change where my research solves a big problem? Or am I in this purely for myself and my own retirement?
(And yes, I know it can be a combo, but that’s beside the point here).
If the answer is the latter, be aware that you will struggle and – most likely – fail before you get to where you want to be.
If the answer is the former, come to peace with the fact that you have to sacrifice something to get a bigger reward.
Not only will your equity be worth something rather than nothing (in the above example). You will also be far better positioned to achieve success because you enable those factors that are absolutely necessary for you to succeed.