Royal Academy of Engineering Enterprise Hub: The Entrepreneur's Handbook

STAGE 1

Does the idea have potential?

Image: © This is Engineering

In Stage 1

Does anyone want this product?

Spinout or continue with research?

“Just because the science is brilliant, it does not mean it will be of commercial interest.”

Academic entrepreneur, North of England

The innovation or idea

The list of essential ingredients for a successful spinout is long, but first and foremost comes the innovation itself, or the intellectual property (IP). This protectable invention/technology/software/device/know-how (from here on, we will use ‘innovation’ as a catch-all term) you have created will form the backbone of your spinout company.

However, it is also imperative that you consider to what extent the market wants it. In other words, will people pay for it? Just because it does something useful doesn’t mean people will actually pay for it. A product that is objectively perfect for performing a particular task is worthless if nobody wants to do that task, or they already have access to existing methods that are perfectly satisfactory.

This leads to the second most important ingredient, and first point of consideration – the market opportunity. There must be a sustainable business opportunity that can generate a positive return on expenditure, so your first task is to do your market research to prove or disprove that it is wanted.

Does anyone want this product?

Known as market opportunity or market demand, this is a simple test for your innovation’s economic feasibility. A high-level version of this should be conducted at the outset. A lot has been written about this elsewhere, so we’ll just cover why it’s important, rather than how to do it.

This desk-based research will entail collating some basic financial information to ascertain how much money is spent every year on this innovation, or more accurately, how much money is spent solving the problem your innovation solves. By doing this, you should see who is spending the money, who is receiving it, and if the market is growing. Combined, this indicates how big the market is, and how complicated it is.

Running the numbers

Once you have this data, you can consider if it is a business that might be worth pursuing. As you will be looking at this from at least a national level, those numbers might look large. But you need to start considering them through the correct lens, which is mostly a question of scale. As a basic rule of thumb, investors want to make ten times their return on any investment. Here’s why.

To take an overly simplistic example, say you need a £10 million investment to commercialise a medical device. You need to know if you can make a company worth £100 million, and you need to make a lot of profit each year to be worth £100 million. Your market research here should reveal if your Total Addressable Market (TAM)*, and more importantly your Serviceable Obtainable Market (SAM)* is large enough to support that kind of profit. This is all bearing in mind that you are unlikely to capture a high percentage of the market – certainly not at first.

Ask yourself if these cursory figures indicate that the market is big enough to justify the effort and resources involved. Realistically, can you secure enough of it? If not, you don’t have an investable spinout. However, you have figured out you need a new plan before you’ve spent much time and money on the old one.

Image: © This is Engineering

Do the cursory figures indicate that the market is big enough to justify the effort and resources involved? Realistically, can you secure enough of it?

Approach a TTO

When you have concluded that there is the potential for a spinout company, you will need to check what support your university can provide through their Technology Transfer Office. Remember they own the IPR, so their approval is essential. No-one likes last minute requests from colleagues, and your lack of planning is not their problem, so approach them as early as possible so you can best fit around their workload and benefit from their advice.

In our Enterprise Fellowships programme, we asked TTOs how long ago they first heard about a proposed spinout. It’s telling that in the last four application rounds, none of the successful applicants had approached the TTO with less than three months’ notice prior to submission, with the average being just under 12 months.

Even if you don’t have a specific grant/customer opportunity in mind, you should get in touch as soon as you think you may want a spinout. Once contact is made, the TTO can explain the process and timeline ahead, and the help that’s on offer.

“My experience with TTOs was overall a good one. However, one must realise that the system is fairly slow and that there is a lack of communication and transparency. I do believe this is mainly caused by the fact that in general TTOs have a massive amount of work handling many patents and spinouts at the same time, and therefore they must prioritise time-wise.” – Academic entrepreneur spun out in 2021

The table below is taken from the survey responses as to what percentage of approaches made by academics to TTOs progress to each stage in their quest to spinout.

The table above shows quite a lot that is worth noting:

Data from our survey reveals that TTOs receive 17 approaches a year on average, and only 15% (as shown in the table) actually successfully spin out. Bear this in mind as you work with your TTO through the process; they will be inherently sceptical at first, and understandably so.
About 25% fail due to the Academic not pursuing it, vs 20% being rejected by the TTO, so they are not the primary blocker to progress as some people may believe.
The majority of proposals to authorising bodies do get approved, implying the TTOs know what is required to get approval – work with them and take their advice on board.
The TTO is more likely to put a proposal through to the authorizing committee than they are to suggest a licence approach, or to reject it entirely.
Only half of those that are approved make good progress. This may seem like a poor success rate, but venture capitalists generally follow a 6:2:2 model. This means two successes, two failures, and six breakeven companies for every ten investments. A 50% success rate isn’t bad, and success at that stage is out of their hands anyway.

How long does this all take?

Subject to university procedure, on approaching your TTO you will be assigned a lead contact to handle your case. You will be working with this person a lot, so if you have a choice, do your research and pick someone who you can best work with on a personal level. Pick someone who has sector expertise the necessary experience to move at pace through the university’s procedures. Some TTOs may refer you to external organisations where you can acquire additional support, such as InnovateUK, Royal Academy of Engineering, Royal Society of Edinburgh and PraxisAuril, the latter of whom have helpfully published many spinout templates and guides.

You can’t rush the TTO through the process – they have limited resources and many demands on their time. From our survey, the average Tech Transfer Office has 25 employees, with overall sizes ranging from one staff member to 100. Some universities will have entire teams for licensing, legal and other functions – they deal with a range of commercialisation aspects beyond just spinouts and can develop significant expertise and efficient processes. However, 70% of TTO respondents have 12 or fewer employees, so resources may be spread thin with fewer experts for each area.

In total, 63% stated that they consider their TTO under-resourced or substantially under-resourced when asked about the technology transfer ambitions of their university. Keep this in mind when considering why some institutions may operate with a more generic policy. They cannot treat you as a special case and move you to the front of the queue, as it’s simply not efficient.

TTO survey respondents stated that their teams handle an average of 17 approaches to spinout each year (with answers ranged between one and 80). When you consider how long spinning out takes (below), each TTO will be working on multiple concurrent proposals, so one of your first tasks is to find out what they need from you to ensure a smooth process. Make yours the one they prioritise by showing your progress through regular updates.

The number of approaches your TTO is dealing with should demonstrate that they are experienced. They will have seen much of the process before, so listen to them. They want good ideas and it’s their job to find them, so if they seem reluctant to help you, find out why. If they are unconvinced by your idea, ask what actions or evidence would change their mind and then make that happen. As you will see in Stage 2, aspects like market research, IPR audits and patents are costly. They simply cannot afford to pursue every opportunity, and will select only the most promising ones.

To sum up, be realistic. Spinning out is a process typically taking at least two years, and even after that time you probably won’t have anything more than a bare-bones company. This is why we insist applicants to our Enterprise Fellowships Programme work only on the spinout, so they can focus their efforts and work at pace.

Technical due diligence

From here on, we will cover a range of planning steps that must be undertaken to assess if you are ready to proceed further towards spinning out. The answer may well be a disappointing ‘no’, for any number of reasons. We cannot stress enough how important it is to listen to your TTO and other advisors who are looking to save you wasting weeks, months and years on chasing a dead end. But before we delve deeper, a quick word on IP.

“[I had a preconception that] you have to patent everything before moving forward – there are many ways to protect your IP that are cheaper and more effective.”

Academic entrepreneur with two spinouts

Image: © This is Engineering

What is IP and who owns it?

Intellectual Property, or IP as it is generally referred to, can be summed up as the innovative or novel output of intellectual or creative thought and effort. Note that ‘output’ means more than just patents. IP encompasses an expansive range of material which can be protected in a variety of ways. These protection rights allow the owner to control the use of (and thus the commercialisation of) said material for a fixed time period.

One of the primary benefits of working with your TTO is that they can help you protect your IP. Understanding patent strategy and writing quality patent applications is a skill that takes a lot of practice, and its importance cannot be overstated. As a founder, you will have a lot to do, so work with your TTO to share the burden. Not only are they well-versed in these processes, they’ll also probably have a budget for it. This will be very helpful to you given the steep costs of filing.

The five types of IP

Who owns the IP?

While it may seem like a simple question that you’re tempted to skip over, as you probably did the work yourself and so consider it your brainchild, it’s not that simple. Firstly, you generally don’t own anything – your employer owns it all. Your contract of employment almost certainly states that anything that results from your employment is owned by the university. This is not negotiable after the contract has been signed, and it’s standard practice throughout all sectors of industry and public sector life.

If you only take one thing away from this section, understand that with ownership comes the power to determine who can use the IPR, and in what manner. In short, you need the university’s permission to use the IPR, which is normally given by the TTO in the form of a licence.

As a side note, if the university does not own any of the IP rights (IPR), such as personal know-how, some would encourage you to leave the university and start up independently. However care must be taken to differentiate between the personal knowledge and know-how of an academic researcher e.g. for use in consultancy, and confidential know-how and data produced whilst in the employ of the university, the latter of which requires permission to utilise for commercial purposes (including filing derivative patents on such know-how or data). It is advised that you seek advice in such situations before progressing too far down either route (personal consultancy vs university spin-out).

So where does this leave you?

Firstly, talk to the TTO so they can fully determine the IPR situation by answering three questions:

What constitutes the intellectual property (the five types listed above)?
Who contributed to it (yourself, other academics, support staff, funding bodies, corporate sponsors, other universities and any related prior research)?
Can it be protected – can you turn your idea into Intellectual Property which only you have a legal right to use or allow the use of?

It’s worth noting that the Intellectual Property Office states: “The prevailing view is that joint ownership of IP can be particularly problematic and, in general, is best avoided.”

Do you have freedom to operate?

Could someone else get there first? Just because you haven’t seen anyone else do it doesn’t mean you’re the first person to have had the thought and acted upon it. There may be pre-existing patents specifically covering it, or one worded loosely enough that their description more or less covers your idea even if that wasn’t their intention. Either could stop your plans entirely. Don’t make the mistake of assuming you’re fine to proceed.

To answer this question, you will need the help of your TTO to scan for existing patents and activity. If all goes well, patent lawyers can do further checks. We discuss this in greater detail later in the IPR Audit and Freedom to Operate sections, but for now, an initial search utilising the guidance and aid of your TTO should suffice. Two good places to start your search include the British Library and the European Patent Office.

Learn the spinout process

There are two aspects to understanding the spinout process. Firstly, you need to understand what the standard startup process is when there is no university involved. Next, you need to understand your specific university’s process.

When the survey asked ‘What do you think the barriers to spinning out are’ 46% of investors, 41% of entrepreneurs and 35% of TTOs criticised the spinout process in some way, mainly for equity stakes or speed. So it’s safe to conclude the perfect approach has not been discovered yet. However, consider that these responses are from those experienced in the process; if they haven’t managed to get policies changed, it’s unlikely that you’ll be able to. Pick your battles wisely, since your goal is to create an effective team working with your TTO, not start an argument which can best be led by others.

Furthermore, irrespective of the strength of your arguments or possible position of influence, your calls to make the process easier will naturally be met with the scepticism of a vested party if you are in the process of spinning out. These policies exist for a reason (often one you haven’t thought of), so consider if your time is better spent adapting to the rules or fighting them.

Breaking down barriers

When thinking about barriers to spinning out, a number of TTO employees (32%) and investors (16%) specifically referred to a lack of understanding or fear of the spinout process being a particular issue. Some of these relate to the mindset or abilities of those involved – e.g. unrealistic expectations (of all three stakeholder groups), lack of ambition, confusion between groups. Others are related to the processes themselves, and issues were cited around complexity and lack of transparency.

“I have found that fostering a team approach, with transparency about the spin out transaction process and university requirements, is beneficial and can create a very positive environment. Challenges arise where that ‘team approach’ breaks down and there is no longer a willingness to constructively problem solve. This can be notable where there are diverse interests between an incoming investor, and the academic entrepreneurs feel caught in the middle.”

TTO employee

How long each task takes

According to the UK Government’s Companies House service, setting up a company ‘costs £12 and can be paid by debit or credit card. Your company is usually registered within 24 hours.’

However, you should have gathered by now that it’s rarely that straightforward. There are many moving parts and people involved, all ready to pose unforeseen challenges that will take longer to navigate than expected. Your TTO has been through all of this before, so listen to their guidance. A snapshot of timelines is given below, and there isn’t much you can really do to shorten this:

A snapshot of timelines is given below, and there isn’t much you can really do about this:

“[A key barrier to spinning out is] university staff not being empowered to make decisions or progress deals. Overworked, top-heavy management slows deal progress to an almost unworkable level, negating a key advantage of SMEs – speed of movement”

Academic entrepreneur

Image: © University of Southampton. Computer Science.

The quotation above represents a common gripe of academics – the process takes far too long. This won’t be true for all instances, but it’s not an isolated comment.

Spinout or continue with research?

It’s important to be aware that you can always spinout later. If the TTO suggests it’s too early, don’t take this as a never, or as a negative. Ask their advice on what might indicate it’s the right time in your specific case, and build towards that. It’s better to stay within the relative safety net of university employment for a little longer than to quit your day job too early.

Conversely, if your TTO suggests this is the right time, you personally may not be ready and able to commit. Reducing research and realigning your career towards commercialisation before understanding how you will remain funded is rarely a good idea. Commercialisation grants tend to be quite short, and we occasionally see our Enterprise Fellows complete their award without having secured a commercialisation grant or investment to continue the journey (we do warn them of this possibility). Check if the university has sabbatical options that you could put to good use; grants may be suitable to undertake the early stages of commercialisation alongside your research work.

Also consider if this is the right course of action for you. The table below shows the hours each stakeholder group believes you will need to work each week to make the spinout a success. If you are not ready to make this level of commitment right now, either it’s not the right time, you are not the right person, or spinning out is not the right option. It is our belief that considering the workload involved and how competitive the commercial world is, as the lead you will need to work on the start-up full time, and this most likely involves leaving the university, at least for a short time. This is not a universally held opinion however:

Hours per week a founder is expected to work

Finance, skills and a team

The final two early assessments you need to make relate to your team and finances, since your company will require money to grow. You will probably already be familiar with grant funding, but investment is a different ball game. The securing of investment is covered in Stage 3. Your grant application may be considered by three reviewers for a few hours each, then an interview panel of three or four more reviewers, taking up two working days or thereabouts. However, the level of due diligence an investor will put you through is on a whole other level, and will be measured in weeks and months rather than hours.

Whatever the potential source of finance, it will not be forthcoming in the absence of a robust and credible business plan (covered in Stage 2). All stakeholders (and particularly investors) will expect to see your business led by a team with evidenced, relevant management experience in areas such as finance, marketing, sales and people management, ideally with previous startup experience. This will likely mean you need to let others lead where they have greater experience, or you need to gain that experience and training through commercialisation programmes. Knowing your own limitations and recognising where you/your business need help are key attributes of successful entrepreneurs. You’re not expected to know it all, but you are expected to drive it forward and seek help as required.

Collaborators: understand who makes up your team

Just as a lack or absence of research experience on the team would make you question a research proposal, a lack of entrepreneurial experience is clearly a weakness for a startup. Diversify your team with a broad set of complementary skills, looking beyond your immediate set of researcher colleagues. You or the university may want to put in an external CEO from the beginning, or perhaps introduce one to mentor you. You should seriously consider which is the best approach in your case. People can learn to become a CEO, and the CEO they might want to bring in had to start somewhere, so why can’t you take on the mantle?

Be realistic - are you going to be able to dedicate sufficient time to learning how to be a CEO? Are you well suited to this role? Do you even want to take on this kind of pressure, with people’s careers relying on you? Are you comfortable removing yourself from the research and product development side of the business, or do you see yourself in more of a Chief Technology/Science Officer role?

“Starting a spinout just before a recession (early 2008) wasn't the best plan, but who could have foreseen it? And running the company as a temporary CEO through the pandemic last year wasn’t particularly enjoyable. Academics aren't called academics for nothing. Entrepreneurship isn't for everyone, so know your limitations and the extent to which you're prepared to let others run with your idea.”

Academic entrepreneur who has remained in academia alongside spinout

Born to lead?

At the Academy, we are firm believers that entrepreneurs are made, not born. The skills necessary to become an entrepreneur can be learnt, hence why our Enterprise Fellowships programme focuses on enabling academics to become a CEO or COO. However, as with all roles in life, it also takes the right mindset to apply those skills effectively. Despite the focus of our programme, we don’t believe academics becoming the CEO is the best way – it’s simply one way.

Consider what you want and also your capabilities, weighing up the two to influence your choice of role rather than allowing this to be dictated to you by the TTO or investor. It might be the case that it’s best to take a back seat for your first spinout, learn from it and lead on the next one. Or you could take it slow and take the time to learn the skills you need to be the CEO. Go after the role that best suits your ambitions.

“Trying to convey the skills, attitude, resilience and resourcefulness required to drive a start-up/spinout can be quite challenging. The importance of a whole team approach cannot be over-emphasised.”

TTO employee

Your TTO can help you begin to build your team, and you should use them to do so. You will already have a personal network of colleagues and students you have worked alongside to develop your business idea, but don’t forget your funders may also be valuable resources for guidance, mentorship or networks.