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In Stage 2

“Academics can learn to be entrepreneurs. Pushing them outside their comfort zone to perform customer discovery and understand stakeholder needs/pains does bring rewards to their original science.”

TTO employee

Learn about commercialisation

Your whole spinout experience is going to be far smoother if you enter it equipped with the expectations and information you will require. One crucial understanding you’ll need to accept is that unless your PhD happens to be in spinning out, you’re not an expert anymore. In fact, you’re a student once again. The other stakeholders know this, so what kind of student do you want to present yourself as?

You need to learn as much as you can about business in general, and the industry you will operate in specifically. Investors will expect to see a demonstrated understanding and desire from you to keep learning. If you’re going to accept investment, you’ll also need to understand that your shareholdings will be diluted. As the business grows, leading it will require different skillsets, so you may not remain the best person to lead it. As this happens, you will lose individual control of the business and its direction, which is something you must accept. Few individuals can lead a company from concept to multinational – this is not something to be feared, but a natural consequence of progression.

Ask yourself are you ready for this? This does not purely constitute an understanding of what processes and hurdles you will encounter along this journey, but also consideration of the impact this new direction of travel is going to have on you personally. It will also impact on your family, your friends, your life, and your career.

Respondents to our survey indicate the career path of the academic founder often involves leaving the employment of the university to concentrate on the spinout, and then returning to academia at a later date.

“Academics often underestimate the challenges of forming a spinout. They either assume that someone else will do all the heavy lifting for them, or they assume they can be a full-time academic AND a full-time CEO at the same time. They tend to overestimate their personal financial return, and also overestimate the value of the technology to the market. They do not understand quite how early their technology is.”

TTO employee

Knowledge is power

When talking about experiences of interacting with academic entrepreneurs, the most common theme described by both investor respondents (56%) and TTO respondents (47%) related to insufficient knowledge or naiveté on the commercial side. Specific points in response were around an underappreciation of the time and effort the spinout process can take, thinking that good science will definitely make a good spinout, and not appreciating the amount of commitment and involvement required to achieve commercial success.

This wide range of experiences is also reflected in the rate at which different universities spin out. The ten most active universities are responsible for 54% of spinouts, so it’s clear they will have more experienced teams and more developed processes, as well as good links to investors. There is not much an academic can do about this, but being aware of your university's track record may help guide you as to what preparation and learning may be necessary on your end.

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“Some academics who are heavily advised will be very clued up, and will actively raise points with investor straight away about equity, IP negotiations etc. Other academics have literally no idea, waiting for months for the TTO to decide through the spinout process.”

VC investor

Market research

This a complex and crucial topic, forming the linchpin of your business plan. There are essentially three ways to do this:

  • Desk-based research
  • Get out of the office to talk to potential future customers
  • Get feedback from existing customers.

Through conducting market research you will learn who wants your innovation, why they want it and how badly, how to reach them, and how much all this will cost.

Desk-based research

Academics should be naturals at this task – taking an objective look at the markets you wish to enter is the first step in forming a business plan. You should seek to learn how big the market is, its growth rate, how complex it is, who the key players are and how they all interact. These interactions might be through trading money, goods, knowledge, data or services. This should indicate if the market is worth entering – and if so, how and where.

A large part of your market research will involve identifying your competition. Having strong competitors is not necessarily a bad thing as it shows there is a healthy market to enter, as long as you have a competitive edge over them that will enable you to take market share or grow the market by bringing new customers into it. There’s a lot you can learn from your competition and how they operate; for example, is it normal to sell through distributors or direct to the customer? You may not understand why they operate the way they do at first, but there will be a reason, so figure it out and see if that applies to you too.

Crucially, you’ll find out what price customers are willing to pay, which (if you know your costs of production) can be very informative as to whether you can compete on price. You may have to compete on another metric, such as quality, exclusivity, innovation, or service.

This process often leads to the creation of an ecosystem diagram, mapping out how all the key players in the ecosystem interact. Once assembled (it’s never truly complete!), you should consider:

• Is the market large enough to be worth the time and effort?

• Is a licensing model more appropriate (i.e. don’t spinout)?

• Do you have a Unique Selling Point (USP) that will make you competitive? It may be disappointing to conclude the answer is ‘no’, but it’s good to find this out now rather than a year down the line – the fail-fast mentality of startups.

• Where should you insert yourself into the market, and who is it best to sell to?

• Who should you partner with?

• How does this affect your exit strategy (see stage 5)?

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(1) underestimate the importance and role of market research,

(2) overestimate the value of their IP – which is normally very low TRL, and

(3) underestimate how much time/money/expertise is required to successfully take a product to market.”

TTO employee

Get out of the office and talk to potential future customers (customer engagement)

Customer engagement is arguably the most important task any entrepreneur can undertake in the early stages of a company. Being such an important step, there are plenty of resources covering this, so we won’t tell you how to do it – merely why you must. The first point to note is that rather unhelpfully, ‘customer’ does not mean ‘customer’ in the traditional sense, but rather anyone who might be affected by your product as it flows through the ecosystem.

Also, you are not trying to sell anything to anyone – you’re simply trying to gather information. Often referred to as a ‘getting out the office,’ ‘customer safari’ or ‘one hundred conversations,’ customer engagement means all of these things. Get out of your office or lab, talk to everyone who could conceivably be impacted by your product, get them to introduce you to yet more people, and find out what they think and how they operate.

Image: © This is Engineering

Customer engagement is arguably the most important task any entrepreneur can undertake in the early stages of a company

The customer is always right

Key to this process is understanding that, no matter how confident you are that you’re correct about who wants your product and what they would do with it, your opinion is essentially meaningless. All that really matters is what the customer thinks. Rely on their insight and not your own. Does the product really solve a problem that the customer will pay to be solved?

You can’t answer this question through theory alone. You have to go and talk to as many people as possible. It can be a discouraging grind cold-calling people for several months to get this data, but it’s better to suffer through it for three months than to skip this process and dedicate the next few years to an idea for which no market actually exists. It’s highly likely that this process will lead to your first pivot (change of plan). Indeed, not having made a single pivot off the back of this process will serve as a warning sign to future investors, so keep an open mind and learn from the feedback.

As one academic entrepreneur, whose company has raised just under £6 million since incorporation in 2015 through seven investment rounds, puts it: “Don't be afraid to pivot, as the initial target application can often be very different from what is successful.”

“[It’s a myth] that the initial concept/idea will not change from spinout creation to equity realisation. Generally there will be at least one pivot as the organisation grows and matures.”

TTO employee

Fail to prepare…

You must remain objective in assessing if there is true demand for this product. This is where the fabled ‘fail fast’ mentality comes in. Always have at the forefront of your mind that 90% of companies fail. Learning at this stage that the innovation will not work is actually a fantastic result. You have discovered nice and early that you should quit before you become too invested, without spending too much of your precious time and money. Time to celebrate a bullet dodged and move on to the next idea.

Don’t just stick to your sector. Talk to everyone, as you never know where else your innovation could be of use. There is a lot happening in the world, and it would be foolish to think you identified the best option right from the outset. Conferences and startup events are good places to meet people from a wide range of sectors, be it as an exhibitor or delegate. You may get lots of enthusiastic suggestions as to how else to use your technology. Some will be wacky, but others may be insightful. Look out for trends and delve into those. By demonstrating you have explored these ideas already, you will impress the other stakeholders and build their confidence in you.

At worst, if you find no other suitable sectors, you can now reassure your TTO, investors and yourself that you have considered your options and you now know for sure Plan A is the best.

“One particular member of staff from my university TTO office was incredibly supportive in helping with the groundwork to set-up the company, e.g. patent filing, help with Innovate UK ICURe application, support through ICURe program, business plan writing to obtain initial spin out funding from Innovate.”

Academic entrepreneur

Image: © Rolls-Royce PLC

Supportive resources

Fortunately, there are great resources available to help you with this stage of your journey. There is a clear trend of best applicants to our Enterprise Fellowship programme having done this in one form or another, often through ICURe. Your existing network is a good place to start; as a researcher, you may find people are happy to chat to you about their problems as they are less likely to perceive this as a sales session – because it isn’t. Your TTO will also be able to guide you through this process, and many entrepreneurship courses will cover this as core content.

The output from this market research is being able to demonstrate ‘product-market-fit.' As can be seen below, the need for a good product market fit is one of the few areas where all stakeholders align, and is key to gaining their confidence. Information gathering is a crucial step.

“The ICURe programme is a good thing in that it's opening up potential spinout founders and bringing them together. The more these folks are socialising and doing useful customer discovery programmes, the less likely they are to be cut bad deals. Unis/TTOs promoting these are doing a good thing.”

VC investor

“Really try to understand what it will take for somebody to buy your technology. Quantify the value/benefit and think carefully about the cost and the risks. Make sure there is a good product-market fit. A lot of spinouts fail because of a lack of a really compelling value proposition.”

Academic Entrepreneur, incorporated 2011 with four investment rounds worth over £2 million

“My first spin out had a good idea but it turned out not to be needed in a product. The technology is less important than identifying the appropriate gap in the market (and the product to fit it). Also, I'd assumed the technology was the most important element, but it's only one element (and probably not the most important one). You really do need a good business model, a good idea of what the market really needs and a good commercial/sales team.”

Academic entrepreneur, ten year-old spinout with three investment rounds of over £2.9 million

“I think there are some academic PIs who think that the sheer brilliance of the technology is enough to form a successful company, and don't like the fact that the market opportunity is questioned/needs to be validated. I'm seeing fewer of these types of individuals, but there are still a minority.”

TTO employee

Identify a beachhead market - your first target

When you’re satisfied with your market research, you will need to identify your beachhead. This is a huge challenge in itself, and one covered in detail elsewhere, so we’ll keep this section brief. What you’re seeking is a balance between a market large enough to be of sufficient value to attract investors and be worth your effort in pursuing, without biting off more that you can chew.

The best advice here is to target a customer group where your product or service can have a real difference – a group where what you offer can become a must-have. You’re a startup with no reputation, so the people that buy from you will be those willing to take a risk because they believe it will make a big difference to them. You want quick (and relatively easy) sales, without the need for an expensive marketing campaign to reach them. On top of this, you will need to identify a group that can act as a springboard to something else, so do they give you a foothold in the market from which you can sell your second (more profitable) product? Or do they give you time to refine your product so it has greater appeal to the masses? The first market is not the only one out there, and not necessarily the best or biggest – so where do you go from there?

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Target a customer group where your product or service can have a real difference – a group where what you offer can become a must-have

Off the back of identifying the first market, you may wish to pursue proof of concept grants to fund the initial development and testing or the market, building on what you’ve learned so far through customer feedback. Your TTO will be able to help identify suitable grants. Securing your first customer, while exciting, does not demonstrate you have found your beachhead market. You need repeat sales, not outliers, unless public sector departments are large enough to act as a market in themselves.

Sometimes the initial market isn’t that obvious, particularly when it lies beyond your field of research. Further independent and in-depth market research may be commissioned following this preliminary stage, and you should look to your TTO to access funds to support this. All stakeholders will probably have seen similar innovations before, and will likely have suggestions as to suitable markets. Reach out to the network and explore the avenues suggested.

You may also find that an initial customer greatly focuses the minds of all involved and speeds up the whole process –any customer will want a company to contract with, and a bank account to pay into. If you find negotiations with the university or investor have stalled, then securing a customer can break the cycle by providing evidence it’s a desired product and now is the time to act.

IPR audit

Here, you assess what you have invented, and if anyone else got there first. The aim is to de-risk the startup by securing your access to the market, and to develop your ‘IPR strategy’.​ You really need to get this right, and the results may surprise you. Your idea may also not be as novel as you think. While discovering your startup is a non-starter may be demoralising, it’s good to discover this sooner rather than later, saving yourself effort, time and money – following a fail-fast mentality.​

​If you have investigated this alongside your TTO earlier when assuring yourself you had freedom to operate, you should be well placed to progress this swiftly. At this stage, you are simply checking whether what you found earlier remains true, ensuring you have complete ownership of your IP and that nobody else has started operating in your space since you last checked. This is not a one-off process; like many stages in your spinout journey, it is cyclical. You will have to return to this work at various stages as more information materialises.

“Too many times I've had PhD students come to me with inventions … only for me to discover (sometimes within mere minutes) that someone else invented the technology 20, 30, 50 years earlier ... In other words, within minutes I've shown them they wasted three years of their lives on pointless research – something we need to handle carefully. In the worst case ... one of the very first patents filed, in the 17th century, covered substantially the same work. The only real difference was the research tools the modern academic had available.”

TTO employee

Patent-ly obvious

At this stage, you will need to commission the services of patent attorneys to conduct a patent search and advise on filing your own patents. Your TTO will likely assist here with financial support and in gathering information. ​​Any public disclosure of your technology, including presentations at academic conferences, can preclude patenting, so resist normal dissemination activities. Publications and seminars can render your work unprotectable. We have even encountered a university mistakenly publishing a PhD thesis before the patent had been filed, so avoid costly mistakes by letting others know of your intentions.​

The patent process is expensive and time consuming. In our experience it can take up to three years and cost as much as £15,000 to get a patent filed, and then you have renewal fees of £500 a year for potentially the next 20 years, plus the costs of patenting in other legal jurisdictions. ​Considering how many researchers each university employs, this is a source of substantial cost to the TTO’s budget. This partly explains why TTOs can appear reluctant to file all ideas, and why during the spinout process they request patent costs to be covered. They want to recoup some of these costs where practical.

“Most of the activities we invest in have a major component of computing – impossible to patent. Value rests in the ability to be the first.”

Angel investor

Not everything needs to be patented, and there are other forms of protection beyond patents, such as copyright and trademark. Your IPR strategy should encompass these to lesser or greater extents, as the aim here is not to make it impossible to replicate your innovation, but to make it economically unfeasible to do so. Each layer of defence costs money to overcome. Under this strategy, there is no point in a competitor starting up in the parts of the world where it is unprotected, as those markets offer too little profit to justify the effort required vs the risk of failure.

The twenty years of protection a patent provides may sound long-term but companies can last for many decades, so you may not want to patent everything at once. It can be sensible to patent different aspects of the innovation incrementally, extending the period of effective protection. Also note that shorter, more focused patents are cheaper to translate into other languages, should you seek protection in multiple regions. Lastly, make sure the ownership of any IP created by contractors is clearly articulated; you don’t want to find out a contractor owns critical aspects of the work and can hold it to ransom.

A word of caution if you’re looking to reduce costs, or if your TTO can’t help: don’t try to write it yourself. Professionals will be quicker and better at it, even if they do charge, and your time can be better spent elsewhere. Many patent lawyers specialise in startups and offer payment plans accordingly. In part, their aim is to help you grow so that you become a long-term customer, and their interests align with yours.

To conclude, the end goal here is not to ‘get a patent,’ but rather to ‘develop an IP strategy,’ of which patents are just one element.

Create a business plan

Everything you’ve learned to date must now be clearly and succinctly articulated in a business plan that will garner TTO approval, entice talent to join your team and eventually convince investors to fund you.

Here are some key points to remember:

  1. Keep it short.
  2. This is not an academic publication, so you don’t need references for every point.
  3. Have a clear list of objectives and milestones that build towards an end goal.
  4. Keep it simple. Investors don’t necessarily have specialist knowledge, so you should portray your product as a solution that meets an unmet need.
  5. It will take time. You’ve done a lot of work to get here, and putting pen to paper will help set things straight in your own head.
  6. Own this plan. Seek advice, but you must write this yourself and know it inside out, as you will be quizzed on it.

Business plans come in many forms, with a style and emphasis that suits your situation. Below is a suggested structure, and the questions are non-exhaustive indication of indication of content:

Suggested business plan structure

1) Executive Summary

A persuasive one-page summary of the key points for your investors. Potential investors may read only the executive summary, so make sure that it’s succinct and lifts the key points from the rest of the plan.

2) Market Analysis

What need will your product address? How is it better, cheaper or faster than existing solutions? What is the competitive landscape? Is the addressable market big enough? Is it controlled by a few players? Is there a healthy growth trend?

3) Market Access

How will the target market learn about your product? Which sales and distribution channels will you use? How many prospective customers or key players have you spoken to?

4) Technology Plan and Product Development Strategy

What are the technical or R&D challenges to bringing the technology to market, and how will they be addressed? Does your tech lend itself to opportunities for multiple products or platforms?

5) Business Model

How will the model be actioned in terms of building product scale, delivering services, or licensing? How will you realise cash from the business or achieve an exit for investors? How do you plan to exit?

6) Corporate Governance Plan

The framework for the way the business operates. What is the corporate governance and board structure? Where do you get professional advice (legal, finance etc)?

7) IP Strategy

The intellectual property is likely to be your main (or only) asset. How are you going to protect it, in both the short term and long term? Is broad patent coverage possible? Are there background patents owned by others?

8) People Plan

What skills do you need and how will you find them? Who is on board and what is their track record? Set out the skills and experience of key people, including short CVs in the plan’s appendix.

9) Risk Analysis

Explore best-case and worst-case scenarios. Look at what the main milestones will be, and how you will adjust if they are missed for any reason. Explore when you will need further funding. Investors will certainly ask these questions, and will be pleased if you address them.

10) Financial and Operating Plan

Well thought-out and clearly presented financials are essential. You should usually include at least a three-year summary of the profit and loss account, balance sheet and cash flow projections. This should set out a month-by-month plan for the first year; quarterly thereafter. Show where the money will be spent. Say something about the likely timescales for returns on investment and the method of selling shares (the exit). This is how investors make their returns. Can they expect a sufficient multiple on their initial investment? What market share can be obtained? Is it worth the effort?

Financial assessment

Go-to market strategy

Aspiring academic entrepreneurs often overlook the fact that customers do not magically appear out of thin air by virtue of the product existing. You need a ‘go to market strategy’ – a plan to acquire customers. Many routes to customers exist, but not all exist in all sectors, so your earlier market research will have helped narrow down what’s right for you, and what’s right for your customer.

The main considerations here are the number of customers any route can reach (or size of the market), the cost involved in reaching them, the ease of implementation, and overall profitability. The favoured tactic is to go with whatever is easiest and cheapest to pull off – the ‘low-hanging fruit’ approach. This allows you to confirm if people really do want your product, how much they will pay, what needs changing about the product and does the business look like it will be profitable. If the answer to this last question is a resounding ‘yes’, then you now have a potential steady income stream that will fund the targeting of bigger and more profitable markets. Alternatively, you may have the data to convince investors to give you the funds to do so.

Strategies we often see through our programme which should generally be avoided early on (as you simply don’t have the budget) include:

Selling to the public sector

Although they often have huge budgets and a clear need for the product, they also have many competing demands for that budget, can be very slow to adopt new technology, and have long procurement processes. We normally see this with aims to sell to the NHS and universities.

Lifestyle products

Where you want customers to interact with one another and create a buzz around using the product and customer referrals, such as with many wearables. This requires extensive advertising to obtain critical mass before they can start making a profit, which is very expensive.

Manufacture it and sell direct

The profit may well be higher but factories are expensive, taking time and skill to set up and get going. Asking an investor for such funds will put them off when it’s far better to outsource production in the first instance, so your startup costs are more reasonable.

Custom installation

Popular with software firms, customising the software for each sale to provide a bespoke service is a time-consuming process, massively slowing the potential for growth and risking future technical debt as the offering evolves.

“Don't be afraid to pivot, as the initial target application can often be very different from what is successful.”

Academic entrepreneur, seven year-old spinout with over £5.9 million secured from seven investment rounds

Image: © This is Engineering

Sources of early-stage finance

For researchers used to relying on grant funding, this would seem the logical place to start for commercialisation funding. However, there are national and international rules that limit such state aid, so you must look elsewhere. The main source of funding is investors, and a snapshot of views are given below, along with a summary of other funding sources.

Our survey found issues surrounding investment and early-stage funding were the most frequently mentioned barrier to spinning out for TTO respondents (56%), and the third most frequent for academic entrepreneurs (25%). It’s highly likely you will see raising finance as a significant challenge to spinning out. Conversely (and maybe inevitably for being so embedded in the target group), fewer investors rated accessing equity funding as a barrier (19%).

TTO responses focused on early investment and seed investment, and how this can have knock-on effects on a company’s ability to take on opportunities and grow. “Seed investment for often very complex technologies is not a particularly well served area for the UK outside the golden triangle. Of the last three spinouts I have supported, only one has received significant UK investment; the rest have all had to go to the States/Europe/China to find people with both the technical understanding and the risk appetite for the project.”

Mind the gap

Academic entrepreneur responses also mentioned both grant funding and investment. Responses had some praise for Innovate UK, and recognition of the ‘valley of death’ phenomenon. Two views are given below:

“From my personal view, the biggest issue is the enormous funding gap between the fundamental research that my research group does (e.g. funded by EPSRC) and having something that commercial partners might want to invest in. All my spinout ideas are in chemical/chemical engineering hardware. This takes money and time to get from the lab to a prototype, but there is very little funding or patience/appetite to fund such activity.”

“In deep-tech… there is a long waiting time before revenues. And in this phase, the boundary between university posts and start-up posts is a bit blurred... and advancement is only covered by grants, as even angels look at the tech as a punt. We need more high-risk, high-gain grants accessible…”

Two respondents talked about early stage funding improving, one in terms of improvements having been seen over the past year, and another stating that “Seed funding is a barrier but becoming less so, especially in areas with good investor networks such as Cambridge, Oxford and London.”

A third respondent acknowledged London being well catered for, despite gaps in other regions of the UK.

Funding can come from a bewildering variety of places, so to help you narrow down who or what you should be targeting, we have compiled a table. Note that all finance providers are different, so these are not hard and fast rules, and we haven’t listed them all:

Some sources of funding

Research grants

While specifically not aimed at commercialisation, well targeted research grants can answer some questions in the early stages of your journey and you should seek to make best use of the research funding that is available to universities. You’ll probably be familiar with these commonplace grants already – they are often essential to getting started, and don’t dilute your equity, so they’re a great source of funding for as long as the work intended fits their remit.

Proof of concept grants (PoC)

The first step away from pure research towards commercialisation, if research enables you to generate the innovation, PoC funding enables you to explore if it is technically viable or not. These grants fund initial feasibility studies, basic prototyping and IP protection.

Commercialisation grants

The next stage on from PoC, commercialisation grants focus on how to commercialise the innovation and product development. Relatively few academics have commercial experience, so it’s easier to stand out as being more informed than your peers. Even as a beginner, if you demonstrate good theoretical commercial knowledge and a genuine desire to learn, you can do well here. That is one of the main factors we test for in our Enterprise Fellowship interviews.

Your savings

Here, you invest/live off your own funds until you secure customers. It’s more applicable to startups generally than university spinouts, but you will encounter this method in most advice on starting a business. We’ve included it here for completeness, but we’re not suggesting you follow this method.

Friends, family, and fools

See ‘Your savings’, but you either borrow from them, or sell some of the company to them. This method should be approached with caution. As most companies fail, it can easily sour a relationship. We’ve included it here for completeness, but we’re not suggesting you follow this method.


Going directly to customers gives the benefit of an income unaffected by the repayment of debt and equity financing. You could sell prototypes or evaluation kits, or potentially draw up a Joint Development Agreement (JDA) whereby a corporate funds your product development activities as it solves their problem. Sales and JDAs can be very useful in validating your technology, but JDAs can have a drawback in that the corporate partner may request exclusive rights to commercialisation, or demand a lower price.

This is a difficult balancing act; you likely need the industrial relationships to provide funds and validate the technology, but exclusivity deals can greatly reduce the value of your company, so approach them with caution. A good general rule is that any external discussions are carried out under a Non-Disclosure Agreement, and this would certainly apply here. As for price, avoid selling at a heavy discount, which does nothing to prove customers will pay a reasonable price.

Banks and other financial institutions

Financing from financial institutions typically takes one of two forms: business overdrafts or business loans. Overdrafts will be negotiated based on cashflow forecasts. These are a flexible (but generally quite expensive) way of covering short-term fluctuations in finance caused by the misalignment of timings with cash coming in and out of the business. Loans will be given for a set period, with a fixed or variable interest rate. Note that any lender may look to secure their loan against assets including your home. It’s best to use these only to fund specific substantial purchases, such as premises or equally large investments.

External grants and loans

A variety of government- and charity-funded awards are available in the UK that target the gap between the end of research and the start of commercialisation. Some types of grant funding can be deployed within a spinout to extend the period before you need to find your next funding round, or to progress parallel development projects faster than you would otherwise be able to. Grants that require a consortium to bid can also be an opportunity for you to approach and build relationships with possible customers and suppliers, without either side having to make a commercial commitment.

Watch out for grants whose requirements shift your focus away from your core products and markets. Securing this non-dilutive equity could be very damaging in terms of making quick progress.

Consulting/side jobs

Consultancy can be a great way to bring in funds while your company grows. Watch out that it doesn’t absorb too much of your time, while your main innovation gathers dust in the corner. You could consider separating out the consultancy work from the main activity of developing your spinout, by recruiting a team to deliver the consultancy work.

Business angels

As covered in the introduction, Business Angels are successful, wealthy individuals who have often acquired their money through business pursuits. They generally invest in early-stage ventures (e.g. pre-seed and seed) in exchange for equity.

“There are many different types of investors. Angels are my favourite. They were entrepreneurs themselves so they have been there, done that, and can really understand what a first-time entrepreneur is going through. They are very invested in all phases of the business. Other investors are a bit more passive, but can be very constructive and helpful in matters related to fundraise and exits.” – Academic entrepreneur, spinout over five years old with two fundraisings securing over £5.3 million

Things to beware of with angel investors:

  • Anyone looking to immediately take back their investment as management fees.
  • Situations where many investors take tiny stakes in the business. This can create a complex shareholder register which future investors may not appreciate as it can impede decision making, while keeping many people up to date becomes time consuming.

“Experience of working with individual angels who hold small personal investment portfolios is less good. They often have less insight into time and level of investment needed to create value, and have false expectations as to the value/share of their initial investments” – retired academic entrepreneur, spun out/started up three companies

There are several angel groups around the UK, and these can be very useful for small funding requirements in the £50-£300,000 range. The UK Business Angel Association maintains a directory of angel groups that you can access here.


Crowdfunding enables fundraising by pooling small investments (or payments for future products) from a network of individuals. Equity-based crowdfunding targeting high technology does exist, but most crowd funding is suited for companies that require smaller amounts of capital investment, or are limited to investing at the pre-seed and seed stages as they lack substantial follow-on capability. In this respect, they represent an alternative to angel investors. Typically, the crowdfunding platform becomes a single named investor representing all the minor investors, so as not to complicate the cap table.

Venture capital

As covered in the introduction, venture capitalists are professional firms specialised in providing ‘risk’ finance. Scale is important to VCs. Many VCs are only interested in businesses that can grow to revenues of £100 million upwards, and may therefore decline perfectly good businesses because they consider them ‘subscale’. With VCs, it is often the case that finance to be invested will be provided in instalments, on the achievement of agreed milestones. If certain goals are not reached, or tasks not completed satisfactorily, then the next investment may be withheld.

You should research the market thoroughly before approaching any potential investor, to make sure they’re interested in your field and they can bring something more than just cash to the table. One way to contact them is through the British Venture Capital Association’s website (, which has a keyword matching facility for identifying relevant VC firms.

Your TTO may have links to VCs, and a warm introduction from a trusted contact is generally the way to go. That’s one of the main benefits that organisations such as the Academy offer through their commercialisation programmes.


Tax is a slight tangent on where to raise funding, but is very much a consequence of it. Tax is a specialist subject, so your one takeaway should be to hire an accountant who will be up to date on the latest laws. There are ways to reduce your tax bill and also many things to get right to avoid future liability, so tax is best left to the experts. Even so, three key points are summarised below:

1) Academic spinout relief

When a spinout is created and shares transferred to an academic, they immediately become wealthier on paper. This wealth is pretty much always inaccessible at this stage, so the academic is arguably not richer at all, and this is purely paper wealth. If certain conditions are met, the academic can be exempted from income tax on this increase in wealth, and so avoid a hefty bill. Your TTO will be able to advise.

2) R&D tax credits

To encourage industry to undertake research and development, a proportion of a company’s R&D spend can be reclaimed via the R&D Tax Credit scheme. You can recoup some of the costs, to potentially spend on more R&D. This can provide a useful injection, but it is a complex area, particularly on what can and cannot be counted as R&D. More information on R&D tax credits can be found on this UK Government website here.

3) Patent Box

Again to encourage R&D, companies that register their innovations with Patent Box may apply the lower rate of 10% corporation tax for products that make use of the registered patent. For more information, see here.

The financial plan

There are several core components any financial plan must contain – without these, your business plan may not be treated seriously. The financial plan you construct will reveal your financial needs; whether you need investment, when to raise it, or if you can survive on sales. For the first year, plans should be outlined monthly, with years two and three detailing quarterly, and any years beyond that annually.

The four key components of a financial plan are sales forecasting, profit and loss accounts, cashflow statements and balance sheets. You may wish to seek professional help with any or all of these documents.

The four key components of a financial plan

1. Sales forecast

Sales impacts every aspect of a business. As such, your sales forecast will form the foundation of your financial plan and business plan. This document will outline expected sales volumes, the mixture of products and of customers, timings, your market and its value. This will have an impact on your costs including production, marketing, storage and distribution, wages, selling costs, financing costs and taxes.

2. Profit and loss accounts

The profit and loss account figures are useful in two regards. When looking forward, these figures will represent a budgeted or predicted set of figures to compare progress against. When looking backward, they provide a historical record of actual income and expenditure. The simplest form of this statement will cover money in and money out, which may be enough in the early stages of idea development. As the business grows, your financial requirements will escalate, and you will then need more comprehensive projections and statements.

3. Cashflow statement

The cashflow statement is derived from the profit and loss account and sales forecast, focusing on monthly changes. It is both a record of and forecast for what is expected to be paid and received each month, according to the business plan. It is used to assess the risk of insolvency, if the business plan will work in theory, and if any change of plan is required. Best practice is to create optimistic, realistic, and pessimistic forecasts as to whether or not everything goes according to plan. This stress test may tell you something about the robustness of your plans, and if they need changing, or any weaknesses prioritised.

There must be sufficient cash available to pay for your liabilities when they are due. Your projections will identify cumulative cash positions on a month-to-month basis and will help you identify when these become negative, as intervention will then be needed. This is how to determine when you expect to run out of money. Investors can use this figure to assess how comfortable/desperate you are for money, and so negotiate more favourable terms for themselves accordingly. You can use it to assess if and when you need to raise funds, if sales and grants will sustain you, and if the business plan is working.

If the forecast shows you will run out of funds, you are potentially ‘prospectively insolvent’, and there are laws that limit trading in such cases. This is partly why they say ‘cash is king’, as it has such a significant impact on your decisions. Being part of a university means you probably haven’t had to pay close attention to the bottom line, except at the financial year-end where it typically gets pretty hectic. For a startup, every month is like a year-end; finances are tight, and you need them all in order.

4. Balance sheet

The balance sheet offers a snapshot in time, identifying the health of the company, any assets and any liabilities that exist at that time. Information contained within this sheet, the way it is presented and any notes that expand on details are specified under Generally Accepted Accounting Principles (GAAP).

Building the financial model

The financial model contains all the details that feed into the financial plan above – all your assumptions as to the costs of each item, and how these can change. There will be a range of variables in your model, and these will be based on your assumptions, examples of which include:

  • Assumptions about selling price and sales volumes
  • Expected inflation rates, initial funding, borrowings and interest on these, plus credit terms on purchases
  • Employee wages and employee start dates

These assumptions should be explained, and be constantly revised as you learn more.

It is essential to build a model that will facilitate flexing for best- and worst-case scenarios. This means constructing a model that will allow you to easily modify your assumptions to determine their impact on your business plan, testing the robustness of your plan. There are plenty of free or inexpensive models based on spreadsheet software available via the web. If you’re seeking finance from a bank, they may well supply you with their own model, including guidance and instruction.

The structure of this document should be kept simple, with detail required only to understand why and how figures are as they are. Use summary statements and cross references to indicate links to other worksheets. These might include sales forecast, profit and loss account, cashflow statement and balance sheet.

“After 30 years and over fifty spinouts, I know that it is the quality of the team that is most important.”

Angel investor

Form your team

There’s a good chance you may already have people in mind for some roles within your spinout, but it’s important to make sure that selections are made for the right reasons. It’s somewhat inevitable that you start off by recruiting your colleagues to assist in the early stages, but this rarely looks good to investors when they see a team of four academics with identical skillsets and backgrounds.

You will need to supplement this team as time goes on. Successful leaders recognise their own shortcomings and build a team from individuals with a broad range of complimentary skillsets, backgrounds and experiences. Look outside your immediate network to identify sector experts, who can open doors to contacts and markets you’ll need access to in future.

Advice and mentorship are invaluable assets when laying the foundations for a successful business. You will want to construct an advisory board, be that scientific, commercial or a blend of the two. This board doesn’t need to formally be created until the business is established, but networking early and lining up potential members is always sensible. When doing so, you want to identify individuals who have done something akin to what you aspire to do. Use your network to get introductions, meet them for coffee and ensure these people are good fits. Bad chemistry will come back to bite you later if you rush this appointment.

“You need to build a team you can trust, build your culture early and don't be afraid of getting out of the university. You've made the decision to spin out, so go for it. There will be failures but you just need to learn from them, don't be afraid of getting things wrong. Be agile and enjoy the journey.”

Academic entrepreneur with three fundraisings of over £1.8 million secured

Image: © This is Engineering

Talented entrepreneurial leaders are always in high demand, so seeking advice could be key to finding them. Executive recruitment agencies are useful (but expensive) sources, as are specialist agencies such as Directorbank, the Institute of Directors and any business mentors or investors you’ve brought on board thus far.

In the early stages of spinout formation, it may make financial sense to use contractors to help with specific tasks such as product development. Contractors are not classed as employees, and therefore IP created by them will not by default be owned by the company, so be sure to check the contract is fit for purpose. When taking on a Chair (or other senior roles for that matter) you may want to consider paying them in ‘sweat equity’ – or shares in the company. This can be a good idea, particularly if you have a specific task in mind for them such as leading the fund raising. In our experience the typical payment for such a role is 1-3% stake for one or two days’ work per month. If they expect more, consult your TTO and any friendly investors in your network.

“Spinning out a company can be one of the most rewarding aspects of your career. The single most important factor when recruiting early team members is to choose people who are happy to roll their sleeves up and help – the CEO should be comfortable dealing with key customers, shareholders, etc. but at the end of the working day happy to help put the bins out!”

Academic entrepreneur with three fundraisings of over £4.5 million secured

The entire stage 2 process – Should you try to spinout?

Stage 2 checklist

This list is indicative only and should be adapted both to your needs and the university’s process.

1) Have you completed a comprehensive market analysis in which you have identified:

✔ Estimated market size, including whether this is growing, static or declining

✔ All potential competitors

✔ Your go-to market strategy / route to market

✔ Your business model canvas

✔ An ecosystem diagram

✔ Freedom to operate report

2) What is your value proposition?

✔ And what is your product development pipeline?

3) Have you constructed business projections which include:

✔ Expected sales and profit margin

✔ Overheads and cash requirements for the first three years, including: Profit and loss accounts Balance sheets Cash flow projections

4) A breakdown of major sources of risk and uncertainty. These include:

✔ Technical risks

✔ Academic competition

✔ Commercial competition

✔ Management risks

✔ Have you created a clear, persuasive executive summary that tempts the investor to read further?

✔ Do you have freedom to operate, or is there existing IP that others hold which will act as a barrier?

5) Has the above been assembled to produce a complete business plan?

6) Have you identified who makes up your core team, including identification of the core competencies and skills gaps within the team?



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