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Don’t let spin-out companies fall through the net

Pandemic leaves startups needing help just as private investment dries up, warns Joe Marshall

For university spin-outs the early days, weeks and months are both exhilarating and nerve-wracking.

Ideas and inventions developed in the safety of a university department are now the centrepiece of a fledgling business. The technology needs to hold its own in a commercial environment—investors need to see its future worth, customers need to want it enough to buy it (and keep buying it) and you need to build a team of staff who believe in your ideas as much as you do.

For a founder, all of this is a dizzying world away from academia. And we haven’t even got to the joys of a running a small company—the legals, the financials, the people.

The thing that will wake any founder or start-up entrepreneur up in the middle of the night is cashflow and payroll. Is there enough money in the bank to pay this month’s wages?

This is all under normal circumstances—and these, by every stretch of the imagination, are not normal times. How are spin-outs coping?

Judging from my conversations with technology transfer offices at universities across the UK this week, the situation is perilous. Chancellor Rishi Sunak has announced unprecedented measures to support businesses, with an array of schemes and interventions. But in many instances, spin-outs are falling through these safety nets.

Leap of faith

Spin-outs from universities often incur upfront losses through investing in their ideas and technology, with the hope of potential returns in 5-10 years. They are heavily reliant on equity funding and so not suitable for debt. And their real intellectual property is their people. Sidelining or furloughing staff, even if possible, is in effect closing down the essence of the company. 

Social distancing and lockdown measures are affecting all businesses. Customers and sales have dried up in many sectors and for spin-outs, which are often operating in new markets and creating new sectors, this will be particularly acute. 

Developing sales pipelines is a time-consuming task for any company; spin-outs are asking prospective customers to take a leap of faith on something different and cutting-edge. The appetite to take a risk on new ideas falls away in crisis.

This leaves spin-outs even more reliant on the support of equity funding. The pandemic is likely to leave them needing capital from new or previous investors, at a time when capital is drying up. Many investors won’t have the capacity to meet increased demand for bridge investment across so much of their portfolio.

Universities are already stepping up, as they are in so many other areas, with technology transfer offices giving their spin-outs what aid they can. This ranges from offering free rent to companies operating on university properties, to hands-on help with finance and contingency planning.

But as everyone gets over the immediate shock of the crisis, the realities are beginning to bite. Many spin-outs whose time horizons have been framed in days, weeks and months are shifting to think about getting through the next few days, hours and minutes.

What can be done to help? Highlighting problems has been critical in order to suggest targeted solutions. Government is increasingly aware, and understands that many of these companies are vital not only to aiding our road to recovery, but being the frontier companies that define our future economy. We need to collectively make sure these spin-outs don’t fall through the net.

Joe Marshall is chief executive of the National Centre for Universities and Business