Starting up and Growing New Businesses
Edited by Bart Clarysse, Juan Roure and Tom Schamp
Chapter 10: Private Equity and the Development of University Spin-Out Companies
Mike Wright and Andy Lockett 1. INTRODUCTION University inventions represent an exciting new way to create entrepreneurial ventures. The possibility of creating world-class businesses from the laboratory has captured the interest of governments and universities alike. Academics are increasingly seizing the opportunity to become entrepreneurs through spinning out ventures when just a few years ago this would probably have been anathema to many of them. Yet, ventures spun out from universities face major hurdles if these objectives are to be realized. A key constraint on growth is convincing venture capital ﬁrms and other equity ﬁnanciers to provide funding. The problem is neatly summarized by a venture capitalist aiming to invest in university spin-outs: We manage $2.4bn worth of investments. For us to make money we want to invest $10m to $15m ﬁrst round, and that investment has to grow signiﬁcantly to have an impact on our fund. Therefore, we are looking for the sorts of companies that can attract a lot of customers at a high price point, generate revenues and eventually IPO [initial public oﬀering]. So far very few opportunities presented to us by universities for creating new spin-outs have met our criteria. The problems associated with spin-outs obtaining risk capital is exempliﬁed by the fact that only half of the spin-outs created in the UK in ﬁnancial year 2002 were formed using external equity ﬁnance. Over two-thirds of universities did not create a new spin-out in this period but 30 per cent did create one...
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