The challenges of commercialization: spin-off companies

Good ideas were not meant to languish in the library. Commercialization involves getting them out to market, but licensing a technology to a third party isn’t the only way to do it.

Spinning off a technology into a startup company can offer high returns, if researchers are willing to put in the time and effort to market it. But this approach can be harder for some technologies than others.

Choosing the right technology

“In order to attract investment, investors need to see an ROI through an exit strategy,” explains Peter Garrett, president and CEO of Innovate Calgary, the technology transfer and business incubation centre for the University of Calgary.

“Pharmaceutical startups can be challenging due to the long timelines to market and high cost of development,” Garrett continues. “Many energy spin-off companies can also have the challenge of high startup costs like those associated with field testing.”

Ownership models 

It isn’t just the type of intellectual property that determines the possibility of a spinoff. IP ownership structures may also be a barrier.

A six-university study by UC Davis professors Martin Kenney and Donald Patton suggested that inventor-owned research (as typified by the University of Waterloo’s model, for example) creates a far more conducive environment for spin-off operations. Conversely, while not necessarily preventing spin-off formation, an institution-owned IP model can put roadblocks in the way.

Building the right team

Assuming that researchers have the right intellectual property and business proposition to spin off a company, they must then think about skill sets. Even if the technology is world-beating, it won’t get far without the necessary business acumen, warns Paul Rivett, director of client services for VentureLab, a regional innovation centre in York Region, and a member of the Ontario Network of Entrepreneurs.

“Researchers often assume that they can make business decisions, without business experience, while they continue to pursue their academic careers,” says Rivett. “Researchers often overvalue technical expertise and IP, and undervalue market experience and business savvy.”

One way in which this can manifest itself is in a poorly-formed team, run by engineers rather than business experts. In some cases, says Joel Liederman, vice president at technology commercialization venture MaRS Innovation.

Often, the researchers may not even want to be a part of the spin-off company, knowing their own limitations and wanting to stay in the lab.

All of this can lead to a catch-22 situation, warns Liederman, who argues that it can be hard to hire the right team until a company has enough funding, but that the funding won’t always come until investors see the right team in place.

Venture funding

The context for funding isn’t good anyway. Canada is not a particularly fruitful place for raising investment capital, warns Liederman.

“There’s a dearth of investment capital in this country. We do provide seed funding, but we can’t go much beyond a couple of hundred thousand dollars,” he warns. Even then, the firm counts on funding partners like IRAP and NSERC to help it out.

“We have an exciting company that we helped to spin off from a university, and right now they’re in California in the YCombinator incubator,” he laments. “There’s a good chance they won’t come back.”

Venture capital investment in Canada still has not recovered from 2007, when they stood at $2.1bn, according to data from the Canadian Venture Capital Association. They have crept up since then, but still fall short, and haven’t shifted from $1.5bn for two years.

The amount of VC funding awarded to a Canadian company lags that of their American competitors. In 2012, startup Canadian firms got just 44% of the VC funding enjoyed by firms south of the border.

Don’t rely on the institution

One might argue that universities could step in, but as Rivett argues, this isn’t a guaranteed outcome. “Presumably the academic institution would take into account the risk of obtaining sufficient investment in determining if the spin-out company could be successful,” he says. “I would not expect the institution to step in, to fill a gap – it would not be a sound investment decision on their part.”

Tom Corr, president of Ontario Centres of Excellence, says that this is why it is important to get industry as involved as early as possible. “We can tell you from the start if you’re on the right track because we get the voice of industry involved when reviewing applications for funding,” he says.

Having advisors with some business smarts is just one strut of a broader strategy to starting a spinoff company, as is having a well-rounded team. But ideally, the researchers responsible for the technology itself will themselves have a track record in engaging industry.

The more seasoned the senior players, the more sympathetic the money men will be – and in any case, researchers trying to get technology off the lab and into the market might want to set their sights on lower-level angel funding, rather than shooting for millions of dollars out of the gate.

Previously on CommerceLab: The sure-fire ways to succeed (or fail) at technology commercialization

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