New Methodologies for the Creation of Spin-offs:

The Warwick Way

Isabell MajewskyDirector, Connect Midlands & EFS

University of Warwick

Birmingham

Coventry

StratfordUpon Avon

The University of Warwick

• Founded in 1965• Rated 5th in the UK for research (RAE

2001)• 25 out of 26 Departments and 91% of

the University's academic staff are in departments with top research ratings of 5 or 5*.

• Rated 5th in UK in Sunday Times Good University Guide

Objective of Warwick Ventures

To enhance the reputation of the University of Warwick, by demonstrating that the University makes good use of Intellectual Property arising from publicly funded research, for the benefit of the academics, the University and the region and country as a whole

…. and to make some money!

The Flow of Innovations

• UK Universities generate about 1 potentially exploitable innovation per £1 million of research spend

• This is a useful benchmark to aim for• On this basis, Warwick should generate about 60 a

year• In 2004, we identified 64, so we are on target

The Warwick Situation

• We continue to make very rapid progress• Measured in monetary value, e.g. the paper value

of our share portfolio is growing at over 30% a year (currently €6m, but projected at over €16m by 2007).

• In 2000 we created: – A good set of policy guidelines– An effective team of people– Simple decision making processes, with quite a lot of

delegated authority

What does Warwick Ventures do?

• Innovation Audits to assess innovations• Patent Funds to pay for protection• Market research to define the markets• Production of Business Plans• Fund raising of venture capital or

development grants• Interim management• Business advice to our spin-offs

What does Warwick Ventures do to help spin-off companies?

• Provide soft grants to pay for patenting, market research and business plan production

• Introduce them to banks, lawyers, accountants and potential managers

• Help the company to become “investment ready”

• Introduce them to the right venture capitalist and business angels

What we do not do

• Invest significantly in the company (maximum €8,000)

• Try to control the company

• Own more than 25% of the shares

• Appoint University administrators as Directors

• Get involved in the company’s finances

• Give it much help after the first 2 years

How do we rate our Inventions?

Every innovation is scored on a ten-dimension rating scale, COAP, which has been designed for ease of use by inexperienced staff.

Uniqueness Readiness

Value of market Gross Profit margin

Competitive intensity Competitive edge

Customer conservatism Access to market

Commitment of team Experience of team

A Simple Formation Process

• Make sure that spin-offs are very low-risk for the University, so we can adopt a very simple formation process

• Approval for University involvement is just the Director of Warwick Ventures and the Registrar

• Standard legal agreements are used, so legal costs are Zero

• The whole process can take as little as 2 weeks

Not Investment Ready!

• University spin-offs are usually worse than average:– Most academics have never read a business

plan, let alone written one– They don’t understand the importance of

recruiting senior finance and marketing staff– They over-emphasise the technical issues

and ignore the business issues.– They think that venture capital is a bit like a

grant

Pre-Start Existence Survival Success Take-off Maturity

Sustained Growth

Early Growth

Start-up

Seed

FU

ND

ING

ST

AG

E

LIFE CYCLE STAGE

Springboard Conference

Investment Conference

Proof of Concept

Springboard Conference

12-15 SMEs seeking up to £0.5m to pitch to an audience of investors and intermediaries

Investment Conference

15-18 SMEs seeking up to £3m to pitch to an audience of investors and intermediaries

Roundtable

3-4 SMEs seeking early stage finance to present to 12 target investors over an exclusive lunch or dinner

InvoRed

SMEs receive support to help them shape investment ready propositions

InvoRed

Roundtable

Our success since 2001

• 550 active and networking members– Entrepreneurs, Researchers, Investors, Mentors

• 200 entrepreneur presentations so far

• €70m investment raised by 65 companies

• Additional €6m of offers

• 200 jobs created/safeguarded

Having your cake and eating it

• Keep the university’s formal involvement down. – Maximum of 25% share ownership (but also options)– Appoint an observer to the Board, not a Director– Ensure “arms length” dealings– Minimise administrative linkages

• Put up minimal money (max €8,000 at Warwick)• Maximise your beneficial ownership (shares plus

share options)• Help and advise where needed, but guarantee

nothing, warrant nothing, accept no liabilities

Keep down formal links

• We only need some of our spin-offs to succeed• Since picking winners is impossible, more spin-

offs means more chances to win• But many will die, and some may actually get very

messy (insolvent trading, legal cases, etc)• The university needs to be able to distance itself

from the disasters• A small voting shareholding and no directorship

makes it easy for the university to avoid responsibility when it all goes bad

Protecting the University interest

• Our interest is to make money from our shares in the successful companies

• We thus need to protect our shareholder rights• In this respect we are like venture capitalists• They achieve this through a tough Shareholder’s

Agreement, and many prefer to appoint Board observers rather than directors

• It works for them, and we should imitate them

Avoiding losing money

• A university is unlikely to get a good return from investing in its own spin-offs, as it has no experience as a venture capitalist

• We help the spin-off to present itself to investors• If this fails and they cannot raise money, then that

probably means that it is not a good proposition, and the university should definitely not be the “investor of last resort”

• Even trying to match the investors is very high risk

Minimise trading with Spin-offs

• Most spin-offs get into financial difficulties at some time or another

• This is tricky if the university is trading extensively with its own spin-off (e.g. as landlord, provider of services, etc), as the debts are at risk

• The spin-off directors will assume that the university will not pursue its debt to the point of making the spin-off bankrupt, so will put the university debts at the bottom of the list

Summary

• The University should:– Have appropriate policies– Keeps its voting shares low– Have share options or similar to maximise profit– Assert only the minimum of influence over the Board– Work hard at introducing candidates for senior

management positions to the company– Have a relevant support infrastructure in place

Thank you for listening

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