Home > Topics > The Public Sector and Entrepreneurship > Creating and Developing Spinouts: Experiences from Yale University and Beyond > Editor's Summary, Implications and Best Practices

This chapter presents the rationale for and a comprehensive practical overview on the creation of university spinout companies. If you only read one chapter on spinouts, then this is the one to read. The chapter is based upon the successful experiences of Yale University and advocates the fairly engaged “hands on” approach practiced at Yale, in which the university is actively and directly involved in managing the creation of new companies and investing human and physical resources in its success. The hands on approach has greater chance for success—the authors argue perhaps rightly—than licensing the university’s technology to a startup company that is completely unconnected to the university. The hands on approach does, however, introduce a number of significant risks, which should be carefully managed in order to maintain the potential for success.

The strategy of creating university spin outs, as opposed to simply licensing technologies to existing companies, is likely to appeal to universities in developing countries for several reasons:

1. While licensing is often the “preferred” option for university technology transfer (because it is less complex), licensing requires an acceptable licensee who is both interested in and capable of developing the technology. In many national settings where the biotechnology industry, for example, is in the early stages of development and where there is a smaller chance of finding an acceptable licensee, it may be more successful to create a spinout.
2. To the extent that the goal of commercializing university technologies is to generate economic growth, the creation of new companies can have a greater impact close to home by generating jobs, attracting additional investment, and facilitating the growth of a biotechnology cluster.
3. Because universities and public sector research institutes are often the giants of R&D within a developing economy, they need to be relied upon as sources for human capital and investment in entrepreneurship, as they may be the only source available.

The process of creating a spinout is essentially one of providing the right social/professional environment, legal/financial framework, and resources for something new to grow and succeed and—given the risks—to fail “gracefully” if need be, without causing harm beyond the loss of the opportunity and the initial investment. A very important element of creating spinout companies is to channel the enthusiasm and commitment of those who believe in the technology and want to see it succeed and make a difference in the world. While there is certainly an “art” to entrepreneurship, there are also reliable recipes available—such as those provided in this and the other chapters in Section 13 of the Handbook.

Key Implications and Best Practices

Given that IP management is heavily context specific, these Key Implications and Best Practices are intended as starting points to be adapted to specific needs and circumstances.

For Government Policymakers

• National institutions should be granted maximum flexibility in determining how to encourage spinouts. No single approach is best but must be adapted to the mission, culture, and environment of the institutions As a consequence, governments can do a lot in encouraging organizations to be proactive but should stop short of prescribing specific terms and approaches.
• Local, national, and regional economies can experience growth when university spinouts decide to remain in the region, creating jobs for highly skilled workers, generating joint research projects with the university and other spinout that can attract investments. These spinouts can eventually even form a biotech cluster that can encourage relocation or the opening of branches by existing companies.
• Public sector institutions may be the largest economic entities present in a developing country. Hence, they should take the lead in development by fostering the establishment of spinouts that are seeded with technologies generated in the public sector and protected and managed as IP assets.

For Senior Management (university president, R&D manager, etc)

• University spinouts provide public benefits in the form of new products brought to market, and they promote regional economic development by creating jobs and generating other economic activity.
• By both licensing revenue and appreciating equity owned by the university, spinouts facilitate faculty retention by keeping inventors at the university, and also generate financial returns for the university.
• Faculty recruitment and retention can be served with opportunities to become involved in spinout companies. If spinouts remain in the region and faculty inventors can remain active as consultants or advisors, this can help keep those faculty inventors at the university. Top caliber recruits can be attracted by a university’s proven track record in creating successful spinouts.
• An intensive hands-on approach to creating and managing spinouts may be preferable to the hands-off approach of licensing to third-party startups. The hands-on approach enables the university to control some of the risk factors, while the hands-off approach can lead to more variable results.
• When participating in entrepreneurial activities and taking equity in spinout companies, risks to the university include potential impact on tax-exempt status, liabilities for the actions of the company, conflicts of interest and/or commitment, and conflicts with the mission of the university (or even just public perceptions of conflict). Risks can be managed.
• To be an effective “entrepreneurial” university, representatives of senior administration should routinely review company-founding activities. IP protection, business planning, building of business relationships, recruiting, reviewing conflicts-of-interest, negotiating agreements, financing, and board seats should all be subject to review.
• Universities should have a clear policy in place for disposing of equity in its spinout companies, both for the sake of the university’s integrity—to prevent conflicts of interest—and for the sake of the company—to prevent the university’s divestment from sending any sort of damaging signal to the market about the value of the company or its technology.

For Scientists

• Not all university scientist inventors are entrepreneurs, or are interested in being spinout company founders, and not all spinout company founders from the university are the technology’s inventors.
• While inventors are treated equally under university patenting and licensing policies, involvement as a company founder entails a greater degree of risk and commitment to move an invention to commercialization. Founders should thus expect to be rewarded separately from the licensing consideration (the reward to inventors for their invention).
• Participation in a spinout can be particularly rewarding experience, financially as well as personally, as it involves the practical application of one of your ideas.
• The skills that successful scientists possess may not readily translate into the entrepreneurial skills needed to found a spinout. Be aware that building a successful spinout is a separate and demanding endeavor.

For Technology Transfer Officers

• During the course of managing intellectual property, the key choice might be in determining the most appropriate path for commercialization, that is, whether to license to an existing company or to create a spinout.
• Spinouts carry a number of risks, but with certain factors in place, they can represent the best opportunity for developing early stage technology, in particular because the inventor and others who get involved from the university will have a much greater vested interest in and commitment to the success of that technology.
• Potential investors in a spinout will ask two major IP questions:
  • if there is intellectual property that could block its technology, and
  • if your intellectual property can dominate the market and prevent entry by others.

Other key questions will include the characteristics of the market opportunity and the financial “bottom line” of revenue and expense projections over the life of the technology.