Putting a value on university spinouts
September 19, 2023
Innovation’s importance to economic growth has long been widely recognised across both the public and private sectors.
The recent Innovation and Growth Report 2022/23 – which you can read in full HERE – highlights the potential of universities and research institutions to maximise the societal impact of the IP they generate.
Octopus Ventures’ ‘Gateways to growth – Entrepreneurial Impact Report 2023’ argues that Universities in the UK play “an integral role in economic growth and fuelling innovation”. It was pleasing to see that the University of Dundee and other universities outside the traditional “golden triangle” performed well in Octopus’ university spin-out ranking, showing that opportunities can be found across the country.
Recent news that the UK will rejoin Europe’s Horizon scientific collaboration programme has been met with widespread support from industry voices.
A recent Business Leader article, which you can read HERE, in which Max Bautin, Managing Partner of IQ Capital, described this as “excellent news”. Raj Kandola, Director of External Affairs at Greater Birmingham Chambers of Commerce, also comments that rejoining the programme will “cultivate greater collaboration between research, science and higher education institutions both home and abroad”.
These new opportunities are extremely exciting, and this is an area that we will keep a particularly close eye on as we have experience working with university spin outs.
There are a number of issues we have to carefully consider with regard to university spin out companies. As university spin outs are often research or idea focused, they typically have significant Intellectual Property within them, but may have no prospect of revenue, let alone profits, on the horizon. The IP will exist in a variety of places, including patents that have been issued and registered trademarks or copyrights owned by the company, but also, for example, in the future IP that might be created and the intangible IP such as that present in the team (that inventor’s brain may be very valuable indeed!), the proposed business model and the industry partnerships that may be attached to the company. So, without numbers how do you value the business and why do you want to value it?
Once the IP is uncovered we can value it. There are loads of viable methodologies ranging from comparable transactions and M&A activity (yes, we can find those), but we can also look at the costs of creating the IP from a bottom-up perspective. When it comes to the unregistered IP, the team can be valued on the cost of the sweat equity completed and intended based on market rates for similar salaries and the proposed business model can help us to understand whether this will be a business which relies on nice safe long-term contracts, or not; the former may justify a premium valuation. Our Balanced Scorecard methodology is a very reliable way of assessing these issues and then creating the valuation. There are other solutions too. Do call if you want to find out more.
We thoroughly enjoy valuing spinouts, and our approach can also work for IP rich companies that are further along the track.
It is SO important to get the valuation right prior to a funding round or an issue of an equity incentive plan for staff and others.
If you have one on your desk right now, where you know that a fast, accurate and most important of all easy to understand valuation will get the deal moving, do give us a buzz. We are busy, but never too busy to help you. You can reach me at 07736 676 212 or email modwenna.rees-mogg@athlacapitalmanagement.com.
