There are no comprehensive statistics available indicating how many successful exits have been undertaken by university spinouts, or the total amount of money that has been raised from selling equity since the spinout phenomenon began about 30 years ago. However, some information is available that can provide some pointers.
The majority of the spinout activity is in the major 20 universities in the UK. Up to December 2003, these 20 universities are believed to have spun-out about 700 companies in total. It is estimated that from 2004 onwards from all UK universities, 300 spinouts will be created each year.
By December 2003, approximately 20 spinouts had floated on the stock exchange, most of these being from Oxford University, although Cambridge University, Edinburgh University and Imperial College have had some notable successes. Although public listings of spinouts are likely to attract the most publicity, a trade sale is a more common exit for spinouts than a public listing. Examples of trade sales in the Cambridge Cluster were the acquisition of Adprotech by Canadian Inflazyme Pharmaceuticals (for an undisclosed sum); Meridica being acquired by Pfizer for £125 million; and Alphamosaic being acquired by Broadcom for £123 million (source the Library House/Grant Thornton Cambridge Cluster Report 2005).
Successful public listings from Oxford University have included Oxford Instruments, Oxford Glycoscience, Oxford Molecular, Powderject Pharmaceuticals, Oxford Biomedical and Oxford Asymmetry. Although there are individual success stories (and several academics and investors have made considerable fortunes from spinout companies), anecdotal evidence suggests that only about one in 20 (or 5%) of spinouts has, so far, been a success in the sense of providing a profitable exit for their investors.
Of course, many more spinout companies have been successful in generating revenues and employment for thousands of people (with several also generating operating profits for their investors) and time will tell whether the successful exit percentage will improve.
For many academics the university shareholders’ agreement will be the first one they have experienced. However, when the company embarks on second round funding and the VCs produce their agreement, the academics should, in theory, be better equipped to deal with the agreement and, in particular, to negotiate such things as minority protection.
There is no ‘right’ way to value business interests, as I explain in Appendix 1 and, consequently, any number of methods can be included in a shareholders’ agreement. Some of the methods that can be included and my comments on them follow below:
Many businesses with co-ownership fail to draw up shareholders’ agreements, but even those with agreements in place often fail to address with any thoroughness valuation of interests being sold. This failure can result in agreements being vague and difficult to implement. The other common failure is that although the agreement contains adequate valuation methods, remaining owners make no provision for the funding of a purchase of the interests of the outgoing owners. We will now look at the valuation and funding methods that I believe business owners should consider.