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Why and when to start a company 2019-02-28T11:32:38+00:00
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It is important to consider why and when you should start a company before you embark on this journey. This section should help you navigate these key questions.

WHY START A COMPANY?

Academic research can spark new ideas for commercial solutions and, as an inventor, you might be tempted to take them forward through independent companies. Reasons behind this decision could be connected to the desire to bring about positive change, develop your professional career and reap the financial benefits that a successful business can bring. Whatever the case, you must embark upon this journey fully aware of what lies ahead, as a spinout can require significant amounts of time, dedication and money to establish and operate. In many cases, other commercialisation models might be more appropriate, less onerous or offer better return-on-investment.

When is spinning out appropriate?

Because of the significant amounts of work and funding that a company requires up-front, spinning out is usually recommended in one of two cases:

  1. Disruptive innovation. This is the case for ideas that represent complete breaks with current technology and/or business models. They do not only change the face of technology, but they create a new market for it as well, modifying supply chains and user behaviour. Popular examples include the iPhone, Airbnb and Skype.
  2. Platform opportunities. These are cases where the idea has multiple applications in many industries, which would make its licensing financially inefficient. Machine learning or optimisation algorithms that could be integrated into many solutions and applied to different industrial contexts are prime examples. If your technology falls under this category, you should still consider focusing on a specific industry challenge, as a method without application stands little chance to secure funding.

Not all research can fit a spinout model, and many academic results might be better served through other commercialisation models, such as licensing. More about this in the next section.

You might be tempted to set up a spinout in order to attract more funding to continue research in your field or to retain some of your talented collaborators. While spinouts can help with that, this should not be the main reason for creating a company. Spinouts can only be successful if they have a clear target market and manage to develop a product that responds to needs well enough to become sustainable. This can be a complicated and turbulent process, and many start-ups discover mid-way that they require a team with a different skillset or need to pivot their business focus to find their place in the market. If other considerations, such as retaining staff, come into conflict with that primary aim, the spinout could fail.

What are the alternatives?

Licensing is generally seen as an alternative that is better suited for technologies that:

  • Can easily (and more cost-effectively) be produced and sold by existing companies
  • Are extensions of or can enhance existing products
  • Are likely to be seen as one-time purchases

Licensing can have some obvious benefits:

  • Revenue generation: the licensee of your technology would pay a fee in exchange for a licence to the underlying IP; they would then develop and sell the product independently;
  • No upfront investment: you would not need to invest significant amounts of time and money into building the ‘end’ product, securing investment and reaching the market;
  • Larger market penetration: existing businesses have networks that allow them to sell products based on your IP in wider territories (in turn increasing revenue);
  • Quicker time-to-market: existing businesses already have production capacity and distribution chains in place, meaning that they can bring solutions to market quicker.

However, if your product is very innovative, it is likely that it will be perceived as too high risk by potential licensees. Moreover, (part of) the production/distribution system for it might not currently exist. In such cases, spinning out is likely to be the only way to bring your technology to market.

What do you need to spin out?

You’ve identified a market opportunity that your technology has the potential to solve. You have considered the implications and decided that this is the right route for you. What next? The fundamentals of a successful business are a clear need that affects a significantly large market to make the business sustainable, a skilled team that can develop a solution to meet this need and the investment that will allow the solution to reach its market. But yours is not just any business; as you come from the forefront of research, you will first need to consider a crucial building block: intellectual property.

Intellectual property (IP)

Why protect it?

While often under-valued, IP is likely to be one of the most important assets a digital tech company can hold. It will be one of the key aspects investors will consider when deciding whether to back you or not, so clarity on what IP you own and how you protect it is vital. It will also ensure you have (and hold) a competitive advantage over other market players.

Portico Ventures helps researcher-entrepreneurs clarify to investors the rights the spinout has to the intellectual property developed as part of their academic work. We can also recommend protection mechanisms and experts to help you navigate through filings or IP strategies.

The most current forms of IP and IP protection

Your idea is likely to be based on a combination of several IP forms: patentable methods, algorithms, software, designs, know-how etc. Depending on your idea and business model, you might consider using one or more of the protection options below.

IP protection To be used for Further details
Patents Inventions You can apply for a patent to protect your invention. It gives you the right to take legal action against anyone who makes, uses, sells or imports it without your permission. To be granted a patent, your invention must be something that can be made or used, new (and unpublished/undisclosed) and inventive (not just a simple modification of something that already exists). Patents are expensive and difficult to get (approximately 5 years required to secure them). There is no such thing as a worldwide patent and each country in which you seek protection will need to be applied for individually.
Copyright Software, books and reports, websites etc. Copyright protects your written work and stops others from using it without your permission. The right to copyright protection is automatic – you don’t have to apply or pay a fee, but you are advised to assert if you are claiming copyright in your published work.
Design rights Engineering sketches and equipment designs Design rights only apply to the shape and configuration (how different parts of a design are arranged together) of objects. You can also register your design for better protection provided it meets the eligibility criteria.
Trade marks Brands and names You can register your trade mark to protect your brand, for example the name of your product or service. When you register your trade mark, you’ll be able to take legal action against anyone who uses your brand without your permission and sell/ license your brand. There is no such thing as a worldwide trademark, so you will need to apply for protection in each individual territory.
Trade secrets Know-how, unpublished formulae, etc. Trade secrets are effective ways of protecting your IP as long as confidentiality is maintained. Non-disclosure clauses in employee contracts are excellent examples of ways in which you can protect your company’s proprietary know-how.

Licensing of patents is nearly always accompanied by a licence to the associated know-how. It is clear that an academic has considerably more information on a method or technology that he/she has developed than what has been published in a paper or patent application. This know-how – either with or without a patented technology – is a valuable asset for a spinout.

IP ownership at UCL

In line with section 39 of the UK Patents Act of 1977, IP developed as part of your work with UCL belongs to the University. This recognises the investment that has gone into staff and facilities, and  is described in detail in the UCL Staff Intellectual Property policy. In line with the general market practice, UCL believes that inventors should be rewarded for their success, the University offers significant portions of the net income from commercial exploitation to staff developing new technology/ideas. Moreover, the researcher’s department also receives a distribution of the net income from e.g. an exit from one of our spinouts, enabling more investment into your field and your facilities. More information can be found in the UCL revenue sharing policy.

Before licensing the IP into the spinout, it will need to first be assigned to UCLB through an agreement between UCL, the inventors and UCLB. The agreement also governs revenue sharing between UCLB and UCL (plus any other IP owners). Because, as a founder, you will be taking equity into the company, you cannot also expect a portion of the revenue generated through the UCLB shareholding. You will therefore be asked to waive your rights to a share of the licence revenue; this will happen at the same time as the assignment agreement.

Market opportunity

While IP is important, you must also consider how your innovation will be applied in a commercial context. A product or service that does not respond to a clear need is unlikely to ever take off, so explore your market early and draw up evidence of significant (existing or potential) demand. For most spinouts, this tends to be just as important as the technical breakthrough that underpins the idea.

However innovative, your product or service will need to tackle specific pain points in the market and outcompete existing technologies. You might be convinced that if your solution performs 5% better than competitors, it will be taken up by the market; however, you will need to also consider the costs of implementing your solution and the added risks you present as a new (and sometimes unexperienced) market entrant. Inferior technologies can still appear preferable to users and customers if they offer better value for money, are more reliable and better target their audience.

Your target market is not always the one you initially envisage. Market researchers or experts from industry can further guide your market scoping and advise you on adapting your technology to an appropriate niche. The pain point you decide to focus your solution on needs to be significant enough to offer returns on a scale that investors are likely to back. Consider starting with informal (potential) customer or industry expert discussions; speak to us about non-disclosure agreements (NDAs) if these are likely to go into the inner workings of your technology. More detailed market studies can be commissioned to further understand specific niches and Portico Ventures can recommend dedicated funding sources and experts to undertake them.

Team

Taking on a founding role in a company is exhilarating, but also comes with significant responsibility. As a founder, you will be involved in every aspect of the spinout from the outset. Not only will you be working on the technology itself, but you also need to consider the business, legal, financial and staffing needs of the young company. This can entail both extremely interesting tasks and new learning opportunities, but also a lot of mundane work or situations where you will need to step out of your comfort zone.

While you will be one of the initial shareholders of the spinout, you might also be one of its initial (sometimes the sole) directors. The former role refers to ownership, while the latter is connected to the legal obligations of the company. Especially early on, you will need to demonstrate substantial and very practical commitments to the business; later on, time commitments can be scaled back: as staff is on-boarded, your role could change an advisory position.

Apart from making sure that your personal time commitments are aligned with your willingness to spin out, you will also need to ensure that you avoid conflicts of interest and conflicts of commitment whilst you maintain a formal role with UCL.

Funding

Funding is generally the first concern of aspiring entrepreneurs, and for good reason: even in a very dynamic start-up ecosystem such as London, funding is usually difficult to obtain at the start of the road. There are two sides to consider: 1) the amount of investment you need to develop a product and obtain sufficient evidence of market fit and 2) once revenue starts coming in, the amount of time you will need to reach a significant level of return on that investment and the amount of time revenue can be sustained for. The first figure is likely to be the focus of your financial projections, but it is your ability to put forward a convincing plan under the second point that will bring funders on board.

There are many different financing routes that would allow you to take your ideas forward: your (and your team’s) in-kind time contribution, R&D grants, bank loans, angel and VC investment etc. Throughout the lifetime of your business (and particularly in the beginning), you are likely to use a combination of these. While you might prefer or be more comfortable with one or another, you should consider all the funding tools you can access and develop the skills and networks that will open up these instruments when they are needed.

A short presentation of the various financing options and a longer discussion on the instruments most often used by our spinouts is available under section Raising Finance.

What to expect from the journey?

Time commitments

Time constraints can never be overestimated when starting up a buisness, so your own professional and personal priorities also need to be clarified beforehand. Depending on the role you plan to take in the spinout, it may be possible to reduce the time you spend on your academic duties and dedicate some time to your business endeavours. Time commitments to the spinout are likely to tail off as the business grows

Permissions for involvement

UCL welcomes entrepreneurial initiatives from its staff; to help us ensure you are not overloaded and that the IP produced as part of your academic and entrepreneurial roles is properly delineated, you will need to declare your intention to the department and obtain permission from the Head of Department (HoD).

Conflicts of interest

To make sure that potential overlaps between your entrepreneurial and research interests are properly managed, conflicts of interest (CoI) need to be disclosed in line with the University’s CoI policy. The existence of an explicit conflict of interest is not in any way intended to question the integrity of UCL staff; it is simply necessary to have mechanisms to protect researchers and UCL from reputational damage or other liabilities.

Following your CoI declaration and HoD signoff, the Department should carve out your research commitments, to ensure that you do not work on the same topics as part of UCL as you would as part of your spinout. This will also help in keeping IP developed as part of your company separate from the University’s IP rights over your academic results.

Conflicts of commitment

To help manage workloads and time commitments, you might also want to discuss with your department alternative work arrangements, especially when the young company is just starting out. Reducing your time spent in UCL, or re-considering focus areas for research, are not uncommon actions for researchers-entrepreneurs.

Stages in company establishment

While you might be tempted to jump right into setting up a business, consider the tax and financial consequences of incorporating before you have cash coming in. You can bring together a team, develop your business case and your product, create a website and seek investment before you actually register your business. This protects you from making a financial commitment before you have more certainty over the outcome and allows you to secure proper advice at every stage in the journey:

  • Pre-incorporation, you will need to develop and test your product, understand the market you are going into, build a solid business plan and start securing money (either through equity investment, grants, revenue or other streams). You can then register your company.
  • Shortly after incorporation, you will need to have agreed a shareholder’s agreement and set of articles of association, register for VAT, issue shares and sign the licence agreement with UCL.
  • Post-incorporation, you will need a bank account, bookkeeping and accounting support, manage recruitment and HR, consider office space and operational issues.

At each stage, you will need expert advice and time, so take advantage of opportunities to meet mentors, suppliers and investors who can help you move your spinout forward.

How can Portico Ventures help?

Portico Ventures is a pilot programme that aims to give UCL researchers the freedom to take their ideas to market through spinouts. Currently open to Computer Science academics, the programme recognises the huge opportunities in digital tech and accelerates the creation of businesses that can thrive in a fast-moving ecosystem. It introduces a “light” commercialisation model that gives more independence and a higher share of equity to University staff creating spinout companies.

Who is it for?

Portico Ventures is only available to Computer Science researchers at this time. It recognises the fact that many of the Department staff in this field have experience of building businesses or have networks that can support them in spinning out successful companies.

Some might have set up businesses in the past, have worked with corporate partners before joining UCL or as part of their research, and have most of the skills, knowledge and contacts to transform their academic focus into a profitable spinout. In such cases, where the researcher can independently drive the process, the benefits should also reflect the increased responsibility. This is where Portico Ventures comes in.

The pilot is open to all Computer Science Department staff – from Professors to postdocs –interested in independently taking to the market solutions based on the know-how, software, algorithms or datasets developed through their work at UCL. They could do so in partnership with researchers from a different UCL department, as long as the lead researcher of the proposed spinout comes from Computer Science. Students – either undergraduate or graduate – cannot access Portico Ventures directly, but could be co-founders or employees of spinouts developed by Computer Science staff.

How does it work?

The programme strikes a balance between rewarding researchers that decide to independently build a business based on know-how, software, algorithms or datasets developed in UCL and compensating the University for giving the spinout the right to exploit this intellectual property. In exchange for a 6% equity stake in the company, non-dilutive through the first GBP 1million, UCL will give the spinout a clean IP licence and access to a dedicated support framework. The founding team can distribute the remaining equity among themselves (and any other stakeholders, such as early investors), but should include a minimum 10% option pool to incentivise initial employees, advisors, non-executives etc.

Portico Ventures excludes pure consultancy companies and only covers spinouts based on non-patentable IP, which needs to be disclosed at the start of the process. Our team will perform all due-diligence checks on the IP, establishing ownership rights and working out compensation arrangements with all owners. Once an idea is accepted into the programme, founders can use the tools and support developed by Portico Ventures.

UCLB expects to stay a shareholder in the company until an appropriate exit event (e.g. sale, IPO). During that time, it will have regular shareholder rights, including certain information rights to fulfil its reporting obligations to UCL. It is expected that the 6% shareholding will dilute over time as the company raises investment beyond £1m. At an exit, UCLB will share the proceeds from its converted equity according to the UCL revenue share policy, which means that a significant portion of the net income received by UCLB on an exit event will be returned to the Department / UCL.

Why join Portico Ventures?

Independence
Portico Ventures is designed with the confident researcher-entrepreneur in mind: it aims to allow Computer Science staff to take their ideas forward with greater independence. They would be in charge of devising the spinout’s business plan, making the right connections and discussing investment options with potential funders. The programme would be there to support them by suggesting funding options for any outstanding work, organising investor events, using our networks to help round up spinout teams and introduce them to the experts they might need along the way.

Clean IP
The programme will ensure that the IP required by the spinouts is properly disclosed, as well as that rights and revenue sharing are agreed with all creators before licensing. In most cases, UCL is the legal owner of IP developed by all UCL-employed researchers in the course of their work. This includes (but is not limited to) software, datasets, algorithmic methods and know-how. Publication of such IP does not change UCL’s status as the legal owner. The UCL staff intellectual property rights policy sets out the details of IP ownership for all technologies and know-how developed through research at the University.

Before funding can be considered, researchers are often required to confirm IP ownership and exploitation rights to (non-academic) co-founders and potential investors. The aim is to provide clarity on the UCL relationship in terms of exploitation rights, to confirm proper compensation for all IP contributors and to carve out your research obligations for situations where new IP is expected to be generated. Neglected, these can all cause the spinout to incur financial penalties. Depending on the type of intellectual property that the spinout needs, this process can prove to be complex and costly.

Portico Ventures supports Computer Science academics by taking charge of the IP due diligence and ensuring that an adequate licence is put in place. In order for the programme to assess whether it is able to prepare the necessary licence(s), we need a full disclosure of the various items of IP that would be licensed to the business. This will be done following an initial meeting with the researcher.

Access to UCL support
While founders take the lead, Portico Ventures allows them to access UCL Business and UCL Innovation & Enterprise resources through our support framework. This includes information on funding sources for market studies and proof of concept, templates for legal and financial documents, networks of experts and potential service providers in fields such as tax, legal advice, accounting and visas, links into the wider London entrepreneurial and investment ecosystem.

Recognition as a UCL spinout
All ideas accepted into the programme will be promoted as UCL spinouts through our website and our networks. Companies approved will also receive support to make the best of the wider UCL entrepreneurial ecosystem.

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