A 3D body scanner set to take the world by storm. Vaccination without needles. Sensors that monitor building fatigue cracks. These are just some of the stories Innovation Origins has written about promising university spin-offs.
The Netherlands has a large number of top institutions in research and education and outperforms other European countries, such as Germany. Especially when it comes to university research in deep-tech subjects, such as biotechnology, AI and mechatronics, we do well. Universities of technology are purveyors of spin-offs (30%), followed by UMCs (28%) and general universities (25%).
But, as successful as scientific research is, registering success is difficult when it comes to university spin-outs. The Netherlands lags far behind the UK, Germany, Switzerland and France. Spin-off companies from Dutch universities and university medical centres remain small and their impact limited. 80 percent of all 745 Dutch spin-outs ever established are still active. But, after 10 years, only 48 per cent have more than 10 employees. The potential is there, but growth is slow or lacking.
Culture of universities
“I called three universities in the Netherlands, but it became nothing. We are now working with two US universities,” Stef van Grieken says. Among other things, he was on the product management leadership team of Google Research and is co-founder and ceo of Cradle. The start-up focuses on improving proteins using artificial intelligence and raised €5.5 million by 2022. The company is partly at the Biotech Campus in Delft, and partly in Zurich, Switzerland.
If it is up to the entrepreneur, Dutch universities should become “long term greedy”. “Google’s very first search algorithm originated from PhD research at Stanford University. You could claim: take a lot of shares, because it will be worth a lot. But Stanford only took five percent. When Google went public, that 5 percent was worth $250 million.”
One of the sticking points is the share that universities claim in their spin-offs. Academic spin-offs are based on solutions – or, in technical terms, intellectual property (IP) – developed at university. Once educational institutions have a ‘voting equity stake’ in a start-up, this can stunt the company’s growth and deter future investors. There are no national figures on the revenue generated by Dutch universities from start-ups and patents.
Van Grieken: “Imagine a university has a quarter of the shares. Then you also want to reserve ten percent to attract employees, especially in deep tech, and have something left over yourself. In the Netherlands, most start-ups are dead before they get out the door at all, because the slice of the pie that goes to universities is too big to attract the highest quality investors.”
Standardised deal terms
To at least make the process of scientific research spin-out more transparent, the Dutch universities launched standardised deal terms earlier this year, setting out all kinds of agreements around spin-out.
Suppose a researcher wants to devote her or his full time to commercialising a piece of scientific research done in an academic context. Transferring the IP can be done in three ways: an equity package of 10 to a maximum of 25 per cent (previously 49 percent), a licence agreement with royalty payment or a hybrid equity-royalty deal in exchange for access to the IP. More information on the deal terms can be found here.
25 percent shares for a university, Van Grieken thinks is really too much. “If you are at ten to 15 percent, that is still on the high side, but not uninvestible. You do then lose the top investors.”
ReCarbn: spun out via new deal terms
Guus Dubbink is co-founder of ReCarbn, a spin-off from the University of Twente. The company develops technology for installations that filter CO2 from the air. ReCarbn is one of the first companies to be ‘spun out’ through the new deal terms. The university has 15 per cent shares and the start-up is obliged to achieve set milestones within a few years. If the start-up fails to achieve that, all knowledge goes back to the university.
Dubbink thinks the agreements are only fair. “For the past ten years, the technology around which we are now building a company has been worked on at UT. A pilot was also built at the university’s expense. So I think it is only realistic that the university wants to see something in return. I think the statement that spin-offs that give up more than 10 per cent of their shares to the university are not profitable is nonsense. We have 85 percent left for investors, which is heartily investable – we also get that feedback back from the market. The fact that the university is involved in our business creates a certain trust.”
Increase chances of impact
Jaron Weishut was closely involved in drafting the deal terms on behalf of Techleap. He is initiator of Science to Impact: a national movement aiming to increase the impact of scientific knowledge. Creating more impact through new deal terms is just one of the nine spearheads drawn up to improve the valorisation system.
Above all, he wants to avoid polarising the discussion. “Just two years ago, newspapers headlined that investors think universities should not want to play business. Those investors do not always realise that universities’ help to start-ups is limited by state aid rules, for example. At the same time, it sometimes still seems more important to some academics to prevent a professor from maybe one day being able to buy a Porsche after years of hard work, than to enable a broad application of scientific research – and thus have a big social impact thanks to that professor.”
Weishut sees start-ups as an important way to make impact with scientific knowledge, but also argues that this only works if all stakeholders (want to) understand each other.
“You can say to a Knowledge Transfer Office of a university (KTO: department that supports scientists in valorising research, ed.) that they are asking for too many shares, but if that KTO has to fend for itself, you automatically get KTOs asking start-ups for a lot of shares, or high licensing fees,” Weishut continues. “So then you end up with an underlying question: why do some KTOs have to fend for themselves? With the deal terms, we want to make agreements more transparent, but also put this deeper discussion on the agenda.”
Netherlands, the land of forms
That the process of spinning out is slow is something Dubbink and Van Grieken agree on. Van Grieken: “In the Netherlands, you have to fill in countless forms and make predictions. I don’t know exactly what my market looks like; we are a seed stage company. Anyone who pretends to look five years into the future is a liar. In Switzerland, you can apply for an initial grant of fifteen thousand francs by filling in one A4 sheet. Within a week you will have an answer. It’s simple and it suits start-ups. Yes, many will not become successful. But some will, and that’s what you want.”
Dubbink also sees benefit in a simplified way of bringing in funding. “Now, during the first period you are mainly busy with investments and obtaining subsidies. It would be more efficient for all parties if you immediately get a pot of money with which you can build a team in the first year. Then the path to a commercial product and subsequent scaling up is also faster.”
Dubbink still hesitated to join UT as a researcher for the first year so that he would be paid a salary every month. “But then all the knowledge you develop goes entirely to the university and you have to renegotiate shares afterwards. It would be good to facilitate some kind of interim solution, where you are on the payroll at the university, but allowed to carry out activities for your company.”
That the discussion is being held, and that there are people on the barricade in the process, Weishut thinks is a good thing. But, he also thinks it is 3
too easy to look only at the recorded success of spin-outs. “It is now clear that when too few shares are available to investors, universities hinder the scaling up of spin-outs. At the same time, a professor or researcher must also have a certain commitment towards the start-up. For instance, very high licensing fees are charged there. Yes, things must improve in the Netherlands, but we must also keep looking at the complete picture.”