If you've got the idea, get some help to make money

The Government is taking more interest in university spin-offs than ever - so much so that it is considering a proposal to create a £1 billion fund to assist them.

But how does an academic interested in creating a private company to profit from their research go about it, and what are the pitfalls?

Graham Richards, former head of the department of chemistry at the University of Oxford and a board member of the IP Group, which commercialises university intellectual property, tackles these questions in a new book, Spin-outs: Creating Businesses from University Intellectual Property.

In charting the trials and tribulations of Oxford Molecular Limited, a spin-off that Professor Richards set up on the back of his own academic work to provide software to researchers in the pharmaceutical industry, the book offers guidance and advice to would-be academic entrepreneurs.

"It has become very fashionable for universities to want to exploit their work," he said. "This book works through a case study to tell people what they are likely to face."

The story of Oxford Molecular - the first spin-off established after Margaret Thatcher gave the intellectual property rights of government-funded work to universities - is no fairytale.

With £350,000 from venture capitalists, Professor Richards formed the company in 1989. It grew in value to £450 million after it was floated on the stock market in 1994.

But then disaster struck. Commercial mistakes were made, and the company became too big for its management to handle.

"We screwed it up," Professor Richards said. Oxford Molecular was sold in 1999 for £70 million, less than a fifth of its value five years earlier.

Reflecting on his experiences, he offers practical advice to today's academic entrepreneurs.

First, it is crucial to make sure that the intellectual property behind the business idea is secure. This is where university knowledge-transfer offices can be the most helpful, he said, although beyond this he is less convinced of their value.

He emphasised that academics must look after their own interests.

"You need to protect yourself by having the IP patented, copyrighted or licensed. If you have got just a very good idea and you set it up and it is not protected, someone will copy you."

His next tip is to hire someone with industry experience to run the business side early on because academics do not necessarily make good business people.

The challenge then becomes attracting the money necessary to get started, and his advice is to work out how much the venture will need, and then double the figure.

"A real error is to try to do things on such a shoestring that you don't have enough cash," he explained.

One of his key warnings is about venture capitalists, who may exploit the business naivety of academics.

Having provided the initial cash deemed necessary to get a spin-off going, venture capitalists will often happily provide extra funds - but at the expense of the academics' share in the company, Professor Richards said. "It is a trick they play," he explained.

The money men are motivated by their own profit, and it is important that their academic partners remember that. "They will give you more (money), but (your share) gets diluted," he said.

"Whereas you started by owning a third of the company, after about three rounds of funding you own only about 2 per cent."

All the same, academics need to be realistic about the share of the company they can expect to own.

"One of the errors academics make is to overvalue their contribution and think that they should own 80 per cent of the company because it is all their idea."

He described a typical scenario in which the financial backer gets a 40 per cent share in the spin-off, 25 per cent goes to the university, as the owner of the IP, 10 per cent goes to the business manager. The academic would "probably be lucky" to take the remaining 25 per cent.

Once a company is successfully established, Professor Richards thinks academics should stay out of the day-to-day running and content themselves with a position as a non-executive director or academic adviser.

"It is better run by business people ... let the academic stay doing teaching and research." All Oxford's successful spin-offs have used this model, he added.

His final word is a warning: teaching and research need to remain the most important functions of universities.

As important as it is to exploit intellectual property, he said, it should only ever be a sideline to an academic's scholarly work.

"The best of these companies have come out of blue-skies research," he said.

zoe.corbyn@tsleducation.com

STARTING POINTS

• Graham Richards' advice for those thinking of forming a spin-off
• Make sure the ownership of the intellectual property is clear
• Hire a competent CEO, even if only part time
• Start with sufficient funds: calculate how much you think you will need, then double the figure
• Stick to the day job - academics should stay in the university
• Treat venture capitalists with caution.