Slow down, you're going too fast

In Britain, spinning out companies from universities has become a big business - so big, in fact, that the pros are taking notice. But, argues Jo Taylor, head of venture capital at 3i Group, universities are too quick to hit the spin-out button.

Jo Taylor is head of venture capital at 3i Group, one of Britain's largest venture capital firms, and chairman of the high technology committee at the British Venture Capital Association. As such, he has been speaking out lately about spin-outs. His message: many of them are running before they can walk.

Earlier this year, the British BVCA published a spin-out study, performed by Cambridge research firm Library House, that provided some of the first hard numbers in the field. The snapshot view: There are about 435 spin-outs formed from the top 36 universities - but quantity does not necessarily make for quality. Richard L. Hudson, editor of Science|Business, spoke with Taylor about it.

What do you think of university seed-funding?

It's a high-risk area. There is going to be a failure rate. So try to do the spin-outs slightly later. Do more work on the quality of the market opportunity, the customer-need, validation of the research and technology you're developing. And engage quality managers at the time of proposal, rather than later. Some of these [university companies] are spun out as projects, rather than proper businesses. Some are spun out from the university with the founder still having a fairly dominant position within the company. By and large the ones most successful have a proven entrepreneur involved in the proposition at the time of spin-out. That person knows how to engage funding sources.

Is the university track record so poor?

There's not enough evidence to say X percent of university spinouts fail, while Y percent (outside universities) succeed. But what is fair to say is that some of the more clearly proven winners tend to be in and around the corporate spin-out world more often.

Does that mean universities shouldn't be encouraging spin-outs?

We said very clearly in the [BVCA] report, and I say it on behalf of 3i: We are very keen for universities to spin things out. It's just going to be better for those companies if as much investigation of the market as possible is done prior to spin-out. [The BVCA report] was a petition, as much as anything, to get as much as possible from grant funding at an early stage, rather than equity investment.

Isn't that just passing the buck to central government?

You could argue that. But it's a question of saying to government: If you're going to invest the money, anyway (in grants or in supporting university investment funds) where would it be best directed?

The university investment trend is spreading from Britain to the Continent. Will it work there?

The problem there is they're trying to set up dedicated funds to specific sources of technology, whether specific R&D labs or university institutes. The problem with that model is that often the leading lights in the universities don't want to feel they have a choice of one, in terms of where they can get the capital. They want to have choice of investors. We'd rather be fairly neutral and work with a range of universities rather than just one.