IP2IPO Spins Science into Gold

"We are not a charity; we are not altruistic. We want to make money, and we reject the idea that we cannot."

So says David Norwood, chief executive officer of the London-based technology-transfer specialist IP2IPO. His firm's aim is to form companies based on chemistry and other science generated within university academic departments and then launch them on the stock market.

As Norwood puts it, IP2IPO "is not just a name; it's a concept." He knows that history is littered with failed university spin-offs--which the British call spin-outs--but he is convinced that his company's maiden profits prove such businesses can succeed if managed correctly.

In the first half of 2004, IP2IPO reported net profits of $2.14 million, compared with a loss of $571,000 for first-half 2003 and a loss of $1.04 million for all of 2003. In addition, the company showed a substantial increase in revenues, to $676,000 in the first half, up from $70,000 for the comparable period in 2003.

And its stated goal of launching new companies through initial public offerings--IPOs--was endorsed, as Chairman W. Graham Richards puts it, with the March IPO of Offshore Hydrocarbon Mapping, a company spun off from the University of Southampton.

IP2IPO invested in four new spin-off companies during the first half of 2004, bringing to 17 the number of firms in its portfolio, according to Richards, who is also chairman of the University of Oxford's chemistry department. The investments include the first two companies formed under IP2IPO's partnership with King's College London, part of the University of London. Having begun with Oxford, IP2IPO now also works with the Universities of Southampton and York and with Kings College London.

Moreover, since July, when it acquired 20% of Techtran Group Ltd., a technology commercialization company at the University of Leeds, IP2IPO has added a stake in another 15 spin-off companies.

With the acquisition in June of Top Technology Ventures Ltd., a manager of early-stage venture-capital funds, IP2IPO has gained expertise in early-stage investments, Richards adds. That's important for growing young businesses: During the first half of the year, five of IP2IPO's portfolio companies received second-round financing.

"If you look historically at universities' records in establishing companies, they have done terribly," Norwood says. However, "IP2IPO in just a short time has proved that partnerships do work. We're not active just with chemistry, but in various other sciences also. The criterion is that it must be world-class science--that's what we want to back."

Norwood's assessment of historical success--or lack thereof--is supported by a study released last month by British academic Mike Wright, a professor at the Centre for Management Buy-Out Research at Nottingham University Business School.

Wright's survey was funded by the U.K. funding agency Economic & Social Research Council and published under the title "Spin-outs from Universities: Strategy, Financing, and Monitoring." In it, he points out that "universities are tending to focus on creating businesses rather than creating wealth. The proportion of university spin-out companies that succeed is tiny. Unless universities are prepared to back their spin-outs with appropriate resources, most will continue to fail."

OXFORD WAS ONE of the first U.K. universities to try to counter this phenomenon. In the late 1980s, following passage of enabling legislation, Oxford set up a technology-transfer company called ISIS, separate from but wholly owned by the university, to handle licensing and patenting of the university's intellectual property. The school's chemistry department, Richards notes, was an active participant.

ISIS has created about 40 spin-off companies since 1997, contributing more than $70 million back to the university. In particular, it had equity in two companies that were launched on the London Stock Exchange: Oxford Molecular and Oxford Asymmetry.

A decade later, IP2IPO approached Oxford's chemistry department, whose work it knew from earlier projects with ISIS. And after what Norwood recalls as two years' worth of negotiation, the company entered its first university partnership in December 2001.

Under terms of the deal, the department received an investment of £20 million--roughly $35 million at current exchange rates--which the department needed to build its new central laboratories, and IP2IPO received rights to 50% of the university's profits from any chemistry spin-off over the next 15 years.

For Norwood, university spin-offs have tended to be "a lot of hope but little delivery." Three or four things "always go wrong," he says. Companies do not have a proper commercial focus on creating value, and they lack proper commercial expertise "from day one."

Moreover, he says, "people are always unrealistic about what things cost versus what they will earn. They need realistic revenue projections and manufacturing cost base and disciplined cost control." An important point is that unsuccessful companies lack access to proper financial investors.

As he sees it, IP2IPO is the channel between the science and the value creation. Unlike a typical venture-capital firm that might look at one or two firms being spun off from universities and invest in those, "we invest in a series of spin-outs," Norwood says. "We are partners. We want to share in the business--again and again and again--to create a sustainable channel."

When IP2IPO first invests in a project, Norwood explains, "we are incredibly involved, recruiting chief executives and other managers, helping them write sensible business plans. This is our expertise: building companies. You must channel the science to put together a sensible company. We will sit on the board, negotiate the first deals, raise funds, and so on." And then as the new team takes over and the company matures, IP2IPO's involvement begins to recede.

"We take the project from the science to the £100 million to £200 million level"--roughly $175 million to $350 million in revenues--Norwood says. "It's not an exit strategy per se."

That level, he concedes, seems to become a sticking point. "One reason why the U.K. only creates companies up to £100 million or £200 million is that we don't create a spectacular product. So many U.K. pharmaceutical companies fail at Phase II or III, for example," he argues. "Creating a billion-dollar company is simple; all it takes is a successful product."

IP2IPO, he says, figures that by starting with "brilliant science" and using it to create a product that will sell, that can be taken to billions of dollars, "we can create a proper biotechnology giant. That's our challenge; that's what we think we can do." He acknowledges, however, that it is "one thing to have the concept, another to execute it. If we can deliver, then we've got a chance."

Wright adds: "In principle, [a company such as IP2IPO] is one way of improving the development of academic spin-outs. The standard venture-capital players are not that active, or haven't the skills. These kinds of arrangements can be one way to do it, to handle the spin-outs to IPO. So few reach their potential."

Richards contends that "despite our late start, we've got pretty good at creating spin-outs. But all of the Oxford spin-outs that have succeeded are now foreign owned. We've cracked getting small companies, but we've not cracked getting big companies."

In part, he theorizes, that is because of the U.K. financial community and its short-term timescale. Investors, he says, are "happy to sell a company for £100 million, but they have no patience to turn it into £1 billion." They are keen on trading, not building companies.

"A lot of universities," Wright adds, "are still going up the learning curve. The situation is still very skewed, with just a few very well developed programs. Universities mustn't get blinded by the concept of a spin-out company. To actually create a company that generates wealth is a very difficult procedure.

"These issues are starting to be resolved, but there still is a long way to go," he says. And that closes the circle back to IP2IPO, with its determination to build successful companies based on U.K. university science.