Research Spinouts, and How They’re Formed

Spinouts occur when a company moves some of its assets into a new, separate company. In the context of spinouts from research institutions, they are often created to bring scientific discoveries, technologies, or intellectual property (IP) to the market.

Creating a research spinout is a complex process, with many diverse, often conflicting stakeholders. Here are the key stages that most research spinouts go through.

1. Commercial potential: The first step in to identify research with commercial potential. One must answer the question - can this research solve a real-world problem and meet a need in the market?

2. IP Protection: Once high potential research is identified, it’s essential to protect the IP. This involves filing patents to ensure that the research can be defended and monetized.

3. Market Validation: By engaging with potential users of the technology, ​​can we verify there is a demand for it? The NSF’s iCorps program has done great work to facilitate this key step, getting researchers to expand their focus beyond the laboratory.

4. Strategic Planning: How will the spinout operate, including its value proposition, target market, business model, and growth strategy. A strong business plan is essential for attracting investors and partners.

5. Team Formation: Given the complex nature of spinouts, they require a strong founding team. A team set up for success often includes the original researchers, and experienced business operators, with expertise in areas like management, marketing, and sales.

6. Funding: For most spinouts, securing funding is crucial to get off the ground. This funding comes from sources, including government grants, venture capital, angel investors, or corporate partnerships. We will discuss funding in more detail later in this blog.

Each of these stages is deeply connected, and success in one often depends on careful execution of the others.

Spinouts - Innovation, Growth and Competitiveness

Spinouts play a vital role in driving innovation as they are uniquely positioned to bring research to market at speed. By being focused on specific problem areas, they can speed up development and shorten the time it takes to reach consumers.

By addressing unmet needs, spinouts disrupt markets, challenging established companies and traditional ways of doing things. This disruption drives competition, leading to further innovation and better options for consumers.

In academic institutions, spinouts build a culture of entrepreneurship by showing how research can have a real impact. Seeing their work lead to real-world applications encourages researchers to think beyond academic achievements. Also, when they witness former colleagues build successful spinout companies, it can make them consider the entrepreneurial path. We see this all the time with researchers we work with!

By transforming research into businesses, spinouts create high-skilled employment opportunities, contributing to job creation and economic growth. This ripple effect extends beyond the spinout, boosting the local economy and contributing to national GDP.

Additionally, by advancing key technology sectors, spinouts strengthen national competitiveness. In today’s competitive landscape, remaining at the forefront of innovation is essential. By commercializing technology and bringing it to market, innovations can be built in the U.S., safeguarded from foreign adversaries.

Spinouts vs. Licensing to Corporations

When commercializing research, labs typically license IP to existing large corporations, or create spinouts. The proportion of IP commercialized through these two methods varies depending on the sector, institution, and region.

Data suggests that licensing to corporations is the more common route, particularly in deep technology fields such as life sciences, artificial intelligence, and space. These technologies require significant infrastructure and capital for commercialization, resources that are generally only available to the largest companies.

A good example of this is Alphabet's development of self-driving cars, through their subsidiary Waymo. In July of 2024, they announced a $5 billion investment in Waymo. Alphabet began working on Waymo in 2009, and 15 years later, they are still committing massive resources to a product that has only recently begun to see market adoption!

However, spinouts play an important role in lab commercialization, especially in technology and engineering, where strong entrepreneurial ecosystems make it possible. Unlike large corporations, spinouts are agile and fast-moving, allowing them to quickly pivot, experiment with new ideas, and bring products to market faster. This speed is crucial in industries where technology and consumer needs evolve rapidly, making spinouts powerful engines of innovation.

Corporations often acquire IP to reduce competition rather than to innovate. They may shelve technologies that threaten their market share, which stifles competition. In contrast, spinouts are driven by the need to grow and compete, keeping them focused on advancing new technologies, competing and pushing boundaries.

Funding Landscape for Spinouts

Securing funding is a consistent challenge for lab spinouts due to valuation complexities, long development timelines, and high capital requirements. These factors make it difficult for them to attract traditional startup investors.

Spinout valuations can be complex due to the nascent nature of their technologies. Unlike more mature startups, spinouts may don't have clear revenue streams or proven product market fit, making it challenging to assess their financial value.

The long development timelines typical of deep-tech spinouts require patience from investors, who may not see returns on their investment for several years. The high capital requirements for these ventures further complicate the funding process, as substantial upfront investment is often needed to bring the it to market.

To better support spinouts, the investment community has developed specialized funds and programs tailored to the unique needs of these ventures. Patience capital, or investment with a longer horizon, is essential for supporting spinouts through their extended development cycles.

Furthermore, investors with expertise in navigating academia-industry partnerships can provide the necessary guidance to help spinouts succeed. By offering not only financial resources but also strategic support, the investment community can play a crucial role in ensuring that spinouts thrive and continue to drive innovation and economic growth.

Highway Ventures

Highway Ventures is a startup studio that incubates and builds companies based on research technology. If any of this resonates feel free to reach out at hello@highwayventures.com.