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Structuring Spinoffs

In brief: With large amounts of money being made available for biotechnology opportunities through a variety of funding schemes offered by the federal government and capital markets, you may be wondering whether your organisation should be considering spinning off a company to commercialise your opportunities.

Why Spinoff?

Spinning off a company may be a good commercialisation pathway for your organisation for several reasons. The principal ones your organisation needs to think about are:

  • Addressing the Funding Gap
    Your organisation may not be eligible for, or otherwise able to access, the variety of funding avenues available to further develop the intellectual property. By spinning off a company, that company may qualify for access to seed capital and government grants that otherwise would have been unavailable to your organisation.
  • Losing the Institutional Image
    It may be easier to do business as a company rather than as a research organisation. For example, many venture capitalists and corporates have had experiences that make them wary of dealing with institutional organisations. They may expect issues to become more complex and/or take longer to resolve than when accessing technology from companies or individuals.
  • Providing a Focus
    Researchers in an organisation may have to juggle administrative, teaching and research activities – distracting them from developing the intellectual property. Spinning off a company and employing those researchers will allow the removal of ancillary administrative and teaching responsibilities and provide them with a focus on developing the technology.
  • Getting Rid of Non-core Technology
    Your organisation may have technology that is not being developed because it no longer fits with the organisation's strategic plan. Transferring this intellectual property to a spinoff company can result in development of the technology and recognition of its hidden value, while allowing your organisation to focus on implementing its strategy.
  • Removing Organisational Constraints
    Institutional organisations may have human resource policies, travel and expenditure polices and politics that impede development of an opportunity. Spinning off a company can remove these organisational constraints to ensure that the opportunity has every chance of success.
  • Adding to your Balance Sheet
    By releasing assets to a spinoff company, you may be able to recognise their associated value on your organisation's balance sheet. Also, if an opportunity is itself already an operational business within your organisation, you may be able to release working capital by establishing a stand-alone business (assuming you keep the debtors and creditors of the existing business).

Of course, your organisation will also have to be satisfied it can implement appropriate management structures and controls in the spin-off company to engender its success as a stand-alone entity. The way the spin-off company is managed may be an important factor in accessing funding schemes to commercialise your opportunities.

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What to Spinoff?

Viable Business

To be a successful spin off, the opportunity must be capable of being a viable, stand-alone business. Technology that is capable of supporting a viable business includes:

  • technology which is unique or superior to those already on the market;
  • technology which provides a complete solution; and
  • opportunities in industries where spinoffs are an accepted commercialisation pathway (eg biotechnology and information technology).
Attractiveness to Capital Markets

In considering which opportunities are suitable to spinoff, you should focus on ventures that are interesting to the capital markets. Without the support of investors within the capital markets, it may be difficult to ensure that your spinoff succeeds. Capital markets look for blockbuster opportunities that are reasonably close to market, and that can be supported by a sustainable business model.

Fit with your organisational needs

Before embarking on spinning off an opportunity, you need to be sure that the proposed commercialisation pathway suits your organisational needs. Of particular importance is whether a spinoff will deliver returns to your organisation within the desired timeframe. Remember also that the capital markets may well have much shorter horizons than the timeframes you are contemplating.

Also, you need to have a mechanism in place to manage your equity in the spinoff company. For some organisations, licensing the opportunity may be a more simple and attractive commercialisation mechanism but you will again need to factor in whether the capital markets will view such an arrangement as an adequate and risk-proof method of commercialisation.

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