IP as key success factor for start-ups and academic spin-offs

Recently published research of the European Patent Office and the UK government as well as a German government agency’s policy paper confirm the role of IP for start-up success, particularly for academic spin-offs.

The fact that the protection of intellectual property (IP) is a key factor for the success of start-up companies including so-called academic spin-offs (which have a university or similar academic background) is well-known. IP rights particularly become relevant for the acquisition of funding and the financial success of such start-ups, cf. overview of Zhangabylov et al. 2022 or Häussler et al. 2012. Three recent developments have underlined this.

Recent Study of EPO and university researchers

Start-ups with registered IP have more than twice the likelihood than other start-ups to obtain seed-stage funding and up to 6.1 times higher chances to obtain early-stage funding. The odds of successful exit are doubled in case of IP registration and tripled by applying for both patents and trademarks. These are some of the results of the research published by the European Patent Office in 2023 conducted with the support of the Vrije Universiteit Amsterdam, the Technical University of Munich, the EUIPO and the Swiss Federal Institute of IP. This confirms similar earlier empirical studies, thus drawing a consistent picture of the role of IP for start-ups.

Not surprisingly, the above-mentioned studies have also found that the specific importance of IP protection varies between start-up constellations, particularly depending on the sector. As the EPO’s study also confirms, IP rights and namely patents are particularly relevant for technology focused start-ups, for example in the fields of biotechnology, pharmaceuticals/life sciences and engineering.

IP transfer for university spin-offs priority topic of German government

In these fields, academic research is an important driver of innovation. Therefore, Germany’s Federal Agency for Disruptive Innovation (SPRIND) has a focus on spin-offs commercializing innovation sparked by academic research. This November 2023, SPRIND published its latest “Policy Paper IP-Transfer” to highlight the importance of innovation ecosystems and the need for German academic institutions to enable spin-offs by way of adequate IP transfer, with a number of policy recommendations. 

An academic spin-off relies on IP transfer because oftentimes this spin-off commercializes IP originally owned by the university (generally speaking, the university as employer of inventors/creators is assigned ownership of IP created by employees under German law). There are generally three ways for a spin-off to get access to such IP:

1. The IP is assigned to the spin-off against payment (lump-sum or variety of possible terms).
2. The IP is licensed (with or without exclusivity) to the spin-off – here, too, with a number of possible payment and purchase options.
3. IP for shares: The university receives (virtual or actual) shares of the spin-off in return for assignment/licensing.

The first two options pose considerable problems for start-ups, particularly because of the resulting liquidity drain. Nevertheless, many universities have so far opted for the licensing of their IP, thereby accepting the prevailing problems for start-ups to their disadvantage. 

Some major German universities have recently pursued the latter option, as it avoids the problem of liquidity outflow and at the same time secures the universities a participation in the economic success in case of an exit – according to current practice, the universities receive company shares in the range of approx. 2% - 10%, depending on the (relative) value of the respective patent. However, this approach also faces some difficulties. SPRIND identified some concerns on the part of investors with this approach. For them usually only virtual shares are viable because universities have little experience in managing real shareholdings and usually have no capacity for professional management thereof. It should also be considered that although universities initially provide the IP, subsequently they hardly, if at all, contribute to the further success of the start-ups. From a legal perspective, attention must also be paid to the IP transfer process provided for under this option. In addition to the contract design, the evaluation of the IP is a particularly complex aspect. This is especially true for pharmaceutical/life sciences IP, which can be commercialized only after a lengthy regulatory approval process. From a time perspective, a protracted IP transfer process can also discourage investors. 

In view of the varying and partly nontransparent approaches of German universities in this regard, and inspired by several successful examples from US, UK and Swiss universities, the SPRIND’s Policy Paper IP-Transfer suggests a number of policies to help German universities spark more spin-offs. Plus, the SPRIND’s ongoing project “IP-Transfer 3.0” has now provided a series of results and tools to facilitate the transfer of IP from universities to spin-offs. The result is, among other things, a so-called toolbox containing the following items:

• a structured catalogue of questions to characterise the IP situation (“IP-Wahl-O-Meter”);
• a standardised method for the standard market valuation of IP (“IP-Scorecard”);
• a proposal for a standardised three-month IP transfer process;
• standardised contract templates for different IP transfer scenarios; and
• the analysis of current studies and databases on international practice in dealing with IP-based spin-offs from scientific institutions and comparison with the situation in Germany.
  
   

These proposals specifically address the above-mentioned problems with the lengthy process of IP transfers and valuation issues and are thus making important adjustments to the current situation. 

Independent review published by UK government on university spin-offs

Also in November 2023, the UK government published the “Independent Review of University Spin-out Companies”, which assesses various success factors for spin-off / spin-out companies including the ecosystem, IP and funding aspects. While the numbers of spin-offs and the sums of respective capital investments have significantly increased over the past years, the report makes several policy recommendations to improve conditions and spin-off success in the UK. The report confirms that IP relevance varies between industries, while underlining the role for funding.

This UK report is in line with the German policy paper regarding various aspects, particularly the importance of technology transfer competence and certain standards, the need for an expeditious and professional IP transfer process and specifics concerning the IP-for-shares approach.

Conclusion: IP relevant for founders and investors

In conclusion, the latest publications have confirmed the central role of adequate IP protection for successful start-ups. This is particularly true for academic spin-offs, enabling commercialization of academic inventions. On the one hand this includes the challenge of finding the right IP strategy for the spin-off’s business strategy and sector/technology. On the other hand the topic of IP transfer remains tricky particularly for spin-offs from German universities. While the academic ecosystems and the SPRIND agency are making good developments to spark more entrepreneurial commercialization of innovation, the topic of IP transfer requires further attention and should benefit from international learnings. Both founders and investors need to align their start-up’s IP with the business strategy and conduct legal due diligence accordingly.