EARLY STAGE FINANCING OF RTO SPIN-OFF COMPANIES

Michaël A Bikard Edited by: Elena Andonova Sergio Grande Alessandro Fazio

2019

This publication is a Technical report by the Joint Research Centre (JRC), the European Commission’s science

and knowledge service. It aims to provide evidence-based scientific support to the European policymaking process. The scientific output expressed does not imply a policy position of the European Commission. Neither the European Commission nor any person acting on behalf of the Commission is responsible for the use that

might be made of this publication.

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JRC116458

Luxembourg: Publications Office of the European Union, 2019 © European Union, 2019

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Contents

1 Executive Summary ....................................................................................... 5

2 Welcome Addresses ....................................................................................... 6

3 Panel I. Best practices session on Proofs of Concept (PoC) and Start-up funding ....... 7

4 Panel II. Spin-off companies and fund managers ................................................. 9

5 Panel III. What comes next: Updates from EU institutions ................................... 11

6 Concluding roundtable .................................................................................. 13

7 Policy recommendations ............................................................................... 14

8 Conclusion.................................................................................................. 15

9 Annex - Agenda........................................................................................... 16

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Authors

Michaël A Bikard1, rapporteur

Edited by Elena Andonova, Alessandro Fazio and Sergio Grande2

1 INSEAD, Institut Européen d'Administration des Affaires 2 Joint Research Centre

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1 Executive Summary

The exploitation of academic science by firms in general and by entrepreneurs in

particular can create tremendous value for the economy. Companies such as Alphabet or

Genentech have their origin in academic labs. In their vast majority, recent

commercialization success stories are not European. This is not an accident. There are

still considerable barriers to commercializing science in the EU. This workshop brought

together technology transfer experts, entrepreneurs, investors, and policy-makers to

discuss those barriers, share best practices, and outline potential solutions. The focus of

this workshop was specifically on the financing of RTO (research and technology

organizations) spinoff companies.

In particular, the presentations and discussions focused on three main questions:

• What are the best practices when it comes to the incubation and launch of

RTO spinoff companies?

• What are some of the key issues regarding funding and what are the current

solutions?

• What are the policy initiatives that are meant to address this issue and how

could they be improved?

These three questions where at the core of three different panel sessions respectively

focusing on:

• Panel I. Best practices session on proofs of concept and start -up funding

• Panel II. Spin-off companies and fund managers

• Panel III. What comes next: updates from EU institutions

The workshop’s main conclusions were the following:

1) RTO spin-offs face considerable challenges in attracting sufficient funding.

Those projects are generally too risky for private investment, and European

start-ups often fail in the “valley of death.” Those that do not fail must often

face better-funded competitors from the US or from China.

2) Over the past few years, considerable progress was made to develop so-called

“technology transfer funds” and other policies to facilitate access to funding for

innovative start-ups based in the EU.

3) However, RTO spin-offs still face considerable challenges. Not only is funding

often insufficient, but there are also often other bottlenecks such as the lack of

skills, knowledge, and general infrastructure to accompany entrepreneurs in

the commercialization process.

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2 Welcome Addresses

Giancarlo Caratti, Head of Unit Intellectual Property and Technology Transfer at the

European Commission’s Joint Research Centre, explained in his opening remarks that the

European TTO Circle’s goal is foster innovation by becoming the single contact point for

expertise in technology transfer at the European Commission. The TTO Circle is a

growing network of 33 large research and technology organizations (RTOs) which amount

to over 200 000 people, 35 000 patents, 4 000 start -ups and 5 000 software projects.

Successful technology transfer requires knowledge, people, skills, but also money. The

goal of this workshop is to explore issues relating to the early stage financing of RTO

spin-off companies.

Hans Boumans, Head of Technology Transfer at the Netherlands’ Organization for

Applied Scientific Research (TNO) reminded the audience that the TTO Circle had been

formally created in 2011 by Caratti and his team. He announced that the goal of the

workshop was twofold. First, it was about exchanging best practices. Second, it was

about strengthening the relationship between RTOs and European institutions. He then

discussed how the lessons that he learned through the TTO Circle and the support from

the European Investment Fund have helped him increase the performance—and decrease

the cost— of the technology transfer activities at TNO.

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3 Panel I. Best practices session on Proofs of Concept (PoC)

and Start-up funding

The first panel of the day was composed of technology transfer professionals. They

broadly emphasized that the commercialization of academic findings does not occur in a

vacuum. Instead, an infrastructure is necessary to facilitate this process. The

infrastructure takes different shapes at different institutions, but it generally includes

support mechanisms to help entrepreneur by providing expertise (e.g., legal,

management) and funding, as well as a pruning mechanism to avoid wasting time and

resources on ideas that are not progressing well.

The first presenter of this panel was Neta Pessah, the project manager of the IDEA

(Innovations, Development, Enhancement, and Acceleration) department at Yeda R&D,

the commercial arm of the Weizmann Institute of Science in Rehovot, Israel. Established

in 1934, the Weizmann Institute has become an innovation powerhouse boasting the

highest commercialization income per researcher worldwide. The 2014-started IDEA

Program is an effort to expand further the commercialization capabilities of the Institute.

IDEA provides a structure through which promising projects emerging at Weizmann are

taken out of academia and developed within an industrial setting. The program includes

specific milestones, deliverables, go/no go decisions, well-defined budgets, and quarterly

reports. More than 25 projects went through the IDEA program, primarily in the life

sciences. The program’s budget is about $1 million per year.

Sylvain Colomb was the second presenter. He is in charge of developing startup

processes at CEA (Commissariat à l'énergie atomique et aux énergies alternative) in

Grenoble, France, and he highlighted the crucial role that startups play in the CEA’s

technology transfer strategy. CEA spins out about 10 startups per year in various

domains including software & systems, microelectronics & microsystems, biotech &

healthcare, and new technology for energy. He noted that over 90% of those spin-offs of

still alive after five years. CEA has a four-step process to support startup creation

including an awareness phase, a maturation phase, an incubation phase, and a seed

phase. Through this process, the teams leading those projects receive training, financial

support, and the relevant expertise to further develop their commercialization idea.

Colomb also emphasized the existence of a strong momentum in favor of deep tech in

France, which includes numerous public and private initiatives.

The panel’s third presenter was Johan Haspeslagh, senior venture development

manager at the Institut de microélectronique et composants (IMEC) whose headquarter

is in Leuven, Belgium. IMEC is a world-leading R&D and innovation hub in

nanoelectronics and digital technology. It offers various platforms, services, and

venturing options to support the process of commercialization. Its focus is on high

margin, application-oriented businesses such as the sale of drone-collected data to

farmers. IMEC’s process to spin out companies is organized in five steps including a call

for idea, an enrichment phase, a “venture timebox” to validate the business case, an

incubation phase, and a spin-off phase. On average, each call for idea attracts 25-40

ideas, but high attrition in the development process means that 12-16 ideas make it the

enrichment phase, 3-4 to the venture timebox, and only 1 to the incubation phase. IMEC

offers each commercialization project a number of funding opportunities at every stage of

project maturity.

Rolph Segers, technology transfer officer at TNO in the Netherlands was the panel’s

fourth speaker. He described some of the limitations of venture capital investment in

technology transfer and particularly highlighted the challenges that innovators face when

they attempt to secure funding to build a proof of concept . To address this issue, a

consortium of universities in the Netherlands including Delft University of Technology,

Erasmus University Rotterdam, Leiden University, TNO and others, have launched an

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investment fund called UNIIQ. UNIIQ provides €300 000 convertible loans. Its

investment committee is composed of technological experts, market experts, and

investors. The program’s main weakness is the absence of safeguards. However, one

crucial advantage of UNIIQ is that it is not subject to traditional technology transfer

politics.

The fifth and last speaker for this first panel was Javier Extable Oria of the Deputy

Vice-Presidency for Knowledge Transfer at the Spanish National Research Council (CSIC).

CSIC is a large research organization including 11 085 people and a budget of €737

Million. It is also the top Spanish applicant for European patents. Extable Oria also noted

that the development of proofs of concepts from academic science is very difficult to

fund. Those projects are typically ineligible for tradit ional public research grants and at

the same time too risky for VC investment. To address this issue, the Spanish

government set up Technology Transfer Funds such as the 2016-founded INNVIERTE and

the 2018-founded Fond-ICO Global. Those funds complement more traditional public or

private calls for proof of concept projects. They are not limited to specific dates or

technological areas, but they do require the establishment of a spin-off. More generally,

Extable Oria emphasized the importance of proactive identification of new technologies

from academia and of early collaboration with third parties to explore various funding

options for early-stage projects.

This panel ended with an open discussion led by Asier Rufino, CEO of Tecnalia Ventures,

who was also the panel’s moderator. During this discussion, workshop participants

highlighted the importance of securing an in-house budget from the academic institution

to support early-stage technology development. Others also discussed the importance of

building an ecosystem not only to identify potential licensees, but also to be able to

connect innovators with relevant experts and potential team members and partners.

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4 Panel II. Spin-off companies and fund managers

The second panel of the day focused on the funding challenges that entrepreneurial firms

face when seeking to commercialize academic research. There was a general consensus

that a “valley of death” exists where many startups fail because their projects are too

commercial to be eligible for academic grants but also too risky to be interesting for

venture capitalists or business angels. To address this issue, some academic institutions

and governments have created technology transfer funds, which aim at filling that gap.

This panel brought together individuals who have experienced this issue both from the

funding side as well as from the entrepreneurial side. Lluc Diaz, Innovation and Venture

Officer at the European Space Agency moderated it.

The first speaker was Jörg Wamser, Managing Director at Fraunhofer Technology

Transfer Funds GmbH (FTTF). FTTF is Germany’s first tech-transfer fund and it is

operational since January 2019. The fund consists of €60 million, half of which stems

from the European Investment Fund, and the other half from the Fraunhofer

Gesellschaft. It exclusively invests in Fraunhofer spin-offs and licensing projects and

focuses on pre-seed and acceleration. Fraunhofer is the largest organization for applied

research in Europe, including 72 institutes, 25 000 employees, and an annual budget of

€2.3 billion. Wamser noted that Germany is weak when it comes to early stage VC

investment with 2016 per capita investment of only $6.21 against $35 for Ireland and

over $80 for the US or Israel. FTTF aims at bridging the gap between academia and

industry by providing about 12 months of runway with a focus on acceleration.

Fraunhofer is trying to emulate the success of institutions like MIT or ETH Zürich. FTTF

plans to invest in 35 projects at the pre-seed stage (about €250 000 per investment)

over 5-6 years. Those investments will be made as convertible loans with standardized

conditions and legal documents.

Michael Brandkamp, CEO of High-Tech Gründerfonds (HTGF), was the panel’s second

speaker. HTGF aims at accelerating innovation by investing in high tech startups. HTGF

III was founded in 2017. It consists of €316.5 million, including €106.5 million stemming

from business investors. The fund focuses on young firms (less than 3 years old) and

invests up to €3 million per firm. It adds value not only by providing financial support,

but also by offering hands-on operational support from experts through a large network.

Overall, HTGF Funds I-III have invested €892.5 million through 1 958 transactions with

527 technology firms. There have already been 101 exits. Portfolio companies have

raised over €2 billion from third party sources in follow-on financing rounds. Brandkamp

discussed some of the IP-related issues that often emerge during the due diligence

process, but he also pointed to the fact that valuations and VC investments in Europe are

growing and that business angels are becoming more professional.

The third panel speaker was Emanuele Occhipinti, Vice President at Greenrail.

Greenrail is an Italian startup founded in 2012, which set out to reinvent railway sleepers

by creating smart sleepers out of secondary waste material. Greenrail’s addressable

market is huge and their technology is protected by patents. They have raised almost €5

million from various public and private sources. However, they find it challenging to raise

larger amounts to fund their expansion because they feel that they have become too big

for most venture capitalists in Europe.

Lluís Chico Roca, CEO at Neos Surgery, was the panel’s fourth and last speaker. Neos

create, produce, and sell new solutions for surgical implants. The Spanish firm was

founded in 2003 as a spin-off from two private R&D centers in Spain, eureca! and

tecnalia. They began international expansion in 2013 through alliances with sales

partners in the US and China. So far, their sales amount to €7 million and they have

been EBITDA-positive since 2011. They have received €1.1 million in investment in 2018.

The worldwide addressable market in their segment is very large but they are competing

against an American firm named Intrinsic Therapeutic which has raised $49 million and

has already been granted FDA approval. They feel that VC investors in the EU remain

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more risk-averse than in the US and in China, and that this constitutes a significant

competitive disadvantage.

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5 Panel III. What comes next: Updates from EU institutions

The third panel of the day highlighted the different initiatives undertaken by European

institutions and aiming at boosting the financing of innovation in the EU. The speakers

discussed in particular three initiatives, namely the Capital Market Union, the European

Investment Fund, and the European Innovation Council. In addition, the Directorate-

General Joint Research Centre conducts research to evaluate the efficacy of different

policy instruments.

The first speaker of the third panel was Amaury Chazeau-Guibert who is Policy Officer

at the Directorate-General for Financial Stability, Financial Services and Capital Markets

Union, European Commission. Chazeau-Guibert highlighted that the Capital Market Union

(CMU) is a key EU policy objective aiming at diversifying the funding of the EU economy,

reducing over-dependence on bank loans. The CMU attempts to address a number of

challenges including the future departure of the UK from the Single Market, uneven

standards of supervision and enforcements across countries, the diversity of capital

markets across Europe, the transformation of capital markets by the fintech industry,

Europe’s environmental and soc ial challenges, as well as the challenges set out in CMU

Action Plan. As a result of the CMU, SMEs’ access to finance should improve through a

series of measures enhancing awareness and financial education while boosting

crowdfunding, VC investment, and the market for IPOs.

Next, Jerome Samson, Investment Manager at the European Investment Fund (EIF),

presented the EIF. The fund provides risk financing to stimulate entrepreneurship and

innovation in Europe. It offers various products ranging from venture capital to

guarantees and microfinance by working with financial intermediaries across the EU-28

and EFTA countries, candidate and potential candidate countries. The EIF helps European

SMEs through equity and debt products at every stage of their development . In

particular, Technology Transfer Funds are necessary to bridge the gap between research

grants and VC funds. However, Samson argued that technology transfer is underfunded

in Europe since it corresponds to less than 0.2% of the EU28 yearly public R&D funding

(over €100 billion). Between 2006 and 2018, the EIF has invested €770 million in 38

investment vehicles, which had an average size of €46 million. In the next few years, the

EIF plans to optimize the impact of its current tools and to develop new and

complementary tools.

The panel’s third speaker was Ramona Samson, Deputy Head of Unit, Investments and

SMEs at the Directorate-General for Research and Innovation, European Commission.

She described the European Innovation Council (EIC) and its goal to make Europe the

global leader in innovation. She noted that there is a lack of private finance for

innovators and scale-ups in Europe, which Deloitte (2016) estimated at about €70 billion.

The EIC Pathfinder and Accelerator are two complementary funding programs that aim to

fill this gap. Horizon 2020 (2018-2020) includes €2.7 billion for EIC pilot, but €10 billion

have been proposed for EIC in Horizon Europe (2021-2027). The EIC Pathfinder consists

of a one-off grant to support future and emerging breakthrough technologies, while the

EIC Accelerator provides blended finance (grants plus loan/equity) of up to €15 million or

more.

The fourth and last speaker of this panel was Blagoy Stamenov, Policy analyst,

Knowledge for Finance, Innovation and Growth, at the Directorate-General Joint Research

Centre (JRC), European Commission. Stamenov described the JRC B.7 work on high-

growth innovative companies, which aims at promoting the creation and scaling of high-

growth innovative firms in Europe. So far, the group has analyzed policy instruments for

improving access to finance and their effectiveness. They have already published reports

on equity, direct R&D grants, and R&D tax incentives, and are currently investigating the

role of venture capital in Europe. Stamenov noted that in 2017, the UK largely dominated

the VC investment landscape in Europe. Besides, he also presented various descriptive

statistics about VC investment in France.

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Following those presentations, the workshop attendants discussed several topics in a

conversation led by the session’s moderator, Alessandro Fazio, Head of Competence

Centre on Technology Transfer at the Directorate-General Joint Research Centre,

European Commission. The first question was about whether the EIF complements or

competes against private sector investment, and Samson responded to this question by

pointing to the fact that the EIF is careful not to compete and that they sometimes

decrease the amount that they invest to leave room for private investors. He also noted

that support by the EIF has a strong positive impact on follow-on investments. Another

attendant asked whether the gap between the EU and the US and China is still growing

or whether EU improvement means that the gap is closing. Fazio responded to this

question by highlighting that the gap that used to exist between the EU and the US at

the seed stage has been closing, but that a large gap seems to be widening when it

comes to late stage investment. Samson also discussed anecdotal evidence that the

return on VC investment in the EU has been growing and that it might have overtaken

that of the US. Finally, several attendants discussed the EIF’s potentially conflicting goals

to deliver a return on investment while at the same time investing in Europe’s less

innovative countries, especially in the East.

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6 Concluding roundtable

The last roundtable of the day was moderated by Elena Andonova, Technology Transfer

Officer responsible for Financial Instruments at the Directorate-General Joint Research

Centre, European Commission. This roundtable was an opportunity for many of the

participants to react to the presentations and to exchange about the challenges that they

have faced when managing with the commercialization of academic science.

Asier Rufino, CEO of Tecnalia Ventures noted that we talked a lot about financing, but

that growth is not only about money. It is also about skills and expertise. Many investors

in Europe have limited entrepreneurial experience and they do not understand what it

takes to grow a startup. He further discussed the fact that venture capital and private

equity require very different skills because successful venture capitalists must actively

help entrepreneurs. Yet, many VC investors in Europe have a private equity background,

and their approach might therefore hurt startups.

Bart Swaelens, Head of Tech Transfer and Venture Development at VITO agreed with

Rufino, and further added that expertise among European VCs is very spread out

geographically. VC investors tend to specialize narrowly, so the fact that they are so

spread out geographically means that there might often be a mismatch between

entrepreneurial needs and the skills of local VC investors.

Maria Makridaki, Technology Transfer Consultant at PRAXI Network/FORTH discussed

the historical lack of funding for entrepreneurship in Greece. She noted that the fact that

they recently received €200 million from EU funds means that they can start funding

startups. Improving conditions also means that some entrepreneurs are starting to come

back. However, risk-aversion remains an important barrier to academic entrepreneurship

in Greece.

Julia Schmalenberg, Senior Policy Advisor at Fraunhofer noted that there is an

imbalance in EIC’s applications. She also argued that there is an important problem of

lack of integration in Europe and that European frameworks are too nation-focused. In

response to this, Asier noted that European integration can also happen bottom-up

through cross-borders collaborations, though he agreed that Europe should work on

decreasing regulatory obstacles to joint cross-border investments.

Christopher Kerth of the Transfer & Innovation Department at Helmholtz Association

described the work of Helmholtz and its investment in the commercialization process

from R&D to proof-of-concept and spinoff. He further noted that there is a “valley of

death” when it comes to innovation in Germany, especially in the life sciences. This, he

argued, is an important barrier to entrepreneurship.

Lluc Diaz, Innovation and Venture Officer at European Space Agency (ESA) agreed that

Europe has a growth-funding problem. The handoff between public and private

innovation is critical, and he recognized that VC investors cannot be expected to fill that

gap. He also asked why Europe does not have any Elon Musk-type entrepreneurs.

Culture, he believes, might be part of the problem.

Finally, Michaël Bikard, Assistant Professor of Strategy at INSEAD and rapporteur of

this workshop, noted that academic scientists form global networks and that findings

made in Europe are routinely exploited by entrepreneurs in the US or Asia. He argued

that European policy makers should be concerned about this trend because it means that

the economic value created by European investment in Science is being captured by

other countries. To address this issue, Bikard argued that Europe should boost its

commercialization capabilities. In practice, he believes that this cannot be achieved

unless one looks beyond intellectual property and the so-called “valley of death.”

Knowledge flows between industry and academia can be increased by encouraging

university-industry interactions, individual mobility, and the spread of entrepreneurial

and innovation skills among Europe’s engineers and natural scientists.

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7 Policy recommendations

The workshop’s conversations provided the basis for the following policy

recommendations.

1. Help entrepreneurs cross the “valley of death”

Considering the risk involved in commercializing academic research, private investors

and entrepreneurs need public support. Academic research is funded via research grants,

and private investors (e.g., business angels, venture capitalists) invests in startups

presenting limited risk. Between the two, however, a valley of death exists in which large

numbers of startups fail. Academic ventures will not attract private investment unless

much de-risking is done, and this work is difficult, risky, and costly. So-called

“technology transfer funds” help fill this gap, but those funds appear still too rare in the

EU.

2. Funding is important but it is not enough

Commercializing academic research is very difficult. It requires access to particular skills

(e.g., legal, managerial, technical), but also contacts with potential co-founders,

employees, industrial partners, and of course investors. Having an infrastructure in the

form of a program with specific milestones and go/no go decisions is also crucial. These

capabilities are crucial but they are generally underdeveloped in the European Union,

especially when compared to the US, Israel or Switzerland.

3. There is a need for further integration/harmonization

The process of commercialization might involve stakeholders in different EU countries.

For example, a technology developed in the Netherlands might benefit from the expertise

from Spanish or German investors. Yet, several workshop participants felt that there are

still too many barriers to cross-country collaboration.

4. It makes sense for different regions to specialize on different

technologies/industries

The commercialization of science is a very difficult endeavor. It requires the right

combination of scientists, entrepreneurs, and investors. Thus, it generally happens in

“hubs” in which people know one another and learn from each other’s mistakes. For

example, the US is a leader in the commercialization of science, but by far the majority

of the successes come from only two hubs: the San Francisco/Bay area and the Boston

area. Thus, to foster innovation, it is probably unproductive to spread resources too

widely from a geographic standpoint. Instead, it makes sense to build on existing

strengths to foster the emergence different area of expertise in different regions (i.e.,

“smart specialization”). Yet, such specialization must emerge bottom-up, it should not be

imposed top-down.

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8 Conclusion

The commercialization of academic science is crucial for the development of a dynamic

high technology ecosystem in the EU. Yet, the continent is generally lagging behind its

competitors in this respect, and most new technology giants emerge from other part of

the world. The workshop participants viewed this situation as an urgent problem that the

EU should work on solving.

The workshop was an opportunity to explore different avenues to increase the rate of

commercialization of academic science in the EU. The primary focus on the day was on

funding. Commercializing science is a very costly undertaking, and innovative startups in

Europe fail too often because they cannot attract the necessary capital. Other startups

turn to American or Chinese investors because they provide higher valuations than their

European counterparts. The problem is even more severe in Central and Eastern Europe

where funding for commercialization is very scarce.

The EU is involved in several initiatives to fill this funding gap, including the Capital

Market Union, the European Investment Fund, and the European Innovat ion Council.

Those responses are important and useful, but they generally seem insufficient for three

reasons. First, the current amount of funding is still too low considering innovators’

needs, and in light of what is available in the US or in some parts of Asia. Second, other

bottlenecks exist beyond funding—such as the availability of expertise and the lack of a

general infrastructure to accompany would-be entrepreneurs. Third, European initiatives

are fragmented and the lack of integration complicates cross-border collaborations.

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9 Annex - Agenda

17

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