We’re super pleased by last week’s announcement from Qualigen Therapeutics (NASDAQ:QLGN), that they’ve licensed a small-molecule G-quadruplex stabiliser technology developed at the UCL School of Pharmacy for ongoing translation to clinic in pancreatic cancer. This program was funded in its later stages via the UCL Technology Fund’s (UCLTF) unique Licensing Project funding stream. It highlights the Fund’s unique model of providing support not only for traditional venture-backed spinouts, but also to incubate and de-risk early stage technologies at UCL with potential both for global impact and strong commercial returns, in a capital-efficient manner. It’s a good opportunity to reflect on why we designed the UCLTF specifically with these different approaches being available – looking first here at spinout funding demonstrates why it works so well to also have this project-funding approach integrated seamlessly alongside.
For many venture investors, a spinout company structure is an attractive method for supporting innovation and generating returns. In the archetypal situation, a new company is incorporated and initially it is owned by the academic founders and the university – a venture investor then provides capital in return for an equity stake in the business. This happens simultaneously to the company taking a licence to the intellectual property (pertaining to the technology) from the university. The valuation of the company – a topic worthy of detailed discussion in its own right – is determined by how much the VC is willing to pay for that stake.
There are several things that make the spinout company vehicle appealing for VCs: it’s easy to see who owns what and to put a value on the company today, it provides a simple method for garnering further funding to progress the company’s program(s) by syndicating with other investors, the equity structure enables fair and effective incentivisation both for founders and management teams and, most importantly, the equity stake is a fungible asset that can be sold by the venture investor in order to get to an exit on the soonest timeframe possible. Given the traditional 10-year life of many VC funds, the ability to sell the stake sometimes years before any profits are actually made on selling a product/service is fundamental. This is also why a public listing (IPO) is many spinout companies’ stated aim even at their Seed or Series A rounds – it’s a process that’s more within the control of the investors in the company than the ability to get a successful trade sale away.
From the university’s perspective the structure of the IP licence is critical for generating returns on its own innovation. Though the university will often get an equity stake in a de novo spinout, relatively few (if any?) universities will have the ability to ‘follow their money’ and reinvest in the spinouts as they secure more funding over time. As a result, their share will almost inevitably get diluted. This is the reason that many universities will include terms like milestone payments and royalties on net sales in their license agreements – even to baby newcos emerging from under their wing. This is because, regardless of how much funding those companies raise, the university will receive those same (undilutable) cash payments if the company is successful in progressing to commercialisation. A balance needs to be struck of course – the milestones/royalties need to be commercially sensible such that a spinout can spend the capital it raises on actually de-risking its technology, and any eventual buyer of the business can live with those terms.
There are also technologies for which a spinout structure is more suited – and this is driven largely by capital efficiency and commercialisation model. At the UCL Technology Fund, for example, almost every investment we’ve made on the physical science/engineering/tech side of the Fund since inception 7 years ago has been into a spinout company. The journey to ‘traction’ or product-market fit in meeting some unmet need (as we discuss here) for a tech idea can be relatively capital efficient, at least compared to life-science innovations. For example, it’s probably cheaper to develop and iterate an algorithm to the point of user adoption (hence revenue) than it is to get a medical therapeutic all the way through to a marketing authorisation (hence revenue), the cost of which on some estimates is now between $1.3-2.0bn. So less dilution is likely for an early stage equity investor in a tech spinout. Further, achieving product-market fit in tech relies very much on iterating a product, business model or go-to-market strategy (again more suited to a company) than engaging in the highly regulated and structured process of drug development.
That doesn’t mean that we don’t invest in life-science spinouts – indeed our record is very much to the contrary, and we’re proud to support a number of major UK life-science companies particularly in the cell and gene therapy space. What sets these investments apart is that they are generally platform technologies for which a single process and team has the potential to create impact (and therefore generate revenues) in multiple patient populations or markets.
However, spinning a company out around a single product or process serving a single disease indication doesn’t often make sense for a seed fund such as ours given the capital intensity noted above. Thus, our Licensing Project funding stream – which is how we supported the G-quadruplex program – provides a capital-efficient alternative to a spinout that enables direct backing for technology development within UCL, without the inherent cost and complexity of building a company. Our experienced team of program managers help to ensure delivery on milestones both internally at UCL and externally with CRO/CDMO partners.
The Licensing Project approach de-risks those programs, utilising the world-class translational infrastructure at UCL, to the point where they can be licensed by our friends and colleagues at UCL Business, UCL’s world-class technology transfer company, to a partner who has the wherewithal to take the product all the way to market. The return for the academics, the university and the Fund then comes from sharing revenue on that licence.
Our goal is to make a transformative difference to these programs, not just chivvy them that little bit forwards. Indeed in our second Fund from which we’re now investing, we’ll provide translational support in the millions. And it’s not only money – our collaborations at UCL benefit just as much from our extensive commercial and expert network, industry guidance and rigorous management as do any of our spinout companies. Meanwhile, funded academics can still apply for grant funding alongside or even after our support as the IP remains entirely the property of the university.
So: it’s crucial to get the commercialisation model matched properly to the kind of technology that’s being de-risked. It’s similarly critical to get the fund structure right for the institution and for the sort of innovation that’s going on. We took a risk ourselves with this novel approach 7 years ago to provide a fully integrated venture fund within a single academic institution – and it’s now truly bearing fruit. Much, much more of this to come.