‘Investment speed, not equity’ holding back UK spin-outs

Speeding up the creation of university spin-outs and access to capital are bigger barriers to commercialising UK research than the equity demanded by institutions, a major review has said.

While the Independent Spin Out Review in 2023 led by Irene Tracey, vice-chancellor of the University of Oxford, urged academic institutions to take an equity share of no more than 25 per cent, or, in some cases, less than 10 per cent, a new report commissioned by UK Research and Innovation (UKRI) suggests this issue is “no longer the primary barrier to spin-out success” and “the conversation should now shift to more pressing challenges”.

“There’s little evidence that equity levels alone deter founders or investors,” explains the review titled Deepening University-Investor Links by Tony Hickson, chief business officer at Cancer Research UK, which was published on 3 February.

“More often, spin-out activity is driven by access to capital, as seen in Oxford and Cambridge, where spin-out rates rose significantly when increased local investment became available,” explains Hickson, whose report drew on 115 interviews with investors, university leaders and senior staff in technology transfer offices.

“While still early days, there seems to have been little change in spin-out rates or investment raised at such universities since their equity policies subsequently changed,” he adds.

With the average university start-up dropping from 25 per cent to 16 per cent over the past decade, most universities are not demanding an excessive portion of a business but are within their rights to expect some return given they must “balance public benefit with financial sustainability [when] sharing equity with funders and collaborators”.

“Most investors that I spoke to accept that universities do indeed deserve a reasonable share of future value, though views differ on what ‘reasonable’ means,” he adds, noting that “only a small minority expressed a view that the ‘professors’ privilege’ model of intellectual property ownership should be adopted” – referring to the Swedish model in which academics retain a 100 per cent stake in any spin-out that they found.

International comparisons are often misleading, Hickson added. “Simplistic claims and comparisons to international peers such as ‘US universities take 5 per cent’ but then neglect to mention the antidilution protection that comes with it or ‘ETH takes 2 per cent’ but neglect to mention the higher royalties and ‘equity add-ons’ for the additional services they offer are not helpful,” he says.

“Investors need to stop ‘cherry picking’ the components of the formula they like and ignoring the parts they do not,” Hickson adds.

Overall, “while equity remains a sensitive issue”, the “focus should now shift to more impactful areas like investment readiness, access to capital and speeding up formation processes”, he recommends.

Speaking to Times Higher Education, Hickson explained his report – the fourth major review of the university spin-out scene since 2017 – said investors now perceived that the need for speeding up commercialisation “has gone up” since Tracey’s review was published in October 2023.

“Everything is speeding up in the innovation sphere so the question is ‘how do we keep up?’,” he said, adding: “We need to move on from how much equity universities are taking.”

The report calls for a major increase in pre-incorporation and pre-seed funding, with UKRI urged to boost funding for proof-of-concept to £100 million annually.

Often founded on cutting-edge research and with the potential to scale hugely, university spin-outs should be treated as a “unique asset class”, continued Hickson.

“They shouldn’t just be viewed as part of the overall start-up mix – they need special treatment,” he added, particularly help with acquiring investment via technology transfer offices.

“There is no silver bullet for these things but if start-ups get access to capital then a lot of things resolve themselves,” he said.

With many UKRI schemes for translational research or start-up support scattered across different research councils, there is potential to bring together more of these programmes, Hickson said.

“These are all brilliant highly-rated schemes but we are putting small amounts of money into a lot of areas and making things very complex. Investors want to see a more contiguous pathway so researchers don’t have to constantly jump off one scheme on to another,” he said.