Editor-in-chief James Mawson takes a look at assumed problems around university IP and considers the opportunities of university venture funds ahead of a report by Hermann Hauser.

Technology transfer was a fledgling field when Hermann Hauser co-founded Acorn Computer, a pioneer of personal computing in the UK, in the late 1970s. Acorn later spun out chip developer Arm, which itself was eventually acquired by telecoms and internet conglomerate SoftBank for £24bn ($31.9bn) in 2016.

Hauser, now a partner at venture capital firm Amadeus Capital Partners and a backer of six unicorns – companies worth at least $1bn – in the Cambridge, UK, ecosystem, is preparing a report based on an assumed problem in intellectual property (IP), and the package of services offered by universities to startups that needs to be unbundled to allow markets to set values through competition.

Hauser said in a recent webcast by media company Science Business that universities often regard the work they do for startups beyond the IP as also being valuable, but his recommendation is equally pugnacious. He said if universities worked so hard for spinouts, then the institutions should be in competition with others, such as VCs and angels, so the extra percentage of equity could be negotiated.

On IP-for-equity, Hauser is this month expected to recommend for the UK a model similar to that of top US universities, which use a formula, rather than a negotiation with the entrepreneurs, to establish the value or equity to be taken by the institution. At about 5% of equity for university IP in a company worth up to £2m, it would be quicker than the current system for most spinouts, Hauser said.

This is an amended view on Hauser’s earlier statements on the topic at the start of the decade, which called for “a goodwill-based approach to technology transfer whereby any venture created in Cambridge and employing Cambridge University alumni could donate 1% of its shares to the university when they start up”.

Imperial College London offers founders the option of either giving the university 5% or 50%, depending on how much support they require. In the latter case, half the university’s share is given to Imperial Innovations, the institution’s tech transfer affiliate owned by commercialisation firm IP Group after its acquisition of parent company Touchstone Innovations. The 5% stake, meanwhile, is non-dilutable in future funding rounds.

Similarly, University of Oxford hands half the targeted 50% stake in spinouts to its university venture fund, Oxford Sciences Innovations (OSI), which has raised £580m from local and international investors, such as internet companies Tencent and Google.

University of Cambridge by contrast has to invest first for equity, such as through its Cambridge Innovation Capital (CIC) fund, but, as with other universities, takes fees from use of its IP.

But with Hauser’s report looming, there is renewed attention to the amount of funding these spinouts could receive from university venture funds (UVFs). IP’s acquisition of Touchstone has generated third-party expectations Imperial will set up a new UVF in the next few years.

While OSI and CIC have successfully raised money, both have eyed ways to expand their funds. OSI has looked into setting up a student-targeted fund and CIC is understood to have investment banks, such as Rothschild and Goldman Sachs, on call for fundraising.

Victor Christou, chief executive of CIC, said in an article in the Telegraph in July: “We want to expand our shareholder base internationally to provide leverage for our portfolio companies as they expand globally. It is going to be a substantial raise for us and be impactful in the Cambridge area.”

And with Midlands Innovation, a collective IP initiative with seven UK universities targeting £300m of patient capital funding, there is plenty of competition for capital.

Similarly, Future Planet Capital, another patient capital fund targeting startups from around Cambridge, Oxford, Harvard, Stanford, Berkeley and Tsinghua universities and Massachusetts Institute of Technology, will follow the GCV Asia Congress in Macau and Hong Kong on September 19 and 20 with a roadshow hosted by UK peer Lord Nat Wei.

Other approaches have also been successful. Eight scientists from Cambridge have agreed to co-found the Ahren fund under managing partner Alice Newcombe-Ellis, investing at least £100m in technologies ranging from artificial intelligence and space to brain research and genetics. As well as the eight scientists, who also act as science advisers, outside investors include insurance provider Aviva, Wittington Investments and wealthy US families, according to the FT.

Venki Ramakrishnan, Nobel laureate and president of the Royal Society, Britain’s leading scientific body, told the FT he was excited to be one of Ahren’s science partners because “the vision of investing in companies that can really make a big impact on the world – and supporting them for the long haul – appeals to me. A big problem in Britain is innovative companies selling out too quickly, usually to Americans.”

Although more than 50 UK-based UVFs have been launched since 2015, according to our data analytics platform Global University Venturing Analytics, what underpins future raises will be the results of the entrepreneurs themselves, even if this does include selling out to Americans or Asians.

IP Group and OSI also have a roadshow in Asia, including Hong Kong during mid-September, where portfolio companies, such as sequencing technology developer Oxford Nanopore, are speaking with an eye to a potential flotation.

Oxford Nanopore’s spokeswoman told GUV: “Capital markets in London and Asia are attractive and we are considering them.”

IP Group owned 18.3% of Nanopore, worth £274.1m, after the spinout’s $140m funding round in March this year. But getting an exit for such a unicorn requires patience. Woodford Patient Capital Trust’s £800m fundraising through a public offering in 2015 to invest in startups has seen mixed results since.

Shares in biotech producer Prothena, the trust’s third-largest holding, fell after announcing in April it had ceased research and development of a key drug, while others, such as artificial intelligence technology developer Benevolent.ai and cancer care provider Proton Partners, have seen good news flow.

Insiders at the UVFs raised this decade reckon UK startups in general need another three or more years to hit unicorn valuations and exits. While some, such as Oxford Nanopore, might come earlier, the J-curve effect on venture funds – valuations can often fall or remain flat for years before taking off in a way reminiscent of the letter J – mean Hauser’s report will come at an interesting time for the UK ecosystem.

Given the importance of the UK’s role in the global ecosystem – GUV Analytics has tracked more than 50 fund launches targeting the sector over the past year and more than 2,000 deals in spinouts globally over its first five years of publication – the implications of any changes in policy could ripple out internationally.

Note: The GUV Powerlist 100 of top UVF leaders will be presented at the Venture Houston conference in Texas, US, on November 8-9.