UK universities urged to lower spinout stakes

Universities should take no more than 25% of equity in the startup companies they spin out — and in many cases less than 10% — to encourage more academics to turn their research into commercial ventures.

The government, meanwhile, should increase funding for proof-of-concept projects that would help university spinout companies prove the viability of their products — as well as increasing support for university tech transfer offices and nurturing more entrepreneurial talent among academics.

These were some of the key recommendations published today in an independent report commissioned by the UK government, looking into how to increase the rate at which UK universities commercialise research. Spinouts account for only 0.3% of UK companies today. Increasing their number is seen as a key factor in turning the UK into a science and technology superpower. The study, carried out by Professor Irene Tracey and Dr Andrew Williamson, set out to identify best practice for nurturing them.

Williamson said that he hoped the recommendation on equity splits would put to bed a contentious issue that had threatened to cloud the otherwise positive developments in spinning out companies from UK universities.

“The UK spinout sector is a good news story, with great progress being made, but we have been distracted through this discussion around equity splits. And so my number one goal here was to first of all put that to bed,” he told Global Corporate Venturing.

Making sure that university spinouts have an ownership structure that follows market norms was one of the key recommendations of the report. That means universities taking between 10% and 25% of equity in spinouts in the life sciences, or hardware and engineering. In areas such as software, where there is typically less university support and intellectual property involved, the university should take much less equity, with 10% representing a maximum.

“It is a big issue of contention that had to be addressed,” said Tony Raven, the former head of Cambridge Enterprise, the research commercialisation arm of the University of Cambridge. Many venture capital investors have been critical of the big stakes — sometimes as high as 60% —  that universities have taken in spinouts,  arguing such stakes should be no higher than between 3% and 5%.

Universities in the UK on average take a 17.8% stake in spinout companies according to report earlier this year by the Royal Academy of Engineering Enterprise Hub and data platform Beauhurst. That is down from 24.8% 10 years ago but still far higher than the 7 to 10% of equity that Ivy League universities in the US, including Stanford, MIT and Harvard, tend to hold in their spinouts.

Williamson said it was important for UK universities to operate within global norms. “We are in a global market for talent of ideas and IP and for creativity. We want the UK to be the best, most competitive place, and the equity terms will enable that,” he says.

The equity recommendations were welcomed by investors, such as Nathan Benaich, of Air Street Capital, who has long campaigned for universities to take smaller stakes.

“It was heartening to hear that many institutions now agreed their policies weren’t working and volunteered to change them. We hope it marks the start of a more forward-thinking, founder-friendly era in UK universities,” Benaich wrote in a blog responding to the report.

But he added: “We hope the number of technology transfer offices that push for a 25% stake in life sciences companies remains vanishingly small, even if they technically have this leeway for IP-rich spinouts with long gestation periods.”

The need for speed — and proofs of concept

Beyond the recommendations on equity splits, Williamson’s key recommendations in the report were around speeding up the creation of spinouts, and helping them fund proofs of concept to show that their academic research could translate into commercial products.

Williamson and Tracey interviewed more than 600 of the UK’s approximately 1,000 spinouts during the course of the review to find out what would help them most.

“Key things that came out of that was a need for speed, perhaps even more than equities. If if you’re a founding team, and you have agreed your business plan, identified funding and you’re ready to go, the last thing you want to do is put it all on ice for six to 12 months while you try to negotiate terms,” he says. Putting in place a standardised term sheet template, similar to the US University Startup Basic Outlicensing Template (US-BOLT), would help streamline the spinout process.

More funding for projects to demonstrate the commercial potential of research was also high on every university’s wish list, says Williamson.

“I spoke to pretty much every research intensive university in the country as part of this review. Every single university said proof of concept, or translational funding, is what’s holding us back. They’ve got lots of potential spinouts, where the funding fundamental science research has been done. [But] they need a few $100,000 and another year or so of testing for that particular drug or material, that particular algorithm in a commercial application to show [investors] what it can be,” he says.

The UK treasury is expected to announce more support for proof-of-concept work as part of tomorrow’s Autumn Statement.

Still a need for more early-stage capital

While a focus on the equity structure of spinouts is welcome, Raven said there was still a need to address the biggest issues for university spinouts — access to capital. Raven founded Cambridge Investment Capital (CIC), a follow-on investment fund for university spinouts and Cambridge startups which now has more than $1bn of assets under management. CIC and a similar fund, Oxford Science Enterprises, are seen as having been instrumental in creating a dense cluster of spinouts and startups around Cambridge and Oxford.

Similar funds have been developed for Manchester, Sheffield and Leeds by investment company Northern Gritstone. In the UK Midlands region, a new fund is being developed, Midlands Mindforge, with the participation of several universities in that region, including the University of Birmingham and the University of Nottingham.

Universities without the rich endowment funds that Oxford and Cambridge have will need additional government support, says Raven. This could be done through a government fund of funds, for example, he says.

Early-stage capital is often the most difficult for startups to access, and UK startups need access to large enough rounds to be able to compete at an international level.

“You need $2m for a seed round not $100k cheques. If you don’t have $2m the Californian startups will come steaming past you,” he says.

Williamson said he wanted to see more investment companies like Northern Gritstone seeding new innovation ecosystems in new areas of the UK — and they would increasingly pull in external investors.

“That starts with the kind of public private partnerships. [And then] you will find investors coming in investing alongside them in way that just would not have happened if they hadn’t existed. I think we’re on a good path there. We needed to get the the spinout terms and the equity splits right in order to set the table for those partnerships and for that investment to come in and that’s all happening,” he says.

In addition, the UK chancellor, Jeremy Hunt, is expected on Wednesday to announce a £3m scheme, modelled on the US Kauffman Foundation, to train more science and technology investors in the UK.

Other recommendations in the report include creating shared technology transfer offices between universities so that smaller research universities would have access to better resources, and creating more support services for academic founders, including legal, operational and financial help. Researchers should also have access to entrepreneurship training, with Williamson particularly keen to make it easier for academics to move between universities, commercial companies and startups.

“That sort of porosity of talent enhances performance,” he says.