The debate around equity stakes in UK spinouts often holds up the US as a perfect model to follow — but does the data show any actual differences between the two and what does that mean for academics?
My colleague and partner in many new initiatives in knowledge transfer, Chris Fellingham, shared a paper by Thomas Hellman entitled “How does equity allocation in university spinouts affect fundraising success?” Its main conclusion states that “the broad-brush argument, that higher university stakes make spinouts unfundable, is not supported in the data”. There are some very weak trends including that for every 10% a university increases its equity stakes, there is a 3% decrease in the probability of raising venture capital, but it does rather suggest that the occasional grumblings I might have received from the odd VC in my time helping spinouts raise funds didn’t actually stop them coughing up the cash (which was also my experience).
There is another key point in Hellman’s conclusion regarding the size of shareholdings, which I will return to shortly because it is arguably the most important one.
First, allow me to reflect on my own time as an academic and the academics I have had the pleasure of trying to help since I jumped back into the university world in 2015, it will illustrate why Hellman is right not just in the data but also anecdotally.
I should say, before I go on, that my academic career was rather undistinguished; lots of papers on carbon nanotubes, none of which I would recommend reading, and a subject with which most of academia has quite rightly got bored. If only they’d move on from graphene as well… that’s another matter.
With my lack of distinction combined with an inability to focus narrowly on one area (which made me a terrible academic and an ideal technology transfer manager), I was still nevertheless working long hours. In 2010, when I left academia, I usually worked 55 to 60-hour weeks — clearly less than your average NHS doctor, politician and, dare I say it, VC, but enough for my wife to politely request that she see me a little more than she occasionally did. I was balancing my final research project, which involved hours in the clean room on a machine which I concluded was incapable of creating the nature of thin film I needed for my electronic devices, with undergraduate teaching, a lecture course I was giving remotely to a university in Seoul, managing my university’s contribution to a European project on collecting research on nanotube electronics, paper writing, conference attendance, helping to supervise PhD students, looking after equipment in the clean room… the list goes on. Perhaps I needed more focus, but these were all things that it was said might contribute to my academic career. Note that none of the listed activities above included commercialisation; I did have a patent that, like my research, was shit limited in its potential impact on society.
After my five-year sabbatical to the BBC, another hopelessly sclerotic organisation, though with staff who were generally much better able to keep their work down to a 40-hour week, I returned to universities to find, unsurprisingly, that they too were working the long hours I used to. In fact, the distinguished ones I worked with generally worked longer hours than I did when I was an academic.
One of the more ridiculous processes I had to undertake as a technology transfer manager was to help academics ask for permission from their head of department to undertake their right to 30 days’ consultancy as part of a spinout, when I knew they were already working a full week and a good chunk of the weekends as well doing their day job. Now, I don’t want to stop people from doing work if they are really passionate about it, and academics usually are, but I’m not sure the culture is entirely healthy. It also means that commercialisation needs to happen on top of the work already overstretched academics have to do — the extra work they did was on various university committees, a responsibility I thankfully managed to avoid.
So, the ones that did take the plunge — the “buggers for punishment” as my father would say — would confide in me things such as “so the company wants me to do more work for it to sort a few problems out, but I have so little equity in the company now, I’m not sure I can be bothered”. Others earlier in the process would quite simply drop out (in one case quite dramatically; that was fun), not because they couldn’t raise the capital, but because the equity the university was taking was too high. This is the key issue with high university equity stakes: headroom.
Yes, you can have a massive option pool and dilute the university out that way (if they are willing to abide by this), and there are many other ways to incentivise academics, but Hellman’s paper’s key conclusion that “reductions in university stakes are also associated with increases in the spinout rate,” is the real reason why university equity stakes should be low. Pile them high and sell them cheap.
There is another factor. We often compare the perceived relative success of university spinout in the United States, with low university equity said to be a driver. The data shows that on average, there is very little difference between the US and the UK in university equity stakes, though some of the bigger universities tend to go for lower stakes (occasionally, however, with non-dilution provisions). The key reason that they can do better is that the access to capital in the US is far greater than over here in little Blighty. There have been great advances on increasing the size of the pool, but the US dwarfs us. Growing your spinout over here can be tough. Again, if you are going to encourage your academic to take the leap, lower equity for a university is going to help.
There are those who argue that the academics have a secure job — this isn’t true, most aren’t tenured — and are paid for by the state through research grants et cetera, and it is right that the state should recoup more of the value they create. As I increasingly lean politically to the left, I have some sympathy for this argument. However, I was first trained as a scientist and as a scientist, I look at data.
It is far better for these innovations to be out in the open, making money and jobs for someone and solving the world’s problems, rather than not be seen at all. This should be the key determinant of a university spinout policy and with the various innovation reviews on both sides of the House of Commons taking place, that is where the focus should be.
Mark Mann is the managing director of his own knowledge transfer and strategic innovation consultancy which provides a variety of services and advice across the UK and Europe. You can reach him at mail@markmann.org.uk.
