The Ecosystem: UK universities to take lower stakes in spin-outs following independent review

28 Nov 2023 | News

Review of technology transfer calls for greater clarity on spin-out terms, but clears universities of cashing-in

UK universities will be encouraged to take lower equity stakes in spin-out companies following an independent review of technology transfer practices commissioned by the government.

The aim is to harmonise spin-out terms in the lower range currently seen in practice. Twenty-five percent equity is given as a working standard for spin-outs leaning heavily on university intellectual property (IP), and 10% or less suggested for less IP-intensive spin-outs.

The recommendations, which have been accepted by the government, are seen as a victory for a small but vocal group of investors and company founders whose lobbying prompted the review.

“These recommendations tally heavily with our original spin-out reform proposals, which we reiterated subsequently many times, including to the inquiry team,” said Nathan Benaich of Air Street Capital, who led the charge.

But universities are also positive about the outcome, satisfied that they have justified their right to take equity in spin-outs, and to profit from it where they can.

“The recommendations published in this review will help universities harmonise the creation of spin-outs,” said Anne Lane, chief executive of UCL Business, the technology transfer office of University College London. Now universities, government and investors should to work together “to ensure a healthy and sustained flow of investment back into academic research, whilst supporting the emerging world changing businesses of the next 30 years,” she said.

The review, announced in March this year, was conducted by Irene Tracey, a neuroscientist and vice chancellor of Oxford University, and Andrew Williamson, managing partner of Cambridge Innovation Capital and chair of the Venture Capital Committee of the British Private Equity and Venture Capital Association.

They canvassed stakeholders to identify best practice in university spin-outs and IP licensing, in the UK and abroad, and in particular at the time taken for spin-outs to be formed and IP licensing terms to be agreed.

Unfavourable comparisons with the US were behind many of the complaints about the situation in UK, from the amount of equity taken, to the bureaucracy involved in spin-out negotiations. So, universities can feel pleased that the review puts such comparisons in perspective.

As the review points out, bar a few exceptions, UK universities are not nearly as rich as their US counterparts. Most lack significant endowments and access to networks of philanthropic alumni. At the same time increasing spin-out activity in recent years is contributing to the financial pressure experienced by many UK institutions.

Not cashing in

“Supporting the creation of spin-outs must not result in a net cost for UK universities with already challenged operating budgets and declining real-terms tuition fees,” the review says. “Indeed, the current risk is that structural under-funding might deliver a reduction in such activity.”

The idea that universities are cashing in on spin-outs is also dismissed. “While spin-outs can occasionally provide a revenue source for a university when a spin-out grows to become very valuable, they generally provide only a modest and unpredictable income source,” the review says.

This means revenues from spin-outs should not be relied on as a primary source for supporting commercialisation activities. Instead, Higher Education Innovation Funding, a component of public support for universities in England, should be used to reduce the need for universities to cover the costs of technology transfer offices from spin-out income.

In addition, licensing revenue from spin-out creation should be returned to academic inventors and their departments, to incentivise commercialisation of research, and to help the university support the next generation of spin-outs.

In terms of equity stakes, comparison with the US is not straightforward. A survey of founders and some independent studies, indicate the US and UK are in much the same position.

“Once different practices on royalties and equity dilution are correctly accounted for, deal terms offered by a growing number of UK universities have been moving towards – and are now comparable to – those taken in leading US institutions,” says the review.

However, more work is needed to align all UK universities with this best practice. And while terms are well established for spin-outs in the life sciences and other IP-intensive sectors, the situation is less clear in sectors such as software.

Standard terms

The universities’ trump card in the review process was the University Spinout Investment Terms (USIT) guide, put together by TenU, a collaboration between the technology transfer offices of six leading universities in the UK and four overseas, in collaboration with venture capital investors, law firms and professional associations.

The guide was published just a month after the review began, and appears prominently in its recommendations. It is the source of the 10-25% range recommended as a starting point for university equity splits, and its guidance given as the template for spin-out term sheets, to help streamline the negotiations process.

Among the review’s other recommendations are the creation of a national register of spin-outs, to improve transparency and the availability of data, including on typical deal terms. It also suggests increased proof of concept funding for university researchers considering creating a spin-out. This was accepted by the government, which announced a £20 million proof of concept funding scheme at the same time as the review was published

In order to help build scale and critical mass in the spin-out space for smaller research universities, the review suggests the formation of shared technology transfer offices, which could be set up with existing offices or involve regional or sector-wide cooperation. The sectoral approach might be particularly interesting for spin-outs from the social sciences, humanities, and the arts.

Taken overall, there is a need to consolidate and expand support services for spin-outs, in particular to ensure that founders have access to advice, support, or representation in negotiations with universities and investors. There is also need for training in entrepreneurship and commercialisation, and support for business-building activities.

PhD students should have the option of entrepreneurship training, with opportunities for internships with local spin-outs, venture capital firms or technology transfer offices. There should also be funding to enable researchers to move between academia and industry. Suggestions include funds that buy out academic time so that they can focus on commercial partnerships and potential ventures, and adapting funds for industry collaboration so that they are more accessible to spin-out founders.

Charmed circle

It is now up to universities to implement the review’s recommendations. Cambridge, Edinburgh, Manchester and Oxford universities, and UCL and Imperial College London, which are member of TenU are already well placed to respond. “[The report] shows us that we are on the right track with initiatives such as the USIT Guide, and shines a light on further opportunities to supercharge the sector.” said Ananay Aguilar, head of TenU.

But those outside this charmed circle are also positive about the outcome. Nottingham University is among the institutions that will have to modify its terms in line with the review’s recommendations. Like many others, it typically asks for a 50% stake in spin-outs, a figure that is sometimes justified by the university making a cash investment.

“At the moment the 50% starting position causes much debate,” said Richard Hague, professor of additive manufacturing at Nottingham and the founder of two spin-outs. “Until now this has just been how it is, but now the review gives us a direction forward, and the university some clarity about lining up with its peers.”

This will also help when spin-outs look for external funding. “All the potential investors we talk to are uncomfortable with a university having too high a stake in a spin-out, so having clarity around a lower stake is a good thing. And I think this will drive investment,” said Hague.

Elsewhere in the Ecosystem

  • Lisbon has been named European Capital of Innovation 2023, with Warsaw and Lviv runners up. The award for European Rising Innovative City went to Linköping, with Padova and Cork runners up.
  • Aelius Biotech, a 2018 spin-out from Newcastle University, has raised £1.25 million to further commercialise technology for testing drugs and foodstuffs without the use of animals. The company’s model of the human gut covers three stages of the oral absorption process: movement through the gut; passage through the mucus layer; and crossing intestinal epithelia. The money, from the North East Venture Fund, will enable the company to relocate from the university to its own labs, and expand from five to 15 people over the next two years.

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