The problem with the university spinout process is much more than just equity

University “spinouts” – companies created to commercialise scientific and technological breakthroughs developed by students and researchers – are big business. Ben Clark, Director of Future Worlds discusses the importance of getting the spinout process right. 

Ben works every day with startups through the Future Worlds programme (alumni include Accelecomm and ViridiC02), who are grappling with the university spinout process.

According to a recent report, equity investment in spinouts increased more than fivefold – from £405 million to £2.54 billion – in the decade to 2021. And investor interest is matched by the media, with spinouts increasingly prominent in coverage of the UK tech sector. Firstly this is because spinouts represent a golden opportunity to deliver high-impact solutions to the world’s most pressing problems while also driving economic growth. Turning world-leading discoveries in the lab into world-changing companies is key to realising the opportunity. But the attention is also down to criticism – increasing in volume over the past year – of the role played in the process of spinning out by the universities themselves. Universities  have been accused of demanding outsized equity stakes in spinouts that disempower the founders and hinder the companies’ growth prospects.

These concerns are set to be addressed by the Government, which recently announced the creation of a new committee to carry out a consultation and review of the spinout process. This is an encouraging step because there are undoubtedly issues that need to be resolved to make the process as efficient as possible and give spinouts the best chance of maximising their innovative and commercial potential. But the review will need to consider more than just the equity stakes universities take and the effectiveness of Technology Transfer Offices (TTOs), the department within a university that administers the spinout process.

Instead of just focusing at a transactional level on fixing the spinout process, we need to focus at a total opportunity level on the mindset, ambition, and enabling environment needed to collectively realise the maximum opportunity from spinouts. Achieving the most from spinouts depends on aligning incentives between the talented individuals who develop and seek to commercialise breakthrough science and technology, the institutions that provide the environment for them to do so, and the investors who provide the essential funding to launch and then scale. That is much more complicated than just slicing the pie differently on day one.

A point of agreement: the UK has world-leading universities doing world-leading research

84% of the UK’s university research is classified as “world-leading” or “internationally excellent”, and 19 of our universities are represented in the global top 100. While these statistics show our research excellence, only three percent of UK scaleups are university spinouts – which suggests that the UK has far more commercial potential available through spinouts than is currently being realised.

Everyone agrees that having large numbers of research-driven businesses launching, growing, and thriving in the UK, and making an outsized impact on the continuously changing global stage to drive forward the economy, is a good thing. It’s just the best way to achieve that outcome that is up for debate. If we want to fix the system and enable as many spinouts as possible to reach their full potential, the Government’s review will need to be deeper and more nuanced than recent media debates, which have been characterised by partisan attempts to engineer change through simplistic criticisms without consideration of the underlying challenges.

Top-down versus bottom-up intervention

It’s important to understand the roles of the different parties. Transformative, world-changing ideas in science and technology come from the bottom up through grassroots discovery and the pursuit of audacious ideas by talented and determined teams, not from top-down institutional mandates. Universities play a pivotal role in the endeavour by providing a nurturing environment: where their top-down mandate can be effectively employed to offer funding and other support and resources. Sadly, however, misaligned priorities and internal politics mean that too many of the problems spinouts face today stem from top-down overreach with well-intentioned administrators unintentionally inhibiting the genesis of innovation.

For the Government and universities it will be imperative to adopt a mentality that focuses at its core on empowering the innovators and founders to build the products and services that will shape the world of tomorrow, ensuring investment is channelled to these brilliant people who will define the UK’s economic future.

Once world-changing ideas emerge, the role of institutions should be to proactively encourage and reward tangible achievements through additional support. There are some vehicles for such rewards, such as the  Higher Education Innovation Funding (HEIF), a £260 million fund that supports the knowledge exchange between universities and society, including spinouts. But this could be significantly enhanced to incentivise and enable academics to commercialise their research.

Aligning incentives

Simply reducing universities’ equity stakes is not the key to fixing the spinout process. The key to fixing the problem is aligning the incentives of the academics who become founders, the universities who provide the enabling environment for them, and the investors who back the resulting companies. The goal for the UK taxpayer, who provides most of the funding for the activity, should be to create large numbers of publicly-listed UK tech companies launched, grown, and remain in the UK,  addressing the most important needs of the world today and contributing back into the ecosystem that spawned them.

The key is long-term thinking rather than fighting over pennies before the journey has begun – equity is just one of many issues, including licensing, shareholder agreements, speed, and mindset and ambition, that should be in the review’s sights. Aligning incentives in these areas will allow universities and the surrounding ecosystem to even more effectively catalyse research into a positive global impact and UK economic growth.

Is there a root cause?

Sadly debate about university spinouts all too often simply entrenches irreconcilable positions: “Universities must reduce their equity stakes!” founders and investors cry; “But our support was vital, it’s only fair!” the universities retort. In such a debate the tech transfer community deflects criticism of the equity stakes demanded by universities, citing the need to defend public interest and taxpayer resources by fairly recognising the funding and infrastructure role universities play in the creation of the spinouts’ intellectual property.

It’s important to see the big picture. Changes to funding, rising costs, and the withdrawal of EU money and students post-Brexit have left many UK universities running at a deficit on their core teaching and research activity. In that context, universities are inclined  to treat spinout creation – and potential returns on large equity stakes – as a financial lifeboat, especially those without expansive endowments (i.e., most outside of the “Golden Triangle” of London, Oxford, and Cambridge). The result can lead to behaviour that is detrimental in the long term to the scaling of businesses built on research – and therefore to the global impact and UK economic benefits everyone desires.

Ultimately, resolving the spinout problem is best done by zooming out to look at overall university funding. Putting institutions on a more stable footing coupled with incentivising them to take a less risk-averse approach in order to maximise the impact – both social and economic – of the research they foster. Doing so will take more than just reforming university equity stakes and TTO processes, instead going further to align incentives between the universities, spinouts, and their investors, which requires having a more nuanced and constructive conversation.

Why getting this right matters

Getting the mindset, ambition, and enabling environment right for university spinouts, not just the process,  is critical for the  Government to achieve its goal of turning the UK into a “science and technology superpower”. Universities play a uniquely valuable role in creating and enabling world-changing companies, and with 19 of the top 100 universities in the world, the UK holds an exceptional resource that can have a transformational impact on the UK and the world.

To do that we must put our brilliant scientists and engineers at the core of our thinking, ensuring they  have the resources and support they need to first conduct the highest impact research and then build companies that will thrive, scale, and compete on a global stage.