Why university spinouts are a battleground in the government’s ‘science and tech superpower’ plans

Top tech investors and policymakers are looking to up the flow of cash into a new wave of start-ups coming out of British universities, as ministers lean on the private sector to turn the UK into a “tech and science superpower”.

Universities have long been viewed as fertile breeding grounds for tech start-ups by private investors, with equity funding into the UK’s so-called academic spinouts climbing from £405m in 2012 to £2.54bn in 2021, according to data from research firm Beahurst.

However, the venture capital industry has been buffeted globally by rapid rate hikes and soaring inflation over the past year. Tech figures are looking to ease the route for investors to pump cash into innovative university projects to ensure a pipeline of innovation does not dry up.

A group of top investors and universities last month laid out the USIT Guide to provide a  “blueprint” and put “rocket boosters” under the way that universities spin out start-ups and take advantage of research breakthroughs.

“We’re trying to help the entire university ecosystem recognise how we can get more spinouts from those institutions and how we can deliver more value for the UK,” Diarmuid O’Brien, chief executive of Cambridge Enterprise and chair of the USIT Guide working group, told City A.M. in an interview.

“We’ve a group of organisations between us that have raised about £8bn over the last five years, and we’re taking the lessons learned, trying to codify it, and giving it back to the sector and the venture community in a way that we can derive more value.”

The new plans have won the backing of VC firms Abbingworth, CIC, Sofinnova, as well as top universities including Cambridge, Imperial, Oxford and UCL.

The efforts to ease the flow of cash into start-ups come as ministers mount plans to turn the UK into a tech and science superpower. A commitment for  £370m funding from government was met with derision from the tech industry but ministers are hoping a flood of private capital will supercharge the plans.

The Treasury called in two top academics in March to assess the landscape for tech spinouts and assess how to best turn academic projects into commercial success.

O’Brien told City A.M. that unlocking pension capital and providing certainty on research and development tax rules should be top policy priorities to boost the pipeline of spinouts in the UK.

However, some tech figures have cast doubt over whether the government has the technical expertise to ensure that investment continues to flow into universities. Sara Holland, partner and patent specialist at law firm Potter Clarkson, told City A.M. this week that technical talent was currently lacking in government.

“If the government really wants to get this right, it needs people with technological competence – scientists need to be in the room when these discussions happen, and, bar George Freeman and some of the DSIT Engineering team, this is just not the case,” she said.

“At the moment, spinouts happily relocate to the US because the investment across the pond is something that the UK doesn’t have. The support and money needs to be there if we are to keep our spinouts.”

Henry Whorwood, director of research at Beauhurst, which conducts an annual deep dive into the UK’s spinouts, added that ministers needed to better define their aims if commercialisation of university start-ups was to be successful.

“The government needs to work out whether it wants to support spinouts or the general commercialisation of research; whether it wants to support the creation of spinouts or supporting the growth of spinouts; and whether interventions supportive of deeptech (or even just tech) in general might be a better (and fairer) way to support spinouts,” he told City A.M.

University problem?

Some argue that universities themselves also prove a spanner in the works by demanding large chunks of equity in the firms developed in their own labs and classrooms.

“For those trying to spin out from universities that are demanding up to 50 per equity, there is little that can be done, as these companies have to rely on university-owned [intellectual property],” Holland said. “Active leadership from the government can change this.”

A recent report from Said Business School acknowledged that founder teams and outside investors “frequently criticise universities for taking excessive ownership stakes, weakening entrepreneurial incentives, and making spinouts ‘uninvestable.’”

However, the report argued that statistics show that it had little impact on eventual fundraising.