Our investment template could turn the UK into a spin-out superpower

More than 30 per cent of all European venture capital deals involve UK companies, and more than a third of European life science start-ups are British. Despite this, there has been public debate in recent months about whether UK universities are creating enough successful spin-outs. The perceived failure of these types of businesses has been presented as the soft underbelly of a stuttering UK economy, such that, in March, the chancellor announced a review of how the UK turns academic curiosity into commercial success.

The failure to create more university spin-outs is supposedly preventing the delivery of the Silicon Valley 2.0 vision previously articulated by the chancellor. It is hampering the ability of the UK to deliver on the “science superpower” agenda first articulated by Boris Johnson in 2021 by failing to unlock the research potential of having 10 universities in the top 100 globally. The perceived failure to build these businesses demonstrates, we are told, that UK universities are failing to deliver the dynamic spin-out culture of leading US universities.

The finger of blame is frequently pointed at university technology transfer offices. In particular, critics object to the size of the equity share that UK universities take in new businesses, together with the licensing policies and royalties they insist on when a new company built around academic research is formed. We are told that if universities were to ask for a lower equity stake, this would unlock a wave of research commercialisation.

These narratives, although well-intentioned, demonstrate little understanding of either the strong performance of the university sector in growing spin-outs in recent years or the complicated structures required to support research-intensive spin-outs. In the past decade, according to data compiled by the consultancy Beauhurst, the number of annual UK spin-out deals has doubled, to approximately 400, and there has been a more than fivefold increase in investment, reaching just over £2.5 billion invested in 2021. This is not the data of an underperforming sector.

Figures released earlier this month by the Higher Education Statistics Agency back up this picture. They show that 5,122 new spin-outs and student start-ups were registered at 125 higher education providers in 2021-22. That made for a total of 21,162 companies active in 2021-22 (including nearly 2,000 spin-outs) with a turnover of nearly £15 billion, employing the full-time equivalent of almost 100,000 people. This is up from 13,067 companies employing 41,791 people in 2014-15. Universities’ income from IP has more than doubled over the same period, to just under £330 million.

So is there really a problem in relation to spin-out creation? The answer is nuanced. Although the UK is among the leading nations for commercialisation, there is certainly room for improvement. Creating spin-outs is daunting. It is challenging to take a new and sometimes unproven technology with no customers, no revenue and, potentially, no market and turn it into a high-growth business. Academic founders can’t and shouldn’t be expected to do this alone – they need the support of experienced investors, including from outside the UK, if they are to flourish.

As things stand, many deals with founders and investors to create new spin-outs are created from scratch. But this is time-consuming and fails to build on the lessons from previous success stories. Having a common approach to negotiations across the sector could make the process much more efficient, especially for less experienced parties. To that end, a group of prominent venture capitalists in partnership with the UK’s six leading technology transfer offices have created a new University Spin-Out Investment Template (USIT).

Although USIT is clear in recommending that all spin-outs should be considered on their own merits, we have proposed landing zones for most deals, modelled on best practice among US Ivy League universities – including the fabled Massachusetts Institute of Technology. We know that inventors, universities and, critically, investors will be content with university equity stakes of between 10 and 25 per cent and a royalty of up to 5 per cent, based on the maturity and market readiness of the technology.

We know this because we’ve been there and done it. The group behind USIT is experienced and understands how to do a world-class spin-out. Between us, we have helped create 376 new companies in the past five years, and raised more than £8.6 billion in investment.

We are confident that USIT goes a long way to answering a number of the questions that the chancellor’s review is asking. It will speed up negotiations and make it easier to attract more investment. It will differentiate the UK and attract international capital. If widely adopted, it could be the key to turning a science superpower into the commercialisation superpower that everyone – universities, investors and politicians alike – wants the UK to be.

Diarmuid O’Brien is chief executive of Cambridge Enterprise. Maina Bhaman is a partner in Sofinnova Partners.