EU retreat to give spin-offs cash bonanza

University spin-off companies could soon be freed from European legislation that has stunted their growth, unlocking the door to millions of pounds in government investment and loans.

Spin-offs are seen by ministers as key to a successful knowledge economy, as well as a vital source of income for higher education. But the estimated 600 companies created so far have been starved of state support by European Union regulations.

Governments are forbidden from giving funding to spin-offs because companies must be "independent" to qualify for aid as an SME (small or medium-sized enterprise). A larger organisation may not hold more than 25 per cent of the equity or exercise control.

Because universities usually hold a larger stake - especially before other investors have come on board - they have not met the EU criteria. But a change of definition under consideration in Brussels this week would make the companies eligible for regional development funds and tax credits.

The legislation aimed to prevent large companies spinning off part of their activities to a small firm to enable them to benefit from state-aid packages to SMEs. Universities were unintended victims.

Private venture capital has become scarce since the drop in the stock market, and public funding could be vital to enable spin-offs to attract private investment.

Susan Searle, managing director of Imperial College London's technology-transfer company Imperial Innovations, said: "The issue in the market at the moment is the lack of lead investors - there are plenty of co-investors - regional development funding could take the lead on many investments with £250,000 and unlock probably a further £500,000-£750,000 from other co-investors, enabling early stage rounds to be completed."

If the definition is changed, regional development funds such as the £50 million South Yorkshire Investment Fund or the £35 million North West Equity Fund, government Smart awards and Teaching Company schemes will be available to university spin-offs.

The problem has been recognised for some years. The European Commission began consulting on the definition two years ago but only now has got round to adopting the recommendations. Member states will have until January 2005 to implement the changes.

State money can be used to put into venture-capital funds owned by universities, such as the £9 million White Rose Technology Seedcorn Fund, which is shared between Leeds, Sheffield and York universities. Half the total comes from the government's University Challenge fund.

Martin Doxey, chief executive of the White Rose consortium, said: "There are various publicly funded schemes that would love to help university spin-offs but can't because of the SME definition."

The total public funding to an SME is limited to E100,000 (£70,000) over a three-year period - but it could be crucial to spin-offs, especially as University Challenge funds are almost all spent.