The UK spinout review: moving beyond equity

A photograph of the UK's Treasury offices, Horse Guards Road, London.
Image of Tony Hickson
Published date:
November 21 2023
Tony Hickson, Chief Business Officer of Cancer Research Horizons
Time to read:
5 minute read

The Government’s independent review of the UK spinout landscape reflects how well our universities commercialise their research, with some sensible suggestions on how to improve it further. Will ministers follow the recommendations or will the few loud voices urging to fix what isn’t broken drown out the data once again?

The review, published today, aims to identify best practice for UK universities to form spinouts and license intellectual property. It’s certainly a relief to see that the recommendations made by the independent committee are all generally sensible and that the committee has resisted the temptation to recommend imposing a one size fits all solution. Indeed, every time there has been such a review the results have shown that UK universities are generally good at spinning companies out, an opinion repeatedly echoed by US universities such as Stanford and MIT, and backed up by data from Research England and independent academic reports

The amount of equity UK universities end up with in spinouts compared to founders has been declining for many years now. This is the result of several market factors: global investors have brought more US norms, where universities generally take less equity, to the UK; there is a greater appreciation of the benefits of running a mixed model of sharing rewards that includes both equity and royalties; and knowledge-sharing between innovation ecosystems beyond the Golden Triangle has increased. Some universities have been experimenting with different models of lower institutional equity stakes for a while and the TenU consortium of universities recently got together with a group of experienced UK investors to agree a common set of guidelines. TenU’s University Spin-out Investment Terms (USIT) Guide includes equity stakes of 10–25% (with appropriate flex) and royalties around 0.5–5%. (Though it should be recognised that even such ranges are not appropriate for all sectors and all stages.)

The fact that many more early-career researchers and academics want to engage in spinout activity has put a brighter spotlight on this issue, but that is something to be celebrated: the lack of enthusiasm for the entrepreneurial that we have lamented in the UK for many years is changing. 

Sadly, some commentators are still likely to get the wrong end of the stick here and make vague statements in response to the review, such as, “In the US universities only take 5% equity.” However, that fails to recognise that those US universities who operate such a model (it is by no means universal) also insist that the 5% is anti-dilution protected until the end of Series A funding (plus royalties). Most UK investors are less familiar with anti-dilution provisions and for large capital-intensive startups like biotechs, there may not be much difference between a 20% equity stake and a 5% stake with anti-dilute applied to the end of Series A.

Of course, there are always examples where things that have not gone well, or where founders or investors (and indeed universities) are left feeling dissatisfied with the outcome. Some of these complaints are justified – everyone agrees that we could all do with making the process faster and simpler – but a small number of vocal anecdotes from individuals do not a problem make. There is no evidence that the UK has a particular issue with spinning out companies from academia and it certainly does not follow that inefficient company formation is the root cause of why the UK does not have many unicorn startups, or why they all list on Nasdaq. 

The UK Government should take some credit here. Research England’s HEIF scheme has provided a long-term, politics-agnostic investment in university tech transfer and knowledge-exchange offices. It is only through such sustained and carefully ringfenced investment that cash-strapped universities have been able to consistently build capacity and expertise in their enterprise units. Do some universities do a better job than others? Of course – you see the same distribution of quality in any sample set including founders and investors. The reality is that taken as a whole, UK university tech transfer offices are operating at a similar level to their US equivalents when you adjust for research funding. In fact, when you look closer, the real differences between the UK and the US high-tech hubs often tend to lie in other areas such as academic attitude to entrepreneurship, access to capital, business investment in R&D, and the availability of Government procurement contracts for high technology. 

It is therefore heartening to see recommendations focusing specifically on these areas, including emphasising the importance of commercialisation, encouraging training in entrepreneurship, and enabling movement between academia and industry. It was also good to see the recommendations in the review for more transparent sharing of data on equity stakes by universities. The only way to defeat future anecdote-driven accusations is to produce hard data demonstrating equity stakes are mainly lying within the range recommended by the USIT Guide. Otherwise, in just a few years’ time, the anecdotal voices will grow louder, ministers will listen and once again see this as something fixable, which distracts from the more pressing areas that prevent us from translating discoveries into patient benefit.

Of course, funders need to take their share of the load here. Cancer Research UK and other research funders already fund several accelerator schemes, mentorship programmes, entrepreneurship training, non-dilutive translational funds and seed funds. Nonetheless there is still a shortage of funding in this pre- and nascent company space that the Government could double down on using successful models such as the UKRI/Innovate UK Biomedical Catalyst scheme.

A more controversial recommendation included in the review was to create shared tech transfer offices to help build scale and critical mass in the spinout space at the regional or sector-wide level. Clearly Cancer Research UK has skin in the game here: Cancer Research Horizons is a sector-focused integrated technology commercialisation and development subsidiary that sources university technology from 28+ institutions across the UK and de-risks it to maximise the chance of it being successfully translated into patient impact. We would argue that sector focus brings clarity of purpose, sector knowledge and better curated networks of industry and investor partners. Equally though, attention should be given to the fact that universities are autonomous entities (not arms of government), and that the funding system is not set up to encourage sector- or regional-focused units. There is also scant evidence that non-sector-focused regional units perform any more successfully than individual universities.

My real hope now is that the Government and universities will accept the recommendations and perhaps, finally, we can all put this matter to rest and focus our collective energy on the real issues that are holding the UK and its innovation agenda back. The changes announced in today’s Mansion House Reforms, including an injection of £20m to foster spinouts, are an excellent start.