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A guide to your most commonly heard TTO arguments against reform
Published by Nathan Benaich on 19 June 2023.
Tl;dr In the course of our research and interactions with many stakeholders, we have compiled a list of commonly observed critique against reforming spinout policy. In this FAQ, we systematically address each of these points with data from the field. Feel free to make use of this in your own work. We will be regularly updating this post.
Claim: TTOs provide crucial support for first-time founders such as business advice, networking, and investor introductions.
Fact check: Overwhelmingly, founders are unhappy with the support that universities provide them.
Respondents to spinout.fyi argue that university TTOs lack industry expertise and do not move the speed a startup needs. Unfortunately, few founders point to any examples where the TTOs’ alleged advice or networks either helped them or even existed at all. From a sample of 205 founders, the Net Promoter Score for the spinouts process is -52. This is worse than high street banks.
Claim: Spinouts are based on inventions developed within the university and would therefore not exist without it.
Fact check: IP is developed by founders whilst at the university, not by the university itself.
While most spinouts are based on IP developed within the university environment, that IP is developed by founders whilst at the university, not by the university itself. Importantly, a third of spinouts reach a stage where they no longer rely on their founding IP. It is hard to argue against the fact that founders and inventors do the real work of developing IP, discovering market inefficiencies, and ultimately building a company to solve these problems. As such, why should universities profit off of that post-invention value creation, which is largely driven by execution, via huge equity stakes and licensing fees? Universities have even tried to lay claim to IP that was developed during a founder’s time at university, even if it wasn’t linked to research or reliant on university provided resources.
Claim: Spinout processes are no longer than a founder could expect when raising Seed capital.
Fact check: Spinouts are categorically slower to raise capital for than startups, in large part due to the time needed to reach a deal with a TTO.
Most startup Seed investments take less than 3 months to complete, whereas the average spinout takes 10 months. From our respondents, we saw that spinning out a company can take up to a year, with 56% of deals taking over 6 months, and 22% of spinout deals taking longer than 1 year.
Claim: Investors push for spinout reform because they want other stakeholders to have less equity. They want it all for themselves.
Fact check: There is no connection between founders receiving more equity as a result of policy change and investors benefiting from the same.
The intention behind spinout.fyi is not to transfer equity into the pockets of investors – it’s to make sure founders are having a productive experience developing companies from their inventions. Besides, giving spinout founders more equity in their own company by definition doesn’t result in investors receiving more equity. Taking a smaller stake in a business more likely to succeed is better than a larger stake of one that they’ve set up to fail and is unlikely to ever get past its Seed stage.
Claim: The majority of the VC world doesn’t agree with the survey results.
Fact check: VCs invest little capital into spinouts because they are structurally broken from the outset.
Certain VCs do benefit from privileged relationships with universities and therefore might be getting more favorable deals for the spinouts they invest into. However, the numbers tell a very clear story about how VCs think about investing into spinouts: of the £24B invested into British startups in 2022, less than 5% of this capital was directed to spinouts.
Claim: Universities don’t receive enough financial support, so they have to make the money back somewhere.
Fact check: Monetising spinouts to generate financial returns is akin to monetising the wrong customer.
Across the board, 65% of spinout founders do not plan to make significant donations to their University – but universities in the UK also don’t invest as much in cultivating alumni networks as their US counterparts do. It goes without saying too that spinout founders might be more inclined to give money if they weren't treated as problem children on their path to spinout creation. In fact, our statistics show that lower equity takes and shorter times to spinout from universities are correlated with a higher likelihood of founders making a significant donation.
Claim: If the terms are so bad, why do so many founders accept them?
Fact check: Founders accept bad terms because they have no other option.
There’s little scope for negotiation, as the TTO can ultimately stop a founder from spinning out. This means founders accept terms that they would never have otherwise agreed to. Indeed, even the judge in the Oxford University vs. Oxford Nanoimaging (ONI) case said that the ONI founder could have invoked the “nuclear option” of not signing paperwork in order to get a better deal. This is madness.
Claim: Some founders have a good experience with universities – and we’ve created a number of successful companies which wouldn’t exist without us (like Oxford Nanopore, or Exscientia).
Fact check: Exceptions succeed in spite of the system, not thanks to it.
While it’s true that some founders report a good experience (which is why the Net Promoter Score isn’t -100) there are still too many founders who report negative experiences. These positive experiences are unfortunately an exception, not the norm. Success often happens in spite of the existing spinout ecosystem, not thanks to it. It’s also true from our respondents that there are some regions which consistently get better outcomes (e.g. the US and the Nordics). This is proof that the TTO's claims that universities have no choice to operate this way isn’t true.
Claim: Founders need a lot of institutional support and time to shape their ideas into a spinout that is ready to enter into an IP licensing agreement.
Fact check: Founders would like nothing more than to operate as quickly as the system lets them.
It isn’t founders who are slow, it’s that more often than not they are trapped in a catch-22 with their TTO: Investors are looking for deal certainty with the TTO while the TTO is demanding the certainty that a founder will actually commercialise their IP – something they need an investor in order to prove.
Claim: The survey is biassed and the sample size is too small.
Fact check: The survey is a respresentation of reality in the words of founders who have experienced the system first hand.
We’ve heard from 205 founders and have designed the survey to hear the truth about the founder's experience. We’re not biassing any of our questions to encourage negative responses and have proactively asked for positive stories as well. Our interest lies in collating the most complete picture of the spinouts process as it is now. We have no control over the picture our respondents are painting. Moreover, we observe in the NPS question that responses were given across the spectrum, from terrible to terrific.
Claim: TTOs have to take the percentage of equity they do in order to make the money required to continue operating, paying back departments and serving other future founders. The terms are designed to benefit everyone: the university, inventors, any affiliated funds, and the active founder.
Fact check: TTO policy today, aside from certain rare cases at institutions that are pro-spinouts, is more of a hinderance to spinout formation than a help.
US TTOs generally operate as offices within the university or even as philanthropic organisations with the goal of getting university technology out into the world for the benefit of society. They proactively encourage an entrepreneurial student body, which in turn attracts grants and alumni gifts. The problem is that in the UK, TTOs operate as independent companies with the associated pressure to bring in real money. There is an apparent conflict of interest here: while the university wants to promote spinouts as a means of commercialising IP, its TTOs set the terms under which the spinout has the freedom to operate. Furthermore, those universities who also have affiliated venture funds in which they are also Limited Partners present further conflicts of interest between the university, the fund, and the TTO. Maybe universities claim that everyone is benefitting from the way the system works, but when looked at objectively, it’s hard to see anyone benefiting from the current process.
Claim: TTOs must own equity, royalties and/or other fees in spinouts as a duty to the public, which has funded research through tax contributions.
Fact check: Heavy handed TTO policy is actually a deterrent to realising the value of publicly-funded R&D.
In truth, more inventions are crushed than enabled through poor spinout experiences. Spinouts are the most direct and efficient mechanism to translate scientific discoveries into tangible improvements for everyday life. As mentioned in Sahaj Sharda’s essay “Seize the University Patents”, spinouts are the ultimate justification for publicly funded research: “In a well functioning system, universities would be pushing as much federally funded research into the hands of industry as possible. Instead, in our system, many universities look to greedily extract their cut off of research that the public paid for. Specifically, universities blackmail startups and spinouts with patents that universities have already filed in advance.”
Claim: Running a TTO, advising, filing and maintaining a patent portfolio is an expensive undertaking that must be paid for somehow by monetising spinouts.
Fact check: In relative terms, the numbers don't seem to justify this.
Taking the UK as an example, Cambridge Enterprise costs circa £10M/year to run (cost of sales and administrative costs), UCL Business costs £20M/year, and Oxford University Innovation costs £25M/year. Each of these TTOs is very active, filing a hundred or so disclosures and patents a year, and creating up to dozens of spinouts. Across the UK, the sum of the running costs for major TTOs is likely below £250M. Compare this to the annual budget of £7.9B that the UKRI has to fund UK science.
Claim: Spinout deal terms are converging between the UK and the US: the delta isn’t nearly as large as the survey purports.
Fact check: Spinout.fyi survey data is a recent reflection of reality, which has not changed.
The submissions to spinout.fyi are very recent examples of spinout deal terms: 5% are from 2022, 19% are from 2021, 17% are from 2020, and 17% are from 2019. In 2022, the average equity take rate in the US was 3.8% and in the UK was 15%. In 2021, it was 2.3% in the US, 19.2% in the UK, and 5.1% in the EU. In 2020, it was 2% in the US, 18.8% in the UK, and 6.9% in the EU. In 2019, it was 20.2% in the UK and 13.3% in the EU. As such, the statistics can be deemed a current representation of the status quo, along with the conclusion that the UK and Europe heavily monetise their spinouts compared to the US.
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Founders often lack information to negotiate their spinout deals. They end up with unfair deal terms and an unnecessarily awful spinout experience.
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