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UK spinout policy real talk
Published by Nathan Benaich on 26 April 2023.
It’s been nearly a year since the first release of our spinout.fyi database. We’ve seen quite a few debates emerge on the subject of university spinouts, including the UK Labour party’s startup review and the UK government’s own review of spinout processes (more to come on that later…). We’ve also seen a handful of university TTOs defending their modus operandi: a report from the University of Cambridge, a ‘rebuttal’ from UK Research and Innovation, and the Russell Group denouncing our op-ed in The Times from early this year. Most recently we saw the “University Spinouts Investment Terms” guide, which spends more time congratulating itself for existing than providing practical information for founders who are looking to secure fair deals with their TTOs. This has unfortunately become unsurprising behaviour.
Recent research from the University of Oxford looks into whether the extent to which universities capture equity ownership in their spinouts affects fundraising success. The picture it paints is not all too promising for the state of spinouts. Hopefully universities won’t be so quick to denounce these findings the way they’ve been prone to denounce ours! The researchers were able to identify 1,103 UK spinouts that were established between 2010 and 2021. Their analysis focused on the 650 UK spinouts with a >1% university stake.
As the researchers themselves point out: “founder teams and outside investors frequently criticise universities for taking excessive ownership stakes, weakening entrepreneurial incentives, and making spinouts ‘uninvestable.’”. It certainly seems like those claims are founded. The study reveals a lacklustre funding outcome for spinouts, with only 5% raising more than £25 million in total. To make matters worse, most spinouts fail to raise money from VCs: only 30% of spinouts turn to venture capital. This feels particularly low given that UK universities will typically only support companies they believe have the chance to raise external capital. The researcher’s don't make a comment on what the figures mean, but it’s clear evidence that the majority of spinouts a) fail to scale significantly, and certainly not evolve into leading science or tech companies, and b) fail to attract venture capital investors. Suddenly those claims from founders that spinouts are rendered ‘uninvestable’ as a result of the onerous university involvement begin to make sense…don’t they?
In fact, the research also discovered a significant negative correlation between larger university stakes and the likelihood of raising venture capital. A 10% increase in the university stake was associated with a 4.5% decrease in the likelihood of raising venture funding, which supports the main findings of our survey. The authors of the paper also admitted that the relationship between successful fundraising from other sources outside of VC and higher university stakes could well be a statistical quirk based on universities fighting harder for stakes in more promising businesses versus being an indication that TTOs are having a positive impact on fundraising. Note that this study doesn’t compare the fundraising success of spinouts in other countries, where equity takes are lower.
Another vignette this research makes clear is that the equity of founders can be influenced by previously-negotiated equity of founders in earlier spinouts. Precedent is king in negotiations and makes it all the more important that deal terms are transparent. This is why the work we do at spinout.fyi matters: the project exists to equip founders with real deal term data as they enter these negotiations. By contrast, a TTO sponsored guide to investing in spinouts does not particularly deliver clarity, fairness and consistency to the spinout process.