UK Government’s independent review of university spinout companies

6 mins

The UK Government’s independent review of university spinout companies was published on 21^st November 2023, and provides useful comments and analysis on topics such as equity stake, ownership of IP and other strategies for enabling the UK to become a “science and technology superpower.”

The review has looked at the most successful university spinout ecosystems across the world, and within the UK, to identify best practices and opportunities to support spinouts to generate greater investment and grow faster in the UK, and provides a number of recommendations.

Encouragingly, the review has found success in the UK – for example, UK university spinout investment has increased five-fold from £1.06 billion in 2014 to £5.3 billion in 2021, second only to the US in total investment into spinouts, and currently, a clear ecosystem of self-reinforcing spinout companies is emerging in the “golden triangle” area between Oxford, Cambridge, and London.  However, the review notes the need for greater university-inspired innovation with the aim of creating a world-class centre of spinout companies in the UK that is “more ambitious than a replica of Silicon Valley”.

The review puts forward recommendations to accelerate the UK towards a desired end state where: “universities partner with their local spinout ecosystem to prioritise the rapid creation of spinouts on market competitive terms; academics are encouraged and better enabled to realise impact from their ideas through spinouts, whilst universities develop an entrepreneurial culture throughout the entire institution; and founders can access the right commercial support to create successful spinouts.”

The recommendations include:

• Suggestions as to the appropriate equity stakes in IP rich spinouts;
• The creation of a national register of spinouts;
• The creation of shared tech transfer offices (TTOs) to help build scale and critical mass in the spinout space for smaller research universities;
• An increase in government funding for proof-of-concept funds to develop confidence in the concept prior to spinning-out;
• The recognition of research commercialisation, spinouts, and social ventures as a form of research impact;
• Access to support from individuals and organisations with experience of operating successful high-tech start-ups;
• UK Research and Innovation (UKRI) ensuring that all PhD students they fund have a voluntary option of attending high-quality entrepreneurship training and increase the opportunities for them to undertake internships in local spinouts, venture capital firms or TTOs;
• The welcoming of ongoing reforms to support scale-up capital, such as changes to pensions regulation and encourage the government to accelerate these efforts;
• Improvement in the provision of government funds to enable movement or porosity between academia and industry.

Interestingly, the report comments on the time taken to spinout, noting that not all spinouts follow the same linear journey.  From the research performed for the review, it was found that most spinouts take 4-12 months to spinout.  Importantly they note that time taken to spin out can depend, among other things, on patent due diligence, and notes that some investors or lawyers with little or no experience of working on spinouts challenge industry-standard terms which can causes unnecessary delays.  The review also noted examples where investors hold up a deal with unreasonable terms, or they have a lack of experience and understanding of what standard terms and practices are in university spinouts, for instance, protection of academic freedom to perform further research using the IP underpinning the spinout that they helped develop.

Equity taken is also a topic discussed.  Interestingly, data presented to the review shows that many of the top UK universities are doing most deals at 5-15% equity, which is comparable to the US once different approaches on equity dilution and royalties are taken into account – but that this is often only reached through extensive negotiation, with negotiations on university equity stakes starting at an average of 34%.

The review also touches on IP ownership, comparing approaches that enable academics to retain ownership of their IP (sometimes referred to as “professor’s privilege”) with approaches where the university owns the IP.  The review found that “almost nobody told the review that professor’s privilege would be a preferable model in the UK” and that “professor’s privilege could lead to disagreements between multiple inventors, and voiding IP if the right processes were not followed to secure the IP”.

As the report notes, not only is it important that the right processes are taken to secure the IP, but it is also important that lawyers working with spinouts are familiar with industry standards.  Mathys & Squire LLP are very familiar working with spinouts and understand not only the industry standards but also the specific nuances and challenges that spinouts encounter.  More information relating to our work with university spinouts can be found in our Scaleup Quarter.

A full copy of the review can be found here:

Written by: Andy White and Annabelle Carver