Independent Review of University Spin-out Companies

November 2023

Independent Review of

University Spin-out

Companies

Final report and recommendations

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Contents

Executive summary _________________________________________________________ 4

Background _______________________________________________________________ 9

The spin-out process _______________________________________________________ 11

Financing university technology transfer and proof-of-concept research ________________ 20

Building spin-out ideas into viable ventures ______________________________________ 25

Equity investment and the role of investors ______________________________________ 28

Porosity between academia and spin-outs _______________________________________ 32

International spin-out models _________________________________________________ 35

Annex A – Terms of Reference _______________________________________________ 40

Annex B – Advisory board members ___________________________________________ 42

Annex C – University case studies _____________________________________________ 43

Independent review of university spin-out companies

Executive summary

Spin-out companies (“spin-outs”) are start-up companies that are created based on intellectual

property (IP) generated through a university’s research. The government has an ambition for

the UK to be a science and technology superpower, with thriving partnerships between

universities and high-tech spin-out companies contributing to economic growth and

productivity. This review has looked at the most successful university spin-out ecosystems

across the world, and within the UK, to identify best practices and opportunities to support

spin-outs to generate greater investment and grow faster in the UK. Whilst the review focusses

on science and technology, we note that the UK has particular strengths in the humanities,

social sciences, and the arts, which have already shown spin-out capability. This presents the

UK with a unique opportunity to build a world-leading innovation ecosystem that draws from all

academic institutions and disciplines, and is more ambitious than a replica of Silicon Valley.

Any world-class centre of spin-out creation needs a right mixture of:

• A diverse and experienced pool of academic founders, creating underpinning intellectual

property (IP) and working closely with experienced start-up operators.

• Anchor institutions, particularly universities, enabling researchers to generate world-

leading IP in science and technology, nurturing technical talent, and connecting and

convening stakeholders in the local ecosystem.

• A range of service providers, from accelerators to professional service firms, competing

to offer business and entrepreneurship support to spin-out founders.

• Accessible investment capital ranging from pre-incorporation translational funding to

pre-seed/angel investment to other forms of capital, including venture capital

investment, particularly from investors experienced in building high-tech start-ups.

• A mix of large science and technology corporations providing spin-outs with

partnerships, access to global markets, and experienced technology leaders as co-

founders or advisors.

• A supply of talented early employees to do the necessary work.

• Infrastructure (laboratory space, equipment, compute, housing, transportation) to

support growing spin-outs and their employees, ideally within proximity to their anchor

institutions to enable porosity between all elements of the ecosystem.

When these capabilities come together, innovation thrives.

There are very few places where these capabilities have come together to create world-leading

spin-out ecosystems. The Bay Area, Boston, and San Diego are leading examples in the

US. In the UK, the ‘golden triangle’ between Oxford, Cambridge and London has begun to

exhibit many of these characteristics in the last few years and continues to evolve. Outside of

the golden triangle, multiple new spin-out ecosystems are emerging, supported by partnerships

between universities and investors such as Northern Gritstone, Midlands Mindforge and

Independent review of university spin-out companies

SETsquared, but they have not yet matured to the point where IP, talent, capital, and support

services are truly self-reinforcing.

Over the past two decades, UK universities have increasingly supported the growth of local

spin-out ecosystems. Government funding supporting this has gradually increased through the

Higher Education Innovation Fund (HEIF) in England, and universities are increasingly

assessed on their commercialisation performance through the Impact component of the

Research Excellence Framework (REF).

Universities recognise that entrepreneurship requires skills, experience, and infrastructure that

they have not traditionally possessed. However, research commercialisation is something that

an increasing number of academic researchers, staff, and students aspire to do as it enriches

their research and teaching and can potentially yield a financial benefit. They expect such

opportunities from a modern university. Universities have embraced commercialisation, also

known as technology transfer, to different extents with the most active universities

supplementing their traditional IP out-licensing functions with a growing mix of services for

founders, including entrepreneurial training, venture formation and venture building services,

translational funding, and seed investment. This has helped UK university spin-out investment

increase five-fold from £1.06 billion in 2014 to £5.3 billion in 2021

, second only to the US in

total investment into spin-outs

. But it has also placed added financial pressure on already

challenged university budgets that lack significant or any endowment, including philanthropy

from their alumni, unlike their US counterparts.

In the long-term, the UK’s objective should be to establish productive spin-out ecosystems with

universities playing a vital role in establishing the public-private partnerships that mature the

ecosystem. Supporting the creation of spin-outs must not result in a net cost for UK universities

with already challenged operating budgets and declining real-terms tuition fees. Indeed, the

current risk is that structural under-funding might deliver a reduction in such activity. While

spin-outs can occasionally provide a revenue source for a university when a spin-out grows to

become very valuable, they generally provide only a modest and unpredictable income source

for universities, and should not be treated as a primary revenue source for commercialisation

activities. It is important that some of the licensing revenue from a spin-out is returned to

academic IP inventors and departments to incentivise academics to commercialise their

research, and to help the university support the next generation of spin-outs.

The spin-out deal terms agreed between founders, investors, and universities has been a topic

of hot debate. Data from a survey of founders conducted as part of this review and from other

independent studies shows that, once different practices on royalties and equity dilution are

correctly accounted for, deal terms offered by a growing number of UK universities have been

moving towards – and are now comparable to – those taken in leading US institutions.

However, more work is needed to bring all universities toward what this review identifies as

best practice for the life sciences and other IP-intensive sectors, and to define what best

Higher Education Business and Community Interaction, HESA, 2023, https://www.hesa.ac.uk/data-and-

analysis/business-community/ip-and-startups

Global University Venturing, “University spin-outs doubled fundraising in the last decade”, 2023, accessed July

2023, https://globalventuring.com/university/spinouts-double-fundraising-in-ten-years/

Independent review of university spin-out companies

practice looks like for less IP-intensive sectors such as software (in many instances), where

there are a growing number of spin-outs being established every year. This review seeks to

propose a way forward that properly reflects the crucial but differentiated role that founders,

investors, and universities play in successfully creating and growing spin-outs.

This review puts forward recommendations to accelerate the UK towards a desired end state

where: universities partner with their local spin-out ecosystem to prioritise the rapid creation of

spin-outs on market competitive terms; academics are encouraged and better enabled to

realise impact from their ideas through spin-outs, whilst universities develop an entrepreneurial

culture throughout the entire institution; and founders can access the right commercial support

to create successful spin-outs. We, as a nation wishing to encourage entrepreneurship, should

celebrate when spin-outs achieve commercial success and founders make significant financial

returns. We should share good practice and encourage wider collaborative public-private

partnerships across the UK. However, in order to see the full value of early investment redound

to the UK, it is essential that we as a country can continue to invest in these companies to

ensure they can scale and stay in the UK. Ultimately, this will help grow the economy, attract

more talent, and transform the UK into a science and technology superpower.

Professor Irene Tracey CBE, FRS, FMedSci & Dr Andrew Williamson

The recommendations of the review are:

Recommendation 1: Accelerate towards innovation-friendly university policies that all

parties, including investors, should adhere to where they are underpinned by guidance

co-developed between investors, founders, and universities.

- All parties should agree spin-out deals on market terms, avoiding unnecessary

negotiations. Equity splits identified via TenU’s University Spin-out Investment Terms

(USIT) Guide can be used as a starting point for life sciences spin-outs (10-25%

university equity) with exact terms varying depending on the wider commercial deal.

- Universities, investors, and founders to jointly develop guidance for (i) software spin-

outs, where there is typically less university support and IP can be more

straightforward to work around, and (ii) hardware and engineering spin-outs, which

typically sit somewhere between software and life sciences. For less IP-intensive

sectors, common in software-only spin-outs, typical deal terms should be much lower,

with university equity of 10% or less.

- Universities, investors and founders to jointly build on the USIT guidance to develop a

template for spin-out term sheets, similar to the US University Startup Basic

Outlicensing Template (US-BOLT) to help streamline the negotiations process.

- Universities should have clearly stated expectations on time to complete the stages of

the spin-out process by both the university and founders. University approvals needed

for a standard spin-out should be delegated to trusted individuals and not taken by

committees that meet infrequently.

Independent review of university spin-out companies

- Founders should be encouraged to adopt amongst themselves proportionate equity

distribution that both recognises the contributions to originating IP and continued

intellectual support, but also the need to reward and incentivise those individuals who

will commit considerable effort in taking the company forward.

Recommendation 2: More data and transparency on spin-outs through a national

terms. The Higher Education Statistics Authority’s ongoing review of the Higher

Education Business & Community Interaction (HE-BCI) dataset must present solutions to

improve the reliability of data on spin-outs.

Recommendation 3: HEIF should be used to reduce the need for universities to cover

the costs of technology transfer offices (TTOs) from spin-out income. Given that HEIF

equivalents are lower in the devolved administrations, the devolved governments may

want to consider the findings of this review and provide additional support for their

universities.

Recommendation 4: Create shared TTOs to help build scale and critical mass in the

spin-out space for smaller research universities. These could be operated through

collaboration with established university TTOs and could be implemented at a regional or

sector-wide level. We note that the latter may be particularly of interest to spin-outs from

the social sciences, humanities, and the arts.

Recommendation 5: Government should increase funding for proof-of-concept funds to

develop confidence in the concept prior to spinning-out. These should integrate with the

timing and offering of commercialisation support and venture-building programmes.

Investors should lend their expertise to assessing funding bids for proof-of-concept and

translational funds.

Recommendation 6: In developing the ‘engagement & impact’ and ‘people & culture’

elements of REF 2028, the four Higher Education Funding Bodies should ensure that the

guidance and criteria strongly emphasise the importance of research commercialisation,

spin-outs, and social ventures as a form of research impact. We encourage spin-outs to

assist universities in drafting impact studies for REF.

Recommendation 7: Founders need access to support from individuals and

organisations with experience of operating successful high-tech start-ups, regardless of

the region founders are based in or sector they operate in. The existing landscape of

support services needs both consolidation and targeted expansion to ensure that

founders have access to:

- Advice, support, or representation in negotiations with universities and investors.

- Training on entrepreneurship and commercialisation.

- Support for business building activities: provide support to identify the commercial

proposition of spin-outs, build a business a case, access customers, help connect

Independent review of university spin-out companies

investors with spin-outs, and help identify experienced and diverse people to join as

early employees, advisors, and board members.

- Access to part-time or on-call professional support in law, finance, or operations in

early stages before permanent hires are needed.

- Access to shared equipment and facilities for rent.

Recommendation 8: UK Research and Innovation (UKRI) should ensure 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 spin-

outs, venture capital firms or TTOs.

Recommendation 9: Recognising the important role that university-affiliated funds have

played in helping spin-outs from some regions access finance, universities considering

working with new affiliated investment funds should continue to ensure they are still able

to attract a wider set of investors and encourage competition when agreeing such deals.

Recommendation 10: We welcome ongoing reforms to support scale-up capital, such as

changes to pensions regulation and encourage the government to accelerate these

efforts. Government should continue its reforms to ensure that UK capital markets are

able to provide the financing to incentivise companies to stay in the UK.

Recommendation 11: Government should improve the provision of funds to enable

movement or porosity between academia and industry, including through:

- Funds that ‘buy out’ academic time to focus on commercial partnerships and potential

ventures. Or adapting funds for industry collaboration to be more accessible to spin-

out founders.

- An ‘academic returner’ fellowship for researchers wishing to return to academia from

the private sector.

Independent review of university spin-out companies

Background

The number of spin-outs created has been steadily increasing over time. In 2021/22, 176 spin-

outs were created, but this does not include staff or student start-ups not directly based on IP

generated through a university’s research.

The government has been clear that key objectives of its growth agenda are for innovative

companies to start and grow in the UK and to turn the UK into a science and technology

superpower. To achieve this, the UK will need to focus on ways to translate its recognised

academic standing into commercial and economic success. Generating impact from research

is not only important for economic growth and productivity, it is also crucial for improving health

outcomes and solving some of the biggest challenges the world faces such as climate change,

infectious diseases, and food availability. Spin-outs are becoming an increasingly important

mechanism through which university research impacts wider society, so it is appropriate that

we carry out this review and identify opportunities to make improvements. The terms of

reference of the review are in Annex A.

The early stages of a spin-out’s life cycle are critical to its success. This review has

investigated the establishment and early operation of spin-outs and identified key issues that

need to be addressed:

• Frictions in negotiating spin-out term sheets

• The time taken for the spin-out process

• The role of UK government funding

• The ecosystem to support founders to build and sustain viable investment propositions

• The role of angel, venture, and other equity investors

• The ease with which academics can participate in spin-outs

• Encouraging an entrepreneurial culture within UK universities

There is widespread recognition that UK universities have a great deal of commercialisation

potential which has led to numerous reviews of this topic in previous years. We have not

sought to duplicate recent studies. Our review instead builds on the extensive literature, in

particular the McMillan Review (2016)

and Mike Rees’s 2019 advice to Research England

(RE)

The report’s findings and recommendations have been informed by a series of interviews,

roundtable discussions, external analyses, and targeted surveys involving a wide range of

Higher Education Business and Community Interaction, HESA, 2023, https://www.hesa.ac.uk/data-and-

analysis/business-community/ip-and-startups

University Knowledge Exchange (KE) Framework: good practice in technology transfer, Report to the UK higher

education sector and HEFCE by the McMillan group, 2016,

https://www.praxisauril.org.uk/sites/praxisunico.org.uk/files/2016_McMillan.pdf

Independent advice on university-investor links, Mike Rees Report, 2019,

https://www.ncub.co.uk/insight/independent-advice-on-university-investor-links-mike-rees-report/

Independent review of university spin-out companies

stakeholder groups. This includes government bodies, university leadership, spin-out founders,

venture capital (VC) and angel investors, university technology transfer offices and other

relevant organisations, such as research charities and the London Stock Exchange. The

review has also received input from informed parties from other leading spin-out regimes,

including the US, Switzerland, Canada, and Sweden. An advisory board was formed to inform

the findings and recommendations, with representation from all key stakeholder groups

(advisory board membership is in Annex B).

In conducting this review, we were interested in understanding the perspective of spin-out

founders who are a heterogeneous group that are difficult to access through interviews and

roundtables alone. We created a survey for founders to share their views on the spin-out

process and information on the deal terms agreed for their spin-outs. The survey received 620

valid responses from spin-out founders

. A list of all spin-outs in the UK does not exist so a

representative or random sample survey was not possible. However, the survey was

distributed through a wide set of channels, including individual founders, universities,

investment firms, research funders, incubators, and accelerators for maximum reach. Key

findings are presented throughout the report, with detailed findings in Annex D (separate

document).

620 valid responses remained following data cleaning. Multiple founders from the same spin-out could respond

to the survey, therefore minimal cases of double counting may exist in some of the findings. Founders of multiple

spin-outs were asked to respond for one of them.

Independent review of university spin-out companies

The spin-out process

The spin-out process typically begins with an ‘invention disclosure’ from an academic to the

university. The academic informs the university that they have a discovery or technology with

commercial potential. The technology is often at a very early stage so the academic may or

may not have ideas about how to commercialise their research. The team in the university

supporting commercialisation is typically called the technology transfer office (TTO). The TTO

will work with the academic to analyse the potential commercial opportunity and decide

whether to formally protect IP through a patent, at the university’s expense. The TTO and

academic will then jointly decide whether to licence the IP to an existing company for a

licensing fee or use it as the basis for a spin-out. If the technology requires further

development (often referred to as translational, development, or proof-of-concept research),

the university often supports this through translational research projects and grants, either from

public funds or the university’s own.

There is a perception among some that the spin-out process can often take an unnecessarily

long time, but there is no comprehensive data on the time taken for different steps in this

process. Further, it is not always clear at which point the spin-out process truly begins and not

all spin-outs follow the same linear journey. Figure 1, from our survey of spin-out founders

suggests that most spin-outs take 4-12 months from the point at which the academic founder

and TTO agree to spin-out to completing all necessary processes to having all agreements and

paperwork complete to establish the company.

We worked with five TTOs to perform deep-

dives into 17 spin-out case studies to better understand what factors impact the time taken to

spin-out. The findings of this work support the survey results on time to spin out. They also

revealed that the time taken to spin out depends on various factors, including finding co-

founders, securing investment, agreeing the terms for the involvement of university staff in the

spin-out and managing conflicts of interest, and carrying out patent due diligence. We also

heard that sometimes investors or lawyers with little or no experience of working on spin-outs

challenge industry-standard terms which can cause unnecessary delays. The case studies

revealed some small sectoral differences. For instance, life sciences spin-outs tend to have

complex IP and seek external executives, whereas software spin-outs tend not to have patents

and are more likely to have a sole academic founder as CEO. However, this is not a hard rule

and there are instances where software has multiple contributors which can present

complexities.

DSIT & HMT Spin-out Founder Survey.

Independent review of university spin-out companies

Figure 1: Months taken to complete spin-out deal.

Source: DSIT & HMT Spin-out Founder Survey

Note: Base = 572 respondents.

We have heard that some universities operate inflexible stage-gate processes that can cause

delays. Other universities require approvals to be taken by academic committees that meet

irregularly and do not consist of commercial experts. It is important that universities continue to

manage IP, conflict of interest, charity law, and subsidy control risks, but it is equally important

that these technical matters are delegated to appropriately experienced individuals at the right

decision-making levels. Although we are not recommending that a standardised spin-out

process be implemented across all universities and all disciplines, it is worth universities

reviewing their procedures for creating spin-outs to identify areas where it can be expedited

and ensure founders’ and investors’ expectations are managed at an early stage.

The next sections look at the various stages of the spin-out process in more detail.

IP due diligence

One of the first stages of the spin-out process is due diligence on the IP and securing it. This

requires checking the funding history of the research that led to the IP, which can go back

decades and across multiple research institutions. For patents, this also involves running

searches for related IP ahead of putting in an application. This may need to be in multiple

17%

25%

10%

15%

10%

0% 5% 10% 15% 20% 25% 30%

Do not know

Prefer not to say

3 months or less

4 to 6 months

7 to 9 months

10 to 12 months

13 to 15 months

16 to 18 months

More than 18 months

Percentage of Respondents

Average (mean) = 11 months

Independent review of university spin-out companies

jurisdictions which inevitably adds time to the process. If knowhow is to be licensed, the due

diligence can be more complicated due to the less formal nature in which knowhow is

recorded. At this stage, it may be uncertain whether to create a spin-out or license out the IP.

Approval from research funders

University research is funded by a mixture of sources, including government grants, private

university revenue, and third parties such as charitable funders or the National Institute of

Health Research (NIHR). Third party funders (excluding industry) usually only fund a small

proportion of research and are involved with around 10-20% of spin-outs created each year

In these cases, the TTO needs to secure agreement from all third-party funders to

commercialise the IP. These groups will typically want some return for their involvement

although their drivers are not solely related to financial returns. Charities have statutory

obligations which require all income-generating activities from their work to satisfy a public

benefit test. It is appropriate for third party funders of research to be rewarded for their role in

developing IP and technologies underpinning a spin-out, but the amount being sought should

reflect the relatively small proportion of research that they fund, and it should only come from

the university’s share. The Association of Medical Research Charities (AMRC) guidance on

commercialisation should be used as the basis for agreements with third party funders, with

consents given within 30 days

. Encouragingly, we have seen evidence that the largest

charitable funders are meeting this standard already. All other charitable funders should follow

suit, and consent should not be withheld as a negotiating tactic with universities – the split of

income can be determined with the university after consent is given. We have heard that

government funders of research vary their practices – UK Research and Innovation (UKRI)

operate on a principle of taking no share in IP income, nor requiring consents, whilst NIHR

requires consents and revenue sharing. These funders should consider the findings of this

review when updating their IP consenting and revenue sharing practices.

Spin-out executive management teams

Founders may wish to leave their university to lead a spin-out. The review has heard that this

is more common with PhD students or post-doctoral researchers compared with principal

investigators. However, some founders may feel more suited to act as Chief

Technical/Scientific Officer and the spin-out may also seek a more commercially experienced

individual for CEO. Founders will often wish to maintain some academic link or position whilst

still being involved, part-time, or as an advisor/consultant, with the company. Flexibility is key

and universities will need to continue to adapt and embrace different working models whilst not

undermining their core mission of teaching and research. In some cases, there may be no

academic founder willing to leave academia and the whole executive team would need to be

recruited. Finding outside talent can take a significant length of time, especially where

specialist skills are sought.

Based on data shared with the review by NIHR, Wellcome Trust, Cancer Research UK and the Association of

Medical Research Charities.

https://www.amrc.org.uk/Listing/Category/ip

Independent review of university spin-out companies

Access to finance

In some areas of the country with a less active equity investment market, the launch of the

spin-out can be delayed by difficulties in finding an equity investor. The UK spin-out investment

landscape is discussed further in the chapter ‘Equity investment and the role of investors’.

Negotiating the spin-out term sheet

Negotiating the deal between the university, spin-out founders and investors is a necessary

part of the spin-out process. However, sometimes the negotiations can take an unnecessarily

lengthy amount of time which is partly why some universities have adopted a standardised set

of express deal terms to speed up the process. This can be good practice, provided that the

express deal terms do not inhibit investment and are considered fair terms as identified by this

review. Other universities seek to negotiate deals on a case-by-case basis. This can work if

negotiations proceed quickly and on fair terms.

Arguably, the largest point of contention around deal terms is the equity share taken by

universities. These have decreased from an average of around 25% to around 18% over the

past ten years

. We have heard from investors that large stakes make spin-outs less attractive

for investment. This is especially the case, at later rounds of investment or for international

investors who may be accustomed to universities taking lower equity stakes. We have heard

that spin-out founders need a sufficiently large stake to have the financial incentive to continue

with a spin-out instead of pursuing other lucrative options: if the founders decide to leave, the

investors’ capital is at greatest risk as the spin-out is less likely to survive. Recent research

suggests that larger university equity stakes reduce the chance of the spin-out receiving

venture capital investment in less science-intensive companies, but not the amount of

investment overall

. The impact is small, perhaps because alternative (but imperfect) ways

are found to ‘fix’ the capitalisation (cap) table, for instance by giving large employee options

pools to founders. A much better outcome would be to set-up cap tables at foundation so they

do not require fixing later.

Most stakeholders agreed that through negotiation, it is usually possible to agree market

competitive terms. 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

. However, the process of

negotiating down to this level is often unnecessarily difficult, leading to delay, legal costs

incurred on all sides, and loss of goodwill between negotiating actors. This is partly because

some TTOs have been slower to adjust their opening bids to reflect changing market norms,

but can also be due to a minority of founders with an unrealistic view of their contribution to the

spin-out demanding unreasonable terms. Our survey of spin-out founders revealed that

negotiations on university equity stakes start at an average of 34%, but just over 1 in 4

Beauhurst, “Spotlight on Spin-outs”, 2023 https://www.beauhurst.com/research/spotlight-spinouts-2023/. Our

survey had an average equity of 25% across all years, close to Beauhurst data.

Thomas F. Hellmann, Junida Mulla and Matthias Qian, “How does Equity Allocation in University Spinouts

affect Fundraising Success? Evidence from the UK”, 2023, 2.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4416303

US and other international practices are covered in detail below.

Independent review of university spin-out companies

founders reported that their university’s first offer was 50% or more (Figure 2)

. This is well

above the level most investors would accept and founders would consider fair, and is

supported by our survey which found that only 39% of founders agree that they received a ‘fair

and balanced deal’ from the university, with 43% disagreeing (Figure 3)

. A productive

negotiation needs to involve all sides starting from a place that is squarely within the bounds of

the acceptable market norms described in this review.

Figure 2: Distribution of the first offer equity stake ownership from the university/TTO.

Source: DSIT & HMT Spin-out Founder Survey

Note: Base = 288 respondents.

Ensuring the spin-outs process is efficient and transparent is in the interests of all universities

engaging in technology transfer. We expect that as entrepreneurship becomes something

academics increasingly aspire to, they will pay closer attention to a university’s

commercialisation policies. Only around half of Russell Group universities publish their

licensing policies, and this does not always include details of typical deal terms

. Universities

should publish more information about their spin-out licensing and equity policies to help make

negotiations fairer and attract more academics who are keen to create spin-outs. This will help

create an entrepreneurial culture within universities and establish a strong pipeline of

experienced academic founders to support the next generations of founders.

DSIT & HMT Spin-out Founder Survey

DSIT & HMT Spin-out Founder Survey.

Review’s own investigation of university websites

17%

15%

12%

29%

0% 5% 10% 15% 20% 25% 30% 35%

Do not know

Prefer not to say

1-9%

10-19%

20-29%

30-39%

40-49%

50% or more

Percentage of Respondents

First Offer Equity Stake from the University/TTO

(%)

Average (mean) = 34%

Independent review of university spin-out companies

Figure 3: Founder’s opinion on the fairness of spin-out deals.

Source: DSIT & HMT Spin-out Founder Survey

Note: Investors base = 542 respondents. University/TTO base = 542 respondents.

Under the Patents Act 1977 and Patents Rules 2007, the inventors of IP all have equal status.

Universities usually leave it to co-founding inventors to decide who receives what share of

founding equity in a company based on IP. The split of equity between founders joining the

spin-out as permanent employees and those staying behind in the university (often operating

as an advisor) has been found to be on average equal

. However, investors told us that they

prefer that founders working permanently in the company own the bulk of the founding equity

to reflect the risk taken by the founder in leaving academia. We agree that founders working

permanently in the company should be properly rewarded and incentivised to continue

engaging with the spin-out during what is often an uncertain and challenging process.

Academics who remain in academia but work part-time or perform extensive consulting for the

spin-out also need to be rewarded. Meanwhile, academics who played an important role in

developing the IP underpinning the spin-out but who are not involved in the spin-out should be

recognised. However, their contribution to the future success of the spin-out should not be

overestimated. It is important that founders adopt amongst themselves proportionate equity

distribution that recognises their important but differentiated role in the creation and success of

the spin-out.

Early investors frequently participate in negotiations with the university to agree the spin-out

term sheet. Founders that we have spoken to perceive investors’ role as supporting them in

negotiating a deal that works for the spin-out company and will facilitate future financing

rounds. However, we have heard of 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 spin-outs, for instance, protection of academic freedom to

perform further research using the IP underpinning the spin-out that they helped develop.

Hellmann et al (2023).

21%

22%

10%

15%

23%

20%

32%

19%

22%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

University/TTO

Investors

In this process, I (the founder) believe the deals negotiated

with the following were balanced and fair...

Prefer not to say Strongly disagree Somewhat disagree

Neither agree nor disagree Somewhat agree Strongly agree

Independent review of university spin-out companies

We have heard that the main legal terms are similar in most spin-out deals, so starting from a

common framework or template agreement could speed up negotiations and also provide less

experienced universities, investors, and founders with a useful starting point for their

negotiations. Although some universities have their own templates there isn’t a standard that is

shared between universities. Given that investors and lawyers typically work with multiple

universities, the process may be usefully accelerated with shared template legal terms, similar

to a template launched in the US last year (see section on international spin-out models).

TenU, a collaboration of university TTOs, has recently published the University Spin-out

Investment Terms (USIT) best practice guidance of terms for university life sciences spin-out

deals

. It proposes a market norm of 10-25% university equity for a life sciences spin-out

licensing a patent with high support from the university. This is an appropriate upper limit on

equity stakes for universities that reflects the more hands-on role universities often play in life

sciences spin-outs, while also allowing flexibility for case-by-case adjustments. All universities,

investors, and founders should be encouraged to land within this range for life sciences spin-

outs and spin-outs involving high levels of support from the university. The USIT guidance is

clear that a deal should be considered as a whole – the university taking high amounts on each

of the equity, royalty and milestone ranges in the guidance would be a bad deal for a spin-out

and make it less likely to attract investment and succeed. The USIT guidance is not just for

universities, and investors should also pay attention to the guidance, in particular on the wider

legal terms, to avoid lengthy negotiations over terms that universities are not able to accept or

pushing deal terms outside of market norms.

It is important to reiterate that the USIT guidance is aimed at life sciences. Similar guidance on

deals in software or deep-tech hardware is needed, and we encourage TenU to consider

developing further guidance in close collaboration with a wide range of universities, investors,

and founders. Further, it is our view that for spin-outs with software-only IP that is easier to

work around and less capital intensive to develop, deal terms should be much lower, with

university equity stakes 10% or less. This is in-line with, for example, Oxford’s position for low-

support and patent-less spin-out, or Imperial’s position for software companies. This would

accurately reflect the role university research plays in these types of spin-outs compared to

spin-outs based on the life sciences. It would also still provide flexibility for case-by-case

adjustments as technologies such as Artificial Intelligence evolve or if the spin-out is

underpinned by a complex mixture of technologies such as life sciences and software.

Where universities or funds affiliated with a university invest directly in a spin-out on market

terms these investments should be treated separately to equity granted to the university in

payment for a license as these are commercial investments. This is a common point of

confusion when the equity ownership of university spin-outs is debated.

Some universities have policies that enable an ‘opt out’ of university IP ownership and

commercialisation, or they offer a ‘founder’s choice’ commercialisation route involving less

support from and lower equity stakes for the university. We have heard that maintaining the

split between ‘founder’s choice’ and university-led routes is challenging, with those initially

https://ten-u.org/news/the-usit-guide

Independent review of university spin-out companies

choosing the ‘founder’s choice’ route or ‘opting out’ often ending up needing support or using

the support of third parties who may offer founders even less favourable deal terms – we

consider this to be a sub-optimal outcome. Imperial College London has recently announced

that it will now offer the same support to all founders who will be able to choose between a set

of fair deal terms. Whilst an ‘opt out’ can provide choice, it is our view that if universities move

to fair deal terms as per the recommendations of this review, there is no need to offer an opt

out or founder’s choice route.

It is not only the universities with the largest spin-out portfolios and most developed private

ecosystems that are setting best practice. The University of Sheffield has recently adopted a

‘founder focused’ commercialisation journey. They abandoned previous practice of starting

equity negotiations at 50-60%, and now take 5-20%, with the exact amount determined on a

case-by-case assessment. The university provides significant investment pre-spin-out of £150-

300,000+ from funds created by previous spin-out successes. There is no strong reason why

all research universities wishing to spin-out a company should not be able to adopt the

recommendations in this review. As previous reviews have concluded, imposing a one-size-

fits-all solution or a single cap for equity splits is likely to lead to unintended consequences.

That is why our recommendations are focused on enabling all universities to develop their own

innovation-friendly approaches, within a range of fair market norm terms. Annex C showcases

and celebrates the successful journeys of some UK universities towards innovation-friendly

policies.

Recommendation 1: Accelerate towards innovation-friendly university policies that all

parties, including investors, should adhere to where they are underpinned by guidance

co-developed between investors, founders, and universities.

- All parties should agree spin-out deals on market terms, avoiding unnecessary

negotiations. Equity splits identified via TenU’s University Spin-out Investment Terms

(USIT) Guide can be used as a starting point for life sciences spin-outs (10-25%

university equity) with exact terms varying depending on the wider commercial deal.

- Universities, investors and founders to jointly develop guidance for (i) software spin-

outs, where there is typically less university support and IP can be more

straightforward to work around, and (ii) hardware and engineering spin-outs, which

typically sit somewhere between software and life sciences. For less IP-intensive

sectors, common in software-only spin-outs, typical deal terms should be much lower,

with university equity of 10% or less.

- Universities, investors and founders to jointly build on the USIT guidance to develop a

template for spin-out term sheets, similar to the US University Startup Basic

Outlicensing Template (US-BOLT) to help streamline the negotiations process.

- Universities should have clearly stated expectations on time to complete the stages of

the spin-out process by both the university and founders. University approvals needed

for a standard spin-out should be delegated to trusted individuals and not taken by

committees that meet infrequently.

Independent review of university spin-out companies

- Founders should be encouraged to adopt amongst themselves proportionate equity

distribution that both recognises the contributions to originating IP and continued

intellectual support, but also the need to reward and incentivise those individuals who

will commit considerable effort in taking the company forward.

Recommendation 2: More data and transparency on spin-outs through a national

terms. The Higher Education Statistics Authority’s ongoing review of the Higher

Education Business & Community Interaction (HE-BCI) dataset must present solutions to

improve the reliability of data on spin-outs.

Independent review of university spin-out companies

Financing university technology transfer

and proof-of-concept research

Licensing and exit proceeds

Through our discussions with TTOs, it is clear that most universities do not make substantial

profits and can often lose money on their technology transfer activities. This is especially true

of spin-outs which tend to be more expensive to support than licensing. In 2021/22, UK

universities made £244 million from licensing intellectual property, and only £86 million from

sales in shares, which collectively equal 2.1% of their research expenditure

. Income from

both sources tends to be driven mostly by a small number of large successes, and both can

fluctuate considerably year-on-year. This income is disproportionately weighted towards

universities with the largest research incomes; the 6 universities with the largest research

expenditure made around 50% of licensing income and around 60% of share sales income in

2021/22

. The total number of licenses has increased in recent few years

, but the review

has heard that large corporates are becoming less interested in direct licensing of university

technology, especially for the most lucrative therapeutics licenses. Instead, corporate

innovation is increasingly done by acquiring start-ups or spin-outs. Over the coming decades,

there could be a shift from licensing to share sales revenues.

Universities clearly define the split of the income in their revenue sharing policies between the

academic inventors, the department, the university’s central funds and the TTO. The use of

income back to the university and/or TTO is not public, but 26 universities provided the review

with this information. Many universities have never seen a significant spin-out exit, so do not

have defined purposes for this income were they to realise it. For universities with more

consistent returns, income is typically recycled into ringfenced funds to support future spin-

outs, or to fund more research. Even some mid-size universities invest millions of pounds each

year in proof-of-concept research for future spin-outs. This can be before the spin-out exists or

after it is created, co-investing with private investors due to lack of local equity financing. In

some of the more successful universities, there may be potentially large profits arriving over

the next decade, whilst others are just starting to make the case internally for ringfencing their

returns as they start to become significant.

Government funds

Government provides funding for technology transfer through RE’s Higher Education

Innovation Fund (HEIF). In the academic year 2022-23, HEIF was £260m across England, and

0.8% of total expenditure. Based on HESA data on Intellectual property and OfS 2021-22 TRAC survey on

expenditure. Licensing income can often be ringfenced by conditions, e.g., “must be spent on further research into

[a specific disease].” Some licensing income will come from spin-outs, but only a small proportion.

Based on HESA data on Intellectual property

Ibid

Independent review of university spin-out companies

for the first time ever an additional £20m was ringfenced for commercialisation

. HEIF is

allocated based on the income universities receive for knowledge exchange activities – mainly

contract and collaborative research, but also activities like licensing IP and selling professional

training. Universities choose to spend HEIF on supporting any of these activities, not just

patenting and licensing. From 2016-2019, universities spent 16% of HEIF on technology

transfer; the figure was slightly higher at 23% amongst the most research-intensive

universities

. In addition to this core funding for technology transfer to TTOs, universities

allocate a large proportion of HEIF to seed funds, entrepreneurship training, incubators, and

accelerators. However, it is not possible from existing data to determine the exact amount of

HEIF spent on these other activities. HEIF can play an important role in helping incentivise

universities to adopt the recommendations in this review. We note that the devolved

administrations have their own version of HEIF: Research Wales Innovation Fund, Northern

Ireland Higher Education Innovation Fund, and the University Innovation Fund (UIF) in

Scotland. These are less generous than HEIF. For example, the University of Edinburgh

received £1.7m UIF funding in 2021-22, but would have reached the HEIF cap and received

around £5m if it was located in England. These are devolved policies which we will not put

forward recommendations on. The devolved governments may, however, want to consider the

findings of this review.

We have heard that some of the largest research universities tend to operate TTOs as

subsidiary companies, with the long-term goal of achieving financial sustainability and returning

some profits. Based on evidence from the 26 universities who shared data with the review,

those outside the top 5-10 for research income almost fully fund their TTOs through HEIF,

though financial models vary. We heard significant praise for the work TTO staff do, but also

were repeatedly told that TTO staff are overworked and that bottlenecks can develop. This is

not solely due to funding. It can be due to decisions on priorities, a lack of standardisation, or

high staff attrition because of uncompetitive salaries compared with the private sector. Smaller

research universities may only have one or two staff responsible for licensing with less than

one spin-out per year. This may mean that employees and the university are less exposed to

the market, less specialised in individual sectors, and less able to refine and streamline their

spin-out processes. It may also mean that there is potentially under-exploited IP in smaller

universities. For some smaller institutions, it may make sense to pool their technology transfer

resources or partner up with a larger university with more technology transfer experience. This

review has heard evidence of existing productive collaborations such as that between the

universities of Manchester and Salford which we encourage more of. We recommend exploring

setting up shared TTOs to achieve efficiencies of scale and quality of service to help more

universities develop the capabilities to realise impact from the ideas developed by their

academics. These shared TTOs could be implemented at a regional or sector-wide level. The

UKRI, “Higher Education Innovation Funding”, 2023, accessed July 2023, https://www.ukri.org/what-we-do/our-

main-funds-and-areas-of-support/browse-our-areas-of-investment-and-support/higher-education-innovation-fund/

Tomas C. Ulrichsen, “Assessing the Gross Additional Impacts of the Higher Education Innovation Fund (HEIF).

Technology transfer refers to the core activity of protecting and licensing IP, with the main costs being wages of

technology transfer staff and patent protection costs. An update for the period 2015/16 – 2018/19”, 2020, 9,

https://www.ifm.eng.cam.ac.uk/uploads/UCI/knowledgehub/documents/2020_Ulrichsen_Assessing_Impacts_of_H

EIF.pdf

Independent review of university spin-out companies

latter may be particularly of interest to spin-outs from the social sciences, humanities and the

arts, which often come from universities located across the UK.

Research funding

University publicly funded research projects in the UK are generally funded at a loss. Around

41% of university research costs are publicly funded

. Projects are funded by research

councils at 80% of their full economic costs, and charitable funders typically fund less.

Universities top up this money with RE quality-related (QR) funding, and private income

streams, including international student fees, and for very few universities considerable

philanthropy. 25% of QR funding is now on impact, measured by case studies which can

include spin-outs. The recent announcement that the UK will re-join Horizon Europe as an

associate has been welcomed by academic, small business and industry sectors. This affords

additional opportunities for discovery research and development.

TTOs told us that the wider university funding context makes it harder to make the case for

universities to take a long-term view on the returns from licensing, invest in TTO budgets, and

ringfence returns for future spin-outs. University stakes have dropped in recent years and HEIF

has increased, but some universities have been slower than others to update their policies

accordingly, and some technology transfer is still funded through licensing returns. It is

plausible that only the universities with the largest research budgets will be able to generate a

large enough portfolio to fund their TTOs solely through licensing and share sales in the short-

term. Most of these institutions have already moved to deal terms within or near the

recommendations in this review. Other university TTOs may require longer-term support to

avoid being loss-making. We recommend that technology transfer be put on a firm financial

position to remove pressure to use the returns, including through high equity stakes, to support

TTO activities.

The four UK university research funding bodies have announced that the next iteration of the

Research Excellence Framework (REF) will be scored 25% on ‘engagement & impact’, and

25% on ‘people & culture’

. This is being actively consulted on with the university sector at the

moment. Impact case studies for the REF include spin-outs, but are not always scored based

on outcome indicators such as investment, revenue, and jobs created. Spin-out companies

should be open to assisting universities with drafting impact case studies for REF, as an

important but low-cost way of giving back.

Proof of concept, translational research and development

Translational research or development is focused on developing early-stage research into

practical solutions. This often involves developing a technical proof of concept or prototype.

Funding for translational research can de-risk a spin-out and can come from multiple sources

(Table 1). Although some programmes provide funding of over £100,000, these are limited in

their availability. There are a larger number of grants of around £30,000-£50,000. The impact

of this type of funding is striking. For example, spin-outs supported by the Medical Research

Office for Students, “Annual TRAC 2021-22: Sector summary and analysis by TRAC peer group”, 2023,

https://www.officeforstudents.org.uk/publications/annual-trac-2021-22/

https://www.ukri.org/news/early-decisions-made-for-ref-2028/

Independent review of university spin-out companies

Council’s flagship translational funding scheme – the Developmental Pathway Funding

Scheme (DPFS) – received equity investment, whilst those who narrowly missed receiving the

grant failed to get any significant private investment

. The official evaluation of the Innovate

UK (IUK) ICURe programme estimates that 75% of spin-outs created through the programme

would not have happened without it (after controlling for differences between groups). Further,

those founded through the programme received higher levels of equity investment than those

who did not get onto the scheme

. Recipients of the ICURe follow-on fund also received

greater private investment. Many of UKRI’s translational funding schemes receive high-quality

applications that cannot be funded due to budget limitations – the available evidence suggests

that there is not a lack of quality translational research projects in the UK

. We have heard

that sometimes spin-outs leave a university too early, simply in order to access funding that is

only available to businesses, due to a lack of translational or development funds within the

broader ecosystem. Spin-outs that are created too early are less likely to succeed. Academics

have told us that the timing of translational and proof of concept funds, either with each other

or with other grant funds is often unaligned. This can lead to projects stalling due to gaps in

funding which can ultimately delay the spin-out process. Decisions on who gets funding are

often taken by committees of academics who may lack experience and expertise on what

research project has genuine commercial potential. We think there is a clear opportunity to

review funding timelines to address the misalignment described above, and to consider

including investors in funding award decisions to help ensure funding is directed to the

research projects with the most impact potential.

Table 1: List of open call UKRI funds for translational research in universities

Programme name Total annual spend Maximum individual award

Innovation to

Commercialisation of

University Research

(ICURe)

£~15m £300k for the follow-on fund.

Up to £35k for all

participants.

Impact Acceleration

Accounts (IAAs)

£~40m across seven

research councils, plus

£~8m for place-based IAAs.

To be determined by the

university, but typically

under £100k

MRC Developmental

Pathway Funding Scheme

£30m No formal limit, but typically

£1-2m

ERC Proof of Concept

(Horizon Europe)

Part of Horizon budget. UK

received 12 grants in the

2023 call

€150k

Medical Research Council “MRC 10 Year Translational Funding Evaluation”, 2019, p40

https://www.ukri.org/publications/mrc-translational-research-evaluation-report/

Ipsos Mori, “ICURe Final Evaluation Report”, 2020, p39, https://www.ukri.org/publications/icure-evaluation-of-

pilot-programme/

UKRI analysis shared with the review.

Data provided by UKRI. This table only includes core, technology-agnostic programmes aimed at giving grants

to academics for translational research. UKRI funds a much larger range of translational research in which

universities participate, through Catalysts, missions funds and more.

Independent review of university spin-out companies

We were told that funding for smaller universities and those in lower-income areas was

supported by the European Regional Development Fund (ERDF), which had a focus on

commercialisation and related areas that contribute to local economic growth. The UK Shared

Prosperity Fund has not ringfenced funding for R&D in the same manner, which has led to a

reduction in this support.

Alumni donations

Philanthropic funding of universities is less common in the UK than in the US, where alumni

often make substantial donations. We have heard the argument that if universities improve

spin-out deal terms, successful founders are more likely to look favourably on the institution

and donate money to support future efforts. Whilst this cannot be relied on as a funding stream

in the near-future, UK universities are beginning to explore this type of long-term thinking.

Imperial College London’s Entrepreneur’s Pledge is a non-binding commitment for founders to

consider giving a proportion of start-up exit proceeds back to the institution

Recommendation 3: HEIF should be used to reduce the need for universities to cover

the costs of technology transfer offices (TTOs) from spin-out income. Given that HEIF

equivalents are lower in the devolved administrations, the devolved governments may

want to consider the findings of this review and provide additional support for their

universities.

Recommendation 4: Create shared TTOs to help build scale and critical mass in the

spin-out space for smaller research universities. These could be operated through

collaboration with established university TTOs and could be implemented at a regional or

sector-wide level. We note that the latter may be particularly of interest to spin-outs from

the social sciences, humanities, and the arts.

Recommendation 5: Government should increase funding for proof-of-concept and

funds to develop confidence in the concept prior to spinning-out. These should integrate

with the timing and offering of commercialisation support and venture-building

programmes. Investors should lend their expertise to assessing funding bids for proof-of-

concept and translational funds.

Recommendation 6: In developing the ‘engagement & impact’ and ‘people & culture’

elements of REF 2028, the four Higher Education Funding Bodies should ensure that the

guidance and criteria strongly emphasise the importance of research commercialisation,

spin-outs, and social ventures as a form of research impact. We encourage spin-outs to

assist universities in drafting impact studies for REF.

https://www.imperial.ac.uk/giving/community/entrepreneurs-pledge/

Independent review of university spin-out companies

Building spin-out ideas into viable ventures

Founders’ skills

Creating a successful spin-out requires a confluence of technical and commercial skills, as well

as other legal, negotiation, and problem-solving skills, especially in a spin-out’s early phases.

Academic founders tend to be experts on subject matter and technical aspects with little or no

formal commercial training, meaning that they often do not have the necessary non-technical

skills to create a spin-out on their own, and sometimes may not have the skills or the desire to

be a CEO. There are, of course, exceptions where an academic founder proves to be highly

competent in these other areas and becomes a successful serial entrepreneur. However, in

many cases, academic founders will need to build an executive team and work with a network

of experts to help move from a cutting-edge technology to a viable commercial proposition. In

addition, many spin-outs are in deep-tech sectors that require specialised skills and market

knowledge that are difficult to come by. Even experienced investors or start-up advisors may

be more used to the market dynamics of software start-ups than cutting edge therapeutics or

quantum computing. Universities are increasingly offering PhD students access to training to

develop commercial skills. This is an important step in establishing an entrepreneurial mindset

and the necessary commercial skills in the future generation of academic researchers.

Developing such a pipeline is something we encourage more of, but not at the cost of the PhD

student developing, first and foremost, skills in their subject matter and completing their

studies.

Support services and infrastructure for founders

The review has seen that there are many groups or individuals who will offer to support

academic founders, but this is of variable value and founders often struggle to know who is

both experienced and trustworthy. As a rule, in more mature ecosystems such as in the South-

East, finding dependable mentors, board members, lawyers, and accountants is easier than in

other parts of the country. But it can be more challenging to find space for growth and obtain

necessary planning permissions, with demand for lab space outstripping supply in some of our

more mature ecosystems. Solutions, such as using available university innovation space in

other regions, are happening and bringing considerable benefits to both regions.

The government has provided funding for founders to access support services. For instance,

RE’s Connecting Capabilities Fund (CCF), which this year is allocating £60m of funding for the

coming three years

, has funded various accelerator programmes as well as the development

of venture funds Northern Gritstone and Midlands Mindforge. Other programmes have

leveraged the expertise and networks of university business schools to support

commercialisation, such as the training provided through Creative Destruction Lab, or a course

connecting MBA students to potential academic entrepreneurs, delivered by London Business

https://www.ncub.co.uk/insight/research-england-as-an-ecosystem-builder-60-million-to-invest-in-

commercialisation-success/

Independent review of university spin-out companies

School. There may be opportunities for more programmes to be created that connect talent in

business schools with those in technical departments across the UK, which we would

encourage universities to consider.

There are an increasing number of private sector start-up accelerators and venture-builders

operating around universities. These organisations will assist academic founders with

negotiating licence deals, establishing a business, developing a business plan, pitching to

investors and hiring an executive team. In return they typically ask for small equity stakes in

the businesses, often operating seed investment arms. These services often overlap with the

support that some universities provide but this is a positive development. Universities should

welcome the competition and consider how their offering complements that of the private

sector which may be in a better position to provide commercial support to founders. We

consider best practice to be universities partnering with private providers, where they can

complement each other’s skills and expertise, such as the University of Bristol with Science

Creates. The aim of policy should be to foster an ecosystem where all founders are able to

access high quality services. Universities and funding bodies should encourage investors and

venture-builders to get involved earlier in the commercialisation process, for example through

helping assess bids for proof-of-concept funds (see recommendations in the chapter Financing

university technology transfer and proof-of-concept research).

Building ventures outside science and technology

Founders from UK universities have pioneered spin-outs from the social sciences, humanities,

and the arts, as well as those focussed on social enterprise or a non-government organisation

(NGO) model. The ASPECT programme funded by RE’s CCF has provided a support

infrastructure for the first time anywhere in the world for spin-outs from these academic fields.

It supported the adoption of Oxford University Innovation’s ‘lean spin-out’ methods, recognising

that these ventures are IP-light, have low capital requirements and, unlike most science and

technology spin-outs, can start acquiring customers immediately. The Royal College of Art and

Imperial College London recently ran a collaborative programme to connect scientists with

designers to explore enterprise opportunities. These pilots are promising, and although it is too

soon to see the long-term impacts, they illustrate the leading role UK universities and founders

can continue to play at the vanguard of spin-outs from these academic fields. Universities

should be supported to continue developing this ecosystem alongside traditional science and

technology commercialisation. The UK’s spin-out ecosystem can be unique and world-leading

in helping address not only some of the major scientific and technological issues humanity

faces, but also how to implement them through our understanding of policy and human

behaviour.

Our vision is for founders to have a comprehensive offer of support that they can opt in or out

of. This needs to be easily accessible, and available through a coherent set of schemes and

initiatives that founders can transition seamlessly throughout their innovation journey: from pre-

spin-out support to proof-of-concept research and technical development, into post-spin-out

support of a more commercial nature. This will require stronger connections, collaborations

and movement between different institutions and programmes to facilitate the scientist-to-

entrepreneur career transition.

Independent review of university spin-out companies

Recommendation 7: Founders need access to support from individuals and

organisations with experience of operating successful high-tech start-ups, regardless of

the region founders are based in or sector they operate in. The existing landscape of

support services needs both consolidation and targeted expansion to ensure that

founders have access to:

- Advice, support, or representation in negotiations with universities and investors.

- Training on entrepreneurship and commercialisation.

- Support for business building activities: provide support to identify the commercial

proposition of spin-outs, build a business a case, access customers, help connect

investors with spin-outs, and help identify experienced and diverse people to join as

early employees, advisors, and board members.

- Access to part-time or on-call professional support in law, finance or operations in

early stages before permanent hires are needed.

- Access to shared equipment and facilities for rent.

Recommendation 8: UK Research and Innovation (UKRI) should ensure 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 spin-

outs, venture capital firms or TTOs.

Independent review of university spin-out companies

Equity investment and the role of investors

Most spin-outs are based on early-stage technology that requires further development before

becoming commercially viable. Due to the high overheads associated with R&D, most spin-

outs rely on equity investment to fund their operations from the outset.

Equity investment,

especially from venture capital (VC) funds but also from angel investors, corporates, and

private equity, usually comes with commercial expertise to help guide the business strategy

and route to market. Attracting finance was a key barrier to starting their spin-out that founders

reported in our survey. This chapter explores the spin-out investment ecosystem in more

detail.

Recent trends

Investment into university spin-outs has increased from £1.11 billion in the academic year

2015/16, to £5.29 billion in 2021/22.

This reflects a maturing UK equity investment

ecosystem and funding environment which has developed over the past decade, with support

from government institutions such as the British Business Bank (BBB). The latest data

suggests that spin-out investment fell during 2022 and the first half of 2023

. However, the

share of investment received by spin-outs remained in line with 2021 (at 11.5%) and has

increased slightly in 2023 (12.5%). The fall in investment is also in line with the wider market

slowdown since the middle of 2022, which has continued into 2023.

Increasingly, UK universities are beginning to establish affiliated university investment funds to

invest in spin-outs. These are private investment funds, separate from any internal seed funds

the university may operate. However, the university usually has a role in establishing them, has

seats on the board and may have an agreement with them providing favourable access to

spin-outs to help de-risk the investor proposition.

The creation of university-affiliated funds has coincided with large increases in the number of

spin-outs and the amount of equity they have raised. Before Oxford Science Enterprises (OSE)

was founded, the University of Oxford launched 5-10 spin-outs per year. Since OSE was

founded, it has launched around 20 in most years. Annual investment raised in Oxford spin-

outs has also increased over the same period from around £100 million to over £1 billion.

Spin-outs also perform better than other companies on some metrics, for instance spin-outs raised 33% larger

deal sizes (on average) than the wider market. British Business Bank, Small Business Equity Tracker 2023,

https://www.british-business-bank.co.uk/research/nations-and-regions-tracker-2022/

Higher Education Business and Community Interaction, HESA, 2023, https://www.hesa.ac.uk/data-and-

analysis/business-community/ip-and-startups

Beauhurst, Equity Investment into Spinouts 2023, https://www.beauhurst.com/research/equity-investment-

spinouts-2023/

Beauhurst, Equity Investment Market Update H1 2023, https://www.beauhurst.com/research/equity-investment-

market-update-h1-2023/

Based on HESA HEBCI data. This self-reported number by universities is often slightly higher than that

estimated by deal trackers such as Beauhurst, who reported that Oxford spin-outs raised £743m of equity in 2021.

Independent review of university spin-out companies

These funds can often help the university to improve licence deal terms, for instance OSE was

closely involved in Oxford University’s decision to introduce a new set of terms in 2021.

Recently, consortia of regional universities have created funds to help pool their spin-out

portfolios. Northern Gritstone was launched in 2021 and has raised in excess of £300 million of

capital which it is already deploying. Midlands Mindforge was announced earlier this year, in

collaboration with eight universities, and is now raising funds. Given the challenges founders

report in attracting investment, especially outside the South-East, these are welcome

developments.

The earliest deals between investors and universities in nascent affiliated funds, which have

now mostly concluded, often heavily restricted the university’s freedom to engage other

investors and competition in the local investment market. The newest deals, such as the one

agreed between Northern Gritstone and three universities, are much more open and this trend

should continue. Universities considering working with affiliated investment funds should

ensure they are still able to attract a wider set of investors when agreeing such deals.

Distribution of funding

While the broader equity funding environment continues to grow in the UK, the distribution of

equity funding continues to be concentrated in the South-East of England. In 2022, the BBB

estimated that 66% of all equity investment to SMEs went to firms based in London.

The ‘golden triangle’ of Oxford, Cambridge and London attracts a similarly high percentage of

UK spin-out investment. According to HESA statistics, spin-outs from universities in the South-

East, London and East of England raised £3.94 billion in 2021/22, or 74.5% of investment in

spin-outs. This does not account for spin-outs from other universities which moved into the

South-East.

Scotland performs comparatively well, receiving 17% of investment

but all

other regions across England, Wales and Northern Ireland combined received less than 10%

of investment.

BBB research also shows that the median golden triangle spin-out receives

4.6x more investment than the median spin-out outside this region, despite having fewer

funding rounds.

Part of this South-East bias can be explained by the distribution of research

universities and funding across the UK; however, the distribution of investment is more

unequal than research funding, with stakeholders outside the South-East reporting difficulties

in reaching investors.

This disparity in funding implies that the investment ecosystem is not uniformly mature across

all parts of the UK with some regions structurally worse off. Smaller investment rounds and

lower valuations means founders must give away larger equity stakes to investors. Similarly, if

universities expect multiple small funding rounds will dilute founding equity heavily, it is rational

British Business Bank, Nations and Regions Tracker 2022, 18, https://www.british-business-

bank.co.uk/research/nations-and-regions-tracker-2022/

Higher Education Business and Community Interaction, HESA, 2023, https://www.hesa.ac.uk/data-and-

analysis/business-community/ip-and-startups

ibid

British Business Bank, Backing Innovation-led Businesses 2022, 44, https://www.british-business-

bank.co.uk/backing-innovation-led-businesses-2022/

Independent review of university spin-out companies

for them to seek to take larger equity stakes or royalties and other payments with direct

cashflows.

Investors that have less experience can often take longer to negotiate deals with universities

as they are less familiar with which deal terms are important to universities, or which terms are

genuinely disruptive to scaling a deep-tech business. Further, these investors may be less

well-positioned to offer sector-specific advice and less effective on a spin-out company’s board

than more established competitors. The review heard from founders that non-local investors

often encourage companies to move from their founding location. The largest movement of

spin-outs domestically is from their university town into regions around London, Oxford, and

Cambridge, although some do move outside of the golden triangle

. To ensure that the local

area where a spin-out is created benefits from the employment and other local innovation

spillovers, it is important for founders in all regions to have access to a competitive pool of

experienced and sophisticated investors.

For some spin-outs, particularly those from the social sciences, humanities and the arts,

access to high amounts of equity investment is not essential. Some spin-outs have customers

and contracts lined up from their start and can earn revenues early on. This can make these

spin-outs financially sustainable without the need for large amounts of venture capital that

capital-intensive spin-outs which focus on developing a new product or technology often need.

The role of public finance

The BBB plays an important role in helping high-growth, innovative UK businesses like spin-

outs access finance

. The BBB has itself invested directly in university-affiliated funds,

including £30 million in Northern Gritstone. BBB supported funds made 130 equity investments

in spin-outs between 2020-22, and 16% of the BBB’s deals were made by the Northern

Powerhouse Investment Fund and the Midlands Engine Investment Fund.

Whilst early-stage funding has grown over the past five years, especially in the South-East, the

size of later-stage ‘scale-up’ funding has only recently begun to grow substantially and fell in

2022

. Only 5% of the spin-outs that Hellmann et al (2023) looked at raised over £25 million in

total investment

. While scale up finance is beyond the scope of this review, it is clear that

ensuring that university spin-outs can access the capital they need to scale is vital if they are to

reach their potential and contribute significantly to economic growth.

Importantly for UK spin-outs and deep-tech companies, the establishment of British Patient

Capital as a commercial arm of the BBB in 2018 has improved access to investment. The

interim evaluation of British Patient Capital reported that it had been able to deploy nearly £1bn

in funds targeting the equity scale-up funding gap

. More recent government announcements,

such as the Investment Zones programme, Long-term Investment for Technology and Science

Review’s own analysis of Beauhurst data, based on Companies House registration addresses.

British Business Bank, Backing Innovation: University Spinouts Factsheet https://www.british-business-

bank.co.uk/backing-innovation-university-spinouts/

British Business Bank, Small Business Equity Tracker 2023, https://www.british-business-bank.co.uk/small-

business-equity-tracker-2023/

Hellmann et al (2023).

https://www.british-business-bank.co.uk/wp-content/uploads/2023/02/BBB-Interim-Evaluation-of-BPC-Final.pdf

Independent review of university spin-out companies

(LIFTS) scheme and the Chancellor’s Mansion House reforms demonstrate an ambition to

increase investment into local areas and science and technology companies which we

welcome.

In order to see the full value of early investment redound to the UK, it is essential that we as a

country can enable spin-outs to scale and stay in the UK by continuing to ensure that the UK's

capital markets – both private and public – are well placed to provide the necessary financing.

This agenda has increasing political and regulatory focus, following the Lord Hill listing review

and the ongoing reforms through the Smarter Regulatory Framework to UK capital markets,

and supported by industry groups like the Capital Markets Industry Taskforce. In that context,

we would encourage there being clearer expectations for companies to stay in the UK if they

receive government support.

Venture capital schemes

The government provides three tax-advantaged venture capital schemes: the Enterprise

Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS) and Venture

Capital Trusts (VCTs). The schemes provide a range of tax reliefs for investment into small

and growing companies. Over £3.6bn of funds were raised across the three schemes in 2021-

22. In total, over £40bn of investment has been raised through the schemes since the EIS was

launched in 1994

. All stakeholder groups we spoke to – universities, founders, investors and

TTO professionals – highlighted these schemes as being particularly helpful for spin-outs. We

encourage the government to continue these schemes.