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August 2023

A guide to
university spinouts

Sponsored by

Produced in partnership with City Road Communications

August 2023

A guide to
university spinouts

Sponsored by

Produced in partnership with City Road Communications

Contents

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University spinouts:
What are the benefits and risks?

University spinouts are companies founded to commercialise innovative technologies, products, or services that originate from academic research conducted within universities. These spinout companies bridge the gap between academia and entrepreneurship by translating discoveries into viable business ventures. Spinouts are a unique form of startup and come with their own benefits and risks.

Benefits

Cementing global standing

Transfer of innovation
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Spinouts facilitate the transfer of novel technologies and ideas from universities to the commercial sector, unlocking the potential of innovative academic research to address real-world challenges. This takes place within the safety net of academia and encourages collaboration between established corporate industry figures and educational institutions.

Economic Impact

Economic Impact
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Successful spinouts make substantial contributions to the economy, generating employment opportunities, attracting investments, and stimulating regional growth. By establishing themselves as viable businesses, these ventures create a ripple effect, promoting economic prosperity and bolstering the overall economic ecosystem of their respective regions.

Riding the AI wave

Talent retention
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University spinouts support the retention of top talent in local communities. The opportunities provided by spinouts for researchers, scientists and innovators to commercialise their ideas and discoveries reduces the risk of a brain drain. It can cultivate a vibrant culture of entrepreneurship and innovation within the region, spawning innovation clusters around the university.

Jamie Whitcroft

Head of early stage ecosystem coverage and strategic partnerships, HSBC Innovation Banking

“Universities are hotbeds for innovation. They attract the brightest minds and give them the mandate, time, and resources they need to turn ground-breaking discoveries into the businesses of tomorrow. 

“This means that talented students can easily come together and explore a variety of ideas quickly, safe in the knowledge that they have a strong support system.  

“In addition, there are exclusive funds dedicated to backing spinouts, and less competition than the open market, making it an attractive proposition for those with an entrepreneurial spirit.”

Taran Singh

Challenges

Executing the roadmap

Intellectual property
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Protecting intellectual property (IP) rights can be a complex and intricate process. Spinouts must navigate legal and regulatory landscapes to safeguard their proprietary technologies and prevent disputes over ownership and licensing agreements, safeguarding their long-term growth prospects.

The cost-of-living crisis impacting SMEs

Funding
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University spinouts often face funding constraints in the early stages. Securing initial investments can be more difficult for spinouts than other startups given perceived risks related to technology maturity and the complexities of a spinout’s partnership with its university, particularly over the term sheet conditions a university might have.

The cost-of-living crisis impacting SMEs

Transferring research to the real world
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While university spinouts benefit from cutting-edge research, the transfer of complex technologies from academia to the commercial world may encounter challenges. Innovative ideas based on research findings do not necessarily convert into scalable, market-ready products. This demands seamless technology transfer, rigorous validation, and adaptation to market requirements.

Ariella Young

Senior VP, early stage ecosystem coverage, HSBC Innovation Banking

“The primary challenge sits with the students themselves, as they will have to try and balance their academic responsibilities with the demands of starting a business.

“There’s also the question of location. Spinouts, like other startups, need to be ‘in the right place at the right time’. Funding tends to flow towards flagship universities, and it can be difficult for spinouts in remote areas to access the limited funds available.

“And even if they do, some universities take a major stake in the business, which may affect long-term profitability and deter later investors.”
Taran Singh

University spinouts
data snapshot

431
£4m
£2.13bn
12%
£23.1bn
10-15%

What makes a successful spinout?

University spinouts have emerged as a vital source of innovation and economic growth in the UK. To understand what makes a successful spinout, it is important to explore the key factors and metrics that contribute to their success.

Research
Team
Market validation
Metrics for success

Spinout case studies

Oxford Nanopore Technologies - University of Oxford

One of the most notable success stories of a British university spinout, Oxford Nanopore Technologies is a life science company that specialises in the sequencing of DNA and RNA. The company was founded in 2005 by Hagan Bayley – a professor of chemical biology – and former Oxford chemists Dr Spike Willcocks and Dr Gordon Sanghera under its original name, Oxford Nanolabs.

The company was built upon Bayley’s work on nanopore sequencing, a technique that uses protein nanopores to read individual DNA molecules. In 2014, the company achieved a major breakthrough with the launch of its portable DNA sequencer, called the MinION. This handheld device brought DNA sequencing capabilities out of the laboratory, with some calling it a democratisation of access to genomic data.

Oxford Nanopore Technologies - University of Oxford

Paragraf - University of Cambridge

Paragraf’s journey began in 2015 in Cambridge, when founders – Dr Simon Thomas, an expert in graphene and nanomaterials; Professor Sir Colin Humphreys, a physicist and material scientist; and Dr Ivor Guiney – wanted to harness the potential of graphene, a thin and strong material made of a single layer of carbon atoms tightly arranged in a hexagonal pattern.

The company’s foundation was rooted in research conducted at the University of Cambridge, where the founders recognised the capabilities of the material for improving electronics and sensors. The company sought to commercialise the technology by integrating it into various electronic devices.

Paragraf - University of Cambridge

Ceres Power – Imperial College London

Ceres, the clean energy tech company specialising in low-carbon power solutions, first began as an idea at the prestigious Imperial College London in the late 1990s. The company was founded in 2001 by Professor Brian Steele, Dr Mark Selby and Dr Chris Tomlinson to commercialise solid oxide fuel cell (SOFC) technology that was developed at the university.

Backing for the company first came in the form of a £300,000 grant awarded to Steele to develop SOFC materials. After officially spinning out from Imperial, the company benefitted from further grants to build the prototype of its first full system. In 2003, the company was listed publicly on the Alternative Investments Market (AIM) in London.

Ceres Power – Imperial College London

Quell Therapeutics – University College London

Founded in 2019 by Hans Stauss and Emma Morris – both professors at University College London (UCL) – Quell Therapeutics is a biotechnology company known for developing engineered T regulatory (Treg) cell therapies. Treg cell therapies are a form of medical technology that modifies certain white blood cells to make them more effective at targeting specific diseases.

Funding came quickly for Quell Therapeutics, as the firm secured a £35m investment round from Syncona, along with the UCL Technology Fund, within just a few months. Just a couple of years later in 2021, Quell Therapeutics added an extra £27m to its funding from its existing investors before landing a £121.3m Series B round to fund a host of new medical projects.

Quell Therapeutics – University College London

Spinouts to watch

Praetura Ventures
Gaussion
Mignon
Northern Gritstone
BGF

Spinouts to watch

Praetura Ventures
Gaussion
Northern Gritstone
Mignon
BGF

Top university spinout creators

University of Oxford
University of Cambridge
Imperial College London
University College London

Fastest-growing spinout creators

University of Manchester
University of Bristol

The spinout lifecycle explained

Key Sectors
Idea

As with any startup, the journey of a university spinout begins with an idea. These ideas often originate from research conducted within the university’s facilities or through the ideas of researchers, faculty members or students. The early work for spinouts can be supported by access to the educational institution’s labs, equipment and personnel. As universities are protective of intellectual property made within their walls, they will take a key role in identifying and protecting the idea through patents. The exact ownership of the IP would depend on several factors, including if the founder made material use of university equipment, which could determine if the university controls the IP and could affect the stake it owns in the company itself.

Accelerators & Incubators
Investors
Academia
Key Sectors
Accelerators & Incubators
Investors
Academia

Advice for spinouts

Alex Threipland

Head of early stage portfolio management, HSBC Innovation Banking

“Spinouts have all the essentials of building a promising startup: unique insight into the latest innovations, world-class talent, and access to funding – with the added support network of the universities themselves.

“However, it is never easy to start a business. While a spinout may enjoy the added support of a university, the trade-off is sacrificing significant equity – assuming of course that you can beat your peers to the limited funding on offer.

“Make sure you understand both the benefits and disadvantages of this route. We live in an era where it is possible to raise funds and build a business independently, but if this feels like the right path for you, go for it and try to enjoy the process.”
Taran Singh

Investing in spinouts:
key considerations

Retained equity
University technology transfer office
Retained equity
Retained equity

Where next for UK university spinouts?

Spinout review

The UK government has identified university spinouts as a pivotal part of its “science and technology superpower” goal. In March 2023, Chancellor Jeremy Hunt launched a review to explore how the UK can better utilise the work of university spinouts to boost economic growth, and ensure spinouts go on to become “global business titans”. The independent review, which is being led by Professor Irene Tracey and Dr Andrew Williamson, will report back to the chancellor in the summer with recommendations for government policy and academic institutions. It will compare UK spinout processes with other nations (such as the US); consider the differences in time it takes to spin companies out; examine approaches to equity and IP; assess the role of angel and VC investment in spinouts; and assess barriers for academics pursuing interests alongside their academic work. Here are some of the areas it will examine.
The cost-of-living crisis impacting SMEs

Equitable equity
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Investors frequently cite the high equity stakes that universities hold in spinouts as a barrier to providing investment. The average university stake has declined from 24.8% to 17.8% between 2013 and 2022, according to an analysis by research firm Beauhurst.

Not all equity policies are the same. The University College London takes either a 5% or 10% equity stake, depending on the level of support it has given the founders during the commercialisation process. Others, like the Royal College of Art, negotiate equity on a case-by-case basis.

The Treasury’s spinout review will “examine approaches to intellectual property and equity”. It is therefore possible that the review will recommend changes to retained equity by universities, along with the support they provide spinouts.

The cost-of-living crisis impacting SMEs

Professor’s privilege vs university ownership
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Professor’s privilege, a model that allows academics to retain full ownership of their research, was often the default in some European countries before the 2000s. Since then, the university ownership model has taken precedence in the UK.

A report by The Entrepreneurs Network, a think tank, pointed to analysis that shows UK startups’ likelihood of raising venture capital funding is dependent on their control of the underlying IP and the level of equity owned by non-active entities, such as universities. The think tank recommended a shift to the professor’s privilege model, arguing that academics are more likely to commercialise IP if they own it.

However, there are also drawbacks. Professors are not necessarily entrepreneurs, and they might not have the time or motivation to commercialise their IP. This can lead to patents filed by professors remaining dormant due to a lack of resource from those that created them.

The Treasury’s spinout review will compare spinout processes with other nations, such as the US, and examine different approaches to IP ownership.

Rethinking tech transfer offices

Rethinking tech transfer offices
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University tech transfer offices, or TTOs, are designed to package up researchers’ innovations for the private sector. They pick up much of the administrative burden on behalf of spinouts, and can commercialise innovations that the academics behind it might have otherwise abandoned.

But they have been criticised for moving too slowly. Spinouts are also restricted to the TTO associated with your university, which some see as creating a monopoly effect. The Entrepreneurs Network report recommends giving spinouts the option to “shop around” and pick the TTOs of their choice from other universities. The thinking is that this would incentivise them to provide the best services and better match sector-specific expertise.

The Treasury’s review will look at the time it takes to establish university spinouts and ways to streamline processes, which could lead to a recommendation to revamp TTOs.

Glen Waters

Head of early stage practice, HSBC Innovation Banking

“The first step is to improve access to funding. There is an abundance of talent across the UK, and concentrating spend on a few universities means that some truly brilliant ideas may be overlooked.

“Secondly, it’s imperative to reassess the equity stake that local universities take in spinouts. In the UK some universities take a much larger stake compared to those in the US.

“With more spinouts and a lower stake by the universities, this will make them more attractive to institutional investors at future funding rounds.”
Taran Singh

Thank you to our sponsor

HSBC Innoovation Banking
Regional tech report: West Midlands