Ian Ritchie / The Herald Business HQ / December 2024
FORTY years ago in 1984, I had to negotiate a deal to commercialise software technology developed in a university research project.
Previously, a government agency, the British Technology Group, owned the rights to all publicly-funded commercialisation opportunities but in the mid-1980s these rights were allocated to each individual university, and most of them initially saw this mostly, and mistakingly, primarily as a way of generating funds.
It took over a year to reach a satisfactory license agreement for this software – the university originally had a hugely inflated expectation of the returns that were possible.
Since then, I have been involved many times in trying to reach licensing deals with universities and it has usually been a very frustrating experience.
A few years ago, a leading Scottish university would start all negotiations seeking to retain 50% ownership of a spin-out business. Another major Scottish institution invented a non-dilutable equity stake for their university. Not surprisingly, potential investors found these conditions unacceptable.
So, it was a huge relief to see that last month there was a real breakthrough when 49 UK universities adopted new guidelines on how to commercialise spin-outs in a report that had been published a year before in November 2023.
These guidelines were outlined in a treasury-backed report (see http://bit.ly/4fDJali) which was chaired by Irene Tracey, the Principal of Oxford University, and Andrew Williamson, who has experience in both academia and venture capital in both the UK and the USA.
The report also called on advice from an advisory board which included Anton Muscatelli, the Principal of Glasgow University, David Willets the former Universities and Science Minister, and key commercialisation executives from Stanford and MIT universities.
Investment into university spin-outs has increased from £1.11bn in 2015 to £5.29bn in 2021 and the government is keen to see further growth in this sector. This report was commissioned by the Conservatives but the new Labour government supports it, allocating £40m for proof-of-concept funding in the autumn budget.
This report sets much more realistic goals for the levels of equity involved in spin-outs. It recommends that limited intellectual property deals, such as software technology, should seek stakes of under 10 per cent. The upper limit on more IP-intensive companies, like life sciences business, should be 25 per cent.
The report disclosed that the average of all deals at Cambridge University were done at 11.8 per cent, while average deals at Leeds University could only be agreed at 42.3 per cent. Cambridge is on record as stating that their goal is not to make money from their spin-outs, but rather to make an impact. In addition, the majority of returns from its commercialisation income are distributed back to the inventors, departments and schools, creating a positive feedback loop, and encouraging researchers to create research which achieves real solutions.
As a result, Cambridge today is surrounded by over 5,000 research intensive companies. In the last decade the university has created over 150 spin-outs that have raised over £3bn.
The ‘golden triangle’ of Oxford, Cambridge and London dominate the share of UK spin-out investment with 74.5% of the total; Scotland does relatively well at 17% of investment but the rest of England, Wales and Northern Ireland received less than 10% of the total, demonstrating the relative underachievement of these universities in creating economic growth in their regions.
The report criticises the difficulty often experienced in completing spin-out deals. These negotiations are often seen to be very slow and complex. It recommends acceleration of these processes with deals that are within the proposed guideline investment levels and adopting standardised templates for term sheets to streamline the process.
It suggests that universities which have lower levels of spin-outs might collaborate to create shared Technology Transfer Offices (TTOs) where the experience can be gained to enable quick and effective deals. It recommends that deals are done quickly by one key university executive, and not allocated to an infrequently attended committee.
It recommends that all PhD students should have the opportunity to attend high-quality entrepreneurship training and encourage opportunities to take internships at spin-outs or venture capital, although it accepts that the researcher might be destined to become the Chief Technical Officer. In many cases, a Chief Executive might be sought with more commercial experience.
It also highlights the development of university investment funds which can buy equity in companies on a commercial basis, and this has turned out to be a very successful model at several of the best universities.
In retrospect, we were all trying to invent the basis of commercialisation university research way back in 1984, and subsequently I have often had to do battle with unrealistic TTOs.
It is enormously satisfying to see so much of the UK’s higher education sector now adopting sensible guidelines.
If only it hadn’t taken quite so long to get here.
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