UK universities want millions from new government for startups hatched in academia

Top UK universities are urging the newly elected Labor government to significantly increase funding for startups spun out of academia to £108 million ($140 million) per year, as countries race to capitalize on the AI revolution.

The UK has the third biggest tech industry, valued over $1 trillion, behind the US and China. It’s a research powerhouse, and its universities, often ranked among the world’s best, are the strongest pathways toward creating new commercial technologies. But the process of spinning out companies from academia is notoriously difficult, especially compared to the US where companies like Google got their start at universities, and is just beginning to be overhauled.

Negotiations between universities and startups over term sheets dragged on for far too long, taking 11 months on average, according to an independent review conducted last year on behalf of the government’s Department for Science, Innovation and Technology and Treasury. The technology transfer offices (TTOs) in charge of managing a school’s IP demanded an excessively large equity stake, with many asking for 50% or more. Companies also lacked proof-of-concept funding needed to demonstrate the feasibility of their technology to attract early stage investors.

In response to the review’s findings, Jeremy Hunt, the former UK finance minister, promised to give £20 million over three years to help founders begin to commercialize technologies. Ananay Aguilar, who leads TenU, a collaboration of ten TTOs from the UK, US, and Belgium, told Semafor that the British government needs to provide more funding.

“If you look at the proof-of-concept funds available to Stanford in the US or KU Leuven in Belgium, they each manage a [comparable amount] per year. So we need to scale that,” she said. TenU is now aiming to increase proof-of-concept funding to an annual £108 million from taxpayer funds.

Aguilar is hopeful that the new Labor leadership will be cooperative given the party’s promises to revitalize the British economy.

“I think this government is paying a lot of attention to innovation. One very, very promising sign is that they have appointed one of the most senior and knowledgeable civil servants in this area, Sir Patrick Vallance, to be Minister of State for Science, Research and Innovation,” she said.

In the US, academic institutions typically take smaller stakes in spinoff companies in exchange for licensing patents, typically in the range of 5% to 10%. The Bayh-Dole Act of 1980 gives universities the right to patent technology that resulted from federal grants, which incentivizes them to pursue tech breakthroughs.

The UK is slowly moving to a similar system, lowering the percentage of equity they take, depending on whether the technologies being developed can be patented or not. The University of Bristol will take up to 20% from “IP intensive” companies developing drugs, for example, 5% from IP-light, software-only businesses, and 0% from ones that don’t use any IP.

Andrew Wilson, head of commercialization at the Division of Research, Enterprise and Innovation, said the university recently changed its previous policy, which took a 45%, 30%, and 15% stake in spinouts, respectively.

Other top institutions like the University of Oxford and the University of Cambridge have followed suit, too, agreeing to cut their maximum shares in future spinouts. But many believe the percentages are still too high, and that complex royalty and licensing agreements make it more difficult for companies to raise money from other sources.

“[Universities] would rather have a big piece of a small pie rather than a small piece of a much bigger pie,” Alex Chalmers, platform lead at Air Street Capital, a VC firm focused on AI companies, told Semafor. “If they take 20% of your business, and then force you to go to affiliate spinout funds, which take their pound of flesh as well, it will leave you with a cap table that’s so messed up that most VCs won’t invest in you.”

Lowering the amount of equity universities will take in startups and making the deal terms clearer will hopefully lead to faster negotiations. The tech industry, particularly AI, moves at breakneck speeds, and being slow to launch a new tool or feature could be the difference between success and failure, he said.

Owen Nicholson, CEO and co-founder of Slamcore, a computer vision company that spun out of Imperial College in 2017, believes universities shouldn’t take any equity at all. “If they want to get rich off the back of their IP, make their academics rich,” he told Semafor. “And they will use philanthropy and come back to sponsor a library, or a new building, or just give some of their earnings away because that alma mater loyalty, which is so prevalent in the US, isn’t really here in the UK.”

There has been a fivefold increase in the number of startups spinning out from academia and capital being poured into them, giving rise to an industry worth £5 billion ($6.5 billion) a year, according to Andrew Williamson, who co-led the government’s independent review analyzing the process. “When you have that level of growth, of course, you have growing pains,” he said.

The previous prime minister, Rishi Sunak, was tech friendly and focused on AI. The UK AI Safety Institute, for example, was formed under his watch. But he failed to do enough to fix some of the structural problems that hindered startups from flourishing.

The new Labor government should make bold moves, like increasing proof-of-concept funding for university spinouts, to show it’s serious about boosting the country’s economy and making a change. Confidence in the British government to improve the quality of life is low, given that salaries have flatlined but the cost of living continues to rise.

Now that more universities are being less greedy about equity stakes, giving them more money will make it easier for new startups to launch, increasing the likelihood that more will form. The UK has the capital and talent to grow its tech industry, but there are cultural reasons that make it different from the US. The British tend to be much more reserved and risk-averse than Americans in business.

Entrepreneurs like Elon Musk and Mark Zuckerberg are tech celebrities and are revered for their ambition and wealth in the US, though they also have their critics. There aren’t really any equivalents in the UK, and their flashy behavior would be seen as crass in Britain anyway.

• The new head of the University of Oxford’s TTO also argued for more proof-of-concept funding to help spinouts get off the ground.