Universities have come in for plenty of criticism for allegedly taking too much equity in spinout companies – which is then said to have a negative impact on growth, venture capital, and innovation.
University incubators have struggled to deliver financial returns and spinout numbers commensurate with the rise in recent investment straining university budgets. University technology transfer offices (TTOs) also battle increasing criticism from venture capitalists, investors, and even the founders they have supported in spinning out, as I have noticed in my own work.
Common complaints range from insufficient income generation and low regional economic development to innovation exploitation and founders feeling “shortchanged”. Some investors view spinout terms harshly as “rent-seeking” and argue that the university’s role is to teach and research instead. Founders feel that TTOs are not actively liable for risks of failure, rendering the company ownership they demand unjustified.
Both student and academic founders also complain about the slow speed of spinning out involving long and onerous negotiations. The delay hurts prospects of raising external funding, they say. Other founders have described processes to be unclear, non-transparent, and bureaucratic feeling pressured to accept unfavourable terms in order to close a timely deal. Policymakers would like to see much more job creation, economic development, and regional growth emerging from TTO investment. How did we get to this point?
In context
Historically, many German-speaking and Scandinavian universities used a policy of “professor’s privilege” or inventor ownership, in which researchers own innovations developed through publicly funded research, including associated patent and utility model rights. Between 2000 and 2007, first Denmark and then Germany, Norway, Austria, and Finland all abolished professor’s privilege in favour of university ownership. While Italy and Sweden still retain professor’s privilege, Malaysia now uses a shared ownership model.
The UK continues to use the employer ownership model as outlined in the Patents Act 1977. The government-owned National Research Development Corporation managed intellectual property rights (IPR) from 1948 until 1981 when it merged with the National Enterprise Board to form the British Technology Group (BTG). The BTG was privatised in 1992 and exclusively managed commercialisation of public funded research until then. In 1985, UK universities were allowed discretion to manage patents on their own either through establishing TTOs or through the BTG.
While these provisions and a bigger government push encouraged university patenting until 2000, with universities owning 40 per cent of the patents invented by their researchers, there has been weak growth in IPR income, patent applications, patents granted, and formal spinouts established since then.
The UK Government Office of Technology Transfer observes that, like university spinouts, public sector spinouts have also seen a decline in numbers since 2000. Yet its recent report suggested that public sector organisations may have benefitted from more favourable paths for commercialisation. For example, public sector organisations took on average 41 per cent of equity at the time of spinout formation, much higher than most university TTOs. Overall equity taken ranged from 9 per cent to 77 per cent, suggesting different mechanisms and priorities at play for public sector spinouts compared to their university counterparts. The wide range also suggests a somewhat case-by-case approach. While public sector technology transfer has received less attention than university TTOs, there might be lessons for universities to learn. So, what can university TTOs do?
Beyond the binary
To begin with, the villainization of universities for keeping equity might not be entirely justified – nor in the best interest of founders. Research has shown that compensating mentors with equity enables startups to attract growth-oriented advisors and receive high quality mentoring. Just as equity incentives maintain the quality of mentoring support, they can also help maintain the quality of spinout support. Founders should instead negotiate terms that allow them to review equity in congruence with monitoring the support that university TTOs continue to provide after graduation from their incubator programmes.
Licensing, patenting, and IP can be very complex processes for novel innovations even with the best legal support. Founders would benefit from leveraging the legitimacy that leading universities bring to make a case for their innovation. Therefore, ongoing participation in the university spinout process and post-graduation engagement can be greatly beneficial for founders.
Universities, in turn, also need to design and deliver more dedicated, specialised, and aligned programmes of support with hybrid bespoke and group interventions. A first step in this direction would involve in-depth surveys to gather feedback and performance data from alumni and graduating spinouts to feed back into programmes of support. Publishing high-level, non-sensitive data on the deal terms of past spinouts will help foster trust and confidence amongst future cohorts.
University practice, entrepreneurship research, and government recommendations all seem to agree on what ideal terms regarding equity stakes might be. The Independent review of university spin-out companies in 2023 recommended equity of 10-25 per cent for IP-intensive life sciences spinouts and 10 per cent or less for software-only spinouts. Research agrees. This also aligns with the founder-track option proposed in Labour’s startup review wherein universities take a less than 10 per cent stake in exchange for providing a different programme of support to founders than is usual. By triangulating these recommendations with research on founders’ needs, we can achieve quicker field-level agreement.
Enterprise culture
Both universities and academics driving innovation within these universities need clearer structural incentives to embark on the enterprise and commercialisation path. While financial incentives do go a long way, structural incentives need to go beyond small income generation for universities and escaping academia for better salaries for academics.
A clear category for enterprise in the Research Excellence Framework might be helpful rather than attempting to fit enterprise within impact – this latter category is already oversaturated with other work emerging out of universities. Leveraging the Knowledge Exchange Framework to demonstrate success in commercialisation activity and economic development would be even better.
Finally, universities can retain entrepreneurially inclined academics through enterprise-based promotion tracks to design specialist enterprise programmes – rather than often losing them to the spinouts. These would be similar to teaching-only promotion tracks on offer at many universities. Such tracks would offer better incentives than “entrepreneurs-in-residence” contracts available for senior corporate executives to teach on MBA programmes.
University TTOs can demonstrate their will to empower founders by adopting a service-based approach, improving communication and information flow, and streamlining data sharing. Strengthening founder ties with home institutions will help both parties achieve considerable competitive advantage. Enterprise has immense potential to drive growth and innovation. We must strive to embed it with clear incentives and measurable impact – at every level – within our universities.
