The latest HE-BCI data shows the limitations of the spin-out review

Back in November Irene Tracey, vice chancellor of the University of Oxford, and Andrew Williams, chair of the venture capital committee at the British Private Equity and Venture Capital Association, released their independent review of university spin-outs. And then, almost immediately, the government responded.

Across the two documents everyone agreed that sharing best practice, holding better data, pooling capacity, better training, and more sustainable funding would be a great idea. All entirely helpful policy levers to improve the density and success of spin-outs. The government also encouraged universities to take less equity in companies with the hope that universities can spin out bigger companies, founders can make more money, and in turn the economy will grow.

All very good in theory but the government response did not grapple with how funding, support, or political attention for spin-outs should be prioritised against a plethora of other research priorities.

What the HE-BCI is going on

We’ve now had the first tranche of HE-BCI data since the spin-out review. This is the Higher Education and Business Community Interaction data which, as the name suggests, sets out the work universities are doing with businesses and in the community. It has some limitations as illustrated by DK elsewhere on the site.

According to the data there were 145 spin-outs registered with some higher education provider ownership in 2022-23. This compares to 150 in 2021-22, 167 in 2020-21, and 161 in 2019-20. The number of spin-outs looks to be holding steady at best from what is a relatively low base.

On its own this statistic might not be that helpful. Companies take a long time to develop and fund. Universities do not want an ever sprawling portfolio of companies and investment so over time will sell or otherwise dispense of their shares. The real concern would be if this holding pattern was not through choice. This is not to say there is an ideal amount of spin-out companies (what would a good number be? 100? 1,000? 10,000?) but there is a nagging sense implicit in the spin-out review that growth has stalled.

There is an uneven distribution of spin-outs with some university ownership. The University of Oxford is at the top of the spin-out charts with 16 new companies but it is closely followed by Falmouth University who have spun out 15 new companies. This is not Falmouth’s highest ever return, in 2019-20 it spun out a trend-busting 20 companies. The university’s website provides some information on its work on business investment and support for the local economy – when I sought their views on why Falmouth is such an outlier in terms of spin-out volume to institution size, the university was particularly keen to emphasise the value of its Launchpad programme.

There are 1,183 spin-offs with some university ownership that have survived three years or more. Five years ago this figure stood at 909. Some businesses will have spun out from universities completely and some will have closed to be replaced by others. However, there is clearly and predictably a link between the universities that are supporting the largest number of spin-outs and the total number of university spin-outs that survive.

This is because a big pool of spin-outs is effectively a risk mitigation strategy that some will prove good investments, some will succeed without ongoing university involvement, and some will not survive in the long-term. A bit like the rest of the business world.

The estimated total turnover of firms with some provider ownership was £2.4bn in 2022-23 and around £1.1bn for formal spin-outs not attached to a provider. This compares to £1.4bn for firms attached to providers and £819m for firms no longer with provider involvement in 2017-18.

What is the ideal spin-out economy?

One reading of the data is that over a five year period universities have played a key role in increasing the turnover of spin-out businesses by over one billion pounds. These are businesses that are now employing people, contributing to the tax base, and otherwise fuelling economy.

In reality, because the data does not provide a firm-by-firm comparison, there may be only a few things we can say with confidence. The total number of spin-out firms is growing over time, the turnover of surviving firms is growing, and the density of spin-outs is dominated by a few Russell Group institutions with a few exceptions.

However, a noticeable absence across government literature is that there is no consistent and detailed description of the ideal size and shape of the spin-out economy.

The independent review did a good job of setting out how the sector could be different and its shortcomings but the ideal configuration of the sector is ultimately a political decision outside the scope of the independent review.

The issue with the government response is that it endorsed the findings of the review but it was also not the document that set out where spin-out support sits in the list of priorities that universities are expected to spend their research money on. It is clear spin-outs are important but it is unclear how important in an expansive list of government research priorities.

What might we learn

Institutional trends suggest there are things that could be learned by other providers. After all, the spin-out economy is nothing more than the cumulative activity of universities, researchers, and investors.

In 2022-23 the University of Liverpool registered seven new spin-outs with some university ownership; this compares to five the year before, one the year before that, four the year before that, and zero the year before that. The estimated total income of surviving firms has also grown over the same period. Undoubtedly, growth was aided by a handful of great successes in this time but the case studies point toward a growing mix of university support, funding from research councils, and concerted institutional effort.

Swansea University is another provider that regularly reports high numbers of new spin-outs. Some of the university’s offer includes spin-out support based around specific research strengths, a historic partnership with local partners and investors, and commitment to the wider enabling conditions of the local economy that support spin-outs.

What next

The government has set new expectations on equity ownership of spin-outs, ideas for investment in back office functions, mooted pension reforms to boost investment, and in doing this work raised the salience of spin-outs more generally across the sector.

There is one version of the world where the sector, government, and funders recognise that some progress is being made over time and there still seems to be latent capacity to grow further. There are examples of institutions that have improved performance over time and the reforms suggested in the review will help them grow further. It’s not necessarily a bad thing to embrace moderate growth in a period of declining resources and there could be innovation made around the edges.

However, the wider squeeze on university funding may make a less directive approach unviable in the long-term.

Spin-outs, as shown in the independent review, rely on a mixture of self-generated funds and cross-subsidy from other parts of universities. This can be maintained up until the point when resource overall makes cross-subsidy a more direct choice between different kinds of research. HEIF funding, while not used exclusively for spin-outs, is relatively small for the amount of work it is asked to cover.

If the ambition is for more and larger spin-outs a set of sensible policy recommendations from the review will run into the reality of declining university funding. If the ambition is to encourage moderate growth then a few reforms with a bit of encouragement may be the way to go. The key thing is that deliberate growth requires a definitive choice and with choice comes trade-offs in spending, attention, and support.