Last week, the Chancellor announced in his Autumn Statement a number of proposals designed to boost growth in the UK. A detailed summary of these is available here. The Autumn Statement follows the recent BVCA Venture Capital Investment Compact, which included measures to further strengthen the UK’s renowned venture capital industry.
The UK Government took the opportunity to publish its independent review of university spin-outs, which itself follows TenU’s USIT Guide earlier this year. Part of the UK Government’s stated desire to become a ‘science superpower’, the review is expressly trying to help the UK keep pace with US university spin-outs. According to the review, the UK is second only to the US in terms of total investments into spin-outs.
Several universities and investors have endorsed the new set of “best-practice policies” that are recommended by the independent review. The review and UK Government response are worth reading, but here are five key takeaways of particular relevance for US investors in British spin-outs:
1. All parties are encouraged to establish market terms, and so minimise the friction caused by negotiations. This may include using TenU’s USIT Guide (for life sciences) as a starting point. In time we may see this take on a similar precedent value as the BVCA or NVCA standard documents. The UK Government has promised to improve transparency and data of spin-outs, as well as helping to standardise term sheets.
2. One area of discussion has been the level of equity stake taken by British universities. The review concludes that the size of university stakes has been falling and these are now broadly comparable to those in the US, albeit with less standardisation. The UK has so far favoured larger dilutable stakes, in contrast to lower but non-dilutable stakes in US spin-outs. There is also a recognition that life sciences spin-outs tend to be more capital intensive than IP-driven software, and so may justify a higher level of university ownership.
3. There is a concern that spin-outs should not be a cost for British universities, which lack the ecosystem and philanthropic endowments of some of their US competitors. Although there is a hope that successful British founders may in the future make donations back to their universities.
The UK Government has promised to support the review’s recommendations to use the Higher Education Innovation Fund to reduce the need for universities to cover the costs of technology transfer offices, as well as pilot shared offices (used by some Swiss universities). While leading British universities (such as in the Golden Triangle) have established offices, other universities do not yet.
4. We may see more spin-outs across the country, including from universities which previously lacked the infrastructure. There is currently a significant bias in favour of London and the Golden Triangle, with other regions further behind in terms of investment. Similarly, the review highlights a number of non-financial proposals, such as the need for increased training and support for would-be founders.
As discussed in the context of the Autumn Statement, the UK Government will commit to £250 million in the context of the Long-Term Investment for Technology and Science (LIFTS) initiative. The two proposed vehicles under the LIFTS initiative aim to support high growth companies. In addition, the UK Government is looking to support these private finance vehicles, by establishing a Growth Fund within the British Business Bank.
In addition, the Autumn Statement will also create a new £3 million Venture Capital Fellowship scheme that will support the next generation of world-leading investors in UK’s VC funds.
5. Many British universities have not made substantial profits from their technology transfer offices, with licensing (rather than sales of spin-outs) representing the majority of revenue received to date. However, the review highlighted a growing preference for large corporates to make share acquisitions, rather than licensing deals, which may drive future deal-making.