A survey of venture capital firms highlights how far university spin-outs lag behind their corporatecounterparts when it comes to gaining finance. But, asks Christopher Sell, how can they close the gap?

It has become an article of faith that converting the rich seam of innovations from the UK’s universities into successful business ventures is a must for a successful technology economy. That means tapping into the substantial pool of funding available from the City (second only in size to the US’s), whether as early stage venture capital or private equity investment to fuel business growth.

From the technologists’ point of view, the equation is simple: give us the money and we’ll deliver the goods. But the financial community has plenty of investment choices on the table, and university spin-outs are not always top of the list. It has long been recognised that the UK’s universities present a substantial source of potential businesses, but the path from research to start-up is not easy, transparent or as efficient as it could be.

This was confirmed by new research commissioned by the British Venture Capital Association (BVCA), which represents the vast proportion of UK-based private equity and venture capital firms (VCs). The report revealed an imbalance between university spinouts and their corporate counterparts.

A lack of business acumen and inability to attract key personnel to guide the business through the obstacles and challenges of forming a spin-out firm compound the problem.

The findings are sure to resonate with the government, which has made much of the need to engender university innovation. The government sparked the expansion of Technology Transfer Offices (TTOs) and spin-outs with the introduction of University College Funds (UCF) in 1999. There are now 126 TTOs, all working hard to get their innovations on to the investment radar screen. But according to the BVCA’s research, the corporate spin-out has a number of advantages that stand it in far better stead than a university venture.

Typically, a corporate venture is founded with the explicit aim of meeting a known customer need and the technology is already proven. Furthermore, the team members have been picked for their suitability to improve and sustain the technology. Simply put, corporate spin-outs are launched further down the chain, bypassing the research, validation and development stages.

Meanwhile, the core values that are needed to establish a successful spinout — an understanding of customers’ needs, market demand, securing funds and employing appropriate staff — are not what academics are accustomed to.

However, all these issues need to be overcome if a university wishes to set up a successful spin-out.

It comes as little surprise, therefore, that the report claimed 87 per cent of VCs view the typical university spin-out as an immature prospect, which is reflected in the lower levels of investment.

Prof Chris Lowe is co-founder of Smart Holograms, a spin-out from the University of Cambridge that aims to exploit sensor technology developed for medical devices. Lowe is under no illusions about the reality facing those who wish to commercialise their technology.

‘These things are never easy. One of the big issues we perennially face is actually building up a portfolio to get to a stage where there is some substance for a new company. Generally speaking, once you get beyond initial filing [of patents], you build up some serious costs. And quite often you cannot put 15 patents on the table to create an innovation for a new company — there is no real mechanism for that. It comes down to money at the end of the day. And unfortunately a lot of universities regard this not as investment but as expenditure.’

Smart Holograms itself was helped by £250,000 of VC funding from the University of Cambridge Challenge Fund when it launched in 2002.

While the government has stipulated an increase in Higher Education Innovation Fund (HEIF) provision, Lowe is adamant that the backing is inadequate and leaves companies little chance of attracting venture capital if they are not provided with the resources to impress entrepreneurs and establish a strong business case. ‘It is not good enough at the moment, that’s for sure,’ said Lowe.

‘I think there is an obligation on the universities to acquire funding. It is the whole package: you have to have a portfolio, then good technology know-how that backs it up. You then have to attract the money people and convince them it’s a worthwhile investment. Once you have that, then you have the degree of stability that could get you into the market.’

According to the BVCA, common failings of the university spin-out are an almost naive approach to marketing the product and a lack of direction or knowledge in driving a technology into the marketplace. The process either takes too long, or the desire to secure funding leads to potential spin-outs forming companies too soon. Lowe agreed, pointing out the paradoxical situation that a company must be in good shape in the first place if it is going to attract an entrepreneur to guide it through to the business stage.

‘You have to be in a position to attract a good person willing to do that,’ said Lowe. ‘That means you have to have all the systems in place so you can attract that person who has the qualities to take it through to the serious company phase.’

The report endorsed this view, finding that at the all-important validation stage 60 per cent of spin-outs themselves and 80 per cent of TTOs believe that spin-out founders need practical help. Further evidence of the assistance required was the surprising admission that TTOs were the least concerned of those surveyed about the level of IP protection for technology.

So what can be done? Having recognised that inequality exists between corporate and university spin-outs, and in line with the Lambert Review’s recommendations, the government has confirmed its support for the HEIF scheme to enable continued knowledge exchange and productive interactions with business.

Also mooted by the BVCA is a UK version of the US’s SBIR scheme, where 2.5 per cent of R&D expenditure by US government agencies is spent on small businesses. This amounts to $1.8bn (£1bn) worth of contracts being offered through a series of competitive tenders.

The report claimed introducing such a scheme in the UK would offer the potential for the exploitation of university science through the development of world-leading technology firms. The BVCA believes that putting a UK SBIR into practice would see university spin-outs benefit from the customer interaction and team-building that is found in the corporate set-up.

Furthermore, the BVCA has suggested the creation of specialist  advisory panels to assist TTOs in reviewing candidates for proof-of-market and technology grant funding; BVCA workshops to address issues such as understanding how to secure business investment; and The Gauntlet, an HEIF- funded collaboration between the LSE and Library House to improve the conversion of science into business.