The Royal Academy of Engineering recently sponsored a 2022 report on the state of the UK’s university spinout economy (Spotlight on Spinouts: UK Academic Spinout Trends). The report, put together by data analyst company Beauhurst, compiles a wide range of data on spinout activity across the UK, breaking down activity by university, geographical location and sector activity. It highlights investment trends, scaleups and exits, and also includes an analysis of the different IP policies applied by academic institutions when considering how to derive commercial value from spinouts.

Some interesting findings of the report are as follows:

Life sciences and artificial intelligence leading the way

The two leading sectors for spinout activity were both taken from the life sciences industry: pharmaceuticals and research tools/ reagents. These sectors had as many as 282 spinouts and 257 spinouts respectively as of January 2022. The need for rigorous research and testing processes for life sciences companies seems to fit well with the spinout model, and the report notes that the life sciences sector is preeminent in the list of spinouts with the largest market capitalisation.

The top emerging sector by number of spinouts was artificial intelligence, which had 138 spinouts as of January 2022. It is interesting to note that AI had more than double the number of spinout companies than the second most popular emerging sector, precision medicine. For updates on all things AI and tech law see our posts here.

Increase in number and value of equity investments

The number of equity investments secured by academic spinouts appears to have increased significantly over the last decade, as has the value of such investments. There were 389 deals with a combined value of a record £2.54 billion in 2021, up from 209 deals worth £405 million in 2012. This is despite a drop in activity in 2019/2020 (thought to have been due to macroeconomic factors such as COVID and Brexit).

The average equity investment into UK spinouts in 2021 was at a record ten year high at £6.70 million. The report notes that this is in contrast to the average equity investment into UK private companies last year – which stood at £3.90 million. It is also interesting to note that academic spinouts are still more likely to survive than the average start up. These trends must be in part due to the recognition of the potential of the IP and innovative technology driving spinout companies.

Deriving value for an academic institution

The report includes an interesting analysis of the IP policies for some of the top 20 universities in the UK, that highlights the range of approaches universities may take to gain commercial value from spinouts. When it comes to the issue of equity stakes:

• A number of universities negotiate an equity split on a case by case basis, taking into account factors such as the nature of the technology being licensed, the stage of the project, the contribution made by the inventor and the level of support required.
• Some universities offer researchers different options, depending on the amount of support they would like. For example, a researcher may be able to opt for a higher equity stake with less ongoing support, or choose to receive more support with a lower equity stake.
• Certain universities have a more standardised approach to equity splits to try to avoid the need for case by case negotiation. For example, a university might offer a set percentage stake to the founder researchers and the university, depending on the nature of the project. The typical stake for the university varies from university to university.

However, there are a number of different ways that academic institutions seek to derive value from spinout companies, and taking an equity stake is just one way of trying to achieve this. The report notes that since 2012 there has been a decline in the average equity stake taken in the year of companies spinning out, and institutions may choose instead to licence IP to a spinout without taking equity. It is clear that there is no one size fits all approach. See our article here for more detail on the ways in which universities may approach this issue.

Summary

Recent years have seen numerous successes for spinout companies, particularly in the life sciences sector, and it seems that this trend is continuing. It is interesting to read the report alongside the recent report from UK Research and Innovation (UKRI) (Backing innovation-led businesses: the role of public investment) which has found that research council spinouts are twice as likely to succeed where they receive funding from Innovate UK and the British Business Bank. It seems that the spinout space will continue to be an exciting area to watch, particularly in the context of the government’s stated vision for the UK as a global science superpower.