University spinouts are thriving. According to research published in 2018 by Anderson Law, nine out of 10 spinouts that received private investment between 2011 and 2015 are still operating, whereas only two in 10 UK startups survive beyond their fifth year.

That survival rate doesn't mean that the model is for everyone, however. University research doesn’t always easily develop into profitable products, and spinouts can be complicated to create and sustain. But their combination of academic expertise and a strong support network can be a big attraction to investors.

© iStock/sturti
© iStock/sturti

"Universities are pretty much the source of inventiveness," Douglas Hansen-Luke, the founder of university venture fund Future Planet Capital told Techworld. "Depending on which university it is, they can also be quite good at commercialising it. To us, it seems silly to take lots of risk on startups which don't have a university connection."

How spinouts are made

Universities in the UK have been allowed to commercialise their research since 1985, when the government ended the British Technology Group's monopoly on the ownership of intellectual property rights created by academics.

In 2014, the Research Excellence Framework (REF) that guides the distribution of research funding to universities, added a new assessment criteria for the "impact of research beyond academia," which prioritised investment in work that could benefit the wider economy.

Since then, the spinout system has produced some of the UK's brightest businesses, including ARM, a chip designer spun out of Cambridge University that Softbank bought for £24.3bn, and Oxford Nanopore, a gene-reading company created by academics from its namesake university that reached unicorn status last year.

Read next: Who are the UK's tech unicorns and how did they reach their valuations?

Oxford Nanopore was developed in Oxford University Innovation (OUI), which manages the commercialisation of technology developed by the university's academics.

"All they have to do is come up with an idea and then we can work with them," Gregg Bayes-Brown, the marketing and communications manager for OUI told Techworld.

OUI will then assess the idea and file patents where appropriate to protect the intellectual property, which may then be licensed to an existing company or used to create a new spinout. That process could take just a month to complete but it may last many years, particularly if multiple universities have contributed to the IP.

"There can be disagreements over equity, which can lengthen the process as well,"Bayes-Brown says. "All sorts of things can come up in the process of making a spinout company."

Benefits of forming a spinout

Spinouts benefit from the university's ecosystem of talent and resources from postdoctorate students to venture funds such as Oxford Sciences Innovation, which has a £600 million reserved exclusively for spinouts.

They can also help recruit high-level talent, such as Cyan Forensics CEO Ian Stevenson, who was first exposed to the company when it was a digital forensics research project at Edinburgh Napier University.

"My background is as a technologist and working in startups," Napier told Techworld. "I got involved with the university to help them look at commercialising the technology and ended up becoming the founding CEO of the spinout."

The spinout system is particularly useful for scientific research that can have a far longer development cycle than more commercially driven products. For Existencia CEO Andrew Hopkins, it gave him the ability to convert his passion for his bioinformatics research at the University of Dundee into an AI drug discovery company that could save lives.

"There's an incredible amount of intellectual freedom that one can use to develop one's work, and in many ways for myself, the pursuit of developing Exscientia is a continuation of our academic work ... I think one of the advantages is there's a certain amount of freedom and latitude inside UK universities to allow ideas to be developed," he said.

Read next: Exscientia CEO explains how AI is transforming drug discovery

Risks of the spinout system

Bayes-Brown admits that the spinout formula is not without its dangers.

"It is labour intensive," he said. "You are creating a company at the end of the day. It is a lot on top of the general academic day job to be able to do one of these."

This need to blend business and academic interests can inhibit the development of the company. The majority of academic founders feel significant tensions between their time commitments to university academic work and their spinout, and only a quarter of primary founders are fully committed to the spinout, according to a 2015 survey by the Enterprise Research Centre.

The spinout system has also been accused of giving universities too great a share of the profits.

Spinouts in the UK have less access to venture capital and startup advisors than those in Silicon Valley, making them more reliant on the support of universities, which command a greater share of the equity as a result – up to 50 percent plus IP royalties in the case of Oxford University, according to The Telegraph. By comparison, Stanford and MIT tend to only take a five to 10 percent cut, however, the volume of spinouts is far greater.

In the UK, there can also be a bias towards spinouts from the golden triangle of Cambridge, Oxford and Imperial College of London.

"Ironically, in the world of an incredible speed of communications, money is still very sticky; it tends to be focused towards localities," said Hopkins. "It's much harder, I would say, outside of Oxford, London and Cambridge, for companies to raise capital."

That geographical bias was a key reason why Exscientia moved its headquarters to Oxford, but Hopkins also believes that his company's origins in Dundee had long-term business benefits.

"In the harder environment where there was less capital available in somewhere like Dundee, the focus on deal-making and running a solid business has now turned out to be a very important part of the DNA of the company," he said. "And I think because we were stretched, we didn't go away and waste somebody else's capital on a dream."