Analysis: UK's spin-offs reap £3 billion reward

October 25, 2002

A new survey compares the commercial performance of UK institutions with their north American counterparts. Caroline Davis reports

UK universities have a portfolio of spin-off companies worth almost £3 billion, according to a new survey that claims to be the most comprehensive summary of commercialisation activity in UK institutions.

It found that during 2001 universities created 175 new spin-off companies - almost a third of all spin-offs created in the past five years. On average, institutions made just under £350,000 in 2001 from equity stakes and earned just over £216,000 from licensing deals.

Meanwhile, an average £110,000 per university was spent on external fees to protect intellectual property.

David Catton, chair of the University Companies Association (Unico), which represents technology exploitation companies of UK universities and which carried out the survey, said: "We are slowly but surely inculcating an entrepreneurial culture in academe, but there is still a long way to go."

He pointed out that UK universities were engaged in tens of thousands of research projects. "Even a very modest increase in the identification of commercial opportunities in these projects could have a dramatic impact on the amount of spin-off activity in the UK," he said.

"It is possible to envisage at least a tripling of the headline spin-off company incorporation figure with little or no impact on the 'purity' of research, but there is also a need to ensure that the spin-offs created have the opportunities to realise their potential for wealth creation."

The first Annual Unico-Nubs Survey on University Commercialisation Activities was carried out by Unico and Nottingham University Business School (Nubs), with funding from the Economic and Social Research Council and financial consultants Grant Thornton.

Its aim was to provide annual benchmark data to monitor UK performance as well as to draw comparisons with the US and Canada, along the lines of the annual Association of University Technology Managers survey. This has been gathering data on North American commercialisation activity to 1991.

So far, there has been no definitive comparable survey giving the UK picture, although university technology transfer offices have received a stream of surveys from a range of commercial and public organisations.

Last December, Newcastle University and the Higher Education Funding Council for England produced the Higher Education Business Interaction Survey , which gave the first comprehensive summary of UK activities.

Science minister Lord Sainsbury used data from this to persuade the Treasury of the central role universities would play in the future knowledge economy.

Hefce is expected to reveal an updated version of the survey later this year.

The Unico-Nubs survey sent questionnaires to 122 institutions. Of these, 98 responded, comprising 85 per cent of the sector's £2 billion research spend in 2001. Only two universities with the top 20 research expenditure did not respond - Birmingham and Dundee. However, data from the survey were kept anonymous.

Commercialisation activity was found to be concentrated in a small number of top-performing institutions. While a quarter of institutions had created more than ten spin-offs during the past five years, the same proportion had created none. And while 81 per cent of respondents had dedicated staff and resources for commercialisation of intellectual property, on average each had five full-time staff, but one institution had 35 and 16 had less than one.

The survey asked questions about patent-related activities, intellectual property protection spend, licensing deals and spin-off creation.

It found that the sector filed 743 new patent applications but 19 institutions filed none and one institution filed 91.

A total of 6 patents were granted to just 30 institutions and more than half of the 69 responding institutions were granted none.

Some institutions earned over half their patent-related income from assigning the rights to another party.

The amount universities spent on protecting intellectual property varied from one that spent more than £1 million to 11 that spent nothing. More than two-thirds of universities spent less than £50,000 on protecting their intellectual property.

Universities pulled in more than £16 million in income from 483 licences. Only one in five institutions earned more than £250,000 from licence income. While five institutions had more than 30 licences bringing in money, almost half of the 72 respondents had none.

Unico and Nubs tried to discover how income from exploitation was shared between the inventor, the academic's department and the university. For income over £100,000, on average the inventor received 38 per cent, the department 28 per cent and the university 34 per cent.

Closer inspection, however, revealed a wide variance in actual figures: inventors received between 15 and 50 per cent of such income; the department received between zero and 60 per cent, and institutions received between zero and 75 per cent.

When it comes to counting spin-off companies, the report authors issue a warning. Lord Sainsbury's oft-quoted figures from the Hebis revealed that the UK created 199 spin-offs in 2000, at a cost of £8.6 million per company. In Canada, the cost per company was £13.9 million and in the US it was £53.1 million.

But the Unico-Nubs authors say: "It should be noted that the number of spin-offs created by an institution is no indication of the quality of the new ventures created and how many will go on to create employment and wealth, and become successfully established within their markets."

The report suggests considering the number of spin-offs that attract external equity finances as a better measure. These companies will have been screened by professional investors who are more attuned to spotting wealth generation potential.

Of the 554 companies created since 1996, almost two-thirds were formed using external funding such as University Challenge Funds, the Proof of Concept Fund in Scotland and the Wales Spinout Programme.

A quarter of all companies had used venture capital funding, and six institutions had more than 20 venture capital-backed spin-offs.

A surprising number of respondents - 53 out of 75 - had no spin-off funding from business angels. Funding from business angels was found to vary considerably between institutions.

The University Challenge Funds - a £45 million seedcorn fund collaboration between the government, the Wellcome Trust and the Gatsby Foundation - accounted for the funding of one in eight companies.

The survey notes, however, that although the funds had had significant impact on increasing the number of spin-offs, not all universities had access to a university challenge fund.

The other significant form of funding was from equity joint ventures with industry.

Of the 175 companies created, seven were spin-ins. These ventures are the exploitation of technologies developed outside the university but using the expertise of the university to develop them into products or services. Institutions generally have equity stakes in such companies.

The value of spin-off companies can be difficult to ascertain, especially when they are in their very early stages. The overall value of the portfolio held by universities was found to be heavily skewed to the top ten performers, with one in particular claiming a £1.35 billion portfolio.

More than a third of respondents reported a spin-off portfolio worth nothing. This may be due to many spin-offs being too new to warrant an accurate valuation.

The survey revealed that of 58 institutions, only nine realised any money from selling any of their equity stakes totalling £20 million. Three respondents made £3 million, £6 million and £9 million.

The latest AUTM data showed that the average research expenditure per institution was £1.5 million in the US, £45.5 million in Canada and £11.5 million in the UK. US invention disclosures cost twice as much in research expenditure than both the UK and Canada. But US licence income was four times that in the UK and twice that in Canada. Canadian universities performed best in terms of research expenditure per income-yielding license.

The Unico data showed the UK spent £8.9 million on research for each spin-off compared with £24.7 million in Canada and £88.8 million in the US.

The compilers cautioned against taking too much stock from these figures since not all spin-offs are created alike. Some attract more investment than others; some are ultimately more profitable than others.

The report notes four impediments to commercialisation:

* Amount of time university staff have available to help spin-off companies

* Availability of a clear process for spinning off

* Incentives and rewards to attract commercial management into spin-offs

* Availability of pre-seed financing for gaining proof of market.

However, it also found that the support of the academic entrepreneur in the creation of a spin-off was crucial.

UCL secures £8 million to develop pain-relief drugs
Molecular neuroscientist John Wood, at University College London, began looking for the genes switched on in response to pain in 1995. He filed a series of patents on potential drug targets, and was granted three families of patents.

UCL realised Professor Wood's work was important. It spent a six-figure sum protecting the intellectual property, but it was more than two years before it found backing to create a spin-off.

"At first, venture capitalists weren't very interested," Professor Wood said. "We had a brilliant idea but were wacky academics. The financiers had a hard time evaluating it."

But private equity company Apax Partners had identified pain relief as a potential market, having noted that very few breakthroughs had been made over the past few decades.

In early 2001, Apax came to UCL with a management team already in place that recognised the potential of the academics' ideas.

Together with the Wellcome Trust equity arm, Apax put in £8 million to the company Ionix Pharmaceuticals.

Professor Wood was happy to bow out when the management team came in. "Academics are not very good at interacting with business people. And we think that all exciting new drug targets come from doing pure research."

The college, the department, Professor Wood and his researchers (both postdoctoral and postgraduate) have equity stakes in Ionix. But in the short term, says Professor Wood, "no one is expecting to get rich quick".

He provides a one-day-a-week consultancy for Ionix and in a future inventions agreement, Ionix has first pick of any discoveries that emerge from his laboratory in the initial four years.

Although founded on the very early-stage discovery from Professor Wood, the company has already diversified to balance the risk. It has brought in several later-stage projects on drugs that have already been licensed, which it is redeveloping.

The management team is now looking to raise £20 million in second-round funding.

Enterprise in the arts sector
University enterprise directors are worried that the government's knowledge-transfer policy is focused on science and technology and is ignoring the economic contribution that could be made from the arts and humanities.

The Association of University Research and Industry Links (Auril) has announced that it will devote much of its next meeting to discussing enterprise in the creative arts.

Anne Craig, Auril council member and former chairperson, said that many institutions were contributing to regional regeneration, new media, tourism and heritage. But she said funding was coming from local authorities and the European Social Fund rather than from the Department of Trade and Industry or the higher education funding councils.

Ms Craig said: "Creative enterprises are wealth creators, but they won't pull in millions of pounds." She said that persuading policy-makers of the worth of such ventures was more difficult than for the sciences.

However, a fifth of the 50 companies spun off from Salford University, where Ms Craig is director of enterprise marketing, came from the arts.

The London Institute is hoping to create arts incubators along a "Parisian Left Bank" model by buying up disused buildings, leading to regeneration. The incubators would house graduates hoping to start careers and business ideas emerging from staff research.

Keith Bardon, pro-rector for commerce and enterprise at the London Institute, said government funds were aimed at science, making arts enterprises less likely to apply for money, and that most of the decision-makers were from the sciences.

"We shouldn't underestimate the work required to make the most of innovation in the creative arts and the need to support those involved. I would welcome greater support. Statistics show how important the creative industries are to UK plc."

* The British Academy will challenge assumptions that only science and technology underpin the knowledge economy with a review of the contribution made by the arts and social sciences.

It is likely to highlight such successes as the mobile phone licence auction, designed by the economic learning and social evolution centre at University College London, which netted more than £22 billion for the Treasury.

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