Some of the UK's leading universities have had funding bids rejected by the Engineering and Physical Sciences Research Council under a £55 million knowledge transfer programme.
Times Higher Education understands that Imperial College London, the University of Oxford and the University of Edinburgh submitted bids for cash from the EPSRC's Knowledge Transfer Accounts (KTA) programme, but they were overlooked because judges felt they were not innovative enough.
This is despite the fact that the biggest research-intensive universities receive most EPSRC funding, and the council established the KTA programme to ensure that knowledge generated by its support helped the wider economy.
The EPSRC said it had judged bids on their potential to produce a "step change" in activity.
The decision is a blow to a campaign, led by Imperial and backed by Oxford and Edinburgh, for £1 billion of government funding to support university spin-off firms.
Concerns that the knowledge-transfer allocations would reward only Russell Group universities have proved unfounded.
When the programme was announced last year, Trevor McMillan, pro vice-chancellor for research at the University of Lancaster, said its emphasis on volume looked set to favour the biggest research-intensive institutions.
Paul Marshall, executive director of the 1994 Group of medium-sized research-led universities, welcomed the allocations. He said they "rightly reward ... members' internationally renowned research excellence and success in (engaging) with industry".
Imperial, Edinburgh, Oxford and the University of Cambridge are behind the campaign to establish a £1 billion pot to fund spin-off companies created by universities in partnership with industry.
Sir Roy Anderson, rector of Imperial, led the call for the additional cash last week.
Sir Roy was unavailable for comment in light of the EPSRC decision, but Sir Peter Knight, senior principal at Imperial, reiterated the need for the £1 billion funding pot.
"Over the past decade, the UK's leading universities have spun (off) companies at a higher rate per dollar of government funding than our counterparts in the US," he said.
He added that more spin-off firms survived in the short term here than across the Atlantic.
"Where we are doing less well is in the medium and long-term survival of spin-offs, and that is due for the most part to a lack of venture capital funding. Imperial believes a national innovation fund would address this problem and benefit the UK by helping to create a sustainable economy."