UK punches above its weight in producing startups and spin-outs

UKRI Research England has today published an independent report by Tony Hickson, Chief Business Officer at Cancer Research UK, following his deep dive review of relationships between universities and investors...

The UK research and innovation sector has much to celebrate. It has the leading startup ecosystem in Europe and is second only to the US in the value generated from university spin-outs.

The sector embodies the UK’s ability to advance knowledge, improve lives throughout the country and to drive growth in a myriad of sectors. To fully utilise the UK’s research and innovation as engines for growth, I have identified 20 recommendations for universities, policymakers, public funders and investors.

Access to finance

Despite a sophisticated investor landscape, issues remain such as a shortage in funding at pre-seed and scale up stages, and disparities in access to investor hubs especially outside the Golden Triangle of universities. The report suggests that a more targeted approach of allocating capital to pipeline gaps and key sectors – such as fusion, quantum and creative industries – could support spin-outs in these areas.

The report acknowledges that initiatives made possible by public investment from UKRI are delivering high returns, such as Research England’s Higher Education Innovation Fund.

It calls for system-wide collaboration across universities, investors, funders and policymakers. Specific interventions recommended within the report include:

▪ Significantly boost pre-incorporation and pre-seed funding, including UKRI expanding funding for proof-of-concept to £100 million annually. Funding should be available in a hybrid model including open competition.

▪ A contiguous funding pathway that integrates council awards with Innovate UK funding and others such as British Business Bank would improve visibility for founders.

▪ The Government should accelerate pension reform to utilise capital from pension funds.

▪ Expand specialist DeepTech capital access, with UKRI mapping the gaps in seed, venture and scale up funding across regions and in the eight priority sectors identified in the modern Industrial Strategy.

University-investor relationships

The report describes a “cultural mismatch” between universities and investors. It highlights the strength of universities in managing a complex portfolio of very early stage ideas required for DeepTech – and as such universities tend to spread proof-of-concept grants across a wide range of early-stage projects – whereas investors are more likely to prefer more developed ideas, investing larger amounts of funding on fewer, high-potential ventures.

The misalignment of expectations appears to be a common cause of breakdown in university-investor relations. More specifically, the recommendations include the following to improve university-investor relationships:-

▪ UKRI to adopt a strategic approach to embed entrepreneurship within academic career pathways and curricula, and universities to expand access to entrepreneurship education and combining business skills with hands on experience for PhD students and researchers in start-ups.

▪ Improve institutional support and infrastructure with universities and investors building internal venture teams and seed funds.

Addressing barriers to formation

The report raises concern that too many spin-outs form too early, lack investment readiness or are unlikely to secure funding. Although maturation of deep-tech requires longer time-scales - taking on average 11 months to form a spin-out - this could be sped up further. It is recommended that a number of actions be taken to streamline and better support formation, including -

▪ UKRI to establish a national task force to speed up spin-out formation and reduce time from investor interest to deal completion.

▪ Strengthen early investor engagement and interfaces with universities, embedding more commercial expertise and involve investors earlier in university decision-making.

The UK spinout ecosystem is thriving but there is room for improvement. There is no shortage of good ideas coming from UK universities across the country, and their relationships with investors are improving. Cancer Research Horizons looks forward to partnering further with universities, investors, government and others to make the recommendations in this report a reality and bring breakthroughs to patients sooner.

Whole system approach needed

I am clear that a whole system approach is needed; however, there is no silver bullet and a suite of action is required. Some contributors offered interesting suggestions that may be considered in future:-

▪ UKRI should develop a 10-year vision for developing spin-outs, incentivising behaviour change, defining success through clear outcomes, timelines and measures.

▪ Contributors to the review suggested wider reforms, such as supporting talent to relocate to the UK through immigration reform, regulatory reform to maintain international competitiveness, and capital markets reform.

In response to the report, UKRI is committed to developing a vision structured around seven key themes:-

▪ Explore expansion of proof-of-concept and pre-seed funding.

▪ Work with the British Business Bank, the National Wealth Fund and institutional investors to unlock new flows of pension capital.

▪ Support universities to integrate entrepreneurship into their teaching and staff development.

▪ Promote harmonised intellectual property and equity frameworks and encourage clear, published policies.

▪ Back shared services and sector-specific accelerators to build investor-readiness.

▪ Align interventions with regional strengths: innovation is everywhere, and opportunity must be too.

▪ Work with partnerships to expand specialist training in DeepTech for investors and bring international best practice.