Spinning out

The number of university spin-out companies has declined in the last year despite the government’s recent injection of money into venture capital funds intended to prevent this collapse. Leila Sattary investigates university spin-outs and whether their kind will survive the economic downturn

Universities have stacks of intellectual property and good ideas locked up in the minds of academics. Although most academics are focused on their teaching and research, when a truly innovative idea forms in the mind of a business-savvy academic, great things can happen.

Spin-out companies exploit innovative technologies ranging from medical science breakthroughs to new ways to power vehicles. One of the first commercial spin-outs was Oxford Instruments who developed the world’s first superconducting magnet in 1959 leading to the development of the MRI. More recent university spin-outs include Light Blue Optics from Cambridge University, whose miniature holographic projection systems can turn any flat surface into a touchscreen and i20 Water from Southampton University, which has found a way to reduce the leakage in water distribution networks. Companies are often initially funded by their host institution before entering the big bad world where they must convince venture capitalists of their worth.

Many of these new companies were made possible by a strategic government investment in the late 1990s. The new Labour Government recognised that technology developed in universities could bring innovative new products to market. This led to the creation of the University Challenge Seed Fund which provided proof of concept funding to encourage university researchers to be more receptive to the commercial exploitation of their ideas. There is no doubt that this was sound investment from the government (£20m), the Wellcome Trust and the Gatsby Charitable Foundation (£20m) with universities themselves required to provide at least one quarter of the funds. This timely insertion of energy and liquidity brought many of the innovative new technology companies of the last decade in to being, allowing them to go on to win money from external investors. Spin-outs have made a significant impact on Britain by solving social problems and bringing new wealth and jobs.

However, when last year’s financial crisis brought the banks to their knees, venture capitalists became more prudent. The chance of gaining investment for a high risk venture was low. The time was ripe for the government to provide another injection of cash to universities to sustain growth in new British technologies and innovation. Lord Drayson, science minister said we are going to “innovate ourselves out of the recession.” However, the government solution was to pump £1b into venture capitalist funds, who have the choice of where they invest. With the aim of making money, venture capitalists are more likely to choose to invest in low risk mergers or management buy-outs than new high risk technology companies in a time of financial crisis.

The government claim that they are investing to help emerging technologies reach the market but perhaps this is just another fund to try and keep the financial sector in tact? Despite the cash injection to venture capitalists over 6 months ago, an increasing number of spin-outs are failing to secure investment or looking for foreign investors to keep afloat during the recession. Some recent spin-outs have been successful in gaining funding from abroad. This does bring inward investment and opens doors for international collaboration but means that more of our new companies will be owned by nations afar. Even with some success winning overseas investment, the number of new spin-outs is declining with the lack of focused government support. Lord Drayson, science minister, once an entrepreneur himself is the main champion of the new venture capital finance. Perhaps the £1bn fund was the correct use of resources but it’s yet to ensure the commercialisation of discoveries coming out of the research base. A fraction of the sum, directed towards new technology companies, could have made all the difference.