University tech spinouts: 'Oxford is the worst university in the world for commercialisation'

Oxford University
Oxford University aims to take a 50pc equity stake in any spinout, though has said it would negotiate down

Look around the low-hanging copper lights, the exposed concrete pillars and the retro sofas, and you’d never guess medical software business Deontics emerged from the dusty cloisters and expansive labs of Oxford University.

The academic work behind the venture began more than 25 years ago, but in the space of a couple of years, that research has been transformed into a vibrant, buzzing start-up. 

“It is stressful at times but it’s definitely an exciting thing to do,” said Guy Woods-Gush, who heads up the Deontics team. “If you have a world- leading technology and you can see how it fits in, it has potentially massive prospects, and then it’s very exciting as you start to go down the road. But you have to build it and it’s a big job.”

Big job is an understatement, but it’s easy to see the attraction. Intellectual property commercialisation funds in the UK stand at £4bn in value and the Government has invested £5.2bn into university incubators. It’s little surprise the UK is home to around 1,000 firms set up and run by academics.

But while professors and researchers create the companies, the ownership of them is another matter entirely, and one that has sprouted growing resentment across the academic community. Sitting at the heart of the storm is Oxford. “As far as I can tell, Oxford is the worst university in the world for commercialisation,” one professor told The Sunday Telegraph. 

On the face of it, innovation is thriving within UK universities. In the five-year period to 2011, Oxford University produced 21 spinouts, rising to 41 in the five years to 2016, while Cambridge University’s spinouts grew from 13 to 33.

And there are, of course, the big success stories. ARM Holdings, the microchip designer bought by Softbank in a £24bn deal, was led by Cambridge alumni, and NaturalMotion, a software firm whose technology is included in video games including Dawn of the Titans, was formed out of an Oxford University Zoology PhD student’s research.

However, spinning out a company from a university is not a simple process. There are the issues of intellectual property (IP) rights, equity stakes, technology transfer offices and, on top of all that, the vastly different policies across universities. “They’re all over the place,” said Hermann Hauser, the co-founder of venture capital firm Amadeus Capital Partners. “Sometimes the technology transfer offices or TTOs [the university bodies that help commercialise professors’ IP] are taking egregious percentages in start-ups. There are some cases where they own 60pc of the start-up for the very little they give them.”

Dawn of the Titans
One of the biggest spinout success stories is Natural Motion, who developed the game Dawn of the Titans

Cambridge, for example, does not automatically take an equity stake in a spinout, although it often does invest and gain a shareholding that way, and will take a portion of the revenue generated by the IP used by the firm. Academics can then choose to commercialise their business through the university’s TTO or go it alone. 

Imperial, meanwhile, has two streams. Founders can choose to take a 95pc stake in their spinout, giving the university 5pc, and establish the business themselves, or take a 50-50 split and receive more support. Half of Imperial’s stake is passed on to its commercialisation partner, Imperial Innovations, with whom the academic needs to work to form the business, and the university also takes back some IP revenue. However, it is Oxford University’s policy that has been the subject of most criticism, especially when held up against US university policies where they take, by and large, between a 5pc and 10pc stake.

At Oxford, as well as IP royalties, the university aims to take a 50pc equity stake in any spinout, although the university says it does negotiate down, and then will hand half of that stake to Oxford Sciences Innovation (OSI). This is not Oxford’s TTO, which itself is called Oxford University Innovation, but a university venture fund whose model was based on IP Group. In 2000, IP Group agreed a then novel deal with Oxford University, by which it would funnel investment into building a new chemistry department in exchange for granting those investors equity stakes in the firms coming out of the chemistry department. Formed in 2013, OSI does not just apply to chemistry spinouts but companies created across technology and science departments. Key backers include Google Ventures, Lansdowne Partners and Woodford, and last December it raised a further £230m from Asian investors to take its total fund to £580m.

“It’s a double whammy that Oxford suffers from,” said Hauser. “One is this monopoly that the university asks for, and it makes quite unreasonable requests for the IP, but then they have done this deal with OSI where they basically pledged all the IP to a single fund, preventing competition in spinouts, which is always bad.”

According to a letter seen by The Sunday Telegraph and sent to professors interested in pursuing a start-up company, Oxford University says “it is often difficult to compare apples with apples, as for universities that appear to have materially different policies on founding equity there may be corresponding significant differences in other relevant practices”.

This, in part, is true. Under Imperial’s two-stream policy, for example, professors who opt to hold 95pc to start with are faced with a legal structure to ensure the university’s 5pc is a non-dilutable shareholding. Under its 50-50 policy, the stake is dilutable.

“The devil is in the detail and I’m afraid a lot of people try to simplify it too much,” said Rupert Osborn, chief executive of asset management business IP Pragmatics.

“Within the UK and even within the US there are huge ranges in how those universities deal with spinouts. Do they roll the IP in [giving the IP to the spinout in return for a stake], how much resource do they give to the company, is their stake diluted?”

To justify a larger slice of the equity, Oxford offers the example of Carnegie Mellon University in the US, which takes a 5-6pc founding stake, to which anti-dilution provisions apply until the spinout reaches $2m in investment. Oxford’s stake, meanwhile, is dilutable. Yet, even so, according to one of the university’s professors, who wished to remain anonymous, the numbers do not add up.

“You can sit down and do the numbers, it’s very simple arithmetic and you can figure out what it’s equivalent to,” said the professor.

“This was quite shocking to me because the policy is very unreasonable. They’re trying to hoodwink you with these arguments that are very clearly wrong. We’re all Oxford academics, we know how to do arithmetic, it’s kind of insulting they think we won’t see through that.

“In most cases it’s some sleepy academic who has no business savvy at all but wants to dip their toes into this … I think Oxford University Innovation in particular really preys on Oxford academics. They make it sound reasonable and normal to take a huge equity stake and most academics don’t know any better.” A researcher said the university tended to have a certain size of business it wanted to set up.

“If you have IP but don’t want to do it in a way that necessarily fits the mould they’re working in then it can become problematic,” they said. “If you’re a tech transfer office and want to create million dollar companies and you’ve got someone bucking the trend who wants to do a small company and make a bit of money at the weekend, it’s not very well supported by their model.”

Oxford University argues it takes the larger stake because it provides “the setting for the development of the technology and the spinout”, as well as permissions to stay involved in the business alongside academic work and the benefit of using the Oxford name.

A spokesman for the university said: “Oxford is the most successful University in the UK, having created more research spinouts than anyone else. The equity split is a fair acknowledgment of the academic’s contribution, through research ideas, and the university’s contribution, through the public funding, facilities, buildings and equipment that make the research possible.” This has not convinced some. Nando de Freitas, a former Oxford University professor who co-founded Dark Blue Labs, now part of Google’s artificial intelligence company DeepMind, accused the university on Twitter of “destroying UK innovation”. 

“My hope is that Oxford, Imperial and all other UK universities overcharging/destroying start-ups realise they have to improve or face costs,” he said. “To be clear, I love Oxford CS [Computer Science], its faculty and students. They (and the UK) deserve the opportunity to create competitive start-ups.”

Even if start-ups can navigate the treacherous waters of TTO, they face a further challenge. Figures show that too few of the businesses coming out of universities are competitive, despite the UK’s world-class research.

In Enterprise Research Centre’s most recent data set, around a third of UK university spinout companies were not generating revenue, and the numbers of businesses surviving three years after being spun out has not improved since 2009-10. One reason may be the lack of patient capital, or long-term finance, in the UK.

Sir John Bell, the regius professor of medicine at Oxford University who led the Government’s Life Sciences Industrial Strategy, said UK venture capital firms “don’t have deep pools of risk capital, so they can’t invest over a long time-frame and, in life sciences, if you don’t invest over 10 years, you’ll never grow a real company”.  This very topic was the subject of a government consultation, Financing Growth in Innovative Firms, which considered potential policy options to plug the gap in patient capital in the UK. These included offering support for new funds to list, such as tax proposals and removing barriers for pension funds.

Philip Hammond may well respond with recommendations in his Budget. “The guidance that goes to pension funds from the FCA and others is still deeply conservative and pretty unhelpful,” Sir John said. 

“Given the fact the City of London has trillions of pension money, you don’t have to free up very much of that to make it very attractive to produce a much more well-financed risk capital environment, but also to be better for the pension funds.”

While the missing patient capital in the UK is clearly an issue, others are firm universities could be doing more to be business-friendly. Within the next six months, a best practice paper is expected to be published on behalf of The Academy of Medical Sciences, Royal Academy of Engineering, Royal Society, and the Wellcome Trust. 

The bodies behind it are studying the American model, by which universities take an undiluted 5pc stake until a company receives more than $2m of investment. The pressure on UK universities to stop acting as “gatekeepers” and instead provide a more supportive, speedy approach to generating companies should spur more innovation in the UK. 

However, for those whose spinout companies were set up under the old models, it might be too little too late.

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