Universities in the UK and Europe have a start-up problem

UK universities updates

The writer is a general associate of Air Street Capital and co-author of the State of AI Report

Europe’s start-up scene has finally begun to emerge from the shadow of Silicon Valley. Companies that use scientific inventions in real-world industries such as artificial intelligence, quantum computing, and biotechnology are at the heart of this turnaround. Many of these companies are formed by entrepreneurial researchers at universities who form commercial spinouts aimed at some of the world’s biggest challenges, such as discovering new therapeutics.

Yet academic entrepreneurship is often discouraged in Europe and the UK; indeed, in many universities founders are considered “problem children”. Researchers who are trying to start a business find themselves stuck in bureaucracy instead of receiving institutional support. Negotiations with university technology transfer officers (or TTOs) over intellectual property rights can be one-way and opaque, and often adversarial.

To make matters worse, European or British institutions often demand a 25% equity share upon their founding. Some universities may even require 50% equity. Sir John Bell, regius professor of medicine at Oxford, has said that “too greedy” universities are “trying to skim as much as they can out of the system”.

Too much equity is a motivational and structural problem. The founders of Spinout become minority shareholders in their own businesses. This makes it difficult for them to attract the right talent and funding in a highly competitive market. Leading American TTOs, including Stanford University and MIT, know that entrepreneurship is a long-term game. Their equity share is rarely greater than 10%.

Institutions can also levy royalty income taxes. These rates are too high for Europe. Sometimes they exceed 5% of net sales. This increases spinouts’ drag coefficient. Spinouts could reinvest profits to accelerate their growth. University licensers, established in bygone eras, aren’t set up to be long-term partners to spinouts.

We need to completely overhaul the spinout process. Only four of the 116 European unicorns that have been venture capital-backed are university spinouts, according to my research: Oxford Nanopore, Exscientia and MindMaze. This seems counter to the EU’s quest for “digital sovereignty”. A more permissive spinout environment would attract the best entrepreneurs academics, who would in turn attract the brightest students. Tech sovereignty can be achieved through a recursive process of talent, research and teaching, grants, spinouts that are successful, and alumni donations.

As a researcher-turned-investor, I propose a threefold solution. First, we must implement a simple agreement to spinout: a globally competitive standardised deal offering TTOs a choice of either 1-5 per cent common equity, 1 per cent royalty on net sales, or 1 per cent of the exit value upon M&A or IPO. TTOs at universities must be responsible for maximising the number spinouts that are created under the agreement. They should also make a commitment to complete it within three months.

Third, governments must nudge universities into creating cohesive and supportive alumni ecosystems — a US-style alma mater — that feed future investment in the institutions through mentorship and donations. To strengthen academic institutions that are not adequately funded and to reduce their dependence on spin-offs, we should establish sovereign wealth funds.

We will only further ensnare the ecosystem in a negative downward spiral of short termism if our actions are not taken quickly. Europe and Britain after Brexit will have the best chance to achieve technological sovereignty and build a digital economy that is globally competitive by acting quickly.

Response to this article by a letter

Universities need investors to help bridge the gap in start-up funding / Professor Alice Gast, President of Imperial College London SW7, UK

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