University spin-outs on the up

Over 310 new businesses have been spun out from 37 UK universities since July 1998, a three-fold increase compared with previous spin-out activity from these universities, according to figures provided by corporate finance house, FirstStage Capital.

The figures demonstrate the success of ventures such as the University Challenge Seed Funds set up in March 1999, which are designed to translate commercially viable university research projects into spin out companies. In its first year, the University Challenge Competition created 15 seed funds allowing 37 institutions (31 universities and seven institutes) access to investment capital. The seed funds established from the first competition have been between GBP1 million and GBP5 million with the ability to make single investments to a maximum of GBP250,000 per investment.

So far, the funds have approved 127 projects for funding and committed GBP8.3 million of investment. A total of 44 new businesses have been created, 13 new patent applications and GBP4.8 million of investment was attracted from third parties.

The University Challenge Fund Scheme is a collaboration between the UK Government (contributing GBP25 million), the Wellcome Trust (contributing GBP18 million) and the Gatsby Charitable Foundation (contributing GBP2 million). The total funding available was GBP45 million. In his Budget statement earlier this year, UK Chancellor Gordon Brown, following the large number of good quality applications to the Fund, increased Government’s contribution by GBP15 million, with GBP5 million for the first round and GBP10 million for a second round. The initiative is now entering the second round of the competition.

Jason Purcell, chief executive officer of FirstStage Capital, says the success of these spinouts is extremely encouraging for budding entrepreneurs. At a conference on technology transfer from UK universities he cited companies such as Virata, Oxford Glycosciences, Autonomy and ARM as role models. He added that in a knowledge-driven economy, defensible intellectual property is a core competitive advantage.

For university start-ups to benefit from this funding, speakers at the conference highlighted the need for a new mindset from VCs. These start-ups often have no business plan, a very sketchy revenue model and no clear working product. Investors therefore need to adopt a very fluid, collaborative response.

Iain Wilcock of VC firm Quester, who spoke at the conference, said: “Venture capitalists can’t just play the usual role of gatekeeper who says “No” if an entrepreneur doesn’t make the grade. They need some vision and the willingness to enter into a dialogue.”