University spinouts: from ideas to commercial success

Between the week just gone and the next, nearly half a million students will start university. 

One of them might end up starting a multi-billion-pound company. 

It’s not a crazy claim. The UK is an ideas factory. And it’s slowly but surely getting better at turning great ideas into commercial successes. 

ARM, the Cambridge University spinout that makes smartphone chips, was acquired by Japan’s Softbank in July 2016 for £24 billion. ARM is not an exception. Cambridge University has spun out 15 companies valued at more than $1 billion. Two, including ARM, are now worth more than $10 billion. 

Earlier this year, University of Bristol spinout Ziylo was acquired by Novo Nordisk, one of the world's biggest makers of diabetes drugs, for up to $800 million. Evox Therapeutics, a spinout of Oxford University has recently received funding from GV, the venture capital arm of Google. It was founded two years ago and is now valued at around £85 million.

Limited offer until 16 October – exclusive for Wealth Club investors

Save 0.5% on the initial charge when you invest in university spinouts through the Mercia EIS Fund

What is a university spinout?

A university spinout is a company formed to commercially exploit intellectual property developed at a university. 

What makes spin outs attractive to investors? If properly commercialised, intellectual property can be used on a global scale and potentially help build large companies which can either continue to grow or be bought by larger players at high multiples. 

Some of these companies have the potential to produce exceptional returns, but many will fail and the risks are much greater than with large or long-established companies. As with any investment, risk and reward go hand in hand.

That said, historically, university spinouts have fared well. 

According to research, one in ten UK university spinout companies which received private investment between 2011 and 2015 either died or ceased trading. This is a comparatively high survival rate. If you look at all start-up companies, fewer than one in two survive over a five-year period. 

This can be partly explained with the strict selection process prior to being spun out. 

Most leading universities now have something called a Tech Transfer Office, or TTO, (following in the steps of US universities, which have been historically much more successful than the UK at spinning out companies). 

The TTO’s job is to identify research projects that have the potential to be commercialised and to get them ready. This is a broad remit, involving anything from making sure the technology works and the management team is up to scratch – a university professor might be wonderful at the science but not that a good CEO – to applying for patents to protect the intellectual property. 

Only once all this is done is a company spun out. What is important to note is this selection process is ruthless: very few companies get spun out. For instance, there might be 1,500 to 2,000 research projects going on at any one time at Oxford University. Yet, in the period from 2011 to 2017 only 636 companies spun out, an average of 106 a year.  

How could private investors benefit? 

An option experienced investors could consider is to invest in an EIS portfolio such as the one run by Mercia. 

Mercia specialises in university spinouts and start ups from industry.  It is one of the most active investors in the sector. It has partnerships with 19 regional universities, particularly in the North and the Midlands.

The EIS fund gives exposure to around 15 companies which have already proven in principle the commercial value of their idea or technology and need funding to progress to the next stage: developing and commercialising the product or service. Alongside university spinouts, the Mercia EIS fund also invests in other IP-rich companies.

EIS tax relief can help mitigate the impact of any failures. You could receive up to 30% income tax relief, capital gains deferral, inheritance tax relief and tax-free growth. If the investments don’t go to plan, you could also benefit from loss relief, which could limit your effective loss to as little as 38.5p for every £1 you invest. Remember, tax rules change and the value of tax benefits depends on circumstances.

Limited offer until 16 October – exclusive for Wealth Club investors

Save 0.5% on the initial charge when you invest in university spinouts through the Mercia EIS Fund

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