There’s a common opinion that Europe’s spinout funnel — and the process of commercialising research — is broken. But is that really the case?
On day two of the Sifted Summit, we brought together three experts to give their take: Sam Gyimah, venture partner at Lakestar and former UK minister for universities and innovation; Maija Itkonen, CEO and cofounder of Finnish spinout Onego Bio; and Nathan Benaich, general partner at Air Street Capital.
Here are the key takeaways:
The equity issue
According to a survey of 143 spinouts — across Europe, the UK and the US — by Air Street Capital, most founders are dissatisfied with the spinout process. And a large part of that is to do with the equity stake that universities take in the companies being spun out. On average they take 12.8% upon founding — and that figure’s dramatically skewed by the average of 19.8% in the UK, against 7.3% in mainland Europe.
As an investor that basically makes the company unfundable, said Benaich.
The sheer range of terms across Europe also makes it difficult for investors to consistently deploy cash into the companies coming out of universities — “there’s an immense dispersion of terms, and there’s no standard, no transparency,” Benaich added. Across Europe, the amount of equity taken ranges from 0% to 70%.
Some universities will also double up on unfavourable terms — known as double dipping — whereby they don’t just take equity in the business, but also ask for a percentage of future revenue or of future profit. That often means that by Series C many spinout founders have to pack in their idea, or step aside and bring in external leadership to take the business forward, said Gyimah.
Not all of Europe is set up like this though. In Sweden, for example, researchers own their IP, which makes the process of spinning out much easier. And when Onego Bio was being spun out of the VTT Technical Research Centre in Finland, the tech transfer office gave it favourable terms, Itkonen said, and she was able to focus on growing the business without the stress that comes with negotiating ownership.
What should be the purpose of academia?
There are several pain points holding back the commercialisation of research, academics and researchers say. According to Atomico’s State of European Tech report in 2021 they are:
- A lack of entrepreneurial mindset from universities
- A lack of university support
- A lack of funding
- A lack of risk-taking
Benaich argued that to solve the issues associated with spinning out, the purpose of IP commercialisation needs to change. The purpose of spinouts should be to get technologies out there into the world, so they can become products from which everyone benefits. “There needs to be neutral ground between founders and the universities, and less of the asset manager vibe that tech transfer offices create.”
On top of that, in the UK researchers are often incentivised to publish their research more than they are to create companies, and that’s represented in the data — only 0.03% of UK startups are spinouts. The whole incentivisation set-up needs to be looked at, said Gyimah.
The state of funding
It takes too long to go from idea to negotiating the creation of a spinout and funding.
But the problem isn't lack of capital, Benaich said, it's that capital doesn't go to spinouts because they are unattractive investments. This is down to two things: navigating the aforementioned ownership structure, and the fact that many spinouts focused on deep science don’t have the same timeline for returns as, say, a B2B SaaS company, and those don’t match the 10 to 12-year life cycle of many VC funds.
The funding is there though. Deeptech startups in Europe are set to raise more this year than they did in 2021, and there are several investment funds focused on financing spinouts. Northern Gritstone in the north of England, for example, and German VC Earlybird’s UNI-X fund.
The human side of spinouts
There's a lack of tech entrepreneurs with a proper understanding of deep science, Itkonen said. That means founding teams with deeply technical backgrounds struggle when it comes to the commercial side of scaling a business and attracting investment.
Academics who want to commercialise their research don’t always have the luxury to do so. Pre-tenured professors, for example, often can’t take years out to focus solely on a business.
Governments don’t understand equity enough to be the gatekeepers of spinout terms. So standardising these in the UK wouldn’t work, Gyimah said — there would be too much disagreement on what the standard should be.
Setting a maximum equity percentage could work, though the point was raised that subsequent governments could change this, curtailing progress every time a new government was elected.
The European Innovation Council (EIC) has hired an external fund manager to run its deeptech investment scheme after it hit a roadblock. This has the potential to help Europe’s spinout ecosystem, but it needs to iron out the problems that’s held it back. That includes a backlog of unprocessed applications, payment delays that have left startups on the brink of collapse and a lack of communication.
Benaich pointed out that the EU’s goal of digital sovereignty relies on a fully functioning spinout process, as many of the key technologies — advanced materials, biotech, quantum — are being worked on at the university level.