Spin out companies within UK HE

The terms ‘spin out’ company and ‘subsidiary’ company are often used interchangeably by lay individuals. They are however different. The subsidiary company is one which the parent company wholly owns (100%) or partially owns 50.1% – 99%. A ‘spin out’ or ‘spin off’ company is created as an independent company when a parent company believes that a new independent entity will be worth more or operate more efficiently than as part of the parent company. A ‘spin off’ will have its own management structure and name but may receive financial and technical support from its parent company. This approach to managing the development of a business is common within commercial environments and is often used within Higher Education for similar reasons.

Spin outs in the HE sector

If a portion of a business is beginning to move in a different direction to the parent company or if, in order to thrive and grow it requires different strategic priorities, the ‘spin out’ option becomes a constructive way forward. Imperial College defines a ‘spin out’ company as “a private company created by one or more academics or research staff with the aim of commercialising research carried out at Imperial.”

Given the educational and charitable nature of HEIs, in conjunction with an eye on the reputational consequences of ‘spin out’ companies focusing on profit, some universities have taken steps to influence the conduct of such companies and build in exit strategies. An example of this is the University of Birmingham which, with its “protocol for the governance of university wholly owned subsidiary companies and companies where the university retains an interest” states: –

“• That within the first year following creation the Board of the spin-out Company will normally have at least one independent director with knowledge and experience of the business activity (i.e. for this purpose an independent Director is one who is not an employee of the University or their spouse/partner).

• That the Company will have independent external auditors, appointed through a transparent and fair process.

• That the Company will provide an annual report on activity to Alta Innovations Limited and the University Executive Board or Strategic Planning and Resources Committee

• That, in the event the Company decides to work with organisation which may conflict with the University’s ethical policies or reputation, there is a right for the University to require the other shareholders to acquire its shares for a fair value within the Articles of Association of the Company.”

Some examples

YASA Motors ‘spun out’ from Oxford University’s Engineering Department in 2009. The company produced an innovative motor which brought both high power and high torque density to electric motors. They developed axial flux traction motors that the automotive industry (electric vehicles and heavy electric vehicles) used as well as other industrial applications. Their motors broke speed records, both on water (2018) and in the air (2021). The company was bought by Mercedes-Benz in 2021 and is now a wholly owned subsidiary of that company.

A recent ‘spin out’ company is NavLive which emerged from Oxford Universities Robotics Institute in 2022. It commercialised advanced 3D mapping technology. The technology can monitor on site construction work real-time so that intended changes can be inferred and provide data to facilitate on site decision making. This enables more efficient work on building projects. This year the company won an £800k grant from Innovate UK which is the UK Government’s flagship grant programme.

An example from the University of Bristol which was founded in 2003 is called KWS Biotest. This ‘spin out’ undertakes contract research for biotechnology and pharmaceutical companies and was sold in 2018 to Charles River Laboratories.

An example of a ‘spin out’ company from the Social Sciences and Humanities paradigm is the University of Bath’s: “Bath Social and Developmental Research Limited”. The company was spun out in late 2015 and provides a research service which analyses and “presents feedback from often marginalised stakeholders about drivers for change as they see them, including the impact of specific activities.” The approach does not simply ask people ‘what’ they think but explores ‘why’ and reduces ‘confirmation bias’.

Often universities approach ‘spin out’ companies strategically. For example the Universities of Sheffield, Leeds and Manchester jointly created ‘Northern Gritstone Limited’. The purpose is to invest in early stage science and innovation businesses, to date in excess of £300m has been raised for this purpose.

The significance of ‘spin outs’ within HE

It is testimony to the importance of university ‘spin out’ companies that the Department of Science, Innovation and Technology and HM Treasury commissioned an “independent review of university spin out companies” which was published 22^nd November 2023. This report stated that ‘spin offs’ had the potential for “a world leading innovation ecosystem that draws from all academic institutions and disciplines, and is more ambitious than a replica of Silicon Valley”. The report offered eleven recommendations which are abridged below.

The abridged recommendations of the review are:

Recommendation 1: Accelerate towards innovation-friendly university policies that all parties, including investors, should adhere to where they are underpinned by guidance co-developed between investors, founders, and universities.

Recommendation 2: More data and transparency on spin-outs through a national register of spin-outs, and universities publishing more information about their typical deal terms.

Recommendation 3: HEIF should be used to reduce the need for universities to cover the costs of technology transfer offices (TTOs) from spin-out income. Given that HEIF equivalents are lower in the devolved administrations, the devolved governments may want to consider the findings of this review and provide additional support for their universities.

Recommendation 4: Create shared TTOs to help build scale and critical mass in the spin-out space for smaller research universities. These could be operated through collaboration with established university TTOs and could be implemented at a regional or sector-wide level. We note that the latter may be particularly of interest to spin-outs from the social sciences, humanities, and the arts.

Recommendation 5: Government should increase funding for proof-of-concept funds to develop confidence in the concept prior to spinning-out. These should integrate with the timing and offering of commercialisation support and venture-building programmes. Investors should lend their expertise to assessing funding bids for proof-of-concept and translational funds.

Recommendation 6: In developing the ‘engagement & impact’ and ‘people & culture’ elements of REF 2028, the four Higher Education Funding Bodies should ensure that the guidance and criteria strongly emphasise the importance of research commercialisation, spin-outs, and social ventures as a form of research impact. We encourage spin-outs to assist universities in drafting impact studies for REF.

Recommendation 7: Founders need access to support from individuals and organisations with experience of operating successful high-tech start-ups, regardless of the region founders are based in or sector they operate in. The existing landscape of support services needs both consolidation and targeted expansion to ensure that founders have access to the necessary support.

Recommendation 8: UK Research and Innovation (UKRI) should ensure that all PhD students they fund have a voluntary option of attending high-quality entrepreneurship training and increase the opportunities for them to undertake internships in local spinouts, venture capital firms or TTOs.

Recommendation 9: Recognising the important role that university-affiliated funds have played in helping spin-outs from some regions access finance, universities considering working with new affiliated investment funds should continue to ensure they are still able to attract a wider set of investors and encourage competition when agreeing such deals.

Recommendation 10: We welcome ongoing reforms to support scale-up capital, such as changes to pensions regulation and encourage the government to accelerate these efforts. Government should continue its reforms to ensure that UK capital markets are able to provide the financing to incentivise companies to stay in the UK.

Recommendation 11: Government should improve the provision of funds to enable movement or porosity between academia and industry, including through: – Funds that ‘buy out’ academic time to focus on commercial partnerships and potential ventures. Or adapting funds for industry collaboration to be more accessible to spinout founders. – An ‘academic returner’ fellowship for researchers wishing to return to academia from the private sector.

This report has been welcomed and its recommendations accepted by a number of universities. A strategic future is conceived for ‘spin out’ companies within the sector. The report is positive, optimistic and confident. The recommendations are clear, constructive and practical. If followed the benefits could impact HEI income streams, the economy and those living within it.