There is a desire for the UK to create a science and technology superpower that will drive long-term economic growth. One way to achieve this is to commercialise the intellectual property that universities develop through their research. Companies established to do this are termed ‘spin-outs’.

As the Government’s 2023 Independent Review of University Spin-out Companies states, generating income from research is not only important for economic growth and productivity, it is also crucial for improving health outcomes and solving some of the biggest challenges the world faces, such as climate change, infectious disease and food availability.

We have subdivided this important area of biotechnology spin-outs into two sections: Part 1 will consider the issues from a wide perspective including the impact of the recent Budget; Part 2 will address the practical issues involved in creating a university spin-out and can be considered as a guide going forward.

While start-up companies are high-risk ventures, they offer substantial economic and strategic gains if they are successful, eclipsing most other industrial activities in terms of return on investment.

Medical/biotechnology spin-outs in particular face a unique set of challenges in terms of research intensity, regulatory and marketing issues, and costs that extend the period before profitability can be established. This article will examine ways to mitigate these challenges and propose a way forward.

Beauhurst’s 2024 ‘Spotlight of Spin-outs’ painted a positive picture of the ecosystem, with an overall trend for an increase in the number of spin-outs formed each year; albeit that the total of equity investments reduced from £2.36bn in 2022 to £1.66bn in 2023. Since 2011, the most prolific universities, in terms of the number of spin-outs, have been Oxford, Cambridge and Imperial College, London.

More than half (52.3%) of spin-outs have come from the top ten institutions and 60% of these have been in the pharmaceutical, clinical diagnostics, medical devices, medical instrumentation and related sectors. Of the 1,800 spin-outs tracked by Beauhurst since 2011, 19% have ceased operations, with the average age to spin-out death being eight years. Can a new approach to funding extend the life of spin-outs?

These medical/biotechnology spin-outs are challenged by the length of time taken to produce viable products. This can be because of the need to arrange clinical trials, to meet regulatory requirements and to gain traction with public and private customers in a famously conservative industry. Also, the costs of product development and conducting phase 2 and 3 pharmaceutical trials for new drugs can be prohibitively expensive. This means that the spin-outs must be well-funded and the investors must be patient – with control of cash flow always being a major issue.

Spin-outs and start-ups in this sector are therefore relatively risky enterprises, with discount rates of up to 50% typically being applied to future cash flows when being valued, depending on how close they are to commercialising their technology. On the other hand, exit valuations for successful companies can be high, ranging from ten to 18 x EBITDA for pharmaceutical companies.

In principle, university spin-outs are receiving government support. In November 2023, the Government published the Independent Review of University Spin-out Companies, and a number of recommendations were made, including creating innovation-friendly university policies and guidance suitable for investors, founders and universities. The report also recommended improving the data available regarding spin-outs, improving the way university technology transfer offices (TTO) operate, creating funds for very early-stage projects and enhancing support and training for founders.

In October 2024, Chi Onwurah MP, recently elected to the House of Commons Science, Innovation and Technology Select Committee, commented that the Government should drive the commercialisation of innovation, and celebrate both innovators and entrepreneurs. This is particularly important for potential spin-outs in universities located outside the well-known established clusters. Here, TTOs may not exist and the spin-outs would have to forge their own relationships with the universities. To bring about this cultural transformation will require communication, transparency and leadership from the established universities to guide a process of reform, which could include training of pre- and postdoctoral students, and academic staff in the commercialisation process.

Currently the Royal Society’s Entrepreneur in Residence (RS EiR) programme provides this very successfully across the UK and, from our experience, has provided a significant resource and benefit to translational research in the UK.

Recently, Progressive Britain advocated the expansion of the ‘Golden Triangle’ comprising the universities of Oxford, Cambridge and London, and simplifying the grant system provided by Innovate UK. This is a theme further developed recently by Duncan Johnson, the CEO of Northern Gritstone, who advocated the creation of new cooperating clusters of local universities to create world-class science and attract talent. These academic-commercial clusters will take time to develop and become sustainable in providing a flywheel system creating spin-outs, as in the Golden Triangle. Notable current examples of these are to be found in the North, South West and Midlands of England, along with Wales, Scotland and Northern Ireland.

The corporate tax roadmap, published on Budget Day, states that the Government is looking to maintain current rates and retain the R&D Expenditure Credit (RDEC) and R&D intensive Small and Medium-Sized Companies (SME) schemes.

There will be a £2bn investment for health R&D to drive innovation and support the UK life sciences sector; £520m for the new Life Sciences Manufacturing Fund (£70m in 2025/26 initially), and there is to be a review of the barriers to the adoption of transformative technologies that could enhance innovation and productivity.

Importantly, the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) tax benefits for investors have been renewed for another ten years.

The Government has also committed to ‘mission-delivery boards’ to convert policy into growth projects. This will promote business and academic activities across the country with local, regional and national strategies being implemented to deliver economic impact.

George Freeman MP recently requested bringing about changes to pension regulations so that additional investment can be used to support both early-stage and scale-up growth funds in the spin-out market.

With all this in place, university spin-outs will still have to navigate their way through the minefield of university bureaucracy, that in many cases is ‘learning on the job’, for both parties.

Within the risks and complexity of the medical/biotechnology ecosystems, is there a preferred way for stakeholders to operate so that academic spin-outs are encouraged to start their journeys and increase their chances of success?

The most fundamental building block is education and training. Nationally, curriculums for schools and colleges of further education should include business and entrepreneurial courses. This will mean that future university graduates will have a knowledge and a vocabulary of business that they can build on during their research years.

The advent of ecosystem clusters is beginning to make a significant difference in different parts of the country. One key to accelerate success is to have a partner venture capital (VC) company uniquely associated with the ecosystem. This is well demonstrated by Northern Gritstone (with a £300m fund) being associated with the universities of Manchester, Leeds and Sheffield. Equally, SetSquared has partnered with six universities in the southwest, including the investment firm QantX in a £300m investment vehicle. There is also a proposed Golden Circle of universities in the southwest; however, this will need to be partnered with a well-funded VC company to ensure success. As demonstrated by SetSquared, the inclusion of an established incubator operation in the ecosystem here must be considered a strategic advantage for all concerned.

‘While start-up companies are high-risk ventures, they offer substantial economic and strategic gains if they are successful’

The elephant in the room is gaining access to funds and the extensive time requirements needed to pitch business proposals to multiple interested groups, such as angel networks, VCs, private equity (PE) firms, family offices and others. The time element is important because it effectively takes the academics away from their research, which adds risk to the venture.

The UK is awash with business angel and VC/PE companies; however, convincing individuals and organisations to part with their money and invest is fraught with complexity and difficulty. A recent survey of such investments by the Harvard Business Review showed that only 1% of investment pitches are successful in attracting funds.  There must be a more efficient way of navigating this journey for spin-outs. Is there a more targeted approach that investors could take to make the process more efficient for all parties?

While there is a plethora of great research being conducted in the UK, the appetite for risk in investing in pre-revenue spin-outs is not good. Perhaps investment companies and funds need to take a broader strategic approach and invest smaller amounts on a progressive basis into multiple spin-outs and utilise the tax-efficient SEIS and EIS systems to de-risk their exposure over time. The advantage of this would be to stimulate and expand the spin-out market while enjoying initially low company valuations. This is particularly important when follow-on investments are made. Even if only one in ten companies develops to exit, the risks/rewards for the fund may outweigh that of investing larger amounts in more established companies with lower growth potentials that may well fail anyway.

The missing links for a number of universities are ‘practical connectivity’ and efficient access to finance. As described earlier, some universities have mastered this process very effectively and many institutions can learn from their successes. Further cluster developments being supported by investors will enable this to happen, with universities and academics all working towards the same goal, ie, improving translational research to drive the UK economy.

Charitable funding organisations such as the British Heart Foundation (BHF) have a very important role to play here. It is often their initial funding that triggers the opportunity to validate and commercialise research. At a recent BHF Translational Research meeting in London, Professor Bryan Williams, Chief Scientific and Medical Officer, outlined the BHF’s aims to be more integrated with external investment funds and to use the collaboration to improve transitional research from the initial funding application to commercialisation.

Together with this interconnectivity, there has to be a practical strategy in place of advising and supporting ventures to bring them to the point of accessing investment.  The solution may be to create long-term investment funds, consistent with SEIS and EIS programmes, that can back more projects specifically in this sector and deliver a return on investment over a longer ten-to-15-year period, rather than the traditional five-year period for VC companies.

The overall impact of practically interconnecting university research, sources of funding and external influences should create a dynamic flywheel process for creating more sustainable spin-outs in the future, but this will take time.

Xantho Ventures is adopting such a strategy with its core university and charitable research connections and is in the process of setting up a £50m investment fund. This will help to promote the creation of spin-outs and other new companies in the medical/biotechnology sector to reduce investment risk and accelerate economic growth both regionally and nationally in the UK.