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Universities in the UK and Europe have a start-up problem

The writer is a general partner of Air Street Capital and co-author of the State of AI Report

Europe’s start-up scene has finally begun to emerge from the shadow of Silicon Valley. Central to this turnaround are companies that bring scientific inventions to real-world industries, be it artificial intelligence, biotechnology or quantum computing. Many of these companies are formed by entrepreneurial researchers at universities who form commercial spinouts aimed at some of the world’s biggest challenges, such as discovering new therapeutics.

Yet academic entrepreneurship is often discouraged in Europe and the UK; indeed, in many universities founders are considered “problem children”. Instead of benefiting from institutional support, researchers attempting to start a company find themselves mired in bureaucracy. Negotiations over intellectual property rights with university technology transfer offices, or TTOs, can be one-way, opaque and often adversarial.

Making matters worse, European and British institutions often demand an overly aggressive equity share of 25 per cent upon founding, reaching up to 50 per cent at certain universities. Sir John Bell, regius professor of medicine at Oxford, has said that “too greedy” universities are “trying to skim as much as they can out of the system”.

Parting with too much equity from day one is a structural and motivational problem. Spinout founders become minority shareholders of their own businesses. This leaves them unable to attract the necessary talent and funding in a globally competitive market. Leading American TTOs, including those at MIT and Stanford University, understand that entrepreneurship is about the long game. Their share of equity rarely surpasses 10 per cent.

Institutions can also levy revenue royalties. These rates are too high in Europe, sometimes they are over 5 per cent of net sales, which increases the drag coefficient on spinouts that would otherwise reinvest gains to accelerate their growth. University licensers, established in bygone eras, aren’t set up to be long-term partners to spinouts.

We need a radical overhaul of the spinout system. Of 116 venture capital-backed European unicorns, only four according to my research are university spinouts: Collibra, Exscientia, MindMaze, and Oxford Nanopore. This seems counter to the EU’s quest for “digital sovereignty”. A more permissive spinout ecosystem would attract the best entrepreneurial academics, who in turn would attract the brightest students. A recursive cycle of talent, research, teaching, grants, successful spinouts and alumni donations is the path to achieve tech sovereignty.

As a researcher-turned-investor, I propose a threefold solution. First, we must implement a simple agreement to spinout: a globally competitive standardised deal offering TTOs a choice of either 1-5 per cent common equity, 1 per cent royalty on net sales, or 1 per cent of the exit value upon M&A or IPO. Second, universities must task their TTOs with maximising the number of spinouts created under the agreement with a commitment to complete the process within three months.

Third, governments must nudge universities into creating cohesive and supportive alumni ecosystems — a US-style alma mater — that feed future investment in the institutions through mentorship and donations. In the longer term, we should create sovereign wealth funds to help strengthen underfunded academic institutions and reduce their dependence on monetising spinouts.

If we do not act with urgency, we will further entrench our ecosystem in an unproductive downward spiral of short-termism. Acting expeditiously will give post-Brexit Britain and Europe the best chance of attaining technological sovereignty and building a globally-competitive digital economy.

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