Academic Deep Tech Investment Funds in the UK
Most Russell Group universities have or are establishing an associated early-stage investment fund
An article written by Sifted (paywalled, sorry) claims that in Europe, it is widely believed among investors that the next generation of unicorns will be led by academic founders. In support of this, 92% of Russell Group universities (analogous to the U15 in Canada or the Ivy League in the United States) now have affiliated investment funds. What’s more, while a handful of these have been around for longer, most appear to have been founded in the last 5 years, with some still actively fundraising their first tranche of funding.
This article provides an interesting point of convergence and support for several of my own close-related recent articles, which I link below:
The UK seems to be leading the charge in Europe, but they are far from alone. Recently reported numbers show that deep tech investment in the UK and in Europe generally is accelerating rapidly, showing triple digit year over year growth exceeding multiple categories of deep tech investment metrics. Given that most of the university funds funds are too new to represent a significant contribution to that report, the pace of growth of European deep tech investment shows no signs of slowing down.
The Russell Group funds vary widely in size, scope, and structure. While some are small and locally focused with just a few million GBP AUM, others have hundreds of millions of GBP in AUM and invest more widely. Some are housed within the university, while still others represent partnerships between universities and entirely external VC funds. All exist in service of the same goal, however: to get academic technologies out of the lab, bridging the valley of death in which capital is difficult to access from more traditional sources.
The UK spinout ecosystem is quite different from that of the United States, mainly in the way that universities capture value. Institutional equity stakes are much higher than what would be typical of an American or even Canadian university, which is the subject of an ongoing debate.
In service of advancing that debate, a 2022 report conducted by the UCI Evidence Policy Unit at Cambridge completed a detailed survey of UK universities with respect to tech transfer challenges. It is written by a university to assess university performance, so take it with a grain of salt, but the numbers are interesting. They found that university equity stakes resulting from academic tech transfer had a median value of 33%, which typically gets immediately diluted to ~20% via option pools for incoming CEOs. In contrast, North American university equity stakes tend to be distributed around 5%. The debate has been pushing equity numbers downward, with the recently released USIT guide recommending no more than 25% institutional equity stake in spinouts.
These double digit equity stakes are almost unheard of in North America, but equity alone does not tell the whole story. Unlike North American universities, which often have anti-dilution protection, UK equity stakes tend to be fully dilutable and the related licenses less focused on royalties and other rewards mechanisms. The difference is therefore smaller than it would appear at first glance, and though still significant, reflects a very different mindset with respect to value add to the commercialization process.
The report also notes that given the pace of change with respect to research commercialization currently underway in the UK, these elevated equity stakes do not necessarily represent the current reality:
“Overall, our evidence suggests significant changes in policies over the past decade, with many universities adopting lower equity positions than previously. A crucial implication of this is that we need to be cautious about relying on evidence and claims about university spinout equity approaches from more than approximately 5 years ago as they are likely to be out-of-date.”
I suspect (and hope) that the existence of these investment funds will continue to exert downward pressure on institutional founding equity stakes in spinouts, shifting the focus of ownership based on research toward ownership based on value provision during the commercialization phase, via direct investment.
I encourage reading the full Cambridge report, and will finish by drawing your attention to one of the points made in passing therein:
“A striking result emerging from our study is that far from being static and fixed over the long term, most universities have relatively recently reviewed their spinout-related policies and approaches or are about to do so. Moreover, many universities in our sample are reviewing their policies within 5-year timeframes (emphasis mine).”
The assumption of dropping equity rates is supported by a more recent report, as well.
This iterative and flexible approach to institutional policy development is absolutely critical to achieving impact, and can only occur if data is collected and long-term outcomes are carefully tracked. Canada needs an equivalent report to that of UCI to establish a clear baseline and starting point from which to measure the impact of emerging university investment funds and policy iteration with respect to our support for academic commercialization.