Funding fears as UK university ‘spin-out’ investment tumbles
So-called ‘spin-out’ experts have sounded the alarm today after new figures showed funding for start-ups born in British universities has slumped over the past two years.
British spin-outs, which look to commercialise academic research from UK universities, have suffered their first consecutive period of decline through 2022 and 2023 after a decade-long investment boom, according to research from investment firm Parkwalk and analysts Beauhurst.
Total equity investment into spin-outs fell from £2.73bn in 2021 to £2.34bn, and £743m in the first half of 2023.
Despite the overall downturn, the proportion of foreign investment into UK spin-outs during 2022 and 2023 climbed to a new peak, with over 10 per cent of total funding into came from overseas investors.
The new figures cast a troubling light on the health of the UK spin-out ecosystem, however, as ministers look to put university-born start-ups at the heart of efforts to become a “science and tech superpower”.
Experts warned today that the position could be under threat without more action.
“Growing political support for unlocking for the full commercial potential of the UK’s science base, gives cause for optimism, but the job is not yet done,” said Moray Wright, CEO of Parkwalk, the most active spin-out investor in the UK.
“More must be done to encourage UK investors to back spinouts, such as through the Enterprise Investment Scheme, to ensure more founders can access the funds needed to grow in the UK.”
The drop-off has come amid a wider slowdown in the venture capital environment over the past 18 months as rising interest rates and surging inflation choke off the flow of cash.
To help boost the flow of cash into UK spin-outs, Parkwalk today called for an extension to the enterprise investment scheme (EIS), which offers investors a tax-efficient way to invest in start-ups, and more generous research and development tax credits to allow firms to invest in tech and development.
Ministers have so far failed to provide clarity on the end of the EIS scheme after delaying the wind down of the initiative until the end of 2025.
The government has, however, commissioned a review into spin-outs in a bid to foster a favourable environment for firms developed through academia.
Geraint Rees, vice-provost of research, innovation & global engagement at UCL, told City PM today that the pipeline of research was strong but efforts to boost the health of the ecosystem were needed.
“UK research-intensive universities like UCL have an incredibly strong pipeline in areas highlighted by the report. This includes specific strengths in life sciences and artificial intelligence, but also in complementary areas like the social sciences, creative and cultural industries,” Rees said.
“At UCL external investment in our spin-outs has reached £2.2bn over the last five-years, but deal flow is limited by the availability of pre-seed and scale-up capital. We welcome efforts to channel more UK investment to unlock these areas of huge potential.”