Jonathan Harris: Spinout numbers fall as ‘entrepreneurialism’ rises

Over the past ten years, the number of companies formed as spinouts from universities across the UK has been in decline, but the future is bright for Scotland.

Edinburgh university is just one of the many Scottish institutions that support spinouts. Photographer: Ian Georgeson

The official definitions of spinouts (based on university-owned intellectual property) and start-ups are now blurring, as universities recognise their role in supporting a wider range of company formation, and company founders acknowledge the value of this support – FanDuel, started at the University of Edinburgh’s Informatics Ventures, is a good case in point.

There seem to be several factors at work here.

One has been the realisation by universities that strong technology alone is by no means sufficient to ensure the creation of a successful business. Figures from Spinouts UK show that the failure rate for spinouts has declined over the past five years, while success rates – IPOs, and trade sales, which are both dependent upon market conditions – have increased over the past three.

The sector has also benefited from an increase in specialist venture capital investors, such as IP Group, Parkwalk Advisors, Imperial Innovations, and in Scotland life science specialist Epidarex Capital, and the newly established Mercia Technologies.

Unlike other VCs, which have signally failed to make decent (or indeed any) return on investment at the ‘venture’ stage, these firms have investors of their own who are prepared to take a patient view of company growth, and are able to provide critical support to their seedling investees, by way of making introductions to major corporations, recruiting senior team members, and injecting a sense of business purpose into the undertaking. They are also able to provide more capital than business angel groups, although these still very supportive in the spinout sector in Scotland.

As universities reduce the number of spinouts they create, investing more resource in selecting projects for commercialisation and supporting them through the difficult early stages, there has also been a trend towards the promotion of ‘entrepreneurialism’ across each institution, encompassing staff and students equally.

This, no doubt together with the difficult employment environment, has led to the rapid increase in the number of start-up companies formed by recent graduates, as reported by the Government’s Higher Education Statistics Agency (HESA), and to the lively interest shown by students in starting their own companies.

A further change in this sector is the polarisation of activity between the South East of England and the rest of the UK. The ‘golden triangle’ of Oxford, Cambridge, and London sees much larger investment in spinouts than elsewhere, and some very large companies produced (such as Circassia, an Imperial College spinout which was valued at £200m on its IPO in March last year, and Natural Motion, an Oxford spinout acquired by Zynga for $527m).

Scottish universities still have faith in the spinout model, accounting for 20 per cent of all active spinouts in the UK (for approximately 8% of the UK population). Scotland has not yet seen the levels of investment, or the successful exits, seen in the golden triangle, but there is every reason to hope that this will change over the next few years.

Jonathan Harris is the editor of Spinouts UK, which tracks companies emerging from universities across the UK. He also edits Young Company Finance, which covers the early stage company market in Scotland, in particular reporting investment deals.