Standardising the university spinout 

We took a long break from penning Investor Insights whilst we were busy investing our first Seed EIS Fund, exiting a couple of investments, and dealing with a bunch of portfolio company challenges. But now we’re back, continuing a series of posts we started back in 2022 about university spinouts. 

We’re going to kick off the new series by looking at where the debates on university shareholdings and IP licensing have got to, particularly the inter-relationships between intellectual property ownership (IP), university running yields, and equity percentages, prompted by a couple of industry-group publications on the sector. 

An introduction to USIT 

A University Spin-out Investment Terms guide was published in 2023, with an addendum this year, by Ten-U – a UK government-funded consortium of universities and large VCs.

The guide will have some positive effects. 

The publication has focussed policy-makers’ attention on the importance of university spinouts and provided a useful how-to guide for first-time academic founders: for them, it is a particularly valuable and instructive read.  

Importantly, it has also given university staff reasoned arguments to support decisions about, for example, taking a more liberal view on the equity split. By setting out guidance on industry-standard terms, the USIT guide helps them move to a take more commercial decisions without being too anxious about failing in their stewardship of university IP.  

Some good, some bad 

So the USIT guide is well-intentioned and partly helpful, but we have major concerns about some of TenU’s detailed prescriptions. We’re going to post a short series of articles on what we believe makes for a good spin-out and where, in contrast, we believe that the USIT guide falls short. Our focus is on two main issues: who gets to own the IP, and the extent to which universities can extract cash from a spinout prior to its exit. 

The reason for these posts is to renew the debate on these issues. Our fear is that we will otherwise, sooner or later, be unable to invest in an otherwise attractive spinout company because TenU’s prescriptions become industry-norms. 

How did this happen? 

The consultation group was small – a few of the sector’s biggest investors, Oxford, Cambridge and a few other institutions – and was neither widespread nor representative of the diversity of the market. In essence, it collated market practice from the Golden Triangle adding a dose of US insights. What it ignored was what regional investors and universities were doing. We’ll go into this aspect in more detail in the next post.   

In any case, even if the consultation had been more extensive, the market consists of many views, and all participants are free to negotiate their own terms. TenU note that “the USIT Guide was created to facilitate faster negotiations, to identify a landing zone for what a positive deal should look like.” We’re all for faster negotiations, not least as time passes more slowly in academia, but this cannot be achieved by mandating a template of commercial terms that are either not general practice or – more importantly – just won’t work for investors. And yes, this might sound like another case of “DSW Ventures against the World,“ but we’ve yet to co-invest with an experienced VC who doesn’t share our views on the USIT template terms. 

Round up 

Ten-U’s USIT guide was a welcome addition to the guidance for the university spinout sector by raising awareness raising, the commercial education of academic founders, and in providing guiderails for those negotiating spinout transactions. 

But we would have liked a lot wider representation and much less prescription.

David Smith 

Partner, DSW Ventures