UCL and Oxford are Europe’s ‘worst universities for spin-outs’

Universities should be a natural home for Europe’s top innovative companies, but recent data suggests they’re not doing a great job of turning researchers into business leaders.

A survey by UK VC Air Street Capital of 143 spin-off companies – companies converted from university research with the help of an educational institution – found that European universities are gaining more equity and control on spin-off companies than their American counterparts and that startups are generally unhappy with their experience. .

Many investors – including Air Street – have lamented that European universities have not created the kind of outsized success that the United States has. One of the reasons cited is the amount of equity founders must give to universities’ technology transfer offices, which critics say may deter future investors from committing capital. Others within the system say universities are successfully commercializing research.

Nathan Benaich, founder of Air Street Capital, says academia should be key to boosting Europe’s innovation ecosystem. “This engine is usually broken,” he says. “If we’re going to achieve technological sovereignty, and like big business, we need to fix the engine that creates those businesses in the first place.”

Here are the key takeaways from Air Street’s investigation:

1. Founders are generally unhappy with their spin-out experience

Spin-off founders are generally not satisfied with their experience with their university: when asked if they would recommend the commercialization process to a friend or colleague, on a scale of 1 to 10, the rating average they gave was 4.6. 14% of founders rated their experience with a zero.

“If it was a product, your business would be dead,” Benaich says.

Among the most popular universities, the founders were most satisfied with their experience at ETH Zurich and the University of Cambridge and least satisfied with University College London and the University of Oxford.

One of the biggest problems they face is the long delay in closing deals: 67% of spin-offs say they had to wait more than six months to make an investment. By comparison, a regular seed investment takes about three months to complete.

“If you are a software company and you take more than six months, or God forbid, a year [to close a deal]you are dead,” Benaich said.

2. UK universities are the most equity-hungry

The survey suggests that European universities – particularly UK-based ones – generally require significantly more equity from spin-off companies than American universities. An average capital rate taken on creation reaches 19.8% in the UK while it is only 5.9% in American universities and 7.3% in European universities, according to the data .

This outlook becomes even worse when capital-free transactions, popular especially in the Nordic countries, are taken out of the equation. In this case, the average equity rate required by British universities is 23.6%, and the average rate in European universities almost doubles to 14%.

“A lot of those zeros usually tend to be software companies,” says Benaich. “A lot of the more aggressive ones tend to be like therapeutic devices, diagnostics.”

3. And UK universities want to control governance

British universities tend to demand greater control over the management of spin-outs than American and European universities; almost half of spin-off companies formed at UK universities have hired managers from outside, according to the Air Street survey.

UK universities are also more likely to put a member of their technology transfer offices on the boards of spin-outs – this happens 37% of the time.

“Unfortunately, they are usually not the best people. These are the people who are kind of available,” says Benaich.

4. More conditions attached to spin-out founders in general

Spinout founders in the United States and Europe often have to agree to other financial arrangements with universities outside of equity shares. 45% of all transactions analyzed included the payment of royalties – a regular refund of net sales after a company has reached a certain revenue threshold. Most of these royalties are set at a level of 1-2%, but in some cases they have exceeded 20%.

The survey suggests that most high royalties are included in software vendor contracts.

“If I’m a software company and I’m using all the revenue I have to increase my growth, why do I have to pay you a royalty at the very start of my business when I could use that extra 5% royalty to hire more people?” said Benaïch.

So-called exit fees – a commission a founder pays to the university if he sells a company – are rather rare, but in some extreme cases they can exceed 10% of the final sale price.

5. No Refunds

Any hurdles in the way of commercialization make spin-out founders less likely to support universities financially in the future. Nearly 64% of founders surveyed said they don’t plan to donate to their alma mater, even if their business proves successful.

“If you create an ecosystem, where your spinout founders aren’t happy…they’re not going to evangelize for you, they’re not going to give you money — you’re shooting yourself in the foot,” Benaich says.

Zosia Wanat is Sifted’s Central and Eastern Europe reporter, soon to be based in Warsaw but currently in Brussels. She tweets from @zosiawanat