UK universities are world-renowned for their academic excellence and quality of research, with over 15 British institutions ranking in the top 100 universities globally. From gene sequencing to quantum computing and nuclear fusion, university research departments are at the forefront of technological innovation, producing companies with the potential to not only reshape industries, but radically change how we live our lives for the better.
The UK has built up significant expertise at creating university spinouts, having established multiple investment platforms over the last 20 years that prompted the growth of key university hubs. Early pioneers of the investment model were platforms tied to universities in Oxford, Cambridge, and London. With a number of these platforms now scaling and with their portfolios maturing, we are seeing the UK spinout market poised for growth and entering an exciting new chapter.
While spinouts have come a long way in the last two decades, the market is only now becoming relevant for material institutional investment, where significant capital can provide diversified portfolios of later-stage companies with the funding they need to scale up and achieve their full commercial potential, reaching valuations that we more commonly associate with companies in the US.
In addition, there is a current gap in the market for investors to support companies at the early-commercialisation stage, enabling companies to launch into their markets and scale early revenues. Capital currently exists at the early stages, via specialist VC firms and university-linked investment platforms, and at the later stages, via generalist institutions looking to invest against traditional financial metrics.
However, between these two stages we have high-potential companies that have working products but lack the resources and investor backing to take products to market at speed and compete on the international stage. Whilst UK VC investment in R&D intensive sectors has increased, with the volume of such investment roughly doubling between the periods 2018-20 and 2021-22, the UK VC industry still lacks the depth and maturity seen in the US, creating an opportunity for investment. As a data point on scale and maturity, venture & growth capital deployed in the US was c.12.7x greater than the UK (c. £135bn vs c. £10.6bn) yet relative comparisons of GDP across the two countries puts the US at only c. 8x larger.
Capital need is particularly evident in industries such as healthcare and deep tech, where high levels of funding are required to develop and expand products from breakthrough technology and scale them to profitability. We need to back areas of UK technological strength, such as in quantum computing, where a number of startups are emerging and pushing the boundaries of quantum mechanics to efficiently solve highly complex problems, with applications in fields as diverse as cybersecurity, energy capture, and novel materials development.
Breakthroughs in the research underpinning these companies demands large amounts of capital but are yielding world-changing results when given the chance. Deep tech startups take at least 35% more time and 48% more capital than traditional startups to reach revenue levels of over $5m but can achieve significant valuations based on technological milestones.
The case for investing in spinouts also benefits from a supportive policy agenda, with the government showing a clear commitment to the science and technology sectors as drivers of economic growth. In the Autumn budget, the Chancellor announced £20 billion in investment for UK R&D, and fully funding association to the Horizon Europe research programme. We also saw the announcement of a £520 million Life Sciences Fund that will provide capital grants for the manufacture of medicines, diagnostics, and med tech products.
We see a clear signal of government intent to promote the deployment of both public and private funding into UK growth assets. But this must be underpinned by continued investment in the skills base – both homegrown and through inward immigration – that sets the UK apart internationally and powers our innovation economy.
Investing in university spinouts is an opportunity for investors to not only contribute to the development of the cutting-edge technologies that are solving some of society’s most pressing challenges, but also gain access to a growing asset class in its own right. There are more spinouts emerging from the UK’s top research universities and increasing capital invested in the sector, but there remains a pinch point between the early and later growth stages.
This presents an opportunity for investors with the right access and skills to back incredible companies at attractive entry points. More importantly, filling this gap will mean the brightest researchers and entrepreneurs will have the ability to scale their world leading ventures and also remain here in the UK.
Chris Hopkins is Head of Venture Capital at Legal & General
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