Research commissioned by Parkwalk shows that, despite 2019 being a bumper year for high-growth investment in the UK, spinouts are not securing large growth deals
UK university spinouts are an attractive opportunity for investors, and a driving force in the re-balancing of the UK economy. However, there is a dearth of funding at later stages which results in the longer-term benefits to UK plc getting lost as companies are sold too early.
Research by Beauhurst, in conjunction with Parkwalk, the UK’s leading investor into spinout companies, shows investment in UK spinouts fell from £1.38bn in 2018 to £1.24bn in 2019, despite a record £12bn of capital deployed into wider UK startups over the past year, representing a 58% increase since 2018.
The growth in broader tech sector investment was predominantly driven by large deals of £10m+ by later-stage companies, which are not yet being secured by university spinout companies. The number of small deals of less than £500,000 fell by 19 per cent between 2018 and 2019, while the number of deals ranging from £500,000 to £1m increased, suggesting that larger amounts of capital are needed at even the earliest stages of spinout development. There is still a relative absence of mega deals (£50m+), which is surprising given the rich intellectual property that spinouts develop, and the extensive capital they require to do so.
Moray Wright, co-founder and CEO of Parkwalk, said: “While 2019 saw an unprecedented amount of capital invested into academic spinout companies, it is clear that the huge rounds that are driving the large growth in equity investment in the UK are not being secured by spinouts. The UK punches above its weight in blue-sky research and the gap in the UK funding cycle between early investors and institutional investors needs to be filled to prevent lost opportunities for the UK as our technical lead is lost as many companies are sold to better-funded international rivals.”
UK scientific research is at the forefront of the government’s modern industrial strategy. The government has set out its commitment to reach 2.4% of GDP being spent on science and research and development (R&D) by 2027. Whilst there is now increased opportunity and demand because of the number of quality spinouts, there is a significant lack of later stage growth funding from UK investors. More growth funding needs to be available to enable these businesses to scale up in the UK, retaining both the talent and economic opportunity. Selling companies too early only benefits the early stage investors and the acquirers.
Moray Wright continues “This is an emerging asset class that is proving itself to be at the forefront of cutting-edge technologies, benefiting from the UK’s leading position, and investment, in R&D. But in order to realise a return on this R&D commitment, new investment vehicles need to be formed in order to fully realise this opportunity. And thereby attract long term capital to the sector”.
Other key findings from the research include
- UK spinouts secured less investment from institutional investors in 2019 compared to the previous two years, and the value of the deals they were involved with also declined
- Oxford and Cambridge continue to dominate the spinout investment scene, both securing 56 deals in 2019, followed by The Royal College of Art, but with less than half the number of deals at 21. Cambridge spinouts secured the most investment in 2019 at £346.6m, knocking Oxford off the top spot with £319.9m. Bristol was the next most prolific, securing £41m, the most investment outside the ‘Golden Triangle’ of Oxford, Cambridge, and London institutions.
- Regional investment in spinouts largely reflects the location of major research universities in the UK. Spinouts in the East of England (£514.1m) and South East (£326.2) secured the most investment in 2019, followed by London (£258.8m). Interestingly, Scottish spinouts brought in £60m through 47 deals, while Wales brought in the least investment at £1.3m.