The Burden of University Equity Stakes for Spin-outs: Evidence from the UK

Abstract

Universities are an important breeding ground for innovative ventures, yet there is considerable controversy about the appropriate ownership stake universities should retain in their spin-out companies. This paper examines the extent to which higher university stakes inhibit spin-outs from raising venture capital funding. The analysis is based on a formal theory of spin-out formation and fundraising, and leverages detailed data from UK spin-outs. Using an instrumental variable based on precedents set by prior spin-outs within a university, we find that a 1% higher university stake reduces the likelihood of raising venture capital funding by 0.8-0.9%. The effect is heterogeneous: stronger for companies located in the Golden Triangle (London plus Oxbridge); weaker for deep tech spin-outs; and stronger in the presence of outside managers. The rate at which spin-outs are formed within the university also declines by 0.6–0.8% for every 1% increase in university stake.

Keywords: university spinout, equity allocation, fundraising

JEL Classification: L25; L26; G24