How does Equity Allocation in University Spinouts affect Fundraising Success? Evidence from the UK

Abstract

There is considerable controversy about the allocation of equity in university spinouts. Founder teams and outside investors frequently criticize universities for taking excessive ownership stakes, weakening entrepreneurial incentives, and making spinouts ‘uninvestable.’ Universities in turn defend their ownership rights in terms of the resources needed to generate the research in the first place. This paper uses detailed data from UK spinouts to assess the impact of university ownership on subsequent fundraising success. Perhaps surprisingly, the data suggests a positive correlation between university stakes and fundraising success, even after controlling for observable characteristics. However, this correlation appears to be partly driven by universities retaining larger stakes in their most promising spinouts. Using an instrumental variable based on the precedence set by prior spinouts within a university, we find some evidence that higher university stakes reduce the likelihood of fundraising success. A 10% larger university stake decreases the probability of raising venture capital on average by 3%. The negative effect is concentrated in less science-intensive spinouts (e.g., IT), and is statistically insignificant in the more science-intensive spinouts (e.g., engineering, or biomedical). Reductions in university stakes are also associated with increases in the spinout rate.

Keywords: university spinout, equity allocation, fundraising

JEL Classification: L25; L26; G24