The UK Government’s independent review of university spin-outs rightly points to the strength of university-based intellectual property (IP) in the UK. Without proper allocation of funding and a better understanding of commercial IP strategies, however, spin-outs risk losing value and becoming embroiled in unnecessary and costly IP disputes later in life.

The review’s key recommendations

The UK Government has published a long-awaited independent review into the UK’s university spin-out ecosystem. The review was commissioned to look at what the UK can be doing better to convert its world-class university research into successful spin-outs.

The review recognises that the UK is starting from a good place. For example, it points out that spin-out investment in the UK has increased five-fold from £1.06 billion in 2014 to £5.3 billion in 2021, second only to the US. However, the review also notes various issues in the UK which are holding the sector back. For example, the high level of equity required by some universities reduces their desirability to institutional investors, reducing overall success rates.

One of the key recommendations is for better and more standardised deal terms for spin-outs. The TenU University Spin-Out Investment Terms (USIT) Guide is proposed as a starting point, with 10-25% university equity for science-based spin-outs. The review also makes several other recommendations relating to funding and to developing a better ecosystem of support to provide spin-outs with the services they require.

The importance of intellectual property

The review rightly highlights the fact that universities in the UK develop world-class IP, and that this IP can lead to successful spin-out companies which attract investment and benefit the UK economy. IP, and patents in particular, are touched on throughout the report, and the authors acknowledge that securing patent protection early and managing IP throughout the research process are important factors.

Despite the recognition of the role IP plays, the review does not go into any detail about the importance of effective IP strategies and their impact on successful outcomes for spin-outs. None of the review’s recommendations focus on improvements that might be made to managing and funding IP. This is a surprise and represents a lost opportunity.

Key IP recommendations for universities and spin-outs

1) Develop a toolbox of spin-out-friendly IP strategies

Protecting university and spin-out IP is rarely straight-forward. The initial steps to protect university research go beyond the simple question of whether to patent. We recommend that universities develop a toolbox of IP strategies that can be used by spin-outs. Such a toolbox might include typical IP considerations at each stage of the spin-out process, from early-stage research through to the first years of operation of a spin-out.

Key topics to include in an IP toolbox might include:

• How to manage early-stage IP decisions, such as what to patent and when
• How to develop an IP strategy and the importance of regularly reviewing the relevance of patents that have been filed
• How to forecast costs to ensure adequate funds are in place to cover the cost of obtaining and maintaining IP
• Understanding the importance of collaborations and partnerships and how to manage collaboratively developed IP
• How to handle third-party IP, including when to conduct due diligence

By making such a toolbox available, and providing training in its use, researchers and universities will ensure that spin-outs are set up for success.

2) Allocate specific funding for IP protection

Researchers and spin-outs are under immense pressure to use the money they receive wisely. There is always something competing for funds that might otherwise be spent on IP protection. Given this, many researchers and founders find themselves in the difficult position of needing to divert funds away from IP completely or to spend far less on IP than they would ideally like to.

It would be better if there was a requirement to allocate specific funding to the protection of IP. This would recognise the true value that the IP brings to the spin-out, as well as removing pressure from researchers and spin-outs to make difficult decisions about spending on IP.

We would like to see the Government put better guidelines into HEIF and proof-of-concept funding, to ensure IP is properly protected. It would also be helpful if investors worked to a roadmap that required their funding to have a certain amount allocated to ongoing IP development.

3) Develop a more sophisticated approach to software-related spin-outs 

The review also suggests that software-based spin-outs either don’t have protectable IP or that their IP is not complex. This is a major oversimplification of the issue and potentially counter-productive. We would recommend developing a toolbox dealing specifically with IP strategies for software-based spin-outs.

While software-based research may not require the same level of university backing, software IP protection can be complicated, involving multiple forms of IP and complex legal issues. Software patents are obtainable, but they can be legally complex and challenging to obtain. In fact, a recent decision in the UK Courts has specifically recognised that certain neural network-based inventions are explicitly patentable. Furthermore, other issues such as use of Open Source, licensing-in of software, copyright and the ‘black box’ nature of software means IP protection is further complicated.

It is important that software-based spin-outs don’t take from the review that they don’t need to pay attention to IP. Specialist legal advice focussed on the complex nature of IP in software-based innovation will be key to ensuring that spin-outs don’t miss out on effective IP protection.

4) Improve IP education and training

We recommend that the Government considers how to improve IP education and training in schools and universities. While many universities offer IP training to researchers, it needs to more sophisticated to take into account the points raised above. As well as education around the complexities of IP and IP strategy, case studies showing examples of good and bad approaches to IP would offer real value to researchers and spin-outs.

The issue of IP training should be addressed across our entire education system, from schools and colleges to undergraduate degree courses. It is frequently commented that IP education in the UK is behind our main competitors. Many enterprise education initiatives in other countries include an aspect of IP awareness. If we want founders to have a proper grasp of the importance of IP, the Government should address IP education at all levels.

The House of Lord’s Committee on Education for 11 to 16 Year Olds had just published the results of an inquiry into secondary education in the UK. While the inquiry has highlighted numerous aspects of secondary education that need to be improved to make it fit for the 21st century, there is no discussion of enterprise skills, let alone IP. This is a missed opportunity.

Conclusions

The review rightly recognises the strength of IP being generated by universities and the quality of spin-outs being produced. However, it fails to make any recommendations that might improve the protection of IP to the benefit of all stakeholders, and ultimately the UK economy.

We recommend that the Government and universities look to develop a better toolbox of IP strategies for spin-outs, including a focus on software-based spin-outs. Better allocation of funding and training in core IP subjects would be a major boost to this already successful sector.

If all stakeholders took protection of IP more seriously, everyone would benefit, including the UK economy.