Bridging the Wrong Valley?
The Mixed Impact of Innovate UK Grants on University Spinouts
Introduction
Both current and recent British governments have looked to address stagnating productivity and growth by investing in innovation. Through Innovate UK, significant public funding is channelled towards innovative businesses of all sizes, including academic spinouts, which are seen as a strategic strength of the UK innovation ecosystem. This article uses the findings from original research to examine whether public investment in spinouts through Innovate UK delivers meaningful results.
The results show an interesting paradox: while Innovate UK grants help spinouts survive and hire more people, receiving such grants seemingly shows no impact on the amount of private investment raised by these spinouts. If private investment is a key indicator of commercial viability, this disconnect raises an important question about Innovate UK’s model of supporting innovation, and suggests that Innovate UK’s greater emphasis on technical rather than commercial readiness may ultimately limit the programme’s effectiveness at creating commercially successful spinouts.
Research Background
We investigated 989 university spinouts between 2012 and 2020 to assess whether Innovate UK funding for early-stage spinouts was associated with higher rates of survival, employment and external investment. The analysis combined the use of a difference-in-differences model with a founder survey and interviews with stakeholders from Innovate UK and relevant government departments.
Survival-Investment Paradox
The conditional difference-in-differences analysis matched 295 treated spinouts with statistical twins from a control pool of 558 non-funded spinouts, controlling for key variables including industry sector, region, university status, age, and pre-treatment employment trajectories.
A clear pattern emerges from this analysis. Innovate UK grants are associated with significantly improved survival rates for spinouts younger than five years, while showing no clear benefit for older spinouts. Additionally, the funded spinouts show increased employment compared to the control group – starting from an average of 2.01 employees at the time of treatment, funded spinouts hired on average five additional employees after 3 years. However, despite these positive effects on survival and employment, the results show no meaningful impact on spinouts’ ability to raise external investment.
Age-Divergent Survival Impact
The finding that Innovate UK grants have a greater effect on the survival of early stage spinouts than older ones is not surprising. Early stage companies typically face more acute funding gaps, and this is particularly true of startups in the high-tech sector.
However, in our study results, spinouts aged 5+ years showed no significant survival benefit from Innovate UK grants, suggesting that the scale and nature of grant funding may not be sufficiently meeting the needs of spinouts in this period. This pattern may be linked to a broader gap in innovation policy that is evidenced in the ‘valley of death’. This precarious phase in the innovation support lifecycle occurs in between initial R&D (supported by research grants) and revenue generation (aided by tax incentives) phases, where government mechanisms of support are absent or ineffective, and death rates’ are higher.
Because Innovate UK grants are awarded for Innovative R&D, the specific research supported typically belongs to the early stages of the innovation lifecycle, before the ‘valley of death’. Concurrently, private investors, especially venture capital, are often deterred from this innovation stage by the combination of technological uncertainty and extended timeframes before potential returns materialize. Innovate UK’s limited impact on spinouts aged five or more years suggests that greater investment into commercialisation is needed, particularly at the technology readiness levels beyond the early stages where research grants are more available, but before the technology is commercially ready.
Growth and Hiring Impact
The positive impact on spinout employment growth is also unsurprising. Alongside the quantitative estimation, our survey findings indicate that among Cambridge spinouts who responded, 89% of Innovate UK funded spinouts reported having "slight" or "no" difficulties hiring early employees, compared to just 34% of non-funded ones. This is probably a simple factor of the amount of money available for the grant, it could also suggest that receiving government backing may serve as a positive signal to potential employees about the spinout's credibility and stability.
In light of the positive impacts on employment and survival, it is all the more surprising that grants from Innovate UK aren’t associated with greater private investment. Is public funding truly bridging the ‘valley of death’ between technical innovation and commercial traction, or is it merely contributing to the increased lifespan of spinouts by giving them extra runway?
Exploring The Technical-Commercial Divide
In contrast to private capital, Innovate UK focuses less on commercial aspects when awarding funding, with more attention to technical and innovative aspects. According to stakeholder interviews conducted for this research, Innovate UK primarily supports innovations from early ’early proof-of-concept’ (TRL 3) through to ‘demonstration in relevant environments’ (TRL 7) levels. While venture capital firms also invest across these technical stages, their investment decisions typically lean more heavily on business models, risk, and market potential. However, this distinction isn’t absolute – deep-tech VCs in particular may weigh technical capabilities more heavily in their assessments.
The suggested technical focus of Innovate UK is in itself not a problem: spinouts exist to commercialise a unique technology, necessitating a high degree of technical or scientific merit. It also makes sense for public funding to support early-stage technologies deemed too risky for the private sector, ideally paving the way for the technology to scale with private funding once it is developed. This risk-sharing model has the added benefit of crowding-in private investment through the validation provided by public Investors.
The distinct role of public funding in the innovation ecosystem, including the technical focus, is visible in regional funding patterns. Venture capital tends to concentrate in established innovation hubs, as evidenced by the Golden Triangle’s dominance in UK private spinout funding. In contrast, Innovate UK’s strategic priorities and technical focus are helping innovation funding reach regions that might be overlooked by VCs. Several universities underrepresented in private capital funding rank surprisingly high in Innovate UK funding: the University of Sheffield and Queen's University Belfast rank 7th and 9th respectively for Innovate UK funded spinouts (in the study dataset), despite being outside traditional innovation hubs. This observation extends beyond spinouts. As shown in recent Protopia research, Manchester has become a cluster for AI expertise and is one of the largest recipients of Innovate UK funding. This geographic diversification of innovation funding that public sources can provide helps address market failures in private investment, where promising technologies outside of major VC hubs struggle to secure early-stage funding.
However, excessive emphasis on investing in prospective technological advancements can lead to inefficiencies on two fronts. First, spinouts may emerge from academic breakthroughs rather than market needs, which can result in misalignment with commercial realities. Academic breakthroughs that are not necessarily commercial in nature can have a hard time finding the market, whilst still receiving funding for innovation. Second, an independent review of spinouts conducted in 2023 identified, academics often lack the skills or experience to serve as business leaders. Coupled with a reported difficulty to hire external CEOs, such leadership gaps may undermine a spinout’s ability to present an investor-ready strategy and vision. This divergence in focus between Innovate UK and typical investors helps explain the survival-investment paradox: while public funding keeps these spinouts alive and growing through technological development, these companies may not have the right market or leadership to attract commercial investment.
The Missing Link
The UK’s leading research-intensive university system provides a strong foundation for technical innovation, and Innovate UK’s support for spinouts across the country can help capitalise on this strength. Free from the time pressures of venture capital returns and with an objective to support regional networks, Innovate UK funding is distinct from venture capital and for good reason. However, the paradox of enhanced survival but limited private investment highlights a crucial missing element: the ability of these spinouts to scale.
To help achieve scale, UK public funding bodies need to build better bridges between academic, industry, and investor communities, and its funding programmes need to focus both on technical and commercial development. The newly announced proof-of-concept fund by UKRI, the funding body which includes Innovate UK, signals a promising shift in approach. Aiming to assist researchers in validating innovations before launching, the programme will offer grants ranging from £100,000 to £250,000. Through funding both technical and commercial work, the program aims to prevent innovations from spinning out prematurely. While this initiative is a step in the right direction, its impact will depend heavily on implementation – particularly how effectively it supports genuine market validation beyond simply providing funding.
UKRI’s existing programmes such as the Innovate UK Catapult network and the Future Economy Investor Partnerships programme, show that there are existing frameworks for connecting research, industry, and investors. These could be expanded to draw in venture capital for innovations particularly in the ‘valley of death’ stage, which would be most important for reaching scale. Better integration between UKRI’s and Innovate UK’s various programmes would be an important starting point. Getting this translation right - from technical excellence to commercial success – is essential for maximising the impact of UK research and innovation.