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Department Seminar with Professor Thomas Hellmann, Saïd Business School, University of Oxford 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 unfundable. Universities in turn, defend their ownership rights in terms of the resources needed to generate the research in the first place.
This paper examines the impact of university ownership on subsequent fundraising success. The analysis is grounded in a theoretical model and uses detailed data from UK spinouts. Perhaps surprisingly, the data suggests a positive correlation between university stakes and fundraising success, even after controlling for observable characteristics. This correlation is 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). However, the empirical analysis does not find significant negative effects for several other fundraising metrics, including investment amounts and valuations. Reductions in university stakes are followed by subsequent increases in universities' spinout rates.