The struggle to take technology breakthroughs from the laboratories of Britain’s universities out into the world can often be tougher than a University Challenge starter for 10. But instead of Paxman"s frothy strictures, the so-called “valley of death” awaits in which startups can become starved of investment and fail, investors warn. Unlike typical technology startups where twenty-something developers build apps from coworking offices, these “spin-out” companies sometimes require billions of pounds of funding for clinical trials and their lists of shareholders often include respected professors and centuries-old university colleges. A typical example is Paragraf, a Cambridge University spin-out working on the “miracle material” graphene, whose chairman is Sir Colin Humphreys, a Cambridge professor and physicist who is also a bible scholar. The technologies being developed can be so valuable that the fledgling companies are often courted by deep-pocketed Chinese and American investors who may be keen to bring the knowledge back home with them. However, new research reveals there may be trouble ahead for such UK spin-outs and their investors. Funding into spin-outs dropped in 2019, ending an unbroken rise in investment since 2013, according to research released this month by data firm Beauhurst. It found that 334 investment deals were made into spin-outs last year, down from 358 in 2018. The total amount invested also dropped to £1.24bn, down from £1.38bn in the previous year. Although data shows that this shortfall can be ascribed solely to a drop in investment in the smaller, and hence riskier, deals. The findings mirror a separate Beauhurst report published last week which found that investment across the entire UK tech sector also fell last year. Moray Wright, chief executive of spin-out investor Parkwalk Advisors, which commissioned the report, said the findings were “a surprise.” A deathly outlook Some investors who back university spin-outs are now openly questioning whether there’s enough investment in the UK to keep British businesses from moving overseas. Wright says spin-outs are falling into the valley of death once they grow large enough to require significant investment, typically above £10m, and encounter a lack of available funding. “They can"t get domestic money to see them through this valley of death. The best ones basically get bought,” he says. Most technology investors celebrate their investments getting acquired with congratulatory blog posts, but Wright sees premature sales to larger companies as a “poor result.” He recalls the 2016 sale of one of his investments, Cambridge CMOS Sensors, to Austrian sensor giant ams AG. “There was quite a lot of discussion at the time that this was going to be the acquirer"s base in the UK and they were going to do research here,” he says. “A couple of years later, their office is empty and their R&D has moved somewhere else in Europe.” Investors have a number of theories on the reason behind the dip in spin-out funding, but they agree that any drop in deals is worrying. The Woodford effect Christoph Ruedig, a partner at AlbionVC who manages University College London’s spin-out fund, warns that a drop in deals from once-active investors such as Neil Woodford, Investec and Lansdowne Partners will hurt spin-outs and may be a cause for the drop in funding. “You have had retrenchment of some of what used to be the more prolific, vocal backers of university spin-outs,” he says, “they have really retreated from that market.” Woodford invested in spin-outs including Oxford Nanopore, Sensyne Health and Genomics. He also backed other investors in the field, making him a key player in the industry. But his years-long run of ploughing money into spin-outs seemingly came to an end last year when Woodford dumped his stakes in a series of businesses and investors as he sought to improve liquidity in his funds. The collapse of Woodford’s fund “absolutely” hurts spin-outs, Ruedig says. He had hoped to approach him for backing for a second UCL spin-out fund. Potential disruption in the field hasn’t stopped there, however. Oxford Sciences Innovation, which runs a £600m spin-out fund, recently lost its chief executive and chairman. Rob Kniaz, a partner at Hoxton Ventures, says “it"s always a concern if capital is drying up or changing. It places more of a burden on founders.” Spin-outs have also been particularly exposed to uncertainties caused by Brexit, which is likely to have caused a pause in some deals in the sector. “Uncertainty dragging on for so long was very painful for everyone,” Wright says. “The fear of the unknown made a lot of people put things on hold.” And the academic origins of spin-outs means that they’re particularly vulnerable to any restrictions on immigration. Wright says one of his investments was founded by a Romanian and has an Italian chief executive and an Iranian chief scientific officer. Spin-out investors are hoping that new funds will arrive in the sector to fill the gap in funding and prevent a further slide in investment or a flood of British businesses selling to international giants rather than trying to continue on their own in the UK. And they’re quick to insist that a drop in investments doesn’t mean that the brightest academic brains have stopped working on new technologies. “I don"t think there"s a change in the innovation happening,” Ruedig says, “if anything, I think there"s more innovation happening now than there was two years ago.”