Bridging the funding chasm: why universities need 13x more cash to support UK growth plans

While most businesses were looking at what would happen to tax rates in last October’s budget, those involved in translating university research into start-ups were instead looking beyond the headlines to focus on proof-of-concept funding.

In America, it’s perhaps more accurately referred to as ‘gap funding’ because it bridges the chasm between using grants to carry out research and then delivering proof that the breakthrough works well enough to attract investors. While Jeremy Hunt had promised £20m over three years, Rachel Reeves doubled that sum. However, because it was spread over five years, it was actually only a modest upward revision. Nevertheless the move was welcomed, with hope that the new money will start to be distributed in the first quarter of this year and, even more importantly, that it will mark the start of bigger Westminster investments to come.

“Proof of concept is a real funding pinch point for academics to demonstrate they have something worth investing in,” says Anne Lane, CEO of UCL Business. “It was a great start to show the government acknowledges the gap, but it has to be just the start.”

Funding gap

Just how far that funding needs to rise above what was announced was laid bare by researchers at Imperial College London, working as part of TenU, a collaboration of ten university transfer offices. They agree Rachel Reeves’ announcement is what Simon Hepworth, Director of Enterprise at Imperial College London, calls “a step in the right direction”. However, with Imperial rapidly developing its 23-acre incubator and business park site in White City, London, Hepworth is keen to underline the pressing case for more early-stage funding.

“Through TenU we did some work to scope out what the country needs in proof-of-concept funding and it’s more like £110m per year,” says Hepworth.

“The impact of the shortfall means that we cannot fund great technology. We had 50 proposals for this year, and we could not support at least 20 that were fundable. That’s 20 technologies that UK plc will now not see. It’s a major competitive disadvantage versus, say, Stanford, who get £15m to £20m to spend in this area each year, and Leuven in Belgium, who gets a similar amount.”

Like many universities, Imperial leverages its allocation of around £4.5m to £5m of Higher Education Innovation Funding (HEIF) from the UKRI to work with third parties and build new connections with other universities and businesses to progress research towards commercialisation. This is supplemented with philanthropic funds in programmes such as DT-Prime, funding deep tech start-ups, and SuperConnector, which has so far supported med-tech and AI in successive years. Both initiatives are described as empowering start-ups to “cross the chasm” between research grants and later stage venture funding. Imperial also puts in its own funding to help boost its start-ups.

“Across the group of six universities, 40 companies raised £250m in 2024, earning the SETsquared group a top three position in Sifted’s table of top hubs in Europe.”

Another resource that Imperial, and several other universities, use is an Enterprise Investment Scheme (EIS). The latter is a tax-efficient way for individuals to invest in a fund that supports start-ups and, in Imperial’s case, has allowed the College to deploy £1.3m over the past 18 months. The scheme is administered by Parkwalk Advisors, who manage EIS funds for several other universities including Bristol, Cambridge, and Oxford. These can raise substantial sums. The Oxford EIS, known as the University of Oxford Innovation Fund (OUIF), has raised in excess of £8m since 2014 through five rounds of investment.

Oxford University has also been inventive in how it can supplement what is available through central government. While its EIS will attract private investment, the University’s technology transfer arm, Oxford University Innovation (OUI), offers many business services, including consulting, training and advice, as well as IP protection and space in its incubator. Its start-ups can seek proof-of-concept investment through University Challenge Seed Fund (UCSF) which was set up through an initial government investment as well as funds from the University, Wellcome Trust and Gatsby Foundation. Their combined £4m was subsequently boosted with a £5m investment from local venture capitalist firm, Oxford Science Enterprises (OSE), in 2019.

The wider hunt for funds

Given the widespread belief among university commercialisation teams across the country that there are currently insufficient funds to support proof of concept work, universities are having to investigate multiple options. These include their own money, EIS funds, and joint venture funds with charities and investment partners willing to get involved at an early stage before a start-up can prove it is investible.

At the University of Edinburgh, Charlotte Waugh, Enterprise and Innovation programme lead for Edinburgh Innovations, the university’s commercialisation service, manages the Venture Builder Incubator (VBI). She explains that the tech transfer and enterprise teams have to pursue multiple additional lines of funding.

Barclays Eagle Labs has been invaluable in supporting VBI’s robotics PhD innovators, and Cancer Research Horizons its oncology cohort. Telefónica (Wayra) and Scottish Enterprise also supported the setting up of another successful programme, the AI Start-up Accelerator. Additionally, the Scottish Funding Council and regional funding from Scottish Edge competitions, as well as the City Region Deal, provide additional capital to fund six innovation hubs across the city. The City Region Deal is a UK-wide initiative run by the UK and Scottish governments to distribute £1.5bn over the next 15 years through investing in cities. 

Edinburgh start-ups can also be supported by a network of local angel investors as well as Old College Capital, the university’s in-house venture investment fund. This was set up in 2011 to support early-stage ventures with a co-investment model. It also offers some ‘launch’ funds, of either £20k or £50k, and is now managing a portfolio of 80 companies. Charlotte Waugh reveals these multiple routes for finding start-up funding are essential because young companies are invaluable additions to the university and to the region, and may not be able to receive the support they need with just the Westminster proof-of-concept funding.

“There’s far more of a focus now at universities on having an economic impact,” she says. 

“That’s why it’s so important we back our startups. As well as research-created solutions, we need our innovative young companies to bring jobs to the city, attract investment and bring renewed energy to our region.”

Beyond the golden triangle

The elephant in the room, when it comes to university start-up and spinout funding, is that the ‘golden triangle’ gets the lion’s share. Oxford, London, and Cambridge dominate due to the greater concentration of investors and funds in the capital and their long track record of creating investor-ready companies.

To counter this historic focus towards the capital and the south-east, SETsquared has been created to bring together top research universities in the south-west of the UK. It guides students and staff at Bristol, Cardiff, Bath, Southampton, Exeter, and Surrey in how to set up and fund a start-up. As Marty Reid, executive director of SETsquared, explains, each university has its own exciting pipelines of talent and IP. However, on their own, each would struggle to ‘stack up’ against the golden triangle, where start-ups and scale-ups will usually collectively raise five times more each year than the SETsquared ecosystem.

Even so, across the group of six universities, 40 companies raised £250m in 2024, earning the SETsquared group a top three position in Sifted’s table of top hubs in Europe. Reid describes this level of fund raising and recognition as “very encouraging”, but to take it to the next level, the group is working on establishing a £300m fund with venture capital firm QantX. This will co-invest in start-ups at the proof-of-concept stage, as well as further down the line, to encourage more researchers and students to form a start-up, perhaps through one of the universities’ accelerator programmes.

“It’s a punchy objective, but it is built on the strength of our collective pipeline and the strength of our support ecosystem,” he says.

“It’s essential because start-up investments add such great value to the local and wider economy as they grow and employ more people. They start a virtuous circle through which researchers will see people like them form companies and so they will be encouraged to do the same and build a bigger hub and provide even more employment. It’s a great way to show people they have options other than joining a leading tech corporate firm in their area of expertise. For this to scale, though, it needs to be a mix of investor money and public money.”

This is a common area of consensus among university commercialisation teams. They readily accept the need to engage with local competitions and regional funding while building up contacts with local angels. At the same time, they know big tech and medical companies with early-stage investment and grant teams need to be approached as well as VC firms who may be willing to get involved at proof-of-concept stage. Many have set up an EIS, for individuals looking for tax-efficient savings, which they supplement with university funds.

Still though, there is a real fear that many good ideas are falling through the cracks because they cannot be funded, though they would likely be highly investible if they could get to the proof of concept stage. When the entirety of the UK is being offered what some individual universities in Europe or the USA will have at their disposal, it is clear the proof-of-concept funding on offer from the government will need to be just a starting point. Unless it can be stepped up, there is a real fear that too many promising new technologies will wither on the vine and the UK will miss out on high impact breakthroughs.