How to hatch young tycoons

British universities are emulating America by supporting their graduates in setting up spin-out companies. The result is a new generation of entrepreneurs. Gareth Rubin investigates

"The university's very proud of us; they keep shouting about us from the rooftops," says John Corner. What the university in question - Teesside to be precise - is proud about is Yuzu, the web- design spin-out company that Corner jointly owns and Teesside helped him set up.

"The university's very proud of us; they keep shouting about us from the rooftops," says John Corner. What the university in question - Teesside to be precise - is proud about is Yuzu, the web-design spin-out company that Corner jointly owns and Teesside helped him set up.

Spin-outs are commercial firms established and owned by individual graduates or academics with the helping hand of their university, usually in terms of free office space and business advice. When the university itself sets up and owns or part-owns the firm, it is known as a spin-off. While these have been around for decades, spin-outs have only started to appear in the last few years.

It's no surprise Teesside is proud of Yuzu - as a new university, part of its brief is to offer new prospects to communities and individuals who would otherwise be without them. Corner is a case in point. "I left school with a couple of O-levels, spent 10 years in a series of dead-end jobs, and ended up packing egg boxes. I decided going to university was the only way I was going to change my life and I was right. So I did a foundation year at Teesside in 1996 and that got me on to a course in technology."

Within two weeks of finishing his course, Corner had a job at a local college teaching tutors how to put lecture notes on to web pages. When his 18-month contract ended he wanted to run his own business, and did the rounds of funding bodies and agencies. He ended up back at Teesside. "They pointed me in the direction of a business adviser and offered me a room and computer equipment rent-free for a year. That was great because I needed the money."

Just as important was the environment in which he was working. Teesside has a building set aside for its spin-out companies, what it describes as an incubator unit. It provides advisers who can inform the resident companies on everything from tax to filing patent applications. "Plus," says Corner, "you were in a room next to like-minded people setting up their own businesses, so you could bounce problems off each other. Someone would say: 'Oh, I had that problem last week, this is who you should see about it.' If I hadn't gone to Teesside, I would probably still be putting egg boxes on shelves for a living."

Corner also met Liam Dawson in the incubator. The latter was setting up his own design business. One year ago they came together to form Yuzu, which has just moved out of its room in Teesside into plusher offices. They now have two employees and intend to take on another two by the end of the year. In May alone, their revenue equalled that of the whole of last year.

At any one time, Teesside has about 20 spin-out companies on the go. They are about to get a new home in the university's Victoria Building, a former school, which is being refurbished for the purpose. Teesside is spending £1.4m on the refurbishment to create what it calls its Graduate Business Greenhouse; most of the cash is from European and regional redevelopment agencies. Spin-outs are beloved of such agencies because they give highly skilled young graduates a reason to stay in the area, rather than make a bolt for the south-east.

Laura Woods, Teesside's director of the department of academic enterprise, says: "We've known for a long time that our students have good business ideas but aren't in a position to do anything about them. Many also leave the area for the south-east to take up jobs in industries like computing, even though 50 per cent of them are from the area, so we have a big skills drain from the region. These companies make a direct contribution to creating jobs in the north-east, which is an economically depressed area."

The university of Northumbria, in Newcastle, has a similar facility to Teesside's Greenhouse. Called The Hatchery (even the name is on a similar theme to Teesside's), it is part of Going for Enterprise, a business service set up by the university for students and recent graduates attempting to start a business. It provides six months' free office space for up to eight businesses and offers advice to the entrepreneurs. According to the university's business partnership manager, Roger Candy, the team is on hand to assist the students if they feel they are struggling. "By providing all the facilities free of charge for a six-month period, it allows the participants to concentrate solely on their business and not on its overheads," he says.

The university of Dundee has spun out four or five companies in the last few years, offering academics and graduates free office space for six months in its on-campus "pre-incubator". It is now expanding the scheme. In August, building will be complete on the off-campus "incubator" where the firms will move when they start trading. Rents in its 12 units will be subsidised, and the university has a series of funding packages to help spin-outs. For the smaller concerns, it offers a combination of grants and "soft" (repay-us-when-you-can) loans of up to £20,000.

It has also joined with its older neighbours, the universities of Aberdeen and St Andrews, to create a fund - sponsored by the DTI - that can give a maximum grant/loan combination of £30,000 to a spin-out or take a £250,000 equity stake in a spin-off. Jim Houston, Dundee's director of research and innovation services, says: "We're trying to engender an entrepreneurial spirit in the whole of Scotland. By creating a cluster of biotech companies here, we're trying to give the local community, which has traditionally been founded on heavy industry, a whole new identity."

Spin-offs often grow out of the institution's existing research, and for that reason tend to be in the technology sector and come with a full-scale development team and a market-ready product. Like spin-outs, there is a regional regeneration benefit, with the north-west second only to London for the creation of spin-offs.

Spin-offs make a great deal of money for the higher-education institutions that part-own them. In 2001/02 the turnover of spin-off companies increased from £212m to £289m, and their workforce increased from 10,500 to 12,000. In the same period, universities and colleges nearly doubled their income from intellectual property, from £18m to £33m, and filed just under 1,000 patent applications. From 1999 to 2002, about 200 spin-offs were set up each year; from 1994 to 1999, the average was 70 per year. Oxford University alone has spun-off 40 companies since 1959, 35 of them in the last eight years - which goes a long way to explain why there are now more biotech companies in Oxfordshire than in the Netherlands.

The combined market value of the university's spin-offs is around £2bn. One of them is NaturalMotion, founded in 2001 by Oxford and one of its graduates, Torsten Reil, who appeared in last year's list of the world's top 100 young technology innovators, compiled by the influential magazine Technology Review. Still partly owned by the university, NaturalMotion combines biology with computer science to create realistic animated characters for video games and films. They can be seen in the Hollywood blockbuster Troy, which is in the cinemas now.

"The technology behind NaturalMotion is based on research that I was conducting during my DPhil at Oxford together with Colm Massey, who founded the company with me," says Reil. "We were trying to simulate the motor nervous system that creates the rhythmic movements required for locomotion in humans and animals. When we put these simulated creatures into various environments, we found that they interacted much more naturally with their surroundings than what we had seen before in conventional animations, such as games."

He went to Isis Innovation, a company set up by Oxford to spin off companies whose know-how is based on university research. "They provided seed money, which paid for Colm's salary and computers. This allowed us to produce the first prototypes to show to potential investors. Second, Isis introduced us to a number of suitable lead investors. Third, Isis provided legal and business advice throughout the first funding round. NaturalMotion wouldn't exist without the help of Isis Innovation."

With the Government keen for universities to learn lessons in entrepreneurship from across the Atlantic where these companies are part of the landscape, and an apparently worsening North-South divide, it is likely that the current stream of spin-offs and spin-outs will turn into a flood.

'THEY GAVE US A SAFETY NET TO EXPERIMENT'

One beneficiary of Northumbria's spin-out facility - the Hatchery - is Mark Wells, who co-founded Xenophya with a fellow graduate. Xenophya is a design consultancy that started off producing personalised body work for motorbikes and has now designed everything from websites to new caps for tubes of Smarties. "When we graduated from our transport design degree, we were very keen to stay in the field, but were also aware it was going to be very difficult - if not impossible - to get jobs in that industry. So we thought we would set up our own business. One of our main concerns was overheads, but the facility negates that - we were based there for two years, rent-free, and they gave us access to all the manufacturing tools and design technology we needed. That time was essential; it allowed us to find our feet and gave us a safety net to experiment and try things out. The facility provides a professional environment where the students can bring in potential clients and hold meetings. Also, hosting a variety of businesses under one roof can lead to cross-fertilisation, which plays an important role in establishing new contacts - and that is always useful in the first year of any new business."

education@independent.co.uk