University spin-outs
Andy Lockett, Donald Siegel, and Mike Wright
Introduction
In recent years, there has been a substantial rise in the number of university spin outs (USOs) in many nations (Wright et al., 2002). This stylized fact is consistent with qualitative evidence presented in Siegel, Waldman, and Link (2003), which suggests that universities are increasingly likely to view equity ownership in a USO as an attractive alternative to licensing technologies in embryonic industries. Bray and Lee (2000) report that an equity position in a USO yields a higher average long run return than that associated with the average license. As a result, there has been a concomitant rise in incubators and science parks at universities (Phan, Siegel, and Wright, 2004), which (in theory) nurture university based spin outs at various stages of development.
A potential problem for USOs is that universities typically lack substantial experience and expertise in managing such enterprises. This raises important issues regarding the relation ship between a university’s resources and cap abilities and the establishment of successful USOs, beyond those faced by new high tech ventures in general. Before outlining these issues, we provide a more precise definition of USOs.
Defining USOs
USOs are businesses that are dependent upon licensing or assignment of the institution’s technology for initiation. This definition excludes companies established by graduates or university researchers that are not directly related to intellectual assets resulting from university research.
USOs can be disaggregated into those that are externally financed and those that do not receive such financial support. The willingness of external financiers (e.g., venture capitalists, business angels, industrial partners) to provide risk capital for a USO is a market signal of potential value. This distinction provides an important indicator of potential performance, since the simple creation of a USO does not mean that technology has been transferred successfully from the university to the private sector.
Stage-Based Models of USO Development
Researchers have sought to understand the processes involved in spinning out companies from historically non commercial university environments. Studies have sought to model the spin out process in terms of stages. Vohora, Wright, and Lockett (2004) employ a stage based and resource based framework. They find that the university spin-outs 241 key stages that USOs must pass through if they are to develop are as follows: (1) the research phase; (2) the opportunity phase; (3) the pre organization phase; (4) the reorientation phase; (5) the sustainability phase. Moving among these phases creates critical junctures, which are the key challenges that a USO faces in its development. Critical junctures arise because the new venture needs to acquire additional resources and capabilities if it is to progress to the next phase of development. Four key critical junctures have been identified in the development of spin out companies: (1) opportunity recognition; (2) entrepreneurial commitment by a venture champion; (3) attaining credibility in the business environment; (4) achieving sustainable returns within their respective markets.
The Composition of the USO Team
The composition of the USO team is a key resource in determining the success of the venture. The USO team may comprise a range of different parties, such as the academic who dis covered the technology, a surrogate entrepreneur from industry, an industrial partner, a financier, and a university administrator. Formal team membership may be narrowly de fined in terms of the actor having both owner ship and an active role in management of the USO. However, more loosely connected team members may have important inputs into the team but do not satisfy these conditions for core membership. A key issue for the development of the USO is how to manage the complexity of the team over time. In particular, the size and complexity of the USO team likely will increase as the USO develops. This creates the issue of how to manage the process of team member entry. However, the contribution of some team members may only be important at certain stages of the USO development. Hence, team member exit may also be a feature of the development of USOs.
Traditionally, the academic in the USO has been viewed as both an inventor and entrepreneur, what Radosevich (1995) terms the in ventor–entrepreneur approach. An alternative mode involves the introduction of a surrogate entrepreneur to work alongside the academic inventor. The surrogate entrepreneur provides commercial skills that the academic lacks, while allowing the academic to continue with their research, which may provide future discoveries that help develop the USO. Franklin, Wright, and Lockett (2001) found that universities that generate the most start ups have more favorable attitudes towards surrogate entrepreneurs.
Universities play a key role in facilitating the development of the USO through having clear policies regarding the spinning out of companies, appropriate systems of incentives and rewards, and access to external networks. Within this overall approach, the university’s techno logy transfer officers (TTOs) may play a more hands on role in nurturing the initial development of the USO.
Venture capital firms and business angels may help the USO access resources, putting governance systems in place, etc. However, there may be concerns as to whether venture capital firms possess the necessary skills to add value in addition to supplying risk capital for very early stage ventures in specialist sectors, especially outside the US.
Alternatively, industrial partners may make an important contribution as part of the USO team in terms of financial and non financial resources. While many academics have collaborated with industry on research projects, the commercialization of the scientific discoveries from this re search through joint ventures with the industrial partners has been neglected in the literature. An exception is the work of Wright, Vohora, and Lockett (2004), which provides case based evidence that joint ventures between the university and the industrial partner may help a USO over come the critical junctures it faces.
The Role of the University in the Spin- Out Process
Universities have been found to adopt different generic approaches to spinning out companies. Clarysse et al. (2004) examine the relationship between a university’s resources, its strategy, and its ability to spin out companies. They identified three distinct incubation models for man aging the spin out process, which they termed ‘‘Low selective,’’ ‘‘Supportive,’’ and ‘‘Incubator.’’ These different models of managing the spin out process have big resource implications for universities if they are to achieve their objectives. In particular, Clarysse et al. identified 242 university spin-outs resource and competence differences relating to finance, organization, human resources, technology, network, and infrastructure. The different models lead to very different outcomes in terms of the types of companies that are created. The low selective model has a mission oriented towards maximizing the number of entrepreneurial ventures in line with the entrepreneurial mission of the university to create employment and enhance development in a depressed region, without a focus on profitable growth or creating a realizable financial return for investors. These ventures tend to be oriented around providing self employment for the founder, rather than growth, and may be regarded as life style businesses. The supportive model is oriented to wards generating spin outs as an alternative to licensing out the university’s IP. This model tends to generate ‘‘profit oriented’’ spin outs with potential open ended growth opportunity, but with no envisaged exit to generate a financial return for investors at time of creation. Finally, the incubator model makes a trade off between using a body of research to generate contract research versus spinning off this research into a separate company. Spin outs resulting from this incubator model are ‘‘exit oriented,’’ since the aim of these ventures is to realize a financial gain for the investors within a particular time horizon. Some universities have a mismatch between their objective and resources. These universities view spin outs as an attractive way to commercialize research results and obtain revenues, but the spin out unit tends to be seen as a short term investment to generate long term revenues and as a result tends to be understaffed. These problems are exacerbated by a lack of financial re sources that make it extremely difficult to attract external capital for spin outs. These universities experience problems as they fail to provide the necessary skills and competencies to achieve these objectives. Thus the model of new company creation the university follows deter mines the nature of resources/competencies it will require and the type of firms that will be generated.
Outcomes
Most studies of university technology transfer performance focus on patenting or licensing. Notable exceptions include DiGregorio and Shane (2003), who analyzed why some universities generate more start ups than others. Based on data from 101 universities, the authors found that intellectual eminence, policies of making equity investments in USOs, and the maintenance of a small fraction of inventor equity ownership promoted USO formation. Nerkar and Shane (2003) examined the survivability of start ups that exploit academic knowledge, based on start ups emerging from MIT. They reported that technological radicalness and patent scope reduce the failure of USOs, but only in the context of fragmented markets. Finally, Shane and Stuart (2002) investigated the relationship between USO resource endowments and performance, again using MIT data, and found that the social capital of the company’s founders is an important endowment for early stage USOs. However, there is relatively little systematic empirical research evidence on the performance of the technology transfer process of universities outside the US.
It appears that success in generating external, equity financed USOs is positively correlated with the clarity of the university’s strategy with regard to spinning out companies and the extent of its use of surrogate entrepreneurs (Lockett, Wright, and Franklin, 2003). In addition, the more successful universities were found to possess greater expertise and larger social networks, which appear to be important in fostering spin out companies.
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