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How to Make Academic Spin-Offs Successful?

When we think about technological startups, the first image that comes to our mind is a group of guys with a revolutionary idea writing a code in a garage that hopes to become the next Facebook or a Twitter. To build their ideas startups will try to attract venture capital firms who are looking for significantly high return in exchange for the high risk that they assume by investing in young companies. Once funded, startups can grow quickly and the most successful and innovative of them could scale up into billion-dollar companies. This framework of venture-based IT startups has proved to be particularly efficient for quick, cheap and large-scale emergence of high-tech software companies. As the result, during the last decade we could see hundreds of successful exits of IT startups through acquisitions or IPOs.

At the same time, outside of IT sector the number of successful startups is a lot less. The main reason is that development of new technologies in such industries as energy, cleantech or biotech usually requires expensive scientific research, which involves hard physical assets that are not accessible for most people. That’s why breakthrough technologies in cleantech or biotech are not coming from garages. The major sources of innovation in non-digital industries are corporate R&D and academic research. However, the corporate R&D is not likely to be a source of new startups. The results of corporate R&D usually stay within the company becoming a part of new products or services. At the same time, universities have always been the sources of inventions that have been then spun off into new companies.

Today the number of academic spin-offs (companies that develop a product or a service based on the intellectual property created in academic or research institution) increases significantly all over the world. More and more countries realize the crucial role of laboratories and research centers in innovation and economic growth. For instance, today in the EU there has been launched a large number of government backed programs, which aim to motivate and help scientists to participate in creation of new ventures.  New seed funds, technology transfer centers, incubators and business plan competitions have been created in order to promote the transfer of the results of publicly funded research to new spin-off companies. All these measures should have boosted the growth of innovative businesses in counties where they have been applied. But, unfortunately they didn’t!

Certainly, the number of academic spin-offs has largely increased over the last decade. However, the number of successful spin-offs still remains modest, especially compared to web startups or such spin-off creation leaders as Massachusetts Institute of Technology and Stanford University. After 3-5 years of operation a large number of spin-offs stays small and inefficient: their staff doesn’t exceed 10 employees, their turnover is less than $1M and some of them are still dependent on public support.  In this context I’ve decided to analyze why some spin-offs are more successful than others. Below I would like to present a list of determinants, which, I think, are crucial for successful development of academic spin-offs.

 Not All Academic Inventions Can Be Spun-Off

To create a spin-off, it is important to have a radically new technology. This technology should have a potential to make transitions in the market or generate revolutions in the way that products or services are created. Technologies that only improve existing processes or products are not usually appropriate for starting a company. A disruptive technology gives a possibility to academic spin-offs to compete with established businesses that, normally, have a variety of advantages in technology commercialization and operational activities.

General-purpose technologies have more chances to scale up than technologies with a unique application. Inventions that have a broad spectrum of applications will allow founders to change the market if the first application that they pursued didn’t work. This flexibility is important to the survival of new companies, which have no existing products to fall back on if an application for a new technology proves to be unviable. Spin-offs that develop a general-purpose technology are also more attractive to investors who are always looking for risks diversification.

Also, spinoffs are more likely to succeed when their technology generates significant value for customers. While an established company can exploit a technology that offers only a small improvement in customer value, a new firm cannot afford to pursue the same type of technology. Spin-offs have to show that their technologies offer significant value to customers, because customers will not switch to spinoffs as suppliers unless the new companies provide solutions to customer needs that are better than the solutions that existing suppliers provide.

And finally, the academic invention that serves as a basis for a spin-off should have strong intellectual property protection. Strong intellectual property protection is important for spinoff companies because it is the only competitive advantage available to a new firm when it is first created.

It Is Better To Have a Good Team with an Average Technology, Rather Than Good Technology with an Average Team

It is very important for a spin-off to have a heterogeneous team composed of professionals with different background. It is crucial for a spin-off to add commercial managers at the earliest stage of the company.

At the same time, a large number of spin-offs founders underestimate the importance of commercial and marketing management, believing that the market will naturally recognize their invention.  It is not surprising because many of founders of academic spin-offs have spent their careers focused on basic research and have no idea that transition of their invention into commercial reality requires a whole different discipline and activity.

A spin-off company needs a manager with highly specific detailed knowledge of the target market: its structure, competitors and supply chains. This manager, normally, takes also responsibilities for setting up international activities and attracting funding. A general understanding of the market is often not sufficient to be able to identify the precise niche that offers the best initial opportunity.

It is also important to have someone in the team with product development experience. The strengths of academic founders are more likely to be in building prototypes in the laboratory, rather than designing products that solve customer needs and that will be optimized for manufacture.

At the same time, how can a young academic spin-off attract talented managers? It is obvious that there will be not a lot of managers who will leave their certain and often well paid jobs for a young company. To attract these managers, spin-off founders should first of all be willing to either give up equity or set good employee stock options. This will motivate managers to take a risk in exchange on potential great outcome. Secondly, in order to recruit the best people, founders have to communicate a very compelling goal for their company. Today, a lot of talented people want to do something that really makes difference. So, founders need to convince them that their idea has a high potential to be something significant and world-changing.

Is There a Market for a New Academic Innovation? Who Is a Future Customer of the Innovation? Does This Innovation Satisfy a Customer Need?

Inventions coming from academic research are not generally aimed at any specific market. Few academics develop technology with a specific market application in mind. That’s why the majority of spin-offs face the uncertainty of whether or not there is customer demand for their future products or services. To be valuable a spin-off company should have a very clear idea of what market needs.

The founders of the spinoffs need to gather information about customer needs and how they might satisfy them, as well as to obtain and incorporate customer feedback about the products and services that make use of their technologies. To come up with solutions that satisfy customers, the founders of spinoffs often need to change their technologies. Specifically, they need to develop products and services with the specific features that customers want, even if these features don’t have much in common with the core technology developed in the university.

At the same time, it could be difficult for the founders of university spinoffs to obtain feedback from customers, not only because customers do not know what they want, but also because some technologies are difficult to understand without seeing them. In this case spin-offs need to invest in the development of their initial prototype without the benefit of customer input. In case of simple and inexpensive technology, spin-offs can choose a strategy of getting the product to the market as quickly as possible and validate it as much as possible along the way. Then according to the ‘list of mistakes’ received from the customers, the spin-offs can create a new version of the product that does not have these flaws in it.

Besides customer satisfaction, spin-offs founders should identify potential market applications that are really promising from a business point of view. As the technologies that spinoffs exploit are often very early stage inventions it is hard for founders to identify the right market applications for these technologies. In this case the founder should focus first of all on the application with the largest market size, since this criteria is crucial for investors. Generally, investors favor spinoffs that develop products for a large market, as it can provide greater financial returns if the company successfully introduces this product to the market. If there are two similar markets, the founders can apply other criteria and select an application, which provides the greatest value to the customer, has the best ability to serve the market and is most likely to create a sustainable competitive advantage.

Venture Capitalist are often not interested in university spinoffs at their earliest stage, because the risk of these ventures is very high

Funding plays a crucial role in spin-offs development. However, venture capital investors rarely invest in spinoffs at their earliest stage of development, because at this stage it is not clear how the technology can be exploited, what the product will be, and which market is it aimed at. The main challenge of spin-off companies is to bride this gap. In other words, to attract investors spin-offs have to show a large market, strong patent protection of their technology and a prototype of the product, which will potentially work up the market.

At the same time, for many of spin-offs it is a classic chicken and egg problem.  To get funding spin-offs need to create a prototype, but to create a prototype they need to get funding. That’s why at the early stage academic spin-offs have to look for other sources of funding than venture capital. First of all spin-offs can try to raise seed capital from different public funds. Many countries have recently enacted reforms to encourage technology transfer and academic entrepreneurship. So, today more and more academic spinoffs can get substantial government research grants and contracts, which will help them to develop their technologies to the stage at which they could interest private investors.

Business angels can be considered as another option of funding. Angel investors can make investments at the early stage of technological development and then become involved in the company creation process. Normally, business angels require lower rate of return on their investments as venture capital firms. And finally, business angels are more patient investors than venture capitalists, who, generally, raise money from groups of partners and have to return it back maximum in ten years.

Another form of academic spin-offs financing is non-recurring engineering contracts from large companies. Large companies are often inefficient at product development, because they must deal with legacy issues, bureaucracy and constraints of hiring effectively across a large number of people, which hinders their ability to operate at the same pace as spinoff firms. As a result, spinoffs can conduct product development much more efficiently and effectively than established firms. Once the spinoff creates the product, the big firm then gets the intellectual property rights on this product or seeks to acquire the spinoff company.

And finally, academic spin-offs can try to raise seed capital via crowdfunding platforms. It is well known that today crowdfunding platforms are multiplying around the world and the sums that they are raising are growing exponentially. So, like any other startups, academic spin-offs can get funding from a large number of people interested in their idea. Some universities even encourage their spin-offs to take advantage from crowdfunding platforms. For example, University of Utah’s Technology Commercialization Office has recently entered an exclusive agreement with crowdfunding platform RocketHub.

Spin-Offs Have To Go beyond Academic Network and Build New Networks around Them

Usually scientists underestimate the importance of outside networking and social collaboration. When it comes to pure scientific research, there is definitely regular exchange of research results, theories and ideas between scientists, but, generally, this communication is not going out the academic community. However, when a group of scientists have decided to create a spin-off, the same day they should start thinking about external networking.

Academic entrepreneurship is not merely a transfer of research result, but rather a process of exploration in which various stakeholders (investors, first customers, industrial and academic partners) play a critical role. In order to integrate these stakeholders in the process of spin-off development, the founders have to continuously share their goals, doubts, opinions and achievements, taking advantage of different kind of social networks. Efficient networking can help spin-offs to better anticipate customer needs, accelerate development of their products or services, make successful product introductions, and attract new employees and investors.

Today, there are more and more web services, which can help academic spin-offs to accelerate their development. For example, such platforms as ResearchGate facilitate collaborations and data sharing among scientists around the world. This service can help researches to accelerate scientific progress and technology development. Such services as Quirky can help founders in product development, engaging participants in collaboration on every aspect of product creation. Through publishing and conversation on LinkedIn or startups & technology related blogs, spin-off founders can identify their future employees and attract first investors. In general, expanding the number of nodes in the network, spin-offs can build a foundation that will support their development and growth in the future.

Academic spinoffs play a crucial role in innovation and economic growth, particularly in capital intensive and science-dependent sectors.  They are also an important mechanism in transferring of scientific knowledge into new technologies, products, services and processes. The most successful spin-offs, such as Google or Genentech have shown what tremendous contribution to innovation and entrepreneurship could make academic research. Today we can see a substantial increase in the number of students seeking to create new businesses based on their scientific research during their university studies. These future academic entrepreneurs could greatly contribute to global issues solving and become a driving force of economic growth in their countries. In order to transform young spin-off companies in high growth businesses, academic entrepreneurs should try to improve each of the above elements, which will determine the development of their companies in the future.

 

[1] SHANE, S. (2004). Academic entrepreneurship: university spinoffs and wealth creation. Edward Elgar Publishing Limited.

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