NOTE
Chapter 3: Spin-o ff s Are Not a Homogeneous Group of Companies. Policy Actions Should Take into Account the Di ff erent Business Models and Not
In the French case, there appears to be a degree of complementary, with 32 per cent of the creators being involved in more than one of the four incentive measures. The most important overlap is observed between the competition and the incubators. Of the total companies resulting from the competition and the incubators, 23 per cent are common to both measures, the 315 companies concerned accounting respectively for 47 per cent of the companies created from the incubators and for 45 per cent of the compa- nies resulting from the competition.
However, our analysis of the available data and our discussion with the managers of the incubators and the public seed capital funds show that there is a significant gap between these two instruments. The government intervention model in its present form functions only partially. The linear model adopted by governments is limited as only a very small percentage of the start-ups financed by seed capital funds are from public-sector incu- bators. Although the French government perceived there to be comple- mentarity in its measures concerning incubators and start-up funds, this complementarity did not materialize, since only eight of the 344 firms created from incubators by the end of 2001 had benefited from seed capital funds. Indeed, 77 per cent of the firms supported by the seed capital funds (that is, 27 out of 35) were not created from incubators. Conversely, only 2 per cent of the firms created in incubators (eight out of 344) benefited from seed capital. Even by the end of 2005, companies funded by public seed funds represented only 6 per cent of the total companies generated by the incubators. This result would seem to undermine the main premise of French policy towards spin-offs.
Chapter 3: Spin-offs Are Not a Homogeneous Group of Companies. Policy
factor. Rather, the social acceptance of the technology by the different stakeholders is central. Therefore, the ability to build up this credibility is a key determinant of performance. However, this credibility can only be built if the parent group from which the technology is spun offis widely recognized as an important and leading research group. Only then, will other important stakeholders such as financial and corporate investors be interested in taking a risk in the company and accelerating the growth path.
This growth path can result in an incumbent company which plays a significant role in the market for products. However, it is much more likely that the path leads to a trade sale to an incumbent company. Tellis et al.
(2003) have shown that probably only 6 per cent of the companies that play a leading role in the market for ideas also play such a role in the market for products, and in the latter market they represent only 4 per cent of market share. Hence, it is quite likely that a trade sale will be the destiny of this kind of company.
Although the venture capital backed academic spin-off is attractive through its growth process, it implies a number of risks which have to be recognized by both the university and the policy-maker. First, few research groups have the potential to start up such a company. As mentioned in Chapters 5 and 7, this company requires a balanced portfolio of technol- ogy, which is carefully constructed through the licensing or buy- in of IP developed by others and protected by its own IP. It also requires a research group that has received recognition in the scientific community and that plays a significant role in the market for ideas. Finally, it requires human and financial resources that underscore this reputation. In other words, it must be able to attract a significant amount of venture capital at start-up to be credible in its actions and it must be able to attract most of the researchers that were working on the technology at the university or public research institute to retain scientific credibility. However, each university is likely to have only a few research groups that are able to generate this kind of company. As a result, it is unrealistic to set quantitative targets for public research institutes and universities in terms of the number of spin-offs they should create each year. In fact, the possibility of creating such a spin-off will be rather exceptional. On top of this, the spin-off will inherently represent a risk. Most probably, the spin-offwill be sold to an incumbent firm. If the incumbent firm is not located in the region or even the country in which the spin-offwas founded, this probably means that it will have a foreign parent company and may become an R&D laboratory of this company. In other words, policy-makers cannot expect these companies to generate excessive amounts of employment. Only a few of these spin-offs will be able to achieve significant growth. Even then, there are a number of challenges. The market for products for this type of company is by
definition international and mainstream. This means that they have to grow from a probably locally embedded and supported company into a multina- tional company that has the necessary human resources to be credible at the international scene. This also means that its top management has to turn into an international team. Again, the country or region in which the spin-off was founded might not be attractive enough for expatriate top managers to move into. Having no international top management experience usually results in bad experiences, as the dramatic failures of companies such as BAAN in the Netherlands and Lernout & Hauspie in Belgium have shown.
Most academic spin-offs will not belong to the happy few of the venture capital backed group. The potential of these spin-offs will be more limited because the technology base that underpins their founding is not sufficiently new or credible to play a significant role in the market for ideas.
Usually, they have a patent-protected prototype or maybe a beta version to sell on the market for products. Unlike the market for ideas, the market for products follows a bootstrapping logic. This means that the company should economize on its expenses and use internal funds instead of exter- nal forms of capital. The time to breakeven is crucial and the sources of finance that are used should not interfere with the business model. In fact, in most cases the business model adopted by these companies is focused on consulting or contract research. As shown by Druihle and Garnsey (2004), academics are familiar with this kind of business model and they feel com- fortable with it. On top of this, it requires few investments. In contrast, external capital is provided by equity investors, who have expectations in terms of returns that might by far exceed the market for products.
Therefore, they tend to interfere with the business model of spin-offs since they are not interested in investing in companies that do not have any potential to grow in an exponential way. Consulting or contract research companies typically do not have such a growth path. So, academics who have a business model which essentially follows a contract research or a consulting logic are suggested to productize.
This results in a new kind of company which we have labelled the
‘prospector’ category. These companies attract external capital from public or private equity funds, which are linked to the university or public research laboratory. Usually, the amount of capital is not sufficient to play a role in the market for ideas, nor do the human or technological resources show the intrinsic quality or quantity to attract different stakeholders. So, the ques- tion arises as to why these companies will still attract a significant amount of capital at start-up. An explanation is that the capital serves to value the technology licensed or transferred from the university into the start-up.
Another explanation is that the capital is used as pre-seed money to test
some assumptions behind the business model. In both cases, the multiple that can be realized will not be in line with that expected by an investment manager. Policy-makers and university administrators should be aware that external capital as a pre-seed capital fund is probably not the best way to finance these prospectors. In the early phases of the start-up, especially when the business model is not clear, pre-seed sources of finance should allow the company to fail or to be free to adopt a business model that is not in line with an investor’s expectation. As a result, one should carefully analyse the need for, and the management of, pre-seed capital funds.
Finally, we have identified academic spin-offs which follow a very famil- iar model such as contract research or consulting. These spin-offs start small in a market for products or services and optimize the time to breakeven, following the pecking-order theory in terms offinancing. Some of these companies might become high-growth companies later on, but this is often not clear at start-up. External factors such as increasing customer demand, particular partnerships or favourable financial market conditions, might be the reason why their business model transitions from low-growth orientated towards a high-growth orientated. But even if they stay low- growth orientated companies, their value added as a population might be significant. However, technology transfer officers usually overlook these initiatives and universities show very little support for researchers or aca- demics who want to create a company that does not involve a formal trans- fer of technology. This is remarkable since these companies are less demanding in terms of human,financial and technological resources, and might increase the visibility of the university in the region. They form the heart of what is often referred to as the entrepreneurial university.
Chapter 4: The Way in Which Your TTO Is Organized Has a Direct