NOTES
3. Types of spin-o ff s
3.3 INTRODUCING A SPIN-OFF TAXONOMY
3.3.2 The Business Model
contractual arrangements and other IP rights are usually the technological assets to start from.
Prestige of research group
Apart from the mode of technology, spin-offs are different depending on the scientific quality and prestige of the parent institute. Moray and Clarysse (2005) show that institutes or departments which have a large crit- ical mass of researchers in a specific technological domain can more easily attract the attention of venture capitalists (VCs) to invest in the start-up and more easily find lead users because multinational companies often have invested embedded laboratories on the campuses of these universities and research institutes. As such, we assume that VC-backed companies will more easily emerge from departments within universities that have enough critical mass and scientific excellence to be spotted on the radar of world- wide financial and corporate investors. Alternatively, prospector com- panies make less progress in these environments since they do not pass the highly selective nature of deals to be supported by the parent research insti- tute (Clarysse et al., 2005b). In contrast, these companies seem to emerge from mid-range universities that clearly opt for a spin-offpolicy in favour of licensing out patents to large companies. Finally, lifestyle companies are founded at the initiative of individual entrepreneurs based upon their per- sonal knowledge or based upon a specific product they have developed internally which is market worthy. Hence, the prestige of the parent seems not to be so relevant here.
company is not to generate revenues but to prove that the technology works.
Eventually most of these companies will be subject to a trade sale. In the case of the plant biotechnology company, this trade sale might be to a large seed company. In a few cases, the start-up looking for investor acceptance will make a move itself and become a revenue-generating company.
However, this is not an easy process. Tellis et al. (2003) show that only 6 per cent of the pioneers are able to become market leaders afterwards. Lifestyle companies are making a horizontal move in Figure 3.1, looking for market acceptance. They typically ‘bootstrap’ (develop through their own initiative and effort) and look for minimal costs and a fast time to break even. A typical example of such a company is a professor who has developed a bio- logical test to analyse the quality of water. He starts a company and becomes successful in a niche market, which in this case might be geo- graphically limited. Others start a company in consulting and are interna- tionally active in a very specific niche which is determined by the borders of their in-depth knowledge. A few of these companies move, after some years, from a start-up looking for market acceptance towards one looking for investor acceptance. There may be several reasons for this shift:
beneficial stock markets, customer pulls or other reasons can change the window of opportunity. Finally, we identify the category of prospectors.
These companies still have to refine their business model. An exit through Figure 3.1 Investor vs market acceptance
Investor acceptance
Entrepreneurial opportunity Market acceptance
Revenue growth Employment
growth
Market + investor acceptance Sustainable high growth
‘VC’ ‘VC’/‘IPO’
To accelerate growth VC-backed
Prospector
‘Bootstrap’
Lifestyle start-up
‘Recurrent sales’
trade sale belongs to the opportunities. However, it is not the only possible company outcome. Revenues also are generated and the start-up might well turn out to be a profitable niche company. The most important is that neither of these two avenues is excluded.
Mode of value-capturing
The mode of value-capturing is quite different between VC-backed spin-offs and others. A useful way of thinking about value-capturing is the framework developed by David Teece (1987). According to Teece, the degree to which an innovator or innovative start-up can capture value is a function of its appro- priability regime and its ease of acquiring complementary assets to bring its idea to the market. The appropriability regime includes the degree to which the start-up can protect its idea. Venture capital-backed companies are mostly positioned at places where the appropriability regime is more tight than average and the complementary assets are important and difficult to acquire (see quadrant III in Figure 3.2). In those industries where the appropriability regime is very strong, such as biotechnology, the focus of VC-backed companies is to develop a patent portfolio. Because the comple- mentary assets are important to reach the end consumer and because they are tightly held by a limited number of seed companies, chances to succeed as a company and capture most part of the value chain are limited. The future of most plant biotechnology start-ups is a trade sale to a large seed company.
In industries where the appropriability regime is weaker, such as information
Source: Teece (1987).
Figure 3.2 The Teece framework APPROP-
RIABILITY H
i g h
Complementary assets Free available or
unimportant
Tightly held and important
Difficult to make money
Inventor
Holder of complementary
assets
Inventor or party with bargaining
power L
o w
technology (IT), we often observe that acquisitions are made downstream in the value chain to increase the organization’s bargaining powervis-à-visthe companies that hold the marketing or distribution power (for example, OEMs – original equipment manufacturers). Branding and name recogni- tion based upon technological excellence are used. In both cases, value is created through building up a portfolio of ‘intangible’ assets in order to sell the company to potential buyers downstream in the value chain.
In contrast, lifestyle companies clearly belong to quadrant I in Figure 3.2.
This quadrant is characterized by a weak appropriability and a relatively easy way to access customers. The result is that no superabundance of financial gains can be made. The typical consultant company reflects this very well. The income of the company is sufficient to earn a good living (for example, lifestyle) but repetitive sales are difficult. Finally, prospectors are situated at start-up in quadrant IV in Figure 3.2. The idea is not easy to protect and it seems difficult to build up a position in the value chain.
Therefore, time and money is needed to find out how to position the company in the value chain and capture (part of) the profits.