NOTE
Chapter 4: The Way in Which Your TTO Is Organized Has a Direct Impact on the Kind of Spin-o ff s that Will Be Created
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
described in Chapter 3, this company focuses on contract research and con- sulting as its main activities. It seems perfectly normal that this lifestyle company is the most popular one in a university setting. As Druihle and Garnsey (2004) have argued, researchers or academics will have a tendency to set up a company with a business model that is familiar to their pre-start up activities and which needs little investment. Lifestyle companies fit this profile. They need little investment and the business model of consulting, contract research or – in a rare case – product sales is familiar to the researcher, academic or student who wants to set up this type of company.
Despite the attractiveness of the Low Selective model, the Incubator model has received much more attention among policy-makers and TTOs.
The Incubator model focuses on the creation of spin-offs which we have labelled in Chapter 3 as venture capital backed. Because this model wants to stimulate the creation of growth-orientated ventures, it is highly selective in projects it supports. In other words, it is the quality and not the quantity of created ventures that counts. As suggested in Chapter 3, this venture capital backed model implies that the technology is innovative and can be protected. As a result, we observe that TTO officers in the Incubator model spend significant time in the protection of the technology base in the incu- bation or pre-start-up phase. This includes the licensing in of missing ele- ments and a clear distinction between exclusive and non-exclusive patent rights. Further on, the VC-backed model demands a well-balanced found- ing team, preferably with experience in the sector. Again, during the incu- bation phase the TTO officer is actively searching to compose a team which can attract an investor. Finally, the VC-backed model assumes that the spin-offcan attract a sufficient amount of capital at start-up. Again the TTO is actively looking for private venture capitalists who are willing to invest the capital at start-up. Because of the company’s size at founding, public VCs cannot provide the capital without the help of private VCs.
Finally, universities like KUL have developed an in-between type, which we label the Supportive model. Unlike the Incubator model, the supportive model is not so selective in terms of the kind of spin-offs it wants to stimu- late. Quality is traded offagainst quantity. So, even companies with fewer growth prospects can receive support in this model. In contrast with the Low Selective model however, the companies that receive support usually embody a formal transfer of technology from the university to the company.
They also start with a larger capital base than lifestyle companies and they might attract surrogate entrepreneurs to complete the founding team. The company model that probably best fits the kind of companies targeted by this model is the ‘prospector’ type. These companies are started very early in the product development process and are not certain at start-up about their business model. They are not able to attract venture capital yet, but
their ambition is higher than creating a lifestyle company. The public money associated with the university allows these companies to start. The devel- opment of a structure to support academics who want to create a company within the university seems to be a key success factor in the development of such a model. In such a company, academics usually perform contract research or consulting. Without having to leave the university and with a business model very familiar to them, they can experience whether creating an entrepreneurial venture is attractive to them or not.
A general university might be in need of the three models described above. The Incubation model might serve a research department which is leading in its field and which has developed a critical mass in a certain domain. The Low Selective model fits very well the idea of an entrepre- neurial university and can also serve the social science departments.
Finally, the Supportive model might be useful for those departments where the critical mass is lower but that have developed a specific type of tech- nology which might be a success on the marketplace. A major difficulty at most universities is that TTOs tend to be structured following one of these models and have difficulty in allowing the existence of deviant models at the same institute. This leads to a uniform set of spin-offs. However, these spin-offs do not usually follow a VC logic.
Chapter 5: The Process of Spin-offDevelopment Is an Iterative One Over the Different Phases of the Venture’s Growth. Policy Actions Need to Be Differentiated According to the Particular Phase of Development
In Chapter 5 we examined the different phases in the development of spin- offs and showed that these could be characterized as involving an iterative process that may require issues that arose at previous phases to be revisited.
In moving between phases, spin-offs needed to address specific critical junc- tures. The first critical juncture involving opportunity recognition typically requires the spin-offto acquire the capability to synthesize scientific know- ledge with an understanding of the market to which it might apply. There may be a need for networks of market contacts outside the scientific environment of the university. The second critical juncture requires the venture to acquire an entrepreneurial champion committed to the devel- opment of the venture. Where this is a problem, it appears to arise from uni- versities not providing sufficient resources and network contacts or not developing appropriate incentives and policies. As a result, academic sci- entists or surrogate entrepreneurs failed to become sufficiently committed to developing the spin-off. The third critical juncture, that of credibility, was particularly problematical because of the academic entrepreneurs’ lack of a commercial track record, the often intangible nature of the spin-off’s
resources at this early stage, and the non-commercial environment from which the spin-offwas emerging. All these elements pose barriers to the attraction of customers and financiers. The development of links with sur- rogate entrepreneurs at earlier phases in the development process may help the spin-offovercome this juncture. However, universities need to devise policies to attract the surrogate in the first place, such as through building network links. The demonstration of proof of concept and the potential for a portfolio of products may also help to establish credibility in relation to financiers. Relocation in commercial premises away from the university can help signal a commercial approach to prospective customers. The fourth critical juncture requires the spin-offto develop entrepreneurial capabilities that enable the venture to reconfigure deficiencies from earlier phases into resource strengths, capabilities and social capital.
In the absence of overcoming social capital deficiencies, resources weak- nesses and inadequate internal capabilities, spin-offs did not have the absorptive capacity (Cohen and Levinthal, 1990; Zahra and George, 2002) to become established as rent-generating businesses. In the earlier develop- ment phases it is the individual entrepreneur who needs to acquire the req- uisite human capital that embodies these entrepreneurial capabilities. Over time, as growth became more turbulent and the complexity of the challenges increased, the entrepreneurial capabilities became located in the team.
Chapter 6: The Most Important Resource in Spin-offs Are the Entrepreneurial Teams. An Effective Spin-offPolicy Should Start with an In-depth Understanding of Their Dynamics
In Chapter 6, we discussed the importance of founding teams in the process of creating spin-offs. In particular, we have shown how TTO officers as ‘privileged witnesses’ tend to match researchers with surrogate entrepreneurs who offer their services to the TTO. As such, the TTO officer plays a very important role in this team formation process. However, since various researchers (for example, Heirman and Clarysse, 2006) have shown that the quality of the founding team has a very important impact on the later performance of the spin-off, this team formation process needs to be addressed carefully. More specifically, researchers have shown that teams which are diverse in their functional background but combine this with joint working experience tend to be quite successful. This is often attrib- uted to the positive impact of ‘cognitive diversity’, which stimulates members of a team to challenge each other and hence make better deci- sions. Cognitive diversity does not only assume a different functional back- ground, it also implies that the team members have a different view on how the spin-offshould develop.
We positioned these different perspectives within an organizational culture framework, which classifies team members according to their flexible versus control orientation and their internal versus external orien- tation. Team members who combine flexibility and external orientation tend to be ‘innovative’ individuals who embody a high degree of creativity and vision. Many high-flying academics tend to have a high degree of this orientation. In contrast, people with a high degree of external orientation but also a high degree of focus on control, tend to be ‘goals orientated’. In a founding team, it is very important to have a person with such a vision since its absence is likely to be a project killer. Privileged witnesses such as TTO officers should recognize the need for these different personalities.
However, our research shows that often the surrogate entrepreneurs attracted to form a founding team with the researchers have the same kind of ‘innovative’ orientation as the researchers themselves. This leads to homogeneity instead of heterogeneity at the founding team level. Usually, TTO officers do not want to be in conflict with the researchers on whom they are dependent for deal flow and invention disclosures.
Functional heterogeneity is related to what researchers label the ‘cogni- tive diversity’ in teams. Cognitive diversity means that founding team members challenge each other about the strategy the spin-offideally should follow. Cognitive diversity increases the performance of a team because discussion leads to better decisions. However, this discussion should not result in affective conflict, which means that founders start to dislike each other. We have shown that teams, who know each other and who have developed non-instrumental relations before starting the spin-off have much less chance of experiencing affective conflict than those who do not know each other. Non-instrumental relations can be joint working experi- ence or similar.
Chapter 7: There Are Important Interactions between Finance Provision for