Academic Enterpreneurship

Hamid Houshmand

Why do University Spinoffs Matter?

• Spinoffs encourage economic development: _ Spinoffs generate significant economic value: $34 billion economic value added in US 1980-2000 _ Spinoffs create jobs: High tech jobs _ Spinoffs induce investment in university technologies: Spinoffs do better job in attracting investment in technology than established companies _ Spinoffs promote local economic development: by hiring and sourcing of supply

Why do University Spinoffs Matter?

_ Spinoffs enhance the commercialization of University Technologies _ Spinoffs are an effective commercialization vehicle for uncertain technologies _ Spinoffs are an effective vehicle for encouraging inventor involvement _ Spinoffs help Universities with their mission _ Spinoffs support additional research

Why do University Spinoffs Matter?

_ Spinoffs attract and retain faculty _ Spinoffs help to train students _ Spinoffs are high performing companies _ Creating Spinoffs is more profitable than licensing to established companies

University Spinoff in Historical Perspective • • • • • Modern university was first in German in 19 th century Earliest spinoffs in 19 th century in Germany E.G. : Production of salt and acetic acid Other countries modelled their university system on that established in Germany Land grant Universities were created

University Spinoff in Historical Perspective • • • • Spinoff activities slow in 19 th century At the turn of 20 th century: negative view on faculty members to patent and licensing their inventions As a consequence: from early 20 th century to 1970: more indirect rather than direct to support technology commercialization and spinoff activities University patenting and technology commercialization activity increased after world War I

University Spinoff in Historical Perspective • • • • The volume of the commercialization effort in the first part of 20 th century was still low Research corporation was initiated to assign patent and licensing university innovations In the pre-World War II period, most American universities were ambivalent to make commercial use of their IP Professor Steenbok was a kind of pioneer who commercialized its patent on vitamins in food using alumni of the Wisconsin University

University Spinoff in Historical Perspective • • • • • During the 1920s and 1930s, other universities followed Wisconsin example During 1930s many Universities set up administration units for patenting and licensing activities From 1945-1980: WW II transformed the research universities The federal government provided funding to particularly the engineering departments Significant increase of number of Universities with explicit policies to manage the innovations

University Spinoff in Historical Perspective • • • • First modern venture capital organization was built in Boston at the end of WWII with the goal of commercialization of military technology The post WWII period was marked by a dramatic rise of research and development activities Increase in federal funding in the 1950s and 1960s resulted in increase of R&D activities s and commercialization activities The heavy funding of universities during the Cold War also had a n effect on creation of spinoff companies

University Spinoff in Historical Perspective • • • • Increase technology production and commercialization activities during 1990s Result: significant increase in returns earned from licensing Federal support for biomedical research resulted in creation of biomedical innovations Biomedical inventions increased from 11% by 1970s to 48% by 1997

University Spinoff in Historical Perspective • • • Change in patent law helped to rise in Spinoff activates in 1980s: – – Software patent Biological life forms patentable Dramatic rise in the availability of venture capital and business angel financing University equity polices also helped in growth of spinoff activities

Variation in Spinoff Activities Across Institutions • • • University policies: executive licenses, taking equity, use of university resources, leaves of absence, division of royalties, pre-seed stage capital Technology licensing office characteristics: licensing office resources, company formation expertise, linkage to start-up networks, linkage to start-up networks Other University characteristics: _ University goals _ University culture _ Entrepreneurial role models _ University quality _ Industry funded research

Variation in spinoff activity across geographic locations • • • • Access to capital Locus of property rights: variations across countries Rigidity of the academic labour market: ability of academics to change institutions or industries Industrial composition of the area: Industrial landscape surrounding a University encourage or discourage the formation of spinoffs

The Types of Technology That Leads to University Spinoffs

Spinoff firms

Radical Tacit Early stage General-purpose Significant customer value Major technical advances Strong IP protection Incremental

Established firms

Codified Late stage Specific -purpose Moderate customer value Minor technical advances Weak IP protection

• • • • • The Types of Technology That Leads to University Spinoffs Radical technology: incremental invention is not appropriate for founding a spinoff Cannibalizing existing assets: established firms with a dominant market position in an industry rarely adopt radical innovations Disbelief: dismiss of radical innovation by established firms is a reason for founding spinoffs Tacit knowledge: either is tacit or is held in the minds of inventors. Licensing an invention works best when technology can be codified and made understandable from patent documents Early stage invention: Spinoff formation because of academic innovations are often not more than proofs of concept

• • • • • The Types of Technology That Leads to University Spinoffs Uncertain value: difficult to license because established companies find it difficult to see the value of the early stage The focus of established companies on existing operations: not ready to devote resources on new technology Product development expertise: Complexity of the new technology often requires new competencies. Established companies are to bureaucratic to develop new product form the idea stage. Communicating information about the technology: With a spinoff it would be difficult for inventors to communicate the new technology Ability to capture value: Most of the value is captured through transferring the new technology into new products

• • • The Types of Technology That Leads to University Spinoffs Time horizons: established firms don’t like to make investments in technologies that have unknown or long time horizons General-purpose technologies (platform technologies): Spinoff exploit technologies with several market applications. A flexibility is generated that is important for survival of spinoffs Established firms are unwilling to license general purpose university technologies

• • • • The Types of Technology That Leads to University Spinoffs The problem of different stages of the value chain: general-purpose technology would sometimes be used at different stages of the value chain in a industry that make it difficult for established firms to license it.

High customer value: A new spinoff firm should exploit a technology with significant value to customers, motivating external entrepreneurs, and investors Significant technology advances: A technology to be appropriate to the founding of a spinoff, it also needs to be a significant advance in a scientific field Strong intellectual property the main source of competitive advantage of the spinoff firms: portfolio of patents, interlocking patents are important, a broad scope patents allow a spinoff to block competitors

Industries Where Spinoffs Occur

The industry distribution of MIT spinoffs from 1980 to 2000

Technology

Biotechnology Software Materials Medical device Mechanical devices Computer hardware Robotics Semiconductor Optics/lasers

Percentage of spinoffs

31 23 11 10 7 6 4 4 3

Industries Where Spinoffs Occur

• Spinoffs are concentrated in a few industries in Sweden

Industry

Biotechnology & medicine Computer Electronics Industrial equipment & machinery

Percentage of spinoffs

20 16 13 12

Industries Where Spinoffs Occur

• Why spinoffs are so common in biomedical industries – – Collapsed discovery process Long product development process horizons – Locus of expertise in technology creation in Universities – Focus of customers on product efficacy rather than on cost – – Discrete nature of biomedical inventions Strong patent protection

Industries Where Spinoffs Occur

• Specific industry characteristic that promote spinoffs – – Effectiveness of patents in an industry Complementary assets in marketing, distribution and manufacturing – Age of the technical field: Spinoffs are more common in younger technology base – Market segmentation: Spinoffs more common in markets that are segmented – Average firm size: Spinoffs are less common in industry with large companies

The Role of People in University Spinoffs • • • Three primary group of people inventors Entrepreneurs Investors • • • Spinoffs can be led by any of them Inventor-led (entrepreneurial types) Entrepreneur-led Investor-led

• The Role of People in University Spinoffs Motivation to spin off – Psychological explanation – A desire to bring technology into practice – A desire for wealth – A desire for independence – Career-oriented explanation: – Career cycles: first achieving tenure then obtaining financial return – University status: help to reduce the risks and encourage – Star scientists: seek to capitalize financially on the tacit knowledge – Entrepreneurial experience: exist at the required level

The Process of Spinoff Company Creation

University research: Researchers in science and engineering seek to create new knowledge. Sometimes they produce new technology that is novel

Invention disclosures: Universities in USA require disclosure of invention that used University resources. Otherwise the inventor is free to make use of the invention as he or she sees fit Evaluation of invention: To meet criteria novel, non-obvious, and valuable technology. Technology-licensing office seeks a patent to protect the invention Marketing the technology: looking for private sector entities interested in licensing and commercializing the technologies. Finding out the market opportunity through networking with industries and companies

The Process of Spinoff Company Creation

Licensing decision: Exclusive licensing within a particular field of use. The compensation is paid through royalties on sales of successfully commercialized products or services

Decision to spin off: In USA, 86% of inventions are licensed to existing companies and in 14% of cases new ventures are created. Spinoffs are atypical start-ups, based on sophisticated science or engineering, no business plan, no management, no capital. Minus two step venture: 1. Lack of confidence in commercial value: discovery of market opportunity 2. Discovery of the entrepreneurial/business opportunity

The Process of Spinoff Development

Proof of principle: is the first step, need to establish proof of principle in a specific application to solve a customer problem

Prototype development: Prototypes must be develop for any market application. The prototype needs to work properly and efficiently to meet the customer need Decision of business model: How to capitalize the return. Major business models are: Licensing, partnership, marketing the final product / service Product development: Major value added through product development 1. Turning the invention into product or service 2. The product or service meet the commercial environment Often need to develop / change the technology into something that the customer buys

The Process of Spinoff Development •

Changing to make technologies appropriate for the commercial environment:

– Improving performance – Enhanced robustness – Adding supporting technology – – Scale up Increased ease of use

The Process of Spinoff Development • Developing a market for the technology _ Market uncertainty: no one knows if the spinoff can provide a product/service that customers want _ Gathering market information _ Identifying customers / needs _ Gathering feedback from customers: difficult as customer often can not give accurate feedback in a early stage _ Choosing an application _ Appropriate approach to satisfying customer needs _ Selling the products and services

The Process of Spinoff Development • How to choose application: _ Sales volume _ Value to the customer _ Ability to serve the market _ Competitive advantage

The Financing of University Spinoffs • • • • Government grant: major source during the initial stage Angel investor: at an early stage of technology development, don’t require as high return as VC. Venture capitalist: difficult at early stage because of high degree of uncertainty and information asymmetry Big companies’ venture capital

The Financing of University Spinoffs • Uncertainty makes financing spinoff firms difficult in three ways: 1. It makes the evaluation of the opportunity by investors difficult 2. It create bargaining problems between entrepreneurs and investors 3. It leads investors to seek collateral to minimize the magnetute of investor’s lost

The Financing of University Spinoffs • Acquisition of capital involves: _ Demonstrating the value of the venture _ Large markets _ Strong patent protection _ General-purpose technologies _ Founder attributes _ Social ties

The Performance of University of Spinoffs • The effect of human capital: _ Complementary teams _ Business knowledge _ Management knowledge _ Investor involvement _ Full-time enterpreneur

The Performance of University of Spinoffs • • • Overcoming the technology push problem: – Creating products – Identifying a market application – Assessing and satisfying customer needs Obtaining adequate financial capital The effect of technology: – IP protection – General-purpose technology

The Performance of University of Spinoffs • The effect of firm strategy _ Strategic focus _ Adoptability 1. Adaptation of the technology 2. Adaptation to market

The Problems with University Spinoffs • • • • • Lack of faculty support The adverse effect of a commercial orientation – Spinoff hinder open dissemination of knowledge – Spinoffs influence the subject matter of faculty research – Education of students Conflict of interest The cost of difficulty of developing spinoff companies Risk of creating new firms