University spin-out companies perform poorly in bid to create wealth

Too many UK universities are failing to capitalise on the rewards to be gained from creating entrepreneurial spin-out companies. Research funded by the Economic and Social Research Council and undertaken at Nottingham University Business School suggests that while universities are increasingly keen to create spin-out companies, far too few of these become successful businesses.

Researcher Professor Mike Wright points out: "Universities are tending to focus on creating businesses rather than creating wealth. The proportion of university spin-out companies (USOs) that succeed is tiny. Unless universities are prepared to back their spin-outs with appropriate resources, most will continue to fail."

The poor performance of UK university knowledge transfer activities including USOs was highlighted by last year's Lambert Report on university-business collaboration. Recent Government policy has encouraged universities to commercialise their intellectual property by launching entrepreneurial spin-outs. But, as the Lambert Report points out, while scope exists for wealth generation from the commercialisation of research, in practice there is plenty of room for improvement.

"The Lambert Report and other commentators have observed that there is a distinction between the creation of spin-outs per se and the creation of spin-outs that create significant wealth," Professor Wright argues.

"Few spin-outs in the UK, for example, have been sold or floated on a stock market," he continues. And, while venture capitalists expect 10-15 per cent of the new businesses they back to generate wealth, the proportion of successful USOs is currently much lower.

The success rate could be greatly increased, Professor Wright insists, if universities were more aware of the factors and processes which promote successful spin-out activity. Following a study of technology transfer in 98 leading UK academic institutions, the research team identified five phases as central to the development of a spin-out company (research phase, opportunity phase, pre-organization phase, re-orientation phase and sustainable high-growth phase). "It is evident that each venture needs to pass through the previous phase in order to progress to the next stage of development," Professor Wright explains. "But progress is not automatic and can be halted by deficiencies in social capital, other resource weaknesses and inadequate internal capabilities."

The study identifies impediments to spin-out activity including:

Availability of finance. Lack of seed funding from the university is viewed as the greatest impediment to the creation of spin-out companies.

People. The amount of time university staff have available to help spin-out companies is a highly important inhibitor. Also key is the clash of commercial and academic cultures. Universities need to create a more accommodating culture for those academics that are entrepreneurially-orientated. For example, offering a 'sabbatical' to enable university staff to develop a spin-out free from teaching or research activities would be helpful.

Infrastructure. The most important infrastructure related impediment is the availability of suitable space on a science park for spin-out companies. A lack of suitable space outside the university to accommodate spin-outs may impact on how quickly these firms are recognised as credible business entities by suppliers, customers and investors.

Incentives and rewards. The availability of incentives and rewards for university staff was ranked as the fourth most important impediment to the creation of spin-outs. Universities primarily reward academics for their research efforts and this does not encourage an entrepreneurial spirit. Giving academics a significant equity stake in their spin-out can, for example, act as an important incentive.

Process related impediments. The lack of a clear process significantly undermines spin-out activity.

The effectiveness of the spin-out process might be enhanced, say the researchers, in the following ways:

More focus should be applied to how universities can overcome their existing culture, values and incentives that primarily reward academics for their research efforts.

Universities must devote more resources to increasing their social capital through developing and exploiting existing external partnerships, links and interactions with industry, venture capital firms and surrogate entrepreneurs so that academics and university technology transfer offices may become better positioned to recognise entrepreneurial opportunities. University technology transfer offices could pay more attention to identifying how ventures would achieve proof of market and proof of technology and carry out effective due diligence prior to submitting proposals to external financiers.

The clearest factor which promotes spin-outs is the commitment of the originating academic to commercialising his or her technology. Universities should provide greater career support and entrepreneurial training to those academics who wish to participate in the commercialisation of their academic research in order to gain their commitment to the commercialisation process in some form. Otherwise the tacit knowledge necessary to make the technology function in the marketplace is likely to be missing. The finding of the importance of the academic's commitment is especially pertinent in the light of the Finance Act 2003 that adversely changed the taxation position relating to the gain on an academic's shares in a spin-out.

There is a clear difference between universities in their ability to commercialise technologies due to the existence and quality of internal capabilities and organizational routines as well as clearly communicated policies and guidelines. This includes resources of expertise and pre-seed finance. To enhance the effectiveness of the process there is a need to address the role of academic entrepreneurs' head of department in the context of universities' overall strategies.

"Our research clearly indicates that successful spin-out activity is not about the quantity of ventures initiated but the commitment shown by universities to achieving successful technology transfer outcomes. At present there is a mismatch between the aims espoused and universities' ability to deliver. Universities must consider the skills, resources and networks they need and begin to put these in place," Professor Wright concludes.

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FOR FURTHER INFORMATION, PLEASE CONTACT: Professor Mike Wright, on 44-133-287-4045 or Email: mike.wright@nottingham.ac.uk

Or Iain Stewart, Lesley Lilley or Becky Gammon at ESRC on 01793 413032/413119/413122

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