University spinoff companies

Spin-offs are companies that professors and universities promote with the aim of transferring the results of their research. In this post I reproduce a publication about spinoffs that I published, together with Jaume Valls, in 2003. The considerations we made then remain valid today! I hope you are interested.

To the extent that countries view research as a key to economic development, scientific and technological policies, which constitute instruments to promote this development, drive the university-industry relationship. This has motivated the academic institutions to orient their actions towards their local economy. In this sense, the university is undergoing a second revolution. While the first, which took place at the end of the nineteenth century, implied the incorporation of research as an added task to teaching, the second, recorded in the twentieth century, entails a new task: relations with industry for the promotion of the local and regional economic development. This new objective and the conviction that long-term basic research gains if it is compatible with short-term commercial activities has led to a greater involvement of the university in the development of new companies. Therefore, the entrepreneurial university is the concept.

Reasons and benefits

The decision of the universities to invest in new companies that are based on the results of their research is motivated by three types of reasons: 1) those related to technology transfer, 2) the economic ones, and 3) those that arise from the researchers of the institution.

With respect to the latter, an active role of the university resolves the tensions that arise when academics want to operate in a more commercial way and thus avoid leaving the institution. In addition, the spin-offs create an atmosphere of excitement in the university, which also extends to the students and acts as a motivating factor.

The financial rationale is obvious: universities expect to reap a great economic benefit from their participation in these technology-based entrepreneurial initiatives. Therefore, after these academic institutions decided to commercialize the results of their research through patents and their license, it is logical that they then chose to invest in the companies to which they entail the exploitation of their inventions and that, in addition, are specifically created for this purpose.

As for the reasons related to the technology transfer, the support of the university to the creation of companies and taking equity in them demonstrate the will of the institution to foment this aspect of the university life. In this sense, spin-offs increase the contract-research figures of the university, since, at least in its initial stage spin-offs tend to outsource all their R&D activities. In addition, they have a very positive influence on research and teaching, creating opportunities for doctoral theses and master projects. On the other hand, within this group of reasons related to the transfer of technology, spin-offs express the desire of the university to devote efforts to the economic development of the region. From this point of view, university support helps new companies stay in their closest geographic environment.

Therefore, the benefits for the region where the university is located are evident. Spin-offs generate new jobs and subcontract productive activities and specialized services, rent spaces and use other common services such as transport, schools, etc. In addition, the spin-offs, very dynamic and expansive companies that represent the high technology sector, contribute to modernize and diversify the economy of the region.

From the point of view of university scientists (generators of technology) several factors make them to have now the opportunity, disposition and incentives to develop an entrepreneurial activity. In some fields of science the time between discovery and application has been shortened, due not only to technological but also to financial issues. Today venture capital investment companies are willing to support new technology-based companies long before they can put any product on the market. Also, programs of promotion of this type of initiatives established by governments inspire scientists. In addition, the insufficient public resources of support to the investigation introduce a business mentality in them: They must access competitively to limited resources, draft project requests that resemble a business plan and manage the amounts awarded as if it were a company’s budget.

Finally, the spin-offs themselves also benefit from their association with the university. Thus, the location in a university campus facilitates the development of companies in their initial stages, since they can use spaces, equipment and specialized services. For example, advice on the process of creating the company or on the protection of intellectual property. The condition the university demands in return is that the spin-off contributes to the research of the institution. Spin-offs also have better access to continuing education provided by the academic institution and are in a very favorable position to select and incorporate personnel being in permanent contact with future graduates. Likewise, the relationship between the university’s scientific staff and the company’s technicians creates a stimulating atmosphere. In addition, at the end of the useful life of the first product lines of the spin-off, university research is constituted as a source of new ideas. Finally, the prestige of the university encourages the development of the new company, since its presence in the equity is a guarantee for investors, a vital issue in the initial stages of development of the company, when it does not yet have enough credibility or too many financial resources.

Risks of using spin-offs

The university’s support for the entrepreneurial initiatives of its professors and taking equity in their spin-offs may involve certain problems, of three different types: 1) those related to the university community, 2) financial and management difficulties and, finally, (3) possible negative consequences for the reputation of the academic institution.

In relation to the former, the university community can misinterpret the relationship of the institution with the spin-off and consider it as favoritism towards the academic responsible for it. Financial problems arise because universities do not have the knowledge and experience required to make the most appropriate business decisions. It is difficult, therefore, to recognize good investment opportunities and to manage the equity they take in the spin-offs. On the other hand, an initial investment in a spin-off can be interpreted as a commitment to continue investing in the future. The last group of possible conflicts is the events that can harm the reputation of the academic institution. For example, if a university decides to participate in a business initiative of one of its professors, external investors will interpret that decision as an indication of the possibilities of that company. However, if these expectations are not met, investors will tend to be wary of the spin-offs that the same university may create in the future. Certain irregular behaviors of the company can also generate additional conflicts. For example, human resources conflicts, environmental problems, taxation, etc.

Let’s look at a typical case of creation and evolution of a spin-off. Thus, a university professor generates an invention and proposes its marketing through a spin-off. Its university, which has no established program to create them, agrees to license the technology to the new company but refuses to participate in the company’s equity. The entrepreneur begins his or her adventure with a group of students, a fact that the institution judges positive since it understands that the incorporation of graduates is one of the most important dividends of this type of initiatives. The promoter group, although it is made up of good researchers, has no experience in business management. They search, therefore, externally, usually in the local community. Often it happens that entrepreneurs are victims of the new partner or realize, almost always too late, that this person, although he or she has developed activities in the business sector, has no experience in business creation and, therefore, is not sufficiently prepared. Assuming that these barriers are overcome, the spin-off enters the difficult stage of seeking the necessary funding. It is also a matter of time before the new company is confronted for one reason or another by the courts: for matters relating to staff or business partners, clients or suppliers, for tax purposes, etc. In these cases the university, although it has tried to maintain the distance with respect to the company, is somehow involved.

The solution to all these problems is the establishment, on the one hand, of support programs of the institution to these initiatives and, on the other, of control regulations. Instead of reacting to an opportunity, which usually creates problems such as those mentioned, universities should carefully study the creation of companies as a technology transfer modality and then establish an appropriate support program that can be applied to all researchers of the institution, with a correct evaluation and selection of initiatives and a set of regulations that properly regulate the entire process. It has, therefore, to act proactively and not reactively. Although it seems a paradox, the best way for the university to avoid legal problems with its spin-offs is to be totally related to them and not to dissociate itself from the marketing process. In addition, the degree of support of the institution is one of the determining factors of the success of the spin-offs. As for control regulations, if serious conflicts of interest and accusations of the university community are to be avoided, the entrepreneurial role of the university should involve a total transparency in the relations between the entrepreneur, the company and the university. This is achieved through the correct information on these relationships.

The use of intermediary organizations that manage the process is an action that diminishes the effects of the problems that the spin-offs contain. These organizations act as insulation between the university and the marketing activities of its research. The greater or lesser degree of isolation will come given the greater or less autonomy that the managers of the organization have with respect to the university. In this sense, a balance must be sought between a sufficient level of autonomy that does not hinder its operation and a fair control that avoids inconvenient actions for the academic institution.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.