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Int. J. Technology Transfer and Commercialisation, Vol. 8, Nos. 2/3, 2009 22
9
Copyright © 2009 Inderscience Enterprises Ltd.
University-affiliated Venture Capital funds: funding
of University Spin-Off companies
Lars Øystein Widding*
Department of Industrial Economics and Technology Management,
Norwegian University of Science and Technology (NTNU),
Alfred Getzv. 1, NO-7491 Trondheim, Norway
Fax: +47 735 96426
Bodø Graduate School of Business
E-mail: low@iot.ntnu.no
*Corresponding author
Marius Tuft Mathisen and Øystein Madsen
Department of Industrial Economics and Technology Management,
Norwegian University of Science and Technology (NTNU),
Fax: +47 735 96426
E-mail: mariustu@gmail.no
E-mail: madsen@deamp.no
Abstracts: During the last decade, there has been an increasing focus on
commercialisation from universities, often referred to as University Spin-Off
companies (USOs). USOs are considered more profitable and survive longer
when compared with other start-ups; however, they face major obstacles when
seeking funding due to information asymmetry, uncertainty and the nature
of their characteristics. The findings of this study indicate that USOs lack
financing alternatives at early stages providing sufficient amounts of funding.
In terms of bridging the financing gap, University-affiliated Venture Capital
funds (UVCs) should be considered as an initiative to improve the financing
situations for USOs.
Keywords: technology transfer; USOs; university spin-off companies;
capital gap; risk capital; UVCs; university-affiliated venture capital.
Reference to this paper should be made as follows: Widding, L.Ø.,
Mathisen, M.T. and Madsen, Ø. (2009) ‘University-affiliated Venture Capital
funds: funding of University Spin-Off companies’, Int. J. Technology Transfer
and Commercialisation, Vol. 8, Nos. 2/3, pp.229–245.
Biographical notes: L. Øystein Widding holds a Oecon Degree from
Bodø Graduate School of Business (HHB). He is currently working as an
Associate Professor at Norwegian University of Science and Technology
(NTNU) and at HHB. He is a coordinator for NTNU School of
Entrepreneurship. His special research interests are entrepreneurship,
commercialisation of technology, strategy and knowledge management.
He also has nine years of management practice.
230 L.Ø. Widding et al.
Marius Tuft Mathisen holds a Master of Science Degree within Industrial
Economics and Technology Management from the Norwegian University of
Science and Technology (NTNU) with particular focus on entrepreneurship and
commercialisation of technology. He also has attended MBA studies at Boston
University – School of Management. He is currently working as a consultant at
Rokade, which is a leading Norwegian consultancy in the combined niche of
M&A and business integration/turnaround processes. His research interests are
within the field of entrepreneurship and early stage growth and include
academic entrepreneurship, funding and development of university spin-off
companies, commercialisation of technology and growth through mergers and
acquisitions.
Øystein Madsen holds a Master Degree from Norwegian University of Science
and Technology (NTNU), NTNU School of Entrepreneurship (NSE).
His research is on entrepreneurship, university spin-off companies and funding
initiatives. He is currently working as Project Manager in DeAmp, a university
spin-off company from NTNU.
1 Introduction
There has been an increasing focus on the commercialisation of knowledge
and technology from universities and publicly funded research institutions during the last
decade (Wright and Lockett, 2005). Both national and regional policymakers look to their
universities for entrepreneurial activity that can transfer technology and know-how
to society. Through their traditional activities in teaching and research, the universities
have had an important indirect impact on entrepreneurial activity. This has, for example,
been through educating students who provide society with a skilled workforce, and who
also develop wealth in the existing industry or pursue entrepreneurial opportunities
of their own. As it is common for universities to have research collaboration with
industry, this can lead to the discovery of new commercial opportunities. However,
in recent years, there has been more focus on the direct and institutional entrepreneurial
output from universities (Lockett et al., 2005). This takes the form of patent applications,
licensing of technology to industry and University Spin-Off companies (USOs). In this
paper, we define USOs as new ventures that are dependent on the licensing or the
assignment of the institution’s intellectual property for initiation (Lockett et al., 2005).
These companies are especially interesting since they can be developed into high-tech
companies with global growth potential. In turn, they can directly create wealth
and employment opportunities on both regional and national levels.
Some argue that universities may not be able to capture the full value of their
technology through a licensing scheme, and that a spin-off company will be more
profitable both in terms of the financial returns to the university and the economic value
created (Wright and Lockett, 2005). This proposition is interesting, but unfortunately
it does not make any attempt to analyse what types of university technologies are
attractive and profitable to pursue through a spin-off company. O’Shea et al. (2005)
categorise four types of tangible and intangible resources possessed by a firm:
institutional, human, financial and commercial. These resources constitute a firm’s
resource base, which can be developed for a sustained competitive advantage
(Barney, 1991). In this paper, we will emphasise the financial resources related to the
University-affiliated Venture Capital funds 231
USOs, because raising capital is a tremendous obstacle faced by start-up companies.
More precisely, these companies have a challenge to cross the equity gap (Landström,
2003). The equity gap can be defined as
“The absence of small amounts of risk capital from institutional sources for
companies at the seed, start-up and early-growth stages, which arises because
the fixed costs of investment appraisal and monitoring make it uneconomic for
venture capital funds to make small investments, and also because of the
reluctance of banks to make unsecured lending.” (Van Osnabrugge
and Robinson, 2000)
USOs also represent a type of entrepreneurial firms that Knight (1921) has characterised
as having a very high level of uncertainty. As a consequence, investors lack sufficient
information to be able to calculate risk and define suitable terms for funding. From the
specific characteristics of USOs, we also know that these companies tend to be at early
stages of development and require large amounts of capital to develop a product ready for
sale.
The aim and scope of this paper is to emphasise the need for and the effect
of universities funding spin-off companies by establishing a venture capital fund
affiliated within the university. There are several empirical examples of universities
establishing such funds, but it is an overlooked research field (e.g., Lerner, 2005;
Atkinson, 1994). To be able to discuss the use of such funds and contribute to this
important research gap, we will explore the following research questions:
Q1: What unique characteristics do USOs have, and how does this affect their
capital need?
Q2: What kind of financing sources are available for USOs, and how do the
different sources comply with the needs of such companies?
Q3: How should a venture capital fund affiliated within the university be organised
to increase commercialisation activities at the university?
As stated above, there is an increasing level of interest in university spin-off activity,
and one would expect that this subject would receive a significant amount of academic
enquiry. Even though Shane (2004) concludes that research on this topic is virtually
non-existent, researchers have shown increased interest in the last few years.
Wright et al. (2006) claim that there is a demand for additional research on alternatively
financing mechanisms to fund USOs, and that it is necessary to evaluate how
such sources can complement or substitute institutional venture capital. In addition,
they stress that new research is needed to understand what kind of financial sources are
appropriate for these ventures at different stages in their development. This paper
contributes by responding to these calls for research. It tries to explain the peculiar
financing challenges met by USOs. The paper also evaluates the different sources
of funding available, and discusses a direct way universities can bridge a possible
financing gap between governmental funding and the private financing market for such
companies by establishing their own venture capital fund. Finally, we will draw
conclusions and implications from our findings, and give some recommendations for
further research.
232 L.Ø. Widding et al.
2 Method
This paper is focusing on the process of universities spinning out new firms.
Shane (2004) argues that this requires a phenomenon-oriented method, rather than
a disciplinary-oriented one. A phenomenon-oriented approach uses a variety of
theoretical frameworks to develop understanding, while a disciplinary-oriented approach
requires a particular theoretical framework to test and evaluate the research subject.
Shane (2004) argues that using one theoretical framework seems to be premature, since
there is a lack of broad deep empirical research on the subject of USOs. This is even
more current regarding the financing of such companies. In this study, we use the existing
empirical literature on university spin-off activity as a basis for our analysis. As these
studies use different theoretical research perspectives, this paper is in line with the
phenomenon-oriented approach presented here. In addition, we use the theoretical lens
of uncertainty and information asymmetry, which is useful when discussing phenomena
related to the financing of early-stage technology-based companies (Shane and
Cable, 2002).
We use the existing literature with the purpose of understanding the best practice
on the subject, and to adapt this experience and knowledge in other contexts. Research
questions Q1 and Q2 are answered deductively by an extensive review of the existing
literature and theory. With a literature review, we gain objective insight to the problems
discussed, but we lack precision regarding the context of these observations because
of the distance to the empirical data (Ringdal, 2001). To complement this objective
and the deductive approach, we have used an inductive approach with empirical
examples, which are studied with a qualitative and exploratory method to give
policymakers a practical approach to research question Q3, about how to organise
a venture capital fund affiliated within the university.
Since a significant amount of the research in this field is conducted on US cases, there
are some limitations related to the literature review. One important issue to remember
is that many US universities, and especially those known for their spin-off performance,
are privately owned. This situation is different in Europe, where more of the universities
are funded by the governments. Privately owned universities have tendencies to be more
competitive to invest, recruit and retain top-ranked science and engineering faculty
and students, and the presence of such expertise has been shown to be positively
correlated to spin-off performance (O’Shea et al., 2005). Further, in the context of
entrepreneurial developed regions, such as the greater Boston area or Silicon Valley,
a strong entrepreneurial community has the capability to select the best entrepreneurial
projects and allocate resources to them (Degroof and Roberts, 2004). The scope in this
study is universities with less developed entrepreneurial contexts. The reason for this is
that we can claim that it is among these universities that there is the greatest lack of risk
capital.
3 Theoretical framework
There are several reasons why USOs experience the financial gap. This section will focus
on three of these: First, the unique characteristics of USOs are described. Second,
the uncertainty and information asymmetry are examined, followed up by describing the
University-affiliated Venture Capital funds 233
sources of capital available for USOs. Finally, based on the phenomena in the literature
review, a model for funding USOs is introduced.
3.1 Unique characteristics of USOs
USOs are quite different from other start-ups in many respects. According to
Shane (2004), USOs are more likely to be founded if they exploit technologies having the
characteristics given in Table 1, which also shows the relative technology characteristics
in established firms.
Table 1 Characteristics of USOs relative to established companies (Shane, 2004)
University Spin-Off company Established company
Radical Incremental
Tacit Explicit
Early stage Late stage
General-purpose Specific-purpose
Significant customer value Moderate customer value
Major technical advance Minor technical advance
Strong intellectual property protection Weak intellectual property protection
Shane (2004) has gathered data regarding USOs from MIT from 1980 to 1996. The mean
capital raised by these companies was over $5 million. In comparison, less than 1% of all
start-up companies founded in the USA raise more than $1 million. The large capital
need has its explanation in the unique characteristics of USOs given in Table 1. We will
look into some of these aspects to explain why this is the case.
3.1.1 Radical technologies
When a technology has disruptive properties in that sense that it can alter the way the
market is organised, or how products and services are created, it is more likely that it can
be the basis for a spin-off company. This is what Schumpeter (1934) described as
creative destruction. Existing firms do not want to license such technologies because
it cannibalises their existing assets (Utterback, 1994). Nelson and Winter (1982) describe
this phenomenon as path dependency. Since it will be too expensive for most of the
existing industry to completely alter their production or distribution methods, radical
technologies are often not licensed by existing industry.
3.1.2 Tacit knowledge
With tacit knowledge, the concepts and ideas of a technology are largely held in the
minds and beliefs of the researchers, and this knowledge can be difficult to communicate
to others (Polanyi, 1974). Obviously, this makes licensing more difficult since these
companies are dependent on close collaboration with the inventors to be able to extract
the desired value. When a spin-off is based on tacit knowledge, the company must engage
in scientific research develop a proof of the concept, develop a prototype, and further
product development to be able to concretise the invention into a commercial product.
234 L.Ø. Widding et al.
This business idea will generally take longer time to develop than a more explicit license
in an established firm and, therefore, will require more capital.
3.1.3 Early-stage and general-purpose
When a technology is developed within a university, it is generally so unproven that it
cannot be easily licensed to established firms, and universities may not have other
choices than forming a USO (Powers and McDougall, 2005). The vast uncertainties
of the value of such early-stage technologies imply that potential industry licensees
would rather wait until the technology is further developed (Shane, 2004), both through
proof of concept and proof of technology. USOs also tend to exploit basic technologies,
which have possible application areas in many markets and possibly many industries as
well (Nelsen, 1991). One reason is that established companies avoid such technologies,
since their existing operations are focused on creating products or services within one
specific market or industry. General-purpose technologies are a good basis for USOs
since it makes the founders capable of changing the market application if the first
application that is chosen turns out sour (Tornatzky et al., 1995). When a company is
based on early-stage inventions that are of general purpose, the company must use time
to develop the basic technology into possible commercial application, and perform
market analysis to identify a customer need. Shane (2004) calls this stage the ‘minus two
stage’ and the process of getting to a commercial product is generally long and will
obviously need a considerable amount of financing when compared with other start-ups.
3.2 Financing of USOs: information asymmetry and uncertainty
Information asymmetry and uncertainty are two major obstacles that occur when an
early-stage venture seeks funding. These are fundamental theoretical issues in any
investment decision, but are especially important to explain the financing process
of USOs.
3.2.1 Information asymmetry
Information asymmetry creates at least four challenges in the financing of early-stage
companies. First, entrepreneurs do not want to disclose too much information about their
concept, since this is the basis for their competitive advantage. This means that investors
must make their decisions with less information than the entrepreneur possesses
(Shane and Cable, 2002). Regarding the financing of USOs, this issue becomes even
more complicated. Since most USO technologies probably are unfamiliar with the
investment community, it may be difficult for the entrepreneur to even communicate why
and how the concept can be transformed into real value (Wright et al., 2006).
Second, because the entrepreneurs have superior information that the investors lack, the
entrepreneurs can act with opportunistic behaviour. The entrepreneur can thus extract the
needed resources that a fully informed investor would not provide (Shane and
Cable, 2002). Third, by using this information advantage, the entrepreneur can limit
the investor’s ability to monitor that the investment is used wisely and thus puts the
investor’s resources at more risk than necessary (Shane, 2004). This may also be
particularly perceptible in the context of USOs, since the intellectual property such
companies possess must go through several development phases that are unknown
University-affiliated Venture Capital funds 235
or unfamiliar to the investor before it can become a commercial product. Finally, the
information asymmetry problem can lead to adverse selection by the investors, since
it may be difficult to distinguish between competent entrepreneurs with valuable concepts
from the less talented entrepreneurs with limited concepts (Sahlman, 1990).
Theoretically, these issues could make investors unwilling to provide the resources
necessary to exploit the opportunity. A high degree of information asymmetry between
the inventors and the risk capital will increase the price of that capital, or even worse,
that capital will not be available.
3.2.2 Uncertainty
There is some confusion concerning the difference between risk and uncertainty,
and some use these terms as if they were synonyms (Alvarez, 2007). Knight (1921)
distinguishes risk and uncertainty on the basis of whether or not a rational probability
distribution of a fixed possible outcome is known to the decision-makers. With risky
decisions, all possible outcomes and the possibility of each of them are known.
With uncertain decisions, neither the number of possible outcomes nor the probability
distribution is known. It is obvious that USOs are exploiting new, untried market
opportunities with new technologies operated under higher conditions of uncertainty,
than the average start-up. Various sources of funding have different preferences regarding
the risk of their investments. A challenge for USOs is, therefore, to transform their
ventures where the opportunity is characterised by levels of uncertainty to the level where
investors can evaluate the opportunity with their rational risk assessments. The process
where USOs transform their early-stage technologies into commercial products can be
conceptualised as a way of transforming their entrepreneurial opportunity from high
levels of uncertainty to levels of risk appropriated to different funding sources
(see Figure 2). Commercially focused universities and research institutions have
experienced that these two contrasts are making it difficult for USOs to attract the
necessary private funding (Lerner, 2005; Moray and Clarysse, 2005; BVCA, 2005).
3.3 Sources of capital for USOs
Van Osnabrugge and Robinson (2000) define a model for the main providers of external
financing to entrepreneurial firms (Figure 1). In this model, the most likely sources
of outside finance are identified, even though not every firm uses every funding source
obviously. The amount of funding usually increases with each progressive stage
of financing, and as the firm becomes more mature and grows in size, the inherent risk
decreases and the problems of securing finance normally decrease (Wetzel and Wilson,
1985; Van Osnabrugge and Robinson, 2000). Van Osnabrugge and Robinson (2000)
further indicate the clear presence of the equity gap, as earlier defined, for business
ventures seeking external finance at the early stages.
In this section, we will review sources of risk capital that could be available for
USOs. Owing to the scope of this paper, we will focus on the sources that are available at
the early stages, namely governmental funding, informal venture capital and institutional
venture capital. The purpose of this review is to analyse pros and cons of why these
actors, on the one hand, are adequate investors for USOs, and on the other hand, why
they are not necessarily prepared to handle the uniqueness of the USOs.
236 L.Ø. Widding et al.
Figure 1 Stage of development of entrepreneurial firm
Source: Van Osnabrugge and Robinson (2000)
3.3.1 Government funding
Shane (2004) identifies four main reasons describing why public sector financing can fill
the financing gap and allow USOs to develop to a stage at which private sector financing
is available. First, in the initial critical period, government funding can allow the founders
to explore the technology and to develop products or services that are appropriate for
a valuable market application. Such a development may result in proof of principle
or prototypes, which can be vital in the further financing process. Second, government
grants and contracts allow USOs based on new technology without any identified
commercial use to perform thorough market research and essential evaluation
of customer needs. Third, government financing facilitates the acquisition of private
sector financing. Government grants can be used to lower the investment cost and reduce
the risk for private investors. Finally, government funding provides a way to manage the
high level of uncertainty inherent in developing products or services from university
technologies. Lerner (2002) identifies several limitations of public programs.
If government financing is going to address funding problems, programs will be needed
to overcome information asymmetries and identify the most promising firms.
Further, governmental funding is normally not seen as ‘knowledge money’. That is,
governmental finance does not have knowledge added, e.g., technology knowledge,
commercialisation knowledge, market knowledge or finance knowledge. This is in
contrast to formal and informal venture capital.
3.3.2 Informal venture capital and business angels
Informal venture capital is capital investments made by private individuals, using their
own money directly in private companies with which they have no family connections
(Mason and Harrison, 2000). These are also commonly called Business Angels, and they
play a critical role in the financing of early-stage entrepreneurial firms, and often
contribute with both their financial wealth and entrepreneurial experience (Landström,
1992). According to Mason and Harrison (2000), Business Angels have a critical position
in the financing spectrum, bridging the gap between the entrepreneur’s internal funds and
later-stage financing sources. Erikson and Sørheim (2005) identify a subclass of informal
University-affiliated Venture Capital funds 237
investors, ‘Technology Angels’, which may be an especially suitable investor for USOs.
They are more actively involved in their portfolio companies, and in some cases become
co-founders. This should be very compelling for USOs since investors can use their
business experience and know-how to help to reduce the market uncertainty faced
by USOs (Sørheim and Landström, 2001).
Business Angels are generally more focused on companies in their seed and start-up
phases and often invest before a market application is known (Shane, 2004). Informal
investors thus seem to be well aligned to the financing need of USOs regarding the time
horizon and technical and market development that such companies must engage in.
Informal investors are often more patient than venture capitalists, and have a lower
expectation of the return on investment, and will therefore probably be a more accessible
source of funding for USOs (Van Osnabrugge and Robinson, 2000). However,
Shane (2004) also has examples of Business Angels who regretted financing a USO,
because of a noncoterminous time horizon.
3.3.3 Institutional venture capital
The substantial capital requirement for many high-tech USOs is one reason for why the
VC industry is considered an attractive source of funding. Shane (2004) claims that USOs
pursuing a large market with strong patent protection are favoured. Also, general-purpose
technologies that can be applied in a variety of different markets, and entrepreneurial
qualities of the founders are considered highly valuable.
There is a significant cultural difference between academia and private sector
businesses specialising in commercialisation and innovation (Wright et al., 2006).
Founders of USOs often lack experience and the attributes required (Siegel et al., 2003;
Wright et al., 2006). Value-creating services from a VC investor can, therefore, be
of significant importance for the founders and the success of the venture. Manigart and
Sapienza (2000) state that VCs are more involved in high-tech firms than in other
ventures, and that the time and effort VCs spend in providing value-building services pay
off beyond the value of financing, selecting and monitoring these ventures.
External equity backing by large corporations or financial intermediaries such as VC
firms is considered an important indicator of performance (Lockett et al., 2005).
Such backing can be viewed as a signal of quality as such ventures have successfully
passed the scrutiny of professional investors, who assess their ability to generate
significant future returns (Lockett et al., 2005). USOs can benefit from such an
acknowledgement when seeking the next round of funding or in the process of building
relationships with partners and customers.
The VC industry has adopted screening and evaluation processes to reduce
uncertainty and address the various problems arising from asymmetric information
between the entrepreneur and the investor (Wright et al., 2006). These processes are
developed primarily for commercialisation in the private sector, and introduce at least
three specific problems for USOs in the process of securing venture capital. First, risk
measurements are more difficult to perform with higher level of uncertainty.
Second, early-stage technology may be difficult to communicate and are poorly
understood in the venture capital industry. Finally, commercialisation through technology
transfer is relatively new to many universities.
238 L.Ø. Widding et al.
3.4 A summary of the early-stage financing opportunities for USOs
Based on the theory review, we introduce a holistic model that describes the unique
characteristics of USOs, the concept of uncertainty and risk, and available early-stage
finance (Figure 2). The model is adopted by Van Osnabrugge and Robinson (2000),
and its intention is to demonstrate why the financing gap is even more present in terms
of funding USOs.
Figure 2 Stage of development for USOs
First, the high levels of uncertainty require more financial efforts in the seed stage.
USOs often must undertake additional technical development after founding and these
additional efforts require a great deal of time and postpone the USOs progress to the next
progressive stage. Further, product development is often underestimated, both regarding
time and money. Second, obstacles identified by the lack of knowledge and information
asymmetry make investors more expectant to invest and postpone the point in time
in which informal and institutional venture capital is available. Wright et al. (2006) states
that private investors generally want to invest in USOs that have reached the later stages
of development. This can be critical for these ventures since their characteristics imply
that they have a major capital need, but in their current stage of development they are
unattractive for private sources. Therefore, we argue that the financing gap for USOs
is also a knowledge gap, as the theory on information asymmetry and uncertainty implies.
In terms of bridging the financing gap, it seems reasonable to conclude that
government funding is an important and very necessary initiative (Shane, 2004).
However, it appears to be widely recognised that the available amounts of seed capital
financing, and more precise, pre-seed capital, is insufficient. Especially for
capital-intensive high-tech USOs, such programs will generally be inadequate.
At the same time, several limitations in public programs have been documented in recent
literature. Public–private partnership funds seem to fit closest with the financing
characteristics of USOs in early stages, but because of the private ownership, these funds
will attempt to maximise economic profit and consequently invest in later-stage projects
(Rasmussen et al., 2006). The private financing market is a likely source of equity
investments for USOs but because of high levels of uncertainty and problems regarding
information asymmetries, such financing is generally not available at the seed stage.
University-affiliated Venture Capital funds 239
The basic problem regarding the financing of USOs thus seems to be the lack
of larger investments at early stages. We argue that funding alternatives that attempt
to fill this gap must be driven by other primary goals than short-term profit maximisation.
Otherwise, investments will be focused on later-stage ventures. A classification according
to this assumption is illustrated in Table 2.
Table 2 Classification of financing sources for USOs
Yes
Informal venture capital
(Business angels)
Institutional venture capital
No Government funding UVC?
Low High
Profit as main motivation
Amount invested in each round
4 University-affiliated Venture Capital funds (UVCs)
As indicated in Table 2, a quite novel approach to overcome the challenges USOs face
in acquiring private equity financing is for public-owned universities and publicly funded
research institutions to establish an internal venture capital fund. We call these
University-affiliated Venture Capital funds (UVCs). We claim that UVCs are an
alternative that should be considered to effectuate spin-off performance and frequency
of such organisations. Moray and Clarysse (2005) claim that UVCs are providing the
necessary capital to prepare prototype products and conduct market analysis and thus
provide the financial resources needed to convert uncertainty into levels of risk. There are
some empirical examples of universities that have established a UVC to address the
capital need of emerging technologies (Lerner, 2005; Moray and Clarysse, 2005;
Rasmussen et al., 2006).
4.1 Lessons learned from established UVCs
4.1.1 UK
The UK has implemented a national scheme to assist USOs in the successful
transformation from research to the commercial arena. The initiative was organised as
a competition in 1999 and £60 million has been awarded to 19 new seed funds covering
57 institutions. The concept was called The University Challenge Seed Funds (UCF) and
the background was that many universities experienced a funding gap for bringing
research discoveries to the commercial market. The seed funds was independently driven
and not under the control of the appurtenant universities. A report issued by the British
venture capital association, BVCA (2005), concludes that the UCF arrangements have
been successful in promoting USOs to the stage where institutional venture capital can
take the companies further. The same report notes that UCFs together with R&D grants
from the government were the most important sources of funding in the seed phase for
USOs. Even though most experience seems to be positive, the report also states that too
much of the UCF funds had been allocated to the later stages of USOs, and not in the
proof of concept stage as originally intended.
240 L.Ø. Widding et al.
4.1.2 Belgium
Moray and Clarysse’s (2005) study of Inter University Micro Electronics Centre (IMEC),
a Belgian top-tier research centre, also gives insight into the possible challenges of
UVCs. They are describing a situation in the early 1990s, where the European venture
capital industry and financial markets financing technologies in the (pre)-seed stage
is rather immature. In this decade, the main financial partners are large corporate firms,
and the universities from the associated labs bringing in a part of the capital. In 2000,
IMEC decided to launch an Incubation Fund. This decision is based on the increasing
difficulty in securing VC for early stage, high potential projects that have not yet made
a working prototype or drafted a long-term business plan. The shareholders in IMEC’s
Incubation Fund had expectations of financial returns similar to a traditional venture
capital fund, which cannot be expected from a UVC. In addition, the fund was structured
in a way that allowed investments only to cover 60% of the requested funding amount.
The remainder should be funded by other sources, such as formal or informal venture
capital. These co-investments by other sources proved to be impossible to acquire,
both because of the poor state of the venture capital industry at the time, and for the
reasons mentioned earlier in this paper. The result was that the fund instead restructured,
and that IMEC itself funded in pre-seed and seed stages of its USOs. Maray and Clarysse
(2005) suggest that universities must be careful with the performance expectations of
a UVC.
Before the implementation of the Incubation Fund, IMEC also invested in a local
venture capital fund with the expectation that these VCs would invest in USOs from
IMEC. In retrospect, IMEC learnt that the pre-seed and seed phase is generally of little
interest for the VCs who did not invest in a single one of IMEC’s USOs. Even though the
intention from the VCs is to contribute capital to USOs, this is difficult in practice since
the VCs must fund companies that can provide the greatest financial return within the
lifetime of their fund.
Table 3 Recommendations and consequences for UVS initiatives
Recommendations Consequences
The establishment of a UVC initiative
should be to correct a specific market
failure in the funding of high-tech USOs
Not every university should have a UVC
The UVC initiative should focus on other
primary goals than short-term profit
maximisation
UVSs need to have a long-term strategy relying on
both the strengths of the research conducted
at the university, and the expertise in the
environments
The UVC initiative should base evaluation
activities and screening criteria on lessons
learned from the venture capital industry
and from the academic research in this
area
Build a professional organisation which is
measuring its activity based on best practice
and benchmarking
The UVC initiative should have a limited
technological focus
Focused mandate from the UVC owner(s)
and focused knowledge building within this
technological area
University-affiliated Venture Capital funds 241
Table 3 Recommendations and consequences for UVS initiatives (continued)
Recommendations Consequences
The UVC initiative should be organised
with a professional management with
substantial business development
capabilities
Be ready to fight for the best management
available in business, and be willing to take the
costs this requires. At the same time be crystal
clear about what the management will be
measured on, and the consequences of not
reaching the goals
The UVC initiative should be prepared to
offer follow-on investments selectively
when the market is unwilling and adopt a
long-term commitment to a firm despite
the inevitable vicissitudes of the business
In an ideal world, the fund should be larger. In
practice, only half of the fund can be invested,
and the other half should be used for follow-up
investments
The UVC initiative should strive to
establish close links both to the informal
and the institutional VC community
The success of the UVC is related to deal flow,
value development and exit. This recommendation
is related to exit, and to prepare both the USO to
be ‘investment ready’ and inform the investors
about what prospects the UVC has in the pipeline.
This will reduce the risk
4.1.3 USA
Boston University is another example of a university that has had a UVC running
for some time. This fund has a strict industry concentration on information technology
and life sciences. These two industries are also shown by Degroof and Roberts (2004)
to be the majority of the technological origin of USOs in the USA. Boston University
also has a co-investment policy and requires another investor, usually an institutional
venture capital fund, to take the lead investment role. However, the entrepreneurial
environment in the greater Boston area is well developed, and we therefore suggest that
such a fund may have a different position than UVCs in other environments. The strict
industry focus and co-investment policy make this fund looking more like a traditional
VC. Because of the attractive exit possibilities, information technology and
biotechnology are industries where institutional venture capital is generally more willing
to enter at an earlier stage than other technologies (Shane, 2004). If it co-invests with a
professional top-tier venture capital firm, the university is more likely to get a fair share
of the economic value created by this company. Similar kind of fund structures can also
be seen at Harvard and Stanford University, which have related characteristics to
Boston University and very active entrepreneurial environments.
The reason why UVC is a successful strategy in these kinds of environments is the
strong entrepreneurial infrastructure that has the capability of using well-developed
and intricate social networks to find and select the best entrepreneurial projects
and allocate the appropriated resources to them (Degroof and Roberts, 2004). In weaker
entrepreneurial infrastructures, the universities may need to have a more proactive
approach, by being highly selective and provide greater support functions to their USOs
(Degroof and Roberts, 2004). This and other issues will be discussed in the final part.
242 L.Ø. Widding et al.
5 Discussion and implications
5.1 Premises for the use of UVCs
It is important to realise that UVCs seem to be applicable only in some contexts. We have
learned that the spin-out frequency is correlated to the scientific quality at the university
and research institutions. If this relationship is to be armoured, we would argue that
UVCs are more applicable in universities and research institutions that have a strong
scientific focus. Furthermore, faculty size and funding of the engineering departments are
also predictors of university spin-off activity (O’Shea et al., 2005). Therefore, UVCs are
more applicable in relative large universities with a substantial engineering budget.
In addition, biotechnology and life sciences are proven to be the most promising
technologies to establish USOs (Shane, 2004). However, it is important to remember that
environmental factors are of major importance regarding the commercialisation
possibilities for ventures based on such technologies. The last statement can also be
reflected on by using the example of Boston. The reason why the Boston University UVS
has biotechnology and information technology as its focus is probably the potential
financial returns these kinds of technologies can give in the local environment.
The environment in the Boston area can be described as perfect, because the VC industry
is so large, so specialised and so knowledge-based, that it constitutes a seamless finance
line, from pre-seed to IPO.
However, the owner of a UVS must consider whether the fund should be strictly
focused on the return on investments, or if the fund goals are to bridge a financing gap
for USOs in a more socio-economic approach. Another issue is whether the environment
is capable of adapting the USOs that are produced by the university. There are not many
universities that are in a position like in Boston or in Silicon Valley. Thus, it can be
claimed that USOs are even more important in situations where a robust entrepreneurial
environment is lacking.
Another aspect is that establishing a UVC management can be very costly, especially
if the management is highly skilled and if the university has to compete with VC firms
for their services. This gives some implications for what kind of universities and research
institutions that should pursue this. Degroof and Roberts (2004) argue that such
substantial support functions can only be justified if there is enough ‘deal flow’ from the
university's own research. It could be added that there should be enough exit-possibilities
as well, meaning entrepreneurial environment. If this is not the case, universities and
research institutions should evaluate a partnership and pooling of resources with other
academic institutions.
5.2 Recommendations and consequences for UVC initiatives
In terms of bridging the financing gap, we claim that various UVC initiatives are
alternatives that should be evaluated to improve conditions for the commercialisation
of university research. Extracted from the previous sections, we are proposing the
following recommendations as guidelines for how such initiatives can be organised:
The paper has discussed the financial challenges met by USOs and has proposed that
UVCs can be a direct way that universities can bridge the financing gap. Through the
characteristics that have been identified to categorise USOs, we have shown that such
ventures have a large capital demand in the early phase of the development of the
University-affiliated Venture Capital funds 243
company. Government programs are of major importance in the financing process
of these companies, but we have indicated that USOs face a financing gap before private
equity investments are available. Business Angels with technological experience
and background have been shown to be an important contributor of both capital
and competence, but these investors can probably only cover part of the capital required.
In most European countries, institutional venture capital is not a likely source of funding
for most USOs at early stages, with the unique exception of biotechnology companies.
However, venture capital will become a vital source of funding when USOs reach a stage
where their growth potential matches the strict requirements of venture capital funds.
5.3 Limitations and areas for further research
The authors suggest that more empirical studies are necessary to gain a deeper
understanding about the important variables to consider when universities discuss
technology transfer, and especially the financial options that this paper has focused on.
A collective case study at different universities is a possible methodical approach that
could gain significant insight into best practice on UVCs, and which environmental
factors seem to be important to consider accordingly. One obvious and difficult question
that is not within the scope of this paper is what investment criteria UVCs should have.
Much attention has been given to the investment criteria and process for venture
capitalists (e.g., Fried and Hisrich, 1994; MacMillan et al., 1985), and how these criteria
are designed to minimise adverse selection. Our results show that experience
and capabilities within a UVC management is of major importance in order for the
initiative to succeed. Further research is needed to address appropriate organisation
models and staff compositions. This study has mainly looked at the financing of USOs
from the university’s and investor’s point of view. Additional research should be
conducted from the academic entrepreneur’s point of view to gain additional insight in
what kind of value-added services they give highest priority to, besides financing.
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