The creation of spin-off firms at public research institutions: Managerial and policy implications

Research Policy 34 (2005) 981–993

The creation of spin-off firms at public research institutions: Managerial and policy implications Andy Lockett a,∗ , Donald Siegel b , Mike Wright c , Michael D. Ensley d b

a Nottingham University Business School, Jubilee Campus, Wollaton Road, Nottingham NG8 1BB, UK Department of Economics, Rensselaer Polytechnic Institute, 3502 Russell Sage Laboratory, Troy, NY 12180-3590, USA c Centre for Management Buy-out Research, Nottingham University Business School, Jubilee Campus, Wollaton Road, Nottingham NG8 1BB, UK d Lally School of Management and Technology, Rensselaer Polytechnic Institute, Troy, NY 12180, USA

Available online 7 July 2005

Abstract We consider the managerial and policy implications of the rise of spin-offs at public research institutions (PRIs), based on a knowledge-based view (KBV) of the firm. This framework highlights the importance of knowledge in the creation and development of spin-offs. We argue that in order to understand the development of spin-offs, researchers should focus on “knowledge gaps” these new ventures encounter. Knowledge gaps can occur at different levels of aggregation, including the PRI, spin-off, team, individual, incubator, and at different stages of spin-off development. Based on this framework, we synthesize findings from previous studies and papers in the special issue and offer some suggestions for additional research on spin-offs from PRIs. © 2005 Elsevier B.V. All rights reserved. JEL classification: M13; D23; L31; O31; O32 Keywords: University entrepreneurship; University spin-offs; Technology transfer office (TTO)

1. Introduction In recent years, there has been a rapid rise in commercialization of publicly-funded research at U.S. and European universities. The key channels for commercialization are patents, licenses, research joint ventures, and the formation of spin-off companies, all of which ∗

Corresponding author. E-mail address: [email protected] (A. Lockett).

0048-7333/$ – see front matter © 2005 Elsevier B.V. All rights reserved. doi:10.1016/j.respol.2005.05.010

have increased substantially on both continents. There has also been a significant rise in the number of science parks, incubators, and other property-based institutions designed to launch and nurture new-technology based firms (NTBFs) (Siegel et al., 2003c; Phan et al., 2005). In the U.S., legislative initiatives such as the BayhDole Act of 1980 helped accelerate the rate of diffusion of new technologies from universities and federal laboratories to firms. Bayh-Dole established a uniform patenting policy across governmental agencies, lifted

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some restrictions on licensing, and most importantly, enabled research institutions to own patents arising from federal research grants. Additional U.S. legislation designed to promote collaborative research, and a more rapid rate of university-industry technology transfer, included the 1982 Small Business Innovation Development Act (which established the Small Business Innovation Research (SBIR) Program), the 1984 National Cooperative Research Act (which lifted antitrust concerns regarding collaborative research), and the 1992 Small Business Technology Transfer Act (which established the Small Business Technology Transfer Research program). In the U.K., legislation was also enacted to stimulate the commercialization of university-based research, innovation in small firms, and the development of public-private research partnerships. The British government designed three key programs: University Challenge, Science Enterprise Challenge, and the Higher Education Innovation Fund. University Challenge provides venture capital funding for university-based spinoffs. Science Enterprise Challenge resulted in the creation 12 Science Enterprise Centres at several U.K. universities which provide educational, training, and financial services to would-be academic and graduate student entrepreneurs. The Higher Education Innovation Fund provides direct financial support for projects that strengthen connections between universities and firms. The initiatives we have described were undertaken by national governments to overcome innovation market failure (Martin and Scott, 2000), especially for small firms that may have insufficient financial and human capital to thrive in the marketplace (e.g. the U.S. SBIR program). As a result, there is considerable interest among U.S. and European policymakers and university administrators in understanding the managerial and policy implications of this trend (see Poyago-Theotoky et al., 2002). While there have been numerous studies of university patenting, licensing, and research joint ventures, less attention has been paid to the managerial and policy implications of new firm creation at public research institutions (henceforth, PRIs) or organizations that receive public funds to conduct R&D. Most studies have focused on universities, but that is only a small part of the growth in entrepreneurial activity. The purpose of this special issue is shed further light on the antecedents

and consequences of efforts at PRIs to transfer technology from the public sector to the private sector, via the creation of spin-off firms. In the next section, we outline a knowledge-based view (KBV) of spin-off formation at PRIs. This is followed by an application of KBV to the case of the university technology transfer offices (henceforth, TTOs). Section 4 provides a brief review of the papers contained in the special issue. We demonstrate how each study in the special issue sheds new light on an unexplored dimension of this emerging literature. Section 5 synthesizes these findings, which we use to discuss some policy implications. In the final section, we present some conclusions and suggestions for additional research on spin-offs from PRIs.

2. A knowledge-based view of spin-off formation at PRIs Licensing has traditionally been the dominant route for the commercialization of public sector intellectual property. However, the formation of university-based spin-off companies constitutes a potentially important, but as yet, under-exploited option. In the U.S., technology transfer from universities and other PRIs is increasingly viewed by policymakers as playing a significant role in new venture creation, growth of existing firms, and new job creation (Siegel et al., 2003a). In the U.K., the debate over the role of universities in generating start-up companies has intensified since the publication of reports highlighting the financial and managerial issues that may be critical to their success (Bank of England, 1996; CBI, 1997). In 2003, the U.K. government commissioned the Lambert Review of University-Business Collaboration (Lambert, 2003) which criticized universities for focusing on counts of start-ups, rather than targeting their resources to the development of skills and capabilities that would increase the likelihood that such fledgling firms would be commercially viable. In Europe, there is also growing interest in stimulating new companies that transfer technology from PRIs. Various European Union funded projects, such as PROTON, PRIME, and INDICOM are examining issues concerning the development of these ventures. The exploitation of inventions, in what has historically been a non-commercial environment, raises new

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entrepreneurial challenges beyond those encountered by typical high-tech ventures. In this context, a major gap in our understanding of the formation of spin-offs from PRIs relates to the difference between the knowledge endowment of the start-up and the knowledge it requires to succeed. The knowledge-based view developed as an extension to the resource-based view, and its traditional focus on sustaining competitive advantage (e.g. Barney, 1986, 1991). KBV is based on the notion that knowledge is the key resource of the firm. Thus, corporate-level strategy should be focused on the development, protection, and transfer of knowledge (Henderson and Cockburn, 1994; Liebeskind, 1996). As such, the KBV may be considered to be a shift in focus leading to a greater emphasis on the role of creating new sources of competitive advantage, rather than just sustaining existing sources of competitive advantage (Lockett, 2005). We define knowledge broadly to include intellectual property (or scientific and technical knowledge) and the organizational knowledge required by the new venture to develop. Organizational knowledge is the fundamental source of competitive advantage (Grant, 1996). For spin-offs, organizational knowledge is fundamentally related to technology transfer and entrepreneurship, and management of these activities. In this paper, we argue that it is important to focus on the “knowledge gap” facing these new ventures if we are to better understand the phenomena of spin-offs from PRIs. Adopting a KBV perspective on spin-offs from PRIs facilitates the development of important new research avenues that build upon and integrate previous studies in this area. The scope of this emerging research agenda can be illustrated in Fig. 1. The rows identify the units of analysis and the columns the different phases in the development of a spin-off firm, as outlined in Vohora et al. (2004). At each stage, and for each unit of analysis, we conjecture that there may be a knowledge

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gap, which threatens the successful development of the spin-off. In terms of the matrix, a knowledge gap may be identified across the different units of analysis and at different points in the development of the spin-off. The nature of the knowledge gap helps in understanding the knowledge required at each stage of the process and the roles that may be played by the different units of analysis. Knowledge is the key input into the development of skills/capabilities (broadly defined) by the spin-off. By accessing, developing, and integrating new and existing knowledge, spin-offs will be able to reconfigure the nature of their capabilities, which could potentially enhance their performance. This approach enables us to explain why all spin-off firms are not the same, and thus why it is important to differentiate between spin-offs that involve the transfer of IP and start-up companies that do not involve the transfer of IP but are established by PRI employees. The KBV thus enables researchers to move away from the notion that all firms emanating from PRIs have the potential for high growth. Some critical research questions include examining the knowledge-based factors that are central to the creation of growth and wealth and their importance relative to other determinants of economic performance. It is also important to note that the knowledge gap facing the spin-off firm will change, passing through a number of phases as the venture develops. Key research and policy questions concern the nature of these phases and their associated knowledge; how this knowledge is acquired and which agencies are involved in its acquisition? The knowledge gap can be assessed at different levels of aggregation, such as the university or PRI, TTO (a unit of the university), incubator, venture, or for individuals involved in the process (e.g. academic scientist). Taking these two dimensions together enables examination of both the stage of development

Fig. 1. The knowledge gap matrix.

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at which a problem occurs, as well as the players who can potentially play a central role in overcoming a gap. For example, the individual academic (or surrogate) entrepreneur may be important at the early stages of the venture, but over time the team may become more central to its development. Key research questions might include: How the knowledge in the management team develops? How knowledge is acquired from different parties and to what extent and when should PRIs have a role in the development of the spin-off? The knowledge gap can also be influenced by different environmental contexts. For example, the role of IP law at the national level and the royalty distribution formula at the PRI level could be two critical factors. In the U.S., the Bayh-Dole Act transferred ownership of the IP from the federal government to the PRI, whereas in Sweden, the IP is owned by the academic. Other research questions include an analysis of the consequences of gaps in the knowledge base of these newly created companies on their subsequent performance. It might also be useful to assess the relative importance of different aspects of knowledge (and their absence) on company and university performance. These issues also lend themselves to quantitative and qualitative analysis.

3. Addressing the knowledge gap in spin-offs at PRIs It is important to consider several process issues with respect to addressing the knowledge gap in the development of spin-offs at PRIs. We draw on qualitative research conducted in the U.S. and U.K. (Siegel et al., 2003b; Lockett et al., 2003; Lockett and Wright, 2005) covering PRIs with a broad range of geography, age, size, and science bases. These key process issues are opportunity recognition, the decision to commercialize and due diligence, the choice between licensing and spinning-off, the time-period over which TTOs are involved in spin-offs and accessing resources and knowledge. Our evidence indicates that opportunity search is undertaken primarily by the academic and/or the TTO. There appears to be considerable reliance on the academics to identify the opportunity for a spin-off. In several cases, external entrepreneurial actors or “surrogate” entrepreneurs are involved in opportunity search. As shown in Franklin et al. (2001), surrogate

entrepreneurs tend to be better at this task than academics. The authors also report that the involvement of surrogate entrepreneurs raises the probability that the venture will succeed commercially. Whether the academic or someone else identifies the opportunity appears to depend on the academic discipline. Also, while the academic may perceive a potential opportunity to exploit a technological invention, they may need help from the TTO or a surrogate entrepreneur to identify the market for it. The decision concerning when to commercialize appears to depend on both the technology and the academic. Commercialization typically occurs when the technology is commercially viable and an academic is willing to be involved in the process of technology transfer. Due diligence plays an important role in the decision to commercialize and is mainly focused on IP (i.e., verifying patent ownership). Some universities use patent attorneys to accomplish this task, while others can access in-house expertise to achieve this objective. There are some indications, from universities with varying levels of experience in this arena, that sufficient due diligence is not undertaken and that too much reliance is placed on the motivation of the academic. Less experienced institutions appear to place excessive emphasis on the motivation of the academic to develop the venture as a spin-off. The range of internal expertise available is also important as in some cases the conduct of due diligence depends on the nature of the discipline. The recognition of the need for different approaches to due diligence according to the discipline does not appear to be general across institutions. Overall, there appears to be a need for universities to develop broader approaches to due diligence that go beyond verifying ownership of IP to considering the broad range of commercial aspects of the venture. The evidence regarding the role of the academic in both opportunity recognition and in the decision to commercialize suggests a need for PRIs to develop knowledge in both the academic and TTOs to enable these activities to be carried out successfully. A third process issue concerns the choice between licensing and spinning-off. Our research from the U.S. and U.K. indicates that two key factors were the estimated financial return and the willingness of the entrepreneur to exploit the invention. In some cases, a detailed assessment is made either with respect to a score on a commercial opportunity appraisal process

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or in relation to a competitor analysis. However, there appears to be considerable difference with respect to the sophistication with which institutions carried out this assessment. We believe that universities should develop more sophisticated processes for the assessment of the decision of whether to license or spin-off IP. Such processes would allow universities to better understand the license or spin-off decision and weigh all of the factors that influence venture viability and the financial return to licensing. The timing of TTO involvement over the development phases of the spin-off is a fourth important issue. While some universities attempt to impose fixed time periods for involvement of between 1 and 2 years, others take the view that the process is aligned with hitting certain milestones. These milestones might involve in particular the achievement of funding, at which point the university may maintain a board seat. As the entity begins to operate more and more as an independent entity, the university’s involvement typically tapers off. A fifth critical issue concerns access to resources, or what some would call “complementary assets.” Technology, human capital, and finance are the three key resources. While all these are important, approaches differ in respect to their relative importance. The position of an academic willing to exploit the invention appears to be the driving factor in the largest number of cases and emphasises the knowledge embodied in their human capital. In viewing finance as a complementary asset to knowledge, a distinction should be made between preand post-incorporation. During pre-incorporation, the university or public agencies are typically the sole sources of financial capital. After incorporation, private financial capital, in the form of friends and family, business angels and venture capitalists, is most important. In some instances, however, public agencies provide financial capital in later stages, for example, in the U.K., the University Challenge Fund money has commonly been invested at the earlier stages of spin-off development (Wright et al., 2003). In the U.S., the SBIR program provides most of its funding at earlier stages of firm development (Audretsch, 2002), with the expectation that firms should be obtaining funds from federal agencies (through procurement programs), private investors, or capital markets at later stages of development.

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Differences in access to external funding may partly reflect both the science base of particular institutions, as well as the stage of development of the spin-out process. While this may pose problems, there may be a need for universities to examine both the spin-off development processes and their efforts to link with venture capital providers. Evidence from a recent study in the U.K. (Binks et al., 2004) suggests that universities could do more to make their ventures ‘investor ready’ as well as streamlining, making more transparent and speeding-up their decision-making processes vis-`a-vis venture capital investment. Universities may also need to invest more effort in identifying the appropriate venture capital investor for their particular science base. This suggests a further knowledge gap that needs to be closed in relation to the knowledge by PRIs of what financiers are looking for.

4. Contributions to this special issue The papers in the special issue span a range of different units of analysis from the PRI, to the spin-off firm, the venture team and incubators (e.g. science parks). As a result, these papers provide insights into a variety of issues across the knowledge gap matrix. Given the international diffusion of policies to create wealth from developing spin-offs from PRIs, it is also appropriate that we have attracted papers from different countries and institutional environments. At the level of the PRI, contributions in the special issue include the paper by O’Shea, Chevalier, Allen and Roche (in the U.S.) which examines the determinants of the generation of spin-off companies from PRIs. Moray and Clarysse extend this theme by investigating the inter-relationshps between the nature of the PRI, its institutional context, technology transfer policy, and the type of companies that are formed over time. Thus, their analysis spans two levels of analysis: the PRI and the incubator. Powers and McDougall further expand the scope of the analysis, to examine the inter-relationships between the strategy of the PRI, the local environment, and the PRI’s success at spinningoff firms. At the TTO level, Lockett and Wright focus on the attributes of technology transfer office resources and capabilities in determining the generation of spinoffs. In addition, Markman et al. examine the impact of the involvement of TTOs on the speed of the inno-

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vation process. The unit of observation in the study by Rothaermel and Thursby is the spin-off. These authors examine the relationship between incubator, university and its effect on new ventures, including spin-offs. Moving to the level of the team, Ensley and Hmieleski investigate the differences between top management teams in university spin-offs and non-university new ventures. Finally, the focus shifts to the effect of location. In the case of Link and Scott, the emphasis is on science parks which may act as a catalyst for the development of spin-off firms. In contrast, the paper by Audretsch, Lehmann and Warning examines how universities may impact new venture across a region through the transfer of knowledge. In the remainder of this section, we provide more detailed descriptions of these contributions. The paper by O’Shea, Chevalier, Allen and Roche is an empirical study of the determinants of spin-off activity at 141 U.S. universities. The authors examine a wide variety of data, including the Association of University Technology Managers (AUTM) survey, which contains annual data on the number of university-based start-ups. They link this information to government data on patents and R&D and their own survey of university TTO directors. The authors focus on the role of university resource endowments in spin-off behavior and distinguish among four types of resources: institutional, human capital, financial, and commercial. As such, the paper is a useful extension of Di Gregorio and Shane (2003), who used similar data and concluded that the most important determinants of start-up creation are faculty quality and the ability of the university and inventor(s) to assume equity in a start-up in lieu of licensing royalty fees. O’Shea et al. extend these results by using a more sophisticated econometric technique developed by Blundell et al. (1995) for count regressions. The use of this technique enables the authors to account for unobserved heterogeneity across universities due to “history and tradition.” This type of “path dependence” would seem to be quite important in the university context. Indeed, the authors find that a university’s previous success in technology transfer is a key explanatory factor of start-up formation. Consistent with Di Gregorio and Shane (2003), they also find that faculty quality, commercial capability, and the extent of federal science and engineering funding are also significant determinants of higher rates of university start-up formation.

Moray and Clarysse adopt an institutional perspective on spinning off ventures as a venue for commercialising research. The central question they consider is the following: are the resource endowments of science-based entrepreneurial firms at time of founding influenced by the way in which technology transfer is organised at the parent organisation? Interestingly, they adopt a multi-level longitudinal data approach and a mix of quantitative qualitative techniques based on the Inter University Micro Electronics Centre (henceforth, IMEC) in Belgium, a research institute known for its international research excellence and with a track record in spinning off ventures. Using archival data sources, standardized questionnaires and semi-structured interviews, they collect regional data on spin-out activity, data about technology transfer policies from all (senior) managers involved and data about the 23 science-based entrepreneurial ventures that emerged from the institute until 2002. The authors assert that changes in the internal institutional set-up – and the technology transfer policy in particular – go together with a changing overall tendency in the resources endowed to the science-based entrepreneurial firms. They identify three generations of companies displaying the main organisational changes in technology transfer policies and showing distinct resource characteristics at time of founding. The first generation of companies, established during 1986–1995, received insufficient funding and the lack of experience of IMEC meant led to difficulties in evaluating capital needs. Most of the companies had a working alpha prototype when they started their business activities, but these did not involve the formal transfer of technology from the university. During the second generation from 1996 to 1998, IMEC increasingly began to bring in IP into the firms through licensing agreements, but failed to do so in a systematic way. Some of the firms established in this period involved the spinning-off of technology and the receipt of start capital from IMEC and the attraction of further capital after 12–18 months from seed capital funds, business angels, and venture capitalists once the workability of an alpha prototype had been demonstrated. The third generation starters in the period 1999–2002 are characterised by almost all being spinoffs and with a less mature technology, reflecting the increasing technology push model adopted by IMEC.

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During this period, IP was brought into the spin-off in exchange for equity. IMEC researchers involved in the research project were more likely to join the company, instead of remaining an employee at IMEC. The mean initial capital increases significantly during this period although IMEC did not invest cash in its spin-offs at time of founding. Moray and Clarysse’s paper builds on existing research that demonstrates that PRIs may undertake different generic approaches to spinning-out new ventures: low selective, supportive and incubator (Clarysse et al., 2005). IMEC is an interesting case where the PRI, in effect, has become an incubator over time; the third phase outlined by Moray and Clarysse. Their research shows that the strategy of the PRI to become an incubator has an effect on the type of new ventures that are created. Powers and McDougall test a model of a PRI’s selectivity and support policy orientation for technology licensing and its interaction with the external environment for entrepreneurship. Utilizing previous research on technology transfer practice, combined with contingency theory, they investigate the direct and interactive effects among a university’s policy orientation and a new composite measure of the external entrepreneurial environment in which a university is embedded, entrepreneurial density, on downstream performance. The authors measure performance as the number of licensee firms that subsequently go public and product sale royalties. Based on AUTM data from 134 U.S. research universities, data from IPO listing prospectuses, and additional private and governmental data sources, they estimate hierarchical moderated regression main, two-way and three-way interaction effects for two measures of technology transfer performance—licenses with companies that subsequently go public and product royalties. The authors find that both selectivity and entrepreneurial density are significant positive predictors of the number of licenses held with private companies that subsequently went public. However, a university’s selectivity and support orientation was not found to be significantly influenced by the density or sparseness of the external entrepreneurial environment. Further, university technology transfer performance measured in terms of IPO firms did not appear to depend on the policy orientation, nor is that policy orientation significantly influenced by the exter-

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nal environment for entrepreneurship. With respect to product royalties, they find that universities that are more selective about their choices for what to patent and license via the start-up and small company route appear to be especially disadvantaged in terms of royalty flows when they provide a high degree of support for their technology transfer program. Conversely, universities that are less selective appear to be advantaged by a stronger support orientation. For those universities in the middle third of the support range, an increase in selectivity results in a decreasing royalty benefit up to a point. For those universities that pursue either high selectivity and high support policy orientation, or that pursue a low support and low selectivity policy orientation, the benefits do not appear to be in evidence. Lockett and Wright address a key omission in the literature concerning analysis of the role of the resources and capabilities of universities and their TTO. The presence of sufficient experience and expertise within what are historically non-commercial environments may be central to their ability to generate gains from spin-out ventures. The authors assert that it is important to distinguish between the roles of the stock of universities’ resource inputs and their routines/capabilities in affecting the creation of spin-out companies. They utilize data from a U.K. survey of all research universities that are active in spinning-out ventures and adopt count data analysis, controlling for the presence of a medical school and regional R&D expenditure. The authors report that both the number of spin-out companies created and the number of spin-out companies created with equity investment are significantly positively associated with expenditure on intellectual property protection, the business development capabilities of technology transfer offices and the royalty regime of the university. In contrast, they do not find that the number of start-ups is associated significantly with the number of TTO staff, the years the TTO has been in existence of the available technology. The paper by Markman et al. assesses the determinants of innovation speed, or time to market, in the context of academic entrepreneurship. Their empirical analysis is based on interview data from 91 university TTOs in the U.S., supplemented by archival data on commercialization activity and university characteristics from other sources. The authors employ path analysis, incorporating hierarchical regressions, to test

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whether commercializing speed is a full or partial mediator to licensing revenues and new ventures. They find that speed matters, in the sense that “faster” TTOs can commercialize technologies that are protected by patents, the greater the returns to the university and the higher the rate of start-up formation. The authors also report that there are three key determinants of speed: TTO resources, competency in identifying licensees, and participation of faculty-inventors in the licensing process. On the first point, they find that during the discovery and disclosure stage, TTO’s resources – lack of time, capital, or poor central administration support for licensing activity – are less of a hindrance to speedy commercialization than the limitations posed by inventor-related impediments such as resistance, indifference, and poor-quality disclosures. However, during advanced commercialization stages to new ventures, faculty-inventors seem to play a more positive role in accelerating the process. It could be that some faculty-inventors are the founders of these technology-based start-ups. Therefore, their interest in the new venture extends beyond the licensing process, involving the management of the commercialization process itself. Rothaermel and Thursby consider the importance for incubator firms of linkages to universities. They focus on two types of university linkages: a license obtained from the university by the incubator firm and their links to faculty. The authors propose that a university link to the sponsoring institution reduces the probability of new venture failure and, at the same time, retards timely graduation. Furthermore, they suggest that these effects are more pronounced the stronger the university link. Their empirical analysis is based on detailed longitudinal data from 79 start-up firms incubated in the Advanced Technology Development Centre at the Georgia Institute of Technology over the 6-year period between 1998 and 2003. They estimate multinomial logistic regressions, using maximum likelihood methods, to assess the determinants of three alternatives for these ventures: failure, remaining on the incubator, or successful graduation. The authors find that a new venture’s university linkages through a Georgia Tech license and/or through having a Georgia Tech professor on the firm’s management senior team significantly reduce the new venture’s chances of outright failure, but also retard the firm’s

graduation from the incubator to a significant extent. They attribute the probability of reduced new venture failure to the venture being founded on a technology licensed from the university sponsoring the incubator, while retarded graduation stems from links to faculty from the incubator-sponsoring university. The authors also report that only strong ties matter when predicting graduation within 3 years or less. An incubator venture with a Georgia Tech professor as part of its top management team is significantly less likely to graduate in a timely fashion. Having a Georgia Tech inventor in the incubator firm’s senior management reduced both the probability of outright failure and the likelihood of timely graduation from the incubator within 3 years or less. Ensley and Hmieleski analyze differences between firms that are spun out from university-affiliated business incubators and technology parks and those who emerge without such assistance. The authors draw on institutional isomorphism theory to predict that university-affiliated new venture top management team (henceforth, TMTs) will be more homogenous in composition, display less developed team dynamics, and as a result, be lower performing than those without university affiliation. They adopt the view that universityaffiliated firms will institutionalize themselves toward the norms of the university and the successful ventures that have been launched through their nurturing, rather than toward their own industry, what they term “localized” isomorphic behavior. The costs associated with localized isomorphism are used to explain why the benefits of university affiliation might fail to translate into performance gains. They test for differences in TMT composition (education, functional expertise, industry experience, and skill), dynamics (shared strategic cognition, potency, cohesion, and conflict) and performance (net cash flow and revenue growth) between a sample of 102 high-technology start-ups that are affiliated with university incubators and technology parks and an observationally-equivalent sample of 154 ventures that are unaffiliated with such facilities. Using discriminant analysis and multiple regression, they find university-affiliated start-ups to be comprised of more homogenous TMTs with less developed dynamics than their unaffiliated counterparts. Furthermore, university-affiliated start-ups are found to have significantly lower performance, in terms of net

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cash flow and revenue growth, than unaffiliated new ventures. The issue of location is highlighted by two papers. First, Link and Scott analyze the determinants of the new venture formation within university science parks (a property-based incubator). They focus on science parks because these institutions are designed to enhance knowledge spillovers between universities and tenant firms, and to enhance regional economic growth. Adopting an institutional environment perspective, they conjecture that there are two critical factors that explain the rate of spin-off formation: the research environment of the university and the characteristics of the research park to which the spin-off companies locate. They hypothesize that the more research intensive the university, the greater the probability that faculty will innovate; and, the more innovative the faculty, the greater the probability that technologies will develop around which a spin-off company could be based. They also hypothesize that the formation of university spin-off companies into the university’s park will occur more often in older parks than in newer ones as these have developed the expertise to facilitate opportunity recognition and development. To test these hypotheses, the authors collected survey data for 51 U.S. research parks, which they supplemented with interviews of provosts at these institutions. The dependent variable in their analysis is the percentage of firms on the park that are university spin-offs. The authors employ Tobit estimation and control for university and park characteristics. The empirical results indicate that university spin-off companies are a greater proportion of the companies in older parks and in parks that are associated with richer university research environments. They also find that university spin-off companies are a larger proportion of companies in parks that are geographically closer to their university and in parks that have a biotechnology focus. Second, Audretsch, Lehmann and Warning examine the role of a firm’s choice of location as a firm strategy to access knowledge spillovers from universities. The authors hypothesize that proximity to the university is shaped by different spillover mechanisms – research and human capital – and by different types of knowledge spillovers—natural sciences and social sciences. Their primary source of data consists of 281 young high-technology start-ups that are publicly listed on

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the Neuer Markt in Germany between 1997 and 2002. Data are also drawn from multiple archival sources, including listing prospectuses relating to the firms and government and other sources relating to university data. Based on OLS regressions, their results suggest that spillover mechanisms as well as spillover types are heterogeneous. More importantly, the authors find that firm spin-offs, at least in the knowledge and hightechnology sectors, are influenced not only by the traditional regional and economic characteristics, but also by the opportunity to access knowledge generated by universities. However, the exact role that geographic proximity plays is shaped by the two factors examined in this paper—the particular knowledge context, and the specific type of spillover mechanism.

5. Policy synthesis In this section, we synthesize the findings of the papers presented in the special issue, in order to draw some policy conclusions. At the level of the PRI, there are several policy implications, in terms of the generation of spin-off companies. Start-up creation at PRIs can be stimulated through the development of certain resources and capabilities that help fill the knowledge gap. First, PRIs need to develop an appropriate culture and infrastructure to support academic entrepreneurship and technology commercialization (O’Shea et al.). Second, PRIs need to establish an active partnership with industry and government funding agencies and generate financial support from these institutions. Third, PRIs need to recruit, retain, and develop star scientists. The findings of these studies also imply that PRIs must acquire and develop knowledge and resources to develop spin-offs, depending on the nature of their external environment for entrepreneurship. In external environments that are supportive of the development and growth of small businesses, selectivity by universities does not necessarily provide the advantages that it does in states with less favourable environments (Powers and McDougall). Institutions such as MIT and Stanford do not need nor should be so strict about what to pursue via new ventures since external expertise and resources for making those kinds of choices are readily available in the area. Choice, in those circum-

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stances, should be left to the venture capitalists and local entrepreneurs to “pick winners.” This has important policy implications, since it suggests that it may not be helpful for public universities to emulate successful private institutions like MIT and Stanford, since these two institutions have a low selectivity and low support policy orientation. While this approach may be appropriate given their strong external environment, this is not necessarily the case for a public institution facing a weak external environment for entrepreneurship. These findings are in line with those of Clarysse et al. (2005) for Europe. At the PRI and incubator levels, Moray and Clarysse conclude that the development of a successful incubator requires a substantial amount of organizational learning. The founding resource endowments of spinoffs may co-evolve with the way the PRI transfers knowledge or technology, such as in the amount of starting capital and the maturity of the technology (Moray and Clarysse). The need to develop knowledge means that the creation of a successful incubator requires more than just an investment of resources. It also requires time for the resources to be deployed and for knowledge to be generated and internalized into the incubator. At the TTO level, there is a need to acquire both stocks of resources and to develop appropriate capabilities among technology transfer officers in the spinningout companies and in licensing (Lockett and Wright; Markman et al.). Consistent with Siegel et al. (2003b), there is a strong need for TTOs to recruit, retain and train technology transfer officers with a broad base of commercial skills. There is also a need at this level to strive for more rapid disclosures of faculty discoveries, in order to increase innovation speed (Markman et al.). Shorter turnaround time may not allow for ideas to be tested completely, but it compresses the feedback loop between cause and effect and makes it explicit, all of which accelerate the learning process. This further emphasises the need to develop important knowledgebased capabilities to facilitate the rapid disclosure of inventions. We believe that this result has important policy implications, given the spirit of legislation such as the Bayh-Dole Act, which was designed to accelerate the rate of diffusion of technologies from universities to firms. As noted in Siegel et al. (2003c), invention disclosures constitute the critical input in the process of university technology transfer.

At the venture level, there appears to be a tradeoff between the evidently necessary tight-coupling between the technology invention and the spin-off through a strong university tie, versus the explicitly stated goal of many technology incubators to graduate firms in a timely fashion (Rothaermel and Thursby). Thus, entrepreneurs and incubator managers need to be aware of the trade-off they might encounter when incubating a new venture that relies on a strong university link, either through a technology license and/or having one or more university faculty as part of the senior management team. A combination of professional management and a strong university linkage through a university license might reduce incubator firm failure, while still allowing for timely graduation from the incubator. These findings are also supported by the work of Ensley and Hmieleski. At the level of the TMT in spin-offs and new ventures, evidence suggests that university spin-offs are somewhat immature and incomplete with respect to their TMT dynamics suggests that universities, incubators, and technology parks should devote more attention to developing the TMTs of the new ventures they create (Ensley and Hmieleski; Rothaermel and Thursby). A balanced professional management team is required in addition to a university linkage if the spin-off is to be successful. However, since it may be difficult to find expertise on university campuses in relation to the composition of spin-off TMTs, there is a need for policy initiatives that promote the development of new venture TMTs as a means to increase the viability of university-affiliated firms. It also underscores the importance of factors that most technology transfer managers might not be comfortable with and highlights the need for technology transfer managers in PRIs to acquire knowledge of how TMT composition and development can affect spin-off performance. None of the papers in the special issue consider the individual level of analysis. The qualitative evidence outlined in Section 3, however, suggests important policy implications regarding the human capital of the academic scientists involved in the spin-offs. First, there may be a need to develop training and incentives for academics to undertake entrepreneurial activities. An example of such an approach is the Medici Fellowship program, which is targeted to academics in biomedical fields and provides them with business training and connections to a network of practitioners from

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the biomedical industry (see Mosey et al., 2005, for a detailed review of the program). In particular, it is important to distinguish between academics who are willing to develop a spin-off and those who are capable of developing a successful spin-off. Academics need to acquire the right commercial skills to develop ventures and/or develop an appreciation that for the venture to be successful they may need to step aside and take a more technical role and bring in entrepreneurs and managers who do have the appropriate human capital in terms of commercial skills. Typically, this will be in the form of becoming a technical consultant or the chief scientific officer. Consequently, universities need to develop networks of contacts to enable them to access the right mix of human capital skills. There may be a role here for the development of links with regional and state development agencies both with respect to the provision of training, but also in terms of developing the necessary networks of entrepreneurship contacts. With respect to location issues, the spin-off’s decision to locate on a science park (a property-based incubator) is positively influenced by: (i) the proximity of the science park to the university; (ii) the quality of the university research environment and focus on biotechnology; and (iii) the more established the science park is (Link and Scott). Hence, it is important for knowledge, and in particular tacit knowledge, to flow to spin-off companies. Furthermore, geographic distance does play an important role in the flow of information as the greater the distance between the PRI and the science park then the less likely spin-offs will locate there. Building on this theme, Audretsch et al. assert that the geographical proximity of a university is an important determinant of new venture location. This relationship may not simply be mediated by geographic distance, but rather by the type of knowledge and the mechanism used to access that knowledge. As a result, it is important for researchers to consider the nature of the knowledge that is being transferred and how this process transpires. This will enhance our understanding of the antecedents and consequences of new venture location.

6. Conclusions and research implications The findings from this special issue underscore the importance of the acquisition, development, and inte-

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gration of knowledge in the development of spin-offs at PRIs. It is important to note that this evidence spans a variety of levels of analysis (e.g. PRI, spin-off, and TMT), different stages in the spinning-out process (e.g. opportunity recognition through to raising risk capital and building a sustainable new venture), and several countries (U.S., U.K., Belgium, and Germany). Our framework and the papers presented in this special issue lead us to suggest a number of areas for further research. Future work should focus on the following areas: differences across the different units of analysis, differences across the phases of development of the spin-off, differences between contexts—both in terms of the academic (scientific) discipline and the institutional context, and differences in the human capital requirements of those responsible for filling knowledge gaps. An examination of differences across levels of analysis will yield greater insights into the manner in which the knowledge gap differs according to whether the focus is on the PRI, TTO, incubator, spin-off, team, or individual. More directly, we believe that multi-level models and analysis could yield a more comprehensive understanding of spin-out development and performance. Additional research here should focus on the nature of these differences and their implications for the different units of analysis. There has also been little analysis of the nature of the knowledge gap across different phases of spin-off development. An examination of this issue could shed light on how knowledge gaps change over the life-cycle of the venture. Furthermore, by linking cross-case and cross-phase analysis researchers will be better able to examine how the importance of the different units of analysis will change over time. These cross-case and cross-phase analyses should yield substantial improvements in methodology, generalizability, and value as well. Examining the importance of contexts is also important, since knowledge gaps may be dependent on industry and institutional contexts. For example, the nature of business models in the software industry differ from those in biotechnology (Druilhe and Garnsey, 2004), which may have implications for the nature of knowledge gaps. In addition, although some papers in this special issue have provided insights into how institutional contexts may affect knowledge gaps (e.g. Moray and Clarysse; Powers and McDougall), more work is needed in this area to explain the nature of the affects.

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Different institutional contexts in various nations introduce dimensions such as the ownership of the IP in PRIs, differences in attitudes towards and incentives for entrepreneurial activity, the extent to which financial provision is available, etc. Differences in institutional contexts mean that merely emulating successful private institutions like MIT and Stanford may not be the best strategy for PRIs to pursue. The commercial human capital of academic scientists and technology transfer officers is a central issue in addressing the knowledge gap. A frequent complaint of venture capitalists is the lack of investor readiness of spin-offs compared to other early stage high-tech ventures (Binks et al., 2004). This suggests an important difference between the two sets of firms in the backgrounds of the entrepreneurs, founding teams, and their advisors. Additional research is required at the individual/academic level to understand their motivations and capabilities in developing successful spin-offs and the extent to which this varies across disciplines (Wright et al., 2004). There are also implications for how PRIs should attract, train, and retain technology transfer officers. There may be a need to recruit more technology transfer officers with an appropriate private sector background, including experience of starting a business. Alternatively, PRIs may need to spin-off their technology transfer functions to private sector organisations that do have the skills. Problems in incentivizing technology transfer officers have been well-recognized (Siegel et al., 2003a,b, 2003c). However, if PRIs are constrained to remunerate technology transfer officers in line with other elements of university bureaucracies, they may be unable to attract individuals with the entrepreneurial capabilities required to stimulate and develop successful spin-offs. There is a need for further research at the technology transfer officer level that compares the effectiveness of officers with different backgrounds and different incentive systems. Finally, although the focus of this special issue has been on the creation of new firms through spin-offs, as opposed to licensing, the findings presented here raise issues regarding the choice between these two modes of university technology transfer. If universities are incapable of fostering sufficient commercialization and entrepreneurial skills among their academics and technology transfer officers, it may be appropriate to place more emphasis on licensing inventions. Additional comprehensive research is required to assess the

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