University Startups and Spin-Offs: Guide for Entrepreneurs in Academia (2015)

Part II. Strategies for Universities

Chapter 18. Building a Bridge to the Market

Currently, few links exist between universities and the business community. This makes sense, because both work differently. State-funded universities largely run as not-for-profit entities, whereas businesses with shareholders are at home in the capitalist paradigm. Regardless, universities often declare that they benefit from established links to the business community. These exist mainly in research, where corporations sponsor certain projects. However, when examined more closely, such connections do little for university startups—as I have mentioned, they are often nothing more than a convenient strategy for corporations to let researchers do their R&D inexpensively. Such links are not particularly valuable for universities, and the knowledge exchange is lopsided. Corporations extract know-how from university research teams, but universities gain no insight about how entrepreneurship works and how they could better commercialize research in the market. This is unfortunate, and some universities have begun to realize there is room for improvement.

Most important, it would be good if universities integrated market-oriented thinking in areas beyond the research level with their PhD and postdoc programs. On the degree level, know-how about applying academic research in the market is almost entirely missing.

The rest of this chapter presents some general assumptions about why a pivot toward more entrepreneurship may be difficult for some universities. I also offer recommendations about how to address these difficulties.

Focus on Small and Medium Enterprises (SMEs), Not Large Multinationals

Universities often try to attract large multinational corporations to sponsor research projects or collaborate in other ways. The corporations shoulder the financial risk by underwriting a part of the research. In reality, the amounts they contribute to these projects are small fry compared to their overall profits. Plus, large corporations are tax optimized, often reside in Switzerland, and pass most of the tax burden to their employees. If they hit upon a goldmine with a product developed in a joint research program, the windfall will rarely benefit the university or the researchers.

On the other hand, small and medium enterprises (SMEs) are the real drivers of economies. Companies with fewer than 99 employees are comparable to large firms in their contribution to aggregate employment.¹ They are important engines of job creation and GDP growth in developed and emerging markets.

Most universities treat SMEs as an afterthought. It is of course much more prestigious to announce joint projects with multinationals than with smaller, local companies, but this practice should change. If governments want to support the economy, they should give SMEs better access to universities: for example, in the form of tax breaks, guarantees, or risk sharing. Giving SMEs more access to inexpensive research would help make a larger impact in society. This could go hand in hand with establishing practices for a more balanced knowledge exchange that would actually help universities become more entrepreneurial.

Is the Current System Up to the Task?

Startups are inherently hands-on. Little know-how about rolling up one’s sleeves and turning research into marketable products currently exists in universities. This makes universities less than ideal experts on the topic of entrepreneurship and stipulates the need for knowledge transfer from sources outside of academia. The market is by definition the battlefield on which entrepreneurship takes place. Why not tap into this source to glean some insight about how to commercialize innovation? Later, this chapter investigates how universities can build stronger bridges to the market to help their startups become more entrepreneurial and compete with businesses in the real world.

Can universities reinvent themselves and suddenly become startup hubs? Most of them lack the capacity to reproduce Stanford University in Silicon Valley. Laying the foundation for successful startups will take a while. A cultural shift will need to take place, and this needs time and patience. Unfortunately, a mind shift is impossible while continuing to do more of the same—more grant funding, more lectures by MBAs, and more business plan competitions. These will be of little help in the long run. If universities want to promote startup success, they need a deeper understanding of how entrepreneurship comes into being: how they can enable it from the bottom up, not try to force it into existence from the top down.

Because universities need a radical paradigm shift, their current advisors may not be up to the task. Government officials are hardly startup entrepreneurs. Neither are MBA students, professors in economics and finance, or the technology licensing office (TLO). Considerable trust is placed in those with strong incentives to stick with the status quo. A fundamental mind shift must occur to put universities on the right track. The longer universities put off change, the harder it will be to bring about a course correction later.

Learning from the Market

A pivot toward entrepreneurship can be achieved better by learning by doing than by lecturing. To learn more about this field, universities need to build a stronger bridge to the market. Just as launching a startup is an experiment, universities need to test different approaches and find the ones that yield the best measurable results for them. They should do this by integrating applied business knowledge much earlier than in the research stage of academic education. If degree students have regular contact with market practitioners who have walked the walk and can tell war stories about their trials and tribulations, those students can gain considerable insight. When they reach the research level in their PhD or postdoc, they will already understand how the market works. This will be a huge advantage over those living in the ivory tower of academia who are exposed to business for the first time at age 35.

Universities should be concerned with empowering their students and researchers with the know-how to launch businesses in the twenty-first century. If they achieve that, many more university startups can make a difference in the lives of people who benefit from the innovative products the startups bring to the market. To make an impact, startups should gather this knowledge right at the source.

Industry Links

Entrepreneurial students and researchers profit in many ways from stronger links to industry. Universities should seek and welcome connections not only with large multinationals but also with SMEs. The latter may be appreciative and loyal partners for university startups, especially when a two-way information exchange takes place.

At present, university startups often feel that they have to go the entire distance alone. The founders take management and accounting courses and think about how to sell products and distribute them in the market. It is good to understand as many aspects of business as possible in the early stages of a startup. However, when entrepreneurs are ready to launch their final product, they need to focus their energy. They need a more effective way to manage the moving parts in their operations than doing everything by themselves.

Management and sales skills seldom come overnight, and it can be worthwhile for a startup to join forces with an established company to shoulder these tasks. Nowadays, a joint venture is often an afterthought for a university startup. If it exists, as you’ve seen, it is often an outsourced R&D lab of an industrial partner, who perhaps sponsors some equipment and materials and in return extracts the intellectual property the researchers create. Unfortunately, this arrangement will never allow startups to make a splash. They will remain small, tethered R&D labs forever.

Instead, startups should find a way to get joint-venture partners to form companies with them. This will take industry partners out of the pattern of seeing universities as a free technology platform from which they can cherry-pick the most promising morsels at a discount. When a company is part of a university startup earlier in the process, it can help create an entrepreneurial ecosystem from which the university’s other startups can profit. Management, distribution, sales, support—all these functions will be part of the startup’s daily business under the tutelage of an experienced joint-venture partner. He helps with recruiting operative personnel and support services, and from this link with professional managers, entrepreneurs gain knowledge about other fields of business that they never knew existed. Successful startups will maintain a connection with the university, and having joint ventures in the network will provide major future benefits.

Entrepreneur Alumni Networks

It is common for the founders of a successful company to exit it at some point to start a new firm. This is often the case in finance, where successful teams of managers work at a large investment fund for a few years and then split off to start their own fund. Technology and Internet firms are other examples where this occurs frequently. These accomplished founding entrepreneurs are often excellent partners for future startups launched from the university. Not only can they form a joint venture with new startups, but they may buy entire units and integrate them into new enterprises, which kick-starts an active knowledge exchange between the market and university startup entrepreneurs. Fostering entrepreneurial success and maintaining a link to alumni who have achieved it will enable network effects for the university’s entire startup track. Universities should be open to harnessing this source of knowledge.

With this in mind, it becomes obvious that enabling entrepreneurial success at a university is a multigeneration task. It will rely on establishing a mechanism that launches startups, keeps strong links with the founders and joint-venture partners, and engages them in the future with attractive opportunities and applied research. Some universities may need to rethink some of their programs in this new light. If there is a choice between offering a PhD program that is doing research that is easy to commercialize and one that is not, which one should the university choose? This thinking is less relevant to universities today, but it may play a bigger role when a startup track is in place.

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¹Meghana Ayyagari, Asli Demirguc-Kunt, and Vojislav Maksimovic, “Small vs. Young Firms across the World: Contribution to Employment, Job Creation, and Growth,” Policy Research Working Paper, The World Bank, April 2011, www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2012/11/06/000158349_20121106091157/Rendered/PDF/WPS5631.pdf.