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Critical Junctures in the Growth of University High-Tech Spinout Companies


This paper investigates how university spinout companies develop. The capabilities framework is used to investigate the development of nine different spinout companies. Each venture is found to move through a number of distinct phases and to come up against "generic" problems whilst attempting to move from one phase to another. We identify four critical junctures that spinout companies need to overcome to succeed. The entrepreneur or the entrepreneurial team need to possess key entrepreneurial capabilities to overcome these critical junctures.

The spinning-out of university-based scientific inventions into separate companies represents a potentially important but as yet under-developed option to create wealth from the commercialization of research. Exploitation of these inventions, in what has historically been a non-commercial environment, raises new entrepreneurial challenges beyond those faced by new high tech ventures in general. As with other high-tech start-up ventures, university spinouts (USO) face considerable difficulties in achieving the transition to sustainable growth and profitability. However, USO face specific challenges as they evolve from an initial idea in a non-commercial environment to a sustainable new technology base firm (NTBF). Much of the literature related to the growth of new ventures fails to address the impact of the entrepreneur on the venture's ability to make the transition from one stage to the next. This may be especially important in a USO where academic entrepreneurs may lack commercial skills but at the same time seek to exert a continuing influence over the venture while maintaining an academic career.

This paper aims to address these issues by providing an empirical investigation into how university high-tech spinout companies develop, from which we build theory concerning the nature of the transition problems they face. Drawing on existing research into the life-cycle/stages of business development, and recent advances in the resource-based view of the firm we address two questions. First, what phases do spinout companies go through in their development? Second, what challenges do such ventures face in their development?

To understand how USO develop there is a need to consider both the stages in their life-cycle and the challenges they face in their development. Stage models identify a number of organisational characteristics exhibited at each stage of development and suggest the changes required in the behaviour and practices of entrepreneurs if their business is to progress to the next stage. Several different models have been presented identifying three (Smith et al, 1985), four (Flamholtz, 1986) and five stages (Miller and Friesen, 1984).

Although stage models have a number of well-recognized limitations (Miller and Friesen, 1984), common patterns of organisational transition recur frequently in complex established firms. The transition of a new venture from one stage to the next requires a metamorphosis to a different organisational configuration as ventures respond to the sets of dominant problems they face at sequential times (Kazanjian 1988). These problems are important in defining and measuring discrete stages and in understanding the transitions between stages. Thus our first research question is (RQ1): What different phases of growth do USO go through?

The applicability of stage-based models is limited by the unique nature of USO compared to NTBF in general (Kazanjian, 1988). The traditionally non-commercial nature of universities creates an environment where the resources to develop USO are largely absent (Brush, et al., 2001). A distinction can be drawn between a resource as a stock and a resource as a flow or competence or capability (Teece et al., 1997; Lockett and Thompson, 2001). This distinction emphasises the importance of the firm's ability to develop competencies or capabilities since it is these factors that enable firms to learn over time and generate stocks of new resources.

Established firms possess capabilities through their management and management systems/routines (Galunic and Eisenhardt, 2002). These capabilities are path dependent in nature, i.e. influenced by the evolution of the firm over time (Nelson and Winter, 1982). The issue of path dependence may be considered to be particularly important as USO are generally characterised by an absence of resources, both internal and external in the university environment in general. This is exacerbated by the fact that the existing resource-base of the USO may have a constraining influence on its development (Page-West and De Castro, 2001). In particular, the academic inventors, due to commercial inexperience, may focus too much on the technical aspects of the innovation and may exert a negative influence on firm development. To alleviate this problem "surrogate" entrepreneurs, as outsiders with commercial experience, may be brought in to work alongside the academic inventor to develop the venture and bring entrepreneurial capabilities (Lockett, Wright and Franklin, 2002).

Therefore, we can think of USO evolving through a number of different phases in their development, each one of which may be defined by the "evolving" nature of the USO resource-base. To progress through different phases of development, USO need to develop their resource/capability base over time. Entrepreneurial capabilities are aligned with an ability to identify where resource/capabilities constraints arise and to overcome them. These constraints will change over time and mirror the lack of smooth development of the venture (Miller and Friesen, 1984). The pressure for resources will reach specific junctures, which we consider "critical" if the firm is to grow. At each juncture there is a requirement to access, acquire or develop resources/capabilities in order to overcome the constraint. Thus our second research question is (RQ2): What factors give rise to the critical junctures encountered by USO?

This paper uses detailed case studies to obtain a rich understanding of how USO evolve from research activities into commercial organisations. A USO is defined as a venture founded by employees of the university around a core technological innovation which had initially been developed at the university. We exclude USO traditionally regarded as life-style companies not established to pursue high growth opportunities.

Data were collected using in-depth face to face and telephone interviews with representatives from 9 USO and 5 associated universities over the period July-December 2001. Universities were selected on the basis that they are among the top ten research elite universities in the UK and that they are actively pursuing a programme of university technology transfer. To assist in generalising theory building, each of the selected ventures has a fundamentally different technology platform and each is at a different stage of development (Eisenhardt, 1989).

Semi-structured interviews were carried out with the head of the university technology transfer office (UTTO)(or equivalent), a range of business development managers (BDMs), members of a spinout company who had taken the venture through the process at the university (this included both the academic entrepreneur (inventor) and the "surrogate" entrepreneur where applicable) and the head of each department from which the USO originated.

Empirical Evidence I: The Phases of Growth

This section presents the case material relating to the different phases, which the 9 cases encountered in their development. Each phase is intended to characterize a specific group of activities as well as strategic focus that the firm must accomplish before it can move to the next phase of growth.

Research Phase - In the research phase no idea of a venture exists. For all the academic entrepreneurs/innovators interviewed, their main focus prior to any commercial opportunity being recognised is on perfecting academic research within the academic community. Furthermore, the academic was typically at the forefront of research in his or her chosen field. In the research phase valuable intellectual property (IP) is created, providing the potential opportunity for commercialisation.

Opportunity Phase - The opportunity phase is characterised by the identification of a potential "market" opportunity to exploit the IP, coupled with what several of our interviewees termed as "pervasive uncertainty" with respect to how best to realise that opportunity. During this phase activity mainly focuses on the academic and the UTTO. In each case, the academic and the UTTO worked towards examining whether the opportunity had sufficient underlying value to warrant further effort in pursuing commercialisation. This "screening" process first involves identifying many technical uncertainties such as ensuring there is sufficient evidence that the technology actually exists and works. Simultaneously, there is a need to elaborate the opportunity and define the market to which the technology can be applied.

The imperative during this phase is largely one of dealing with the intense uncertainty surrounding the technology and the application of that technology in a particular market. The uncertainty arises due to a lack of information and the lack of an obvious market in which to exploit the technology. This absence of information creates decision uncertainty and decision complexity. In turn, this means that market specific applications using the technology are difficult to design. The most salient uncertainties occurring during the opportunity stage can be categorised as market, technical, manufacturing, resource, and entrepreneurial.

Pre-Organisation Phase - During the pre-organisation phase many fundamental uncertainties about location, size, market, and administrative intensity may be resolved. Management of the venture can then begin to make and implement strategic plans. The pre-organisation phase represented the steepest learning curve for the academic entrepreneur, particularly if they have little or no commercial experience. In addition, any decisions taken at this stage impact upon the entire future success of the USO since they direct the path it will follow.

Cross-case analysis indicated that it was imperative that management of the USO performed a number of specific tasks during this phase. First, was to define the opportunity in terms of a viable business model. Second, was to develop a strategy that identifies the goals and milestones necessary to realise that opportunity. Third, was to identify the resources/capabilities needed to implement the business model. Finally, was the need to identify and gain the commitment of key individuals who will form the venture's entrepreneurial team.

Re-Orientation Phase - The two main challenges during this phase are how to "build and then re-build the business". To build the business it is necessary to perfect the application of the technology to a particular market niche. In parallel, it is necessary to acquire, develop and integrate resources/capabilities into the business to enable it to undertake productive activities. Whereas, the previous phase represents the steepest learning curve for the entrepreneur, this phase represented the steepest learning curve for the "entrepreneurial team". The team now has to learn how to "manage" the business, and develop the necessary capabilities (systems/routines) to do so.

Many iterations of a business model will be necessary to adapt to changes, to learn from mistakes and to apply the knowledge gained from this learning in order to reassemble and build resources and capabilities as well as perfecting the technology. For all nine spinout cases, the business model, the market focus, make-up of the team and the technology all had to evolve in this re-orientation phase.

Sustainable High Growth Phase - The final phase is characterised by the USO attaining sustainable high growth. In arriving at this phase of development the USO will have resolved many of the early uncertainties via the resolution of its precise business model.

All the companies that had reached this stage are characterised by four criteria. First, the presence of a credible management team able to steer the venture through the sustained high growth phase. Second, the venture is profitable or has the express goal of becoming profitable in the near future. Third, the venture will have moved off the university campus, or at the very least from out of the research laboratory, into a commercial environment, possibly a university affiliated science park or incubator. Fourth, the venture will almost certainly have retained close links with the university. This typically occurs via the academic inventor remaining in academia while acting as a technical advisor to the new venture. This is essential if the venture is to have an innovation pipeline consisting of new technologies coming through from the university that can continue to be exploited via licensing in new patents.

Empirical Evidence II: The Critical Junctures
To reach its full potential as a sustainable high growth company, the venture must successfully make the transition between the different growth phases, as outlined above, that creates what we term "critical junctures" for the firm. We define critical junctures as a complex problem that occurs at a point along a new high-tech venture's growth path preventing it from achieving the transition from one growth phase to the next. From our cases we found that a venture at a critical juncture faces two generic problems. First, the venture faces an impending crisis, which threatens the existence of the venture. Second, the venture faces uncertainty over how to resolve the cause of the crisis. Furthermore, we were able to identify that critical junctures arise due to an absence of one or more key resources/capabilities required by the firm. Although the problem is generic the nature of the required resources differs across the different critical junctures.

Critical Juncture A: Opportunity Recognition - The critical juncture of opportunity recognition lies at the interface of the research phase and opportunity phase. Opportunity recognition involves capturing break through ideas that trigger an evaluation, as a precursor to the formation of commercialisation effort. The possession of idiosyncratic information allows people to see particular opportunities that others cannot, however, this is a necessary but not a sufficient condition for opportunity recognition. From our case evidence we are able to identify overcoming the critical juncture of opportunity recognition as the ability to synthesis knowledge and insights from different domains but principally between the domain of scientific knowledge and the domain of the market. This point was made clearly by an academic entrepreneur who explained how he found himself publishing numerous ideas in academic journals, which hindsight could have potentially been patented.

The critical juncture arises due to a lack of commercial awareness, not just on the part of the academic, but within the culture of university. It seems that the traditional environment of the university, with its lack of incentives to think and behave commercially, is not conducive to having an entrepreneurial alertness and therefore, individuals lack the ability to recognise opportunities and search for relevant information to evaluate opportunities.

Critical Juncture B: Entrepreneurial Commitment - Entrepreneurial commitment is necessary for a potential venture to be taken forward from a vision that the academic has created mentally, to the formation of a business that is operational and engaged in business transactions. Our research indicates that the critical juncture of entrepreneurial commitment arises for four possible reasons. First, the majority of academic inventors we interviewed showed a reluctance to commit to taking the idea forward to actively explore the commercial potential of exploiting their invention, because doing so would mean going against accepted convention. Second, a lack of belief in their ability to cope in an alien commercial environment prevented academics from taking a leap of faith and pursing their inclinationsto form a USO. Third, according to the heads of academic departments, UTTO managers and some of the academics themselves, a common characteristic of academics is a "reluctance to accept and live comfortably with ambiguous situations". What makes some academics great scientists or engineers clearly does not give them a predisposition to naturally behave in an entrepreneurial manner. Finally, our interviewees provided insights relating to the lack of self-awareness over personal limitations and sometimes a lack of humility on the part of some academics.

The majority of the academics we interviewed found it difficult to delegate or share responsibilities when it came to the commercialisation of their intellectual property. This is perhaps not surprising, given many years of scientific training during which time they have examined their work and the work of others meticulously, often isolated in their research from others outside their own group. The problem of not having commercial expertise is thus compounded by the fact that these academics "do not like being told what to do or how best to do it", according to one UTTO manager.

Critical Juncture C: The Credibility Threshold - The third critical juncture concerns constraints on the entrepreneur's ability to actually start doing business. In all cases, finance was the key resource without which the entrepreneur was prevented from carrying out the transition from the venture being a "pre-organisation" to a fully operating organisation that is able to engage in repeated resource transactions. The dilemma that the academic and surrogate entrepreneurs consistently faced was that the building blocks of the venture needed to be put "on standby" ready for the formation of the venture, but these essential resources could not be acquired without financial investment. We term this critical juncture the credibility threshold, as a lack of credibility constrains the entrepreneur's ability to raise seed finance. Traditionally it has been up to the academic entrepreneur to find the means to overcome this critical juncture. Without this initial credibility, new high tech ventures in general, will not be able to overcome sceptical perceptions from customers and financiers, gain access to markets and successfully achieve the transition from a "concept" to a "business" engaged in transactions in the market.

Critical Juncture D: The Critical Juncture of Sustainability - The final critical juncture we define as sustainability. In the new ventures we studied, the entrepreneur needed to first assemble an organisational structure that specified tasks, allocated people those tasks, and provided avenues of authority. The entrepreneur also needed to re-configure these structures and routines on regular, sometimes daily bases. According to one surrogate entrepreneur, "as a USO our mission was simple: to evolve and to do it quickly". Informal structures also need to be developed in order to facilitate communication within the organisation. This dynamic of constantly reconfiguring the venture's resources in order to overcome the next critical juncture was common across all cases.

To overcome these junctures the entrepreneur, and increasingly the team, need to be able to deal with high levels of organisational turbulence. They will also encounter serious difficulties in raising first-stage finance, unless they can demonstrate to investors that they have the capability to achieve sustainable high growth. In general, this critical juncture arises because the USO lacks the necessary resources to build the business, perfect the technology and business model, and establish itself in the marketplace simultaneously. All these things have to evolve in parallel for the USO to overcome a threshold of sustainability. Unless this parallel development can be achieved, the USO will stagnate as financial and other resources become depleted. This may then further constrain the entrepreneur's and team's ambitions for the success of the venture. Growing a business is an expensive and resource intensive exercise.

This paper has explored the transition phases experienced by USO. In particular, our study helps develop theory regarding the problems faced by new high tech spinouts from universities in two ways. First, evidence from the case-study analysis indicates that USO go through a number of different distinct phases in their development and that these phases are sequential in nature. Second, at the interstices between the different phases of development we found that ventures face "critical junctures", which must be overcome to progress to the next phase of development. The factors giving rise to critical junctures suggest the need for two key capabilities on the part of the entrepreneurs involved in USO. The first is the capability of spotting the problems, i.e. foresight. The second concerns the capability to acquire, access or develop the necessary resources/capabilities to overcome the juncture. Our findings suggest that it is the individual entrepreneur in the earlier junctures who needs to develop the requisite capabilities. Over time as the complexity of what needs to be done increases, the capabilities to deal with later junctures become located in the team.


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