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Survey suggests top 10 reasons university start-ups fail


By David Schwartz
Published: July 14th, 2010

Writing on his blog, Beyond the First World, Terry Young, president emeritus of AUTM, describes the responses he received to a survey of 40 tech transfer professionals representing a cross section of the industry, including CEOs of tech transfer service companies, university TTO managers, start-up executives, researchers, and patent officials. Thirty-six individuals responded to Young’s single question, “What are the top three reasons for failure of university start-up companies?”  Instead of using a survey form, participants were encouraged to respond with their own comments. “This ‘survey’ was not proposed or promoted as a scientific survey in any manner,” Young explains. “Rather, it was a free-form attempt to learn from experts their opinions regarding the reasons for the failure of university start-up companies.” Factors cited by respondents include:

1. Management failure (22 mentions). Start-ups are doomed when academics seek to be corporate managers and stay in control too long; management teams lack start-up experience; management fails to accurately project the company’s needs for capital, employees, product development, and technical expertise; or management fails to identify the market opportunity and, therefore, misses it.

2. Failure to raise sufficient capital (15 mentions). Some academic start-ups begin with no capital (“zero stage minus one”) and cannot overcome this deficit, according to respondents. Others don’t secure follow-on investment rounds because they fail to resolve technical challenges or reach major business plan milestones, encounter a cash flow crisis before they have a chance to succeed, or lose their original VCs to other projects.

3. Innovation does not meet a commercial need (12 mentions). Many start-ups succumb to problems such as “laboratory-push versus market-pull,” the entry of a technology into the marketplace too early or late, a “$5 solution for a 25 cent problem,” the inability of an innovation to compete with existing products, or the threat of “neat science” — when a start-up falls in love with its technology and fails to identify a market need.

4. Geography (7 mentions). “Small country start-ups must be successful in their home country before they can think about going international,” according to one respondent. “This is especially difficult when there are no buyers in their home country.” VCs also want their portfolio companies nearby, which may limit investment opportunities to in-country VCs. In other cases, companies run out of cash because the local market — consumers, capital, and suppliers — is too small to sustain.

5. Cultural factors (6 mentions). Start-ups stagnate when the country’s culture devalues risk-taking because there are “no young people with entrepreneurial spirit, no risk money supply, no vibrant IPO market, and no market willing to buy state-of-the-art technological goods,” according to one respondent. “In Europe, despite all the EU propaganda of a ‘single market,’ the reality is that linguistic barriers, geographical trading cultures, and other country-defined factors place severe limitations on the ability of any company to grow beyond the level of a 50-employee company.” In many countries, a company’s failure can damage the reputations of a researcher, university, and company managers, according to another respondent, although in the U.S., such failure “is a ‘badge of honor'” that has little negative impact on the principals.

6. Government laws, bureaucracy, and programs (6 mentions). Start-ups often are handicapped by poor IP protection through national laws, such as constraints on protection of computer software and biotechnology in Europe. In other cases, “government funding programs, such as the Small Business Innovative Research (SBIR), actually have a detrimental effect by causing start-ups to be logical extensions of technology-development, not market-pulled technology needs.” Legislated entrepreneurship rarely works, as government does not understand the technology commercialization process, one respondent adds.

7. Infighting within the start-up team (6 mentions). Start-ups cannot survive without a common objective among key players: inventor, university, management, investors, and government, according to one respondent. The survey also cites the failure of a university and/or investor to give control of a spinoff to the management team and the “clash of cultures” that occurs when start-ups focus solely on technology while investors focus solely on money.

8. Problems with IP (6 mentions). In general, technology needs a clean patent estate to allow a start-up to operate freely, according to participants. “The IPR estate is too weak without issued patents,” one respondent notes. “This is a significant challenge as universities cannot afford the expense to ‘prosecute to completion’ internationally, but investors do not want to invest without allowed claims and start-up companies cannot wait that long without investment. It is a ‘lose-lose-lose’ situation.” In many countries, lack of clarity about IPR ownership also impedes investment.

9. Poor business plan (5 mentions). A business plan that ignores critical first steps to survival precludes start-ups from raising capital. “A business plan may have a misdirected focus upon the technology and the IPR, without seeing the market,” according to one respondent. “Too many start-ups fail to consider the competition in their business plans, especially competition from market leaders, even when the competition’s product is not as good,” another adds.

10. Unrealistic expectations (4 mentions). “The probability of having a blockbuster invention is so low that the chance that any start-up company in America — much less in smaller countries of the world — will be significant is very remote,” one respondent says. “The failure rate is too high to warrant a significant number of investments.”

Source: Beyond the First World

Posted under: Tech Transfer e-News

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No Comments so far ↓

  • Alex Navarre

    Hi Terry,
    Good survey but it leads to believe that university spin-offs are failing. Do you have context or stats with respect to success-failure of U start-ups ?

    Dennis Cooper from NRC had done a longitudinal compilation of the Canadian tech start-ups and his results were quite reassuring as to outcome.

    Best regards
    alex

  • Terry Young

    Hi Alex.
    You make a good point. I conducted this survey under an assumption that I have heard all my life: university start-ups generally fail. However, several people have suggested that I reverse the question to “What are the top three factors to the success of university start-ups?” Which I think leads to your point; maybe the starting assumption is no longer valid?

  • Denys Cooper

    Thanks Alex N for the cross reference. Yes, l was about complete with an extensive update on 800 university spin off firms formed in Canada from 1954 to 1999. Today over #% still survive, another ##% have been taken over but still operate for a net 51% for an average of over 28 years longevity. Put in context this compares with 50% normal start up firms disappear within 5 years.

    In terms of reasons for failures, in general on 70 out 208 closure cases analyzed so far the results are similar to the US responses, except under Geography l included take over cases involving other countries.

    In terms of 209 closures, the rates for takeover cases were similar if the new final parent was Canadian or US ( 50% vs 45%).

    In terms of takeovers: 72 firms taken over by American controlled firms, 18 (25%) were shut down, with IP / and / or some staff transferred to the US. One key reason was greater availability of VC financing in the US.

    It is interesting to note that the failure rate of university spin offs by sector shows very similar results for life sciences (bio, pharma and medical) compared with the ICT sector.

    A major change has been the dramatic drop over 20 years from the incorporation date to IPO, to take over, and even to closure.

    In terms of winners – yes major impacts: For the latest year, over 240 firms obtained over $7 billion sales and had over 40,000 jobs. There is a high presence of high growth firms – gazelles, than for the regular business start ups.

    I expect to present the main findings at a conference in Canada in 2010 December. Oh yes, the results also show that start ups whose IP was professor / researcher owned did better than if the university owned the original IP.

    Denys G.T. Cooper, retired / consultant, Ottawa.

  • Denys Cooper

    Please see revised reply as l left out 2 key stats – corrected:
    Thanks Alex N for the cross reference. Yes, l was about complete with an extensive update on 800 university spin off firms formed in Canada from 1954 to 1999. Today over 36% still survive, another 12% have been taken over but still operate for a net 48% (could rise to 52% for cases still uncertain) for an average of over 28 years longevity. Put in context this compares with 50% normal start up firms disappear within 5 years.

    In terms of reasons for failures, in general on 70 out 208 closure cases analyzed so far the results are similar to the US responses, except under Geography l included take over cases involving other countries.

    In terms of 209 closures, the rates for takeover cases were similar if the new final parent was Canadian or US ( 50% vs 45%).

    In terms of takeovers: 72 firms taken over by American controlled firms, 18 (25%) were shut down, with IP / and / or some staff transferred to the US. One key reason was greater availability of VC financing in the US.

    It is interesting to note that the failure rate of university spin offs by sector shows very similar results for life sciences (bio, pharma and medical) compared with the ICT sector.

    A major change has been the dramatic drop over 20 years from the incorporation date to IPO, to take over, and even to closure.

    In terms of winners – yes major impacts: For the latest year, over 240 firms obtained over $7 billion sales and had over 40,000 jobs. There is a high presence of high growth firms – gazelles, than for the regular business start ups.

    I expect to present the main findings at a conference in Canada in 2010 December. Oh yes, the results also show that start ups whose IP was professor / researcher owned did better than if the university owned the original IP.

    Denys G.T. Cooper, retired / consultant, Ottawa. denys.cooper@sympatico.ca

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