Rethinking our search for spin-off success

ARE WE looking in the wrong places to support the growth of spin-off companies? New Irish research on the biotechnology sector suggests that at least to some degree, national attention and policy emphasis might have been going to the wrong place – university research and development (RD) as a source of spin-offs – rather than private sector companies.

According to the report, New Entrants and Inherited Competence: the Evolution of the Irish Biotech Sector, Irish spin-offs that emerge from existing companies in the biotech sector consistently outperform university spin-offs.

“The most successful companies are coming as spin-offs from the private sector,” says the report’s co-author Chris van Egeraat, geography lecturer at NUI Maynooth and research fellow at Maynooth’s National Institute of Regional and Spatial Analysis.

Government strategy since the 1990s has focused primarily on helping to create university research-derived spin-offs through large-scale funding bodies such as Science Foundation Ireland, he notes. As a result of such support, the universities currently spin out about the same number of companies annually in the biotech sector in Ireland as the private sector.

Yet it is the private sector spin-offs that provide 90 per cent of jobs and which garner the lion’s share of available venture capital. In the period from 2000 to 2010, just five private sector spin-offs – all coming from Elan – received two-thirds of venture investments, a total of €210 million.

By contrast, 21 academic spin-offs in the same period took in €100 million, with the bulk of that – €60 million – going to just three companies, Ntera (from UCD), Opsona Therapeutics (TCD) and Eirzyme (NUI Galway). A remaining eight private sector spin-offs were funded to the tune of €14 million.

The contrast came as a surprise to the report’s authors, who initially embarked on a project to try to determine the different types of knowledge bases for innovation in the biotech area, van Egeraat says.

“We started to look at the data and realised there was another story in this – the public sector versus the private sector spin-offs,” he says.

They found that private sector success was tied to business competences that university spin-offs, which emerge directly from RD competence, generally lack. The authors note that the different competences “are based on different combinations of knowledge, present in different intensities”.

They classify these into the areas of “know- why, know-how and know-who” knowledge, and a fourth area of industry/business knowledge. Know-why knowledge is an understanding of science and its applications. Know-how encompasses technical skills and know-who is the kind of networking and business knowledge that enables a company to find venture funding, employees, and management staff.

The difference in performance between public and private sector spin-offs is “the difference between technical innovation capabilities and know-how, and commercial knowledge – how do I target a market, how do I get VC [venture capital] funding, who do I target?” notes van Egeraat.

Competences particular to the private sector are the core reason for their greater level of success, he says. “The VC guys need a business plan, not IP [intellectual property]. The business plan is most important. If you have a very successful company, people learn, develop competencies, and form spin-offs and as a result you get their greater business knowledge in a spin-off.”

Private sector spin-offs often form as a result of the misfortunes of the parent company – Elan being a case in point. For financial reasons, the company was forced to divest some of its IP “and a lot of that was picked up by employees who formed start-up companies”, he says.

Shay Garvey, a partner at Irish venture firm Delta Partners, says the research reflects the differences he sees in the Irish as well as international market. He notes that in the United States, only about 9 per cent of new companies funded in the broader technology sector in recent decades have come from the university sector.

In Ireland, he says, the number is closer to 15 per cent, probably because university-based start-ups in the US can draw down significant funding from various government agencies.

He’s skeptical that universities here could spin out dozens of companies annually, as was argued by Science Foundation Ireland in a past report. He notes that even the Massachusetts Institute of Technology, which spends about 20 per cent more on RD annually than the entire Irish budget for RD, spins out only about 20 companies a year – and that would be a very high figure for a university.

“My own view of third-level spin-offs is that they are a necessary but not sufficient element of the whole tech ecosystem. Why should we perform better than the US?”

Nonetheless he is quick to stress a point made strongly in van Egeraat’s report – that university-led RD is a fundamental piece of the biotech and technology start-up ecosystem and needs strong state funding.

“One thing the universities are good at is finding molecules – that’s important in biotech and pharma. Universities are a very cost-effective way to do research, so it has to happen at the university level. And as a source of [VC] deals, the university has a role to play,” Garvey says.

“Whereas the Elan-style spin-off – they’re much closer to the market” and are more mature as businesses and therefore more likely to get venture investment, he says. “But that’s not a criticism of university spin-offs – they’re just beasts of a different colour.”

Notes van Egeraat, “The report isn’t a critique of investment and research funding for universities, but I think we should have an eye to the role that can be played by the private sector.”