Spin-off hatcheries

When I first came to work at uni here in Australia, I was expecting to find a degree of spin-off encouragement mechanisms similar to what I was used to in Spain. I was coming from my own company, which we had created a few years before in order to commercialise research results obtained by me and my team at the University of Santiago de Compostela. What I found in Sydney is that universities here are generally more advanced that unis in Spain, but lagging behind as far as spin-off companies is concerned. I have thought about it for a while but I cannot find any reasonable explanation. Perhaps there is one, but just in case there is not, here is my recipe for a successful spin-off hatchery.

Since universities are most probably the biggest creators of research results, it seems logical that they are the ones who must foster the creation of start-up companies that can enhance, “productise” and sell these research results. The authors of the research, i.e. the scientists or academics that created the research results in the first place, are the most appropriate people to found and direct these companies. In the absence of this kind of companies, research results will be published in scholar journals, discussed by academics, and most likely end up archived in the bottom of a drawer. What a pity.

So, universities need to encourage that any academic who has obtained a significant piece of research think a little about it and determine whether the research result has commercial potentiality. If not, well, keep working. If it does, then the academic needs all the support that he/she can obtain to study the feasibility of a business plan and, perhaps, embark on the new adventure of setting up a company.

I am aware that many unis in Australia have a research and commercialisation office that sometimes does things similar to all this. In fact, I know a few spin-off companies that received the help of their respective universities to start up. The biggest difference between what these offices do and what I am suggesting is one of scale. Like venture capitalists who would not meet with you to discuss your plans if they don’t involve millions of dollars, Australian unis are too geared towards large commercialisation projects that usually require a strong financial committment, borrowing large sums of money, and, in general, starting up big. This is very much the USA model.

The European model is different. It starts from the belief that many small efforts are better than a few big ones, especially when the uncertainty of the markets and the viability of research results as commercial products is one the biggest factors in play. Starting spin-offs is a risky business, and, as somebody told me once, if a spin-off hatchery has a success ratio larger than 10% that is a very bad sign: it means that it is taking too little risk, and therefore, the innovation and breakthroughs likely to come up from it are possibly negligible. A research-based spin-off hatchery must focus on parallelism, on starting up as many companies as possible, rather than focussing on maximising the success ratio of any particular one.

Now, starting up companies in large numbers means that the cost of each one needs to be minimised. This is the European model, again. Use a bootstrapping mechanism. Start up with minimal cost. As Eric Sink says, use your savings, borrow from your family and friends, or use your credit cards. Don’t get a million dollars from the bank. This does not go well with the high risk factor involved. We need to grow slowly from zero, not rapidly from one million.

In this scenario, unis should liaise with local government to create public companies that have as single aim to foster the creation of spin-offs. It is important that this is done like this: through a company (owned by the uni and the local government) and not by the uni itself. Why? Because the company mindset must pervade. Unis do not have the agility, know-how and mindset to deal with this problem. A small company, something like 5 or 10 people, well funded from its owners (the uni plus the local government), is the place where I, as a uni researcher, would feel attracted with a cool idea in my head and some itching in my stomach.

Once this spin-off fostering company is running, it should utilise many instruments to encourage resarchers to start up companies. In my experience, the mechanisms that work best are giving help for free and organising awards.

Help for free does not mean money, but services such as business advice, training, liaising with banks just in case you want to borrow a few thousand dollars (but not more!), and keeping a well organised repository of information on grants and other opportunities that might be useful for somebody trying to start up a business. At the same time, they could organise business plan awards: academics write business plans, they are evaluated by a panel of experts, and $50,000 are awarded to the best one to start up a company. Of course, publicity and advertising is necessary to reach all the corners of the academic community.

The process would work as follows. Academics know that this company exists, and therefore are aware that they can go and talk to them at any time with any crazy idea on metamodelling tools, GPS differential correction or microalgae nutrients. Academics may be geniuses at their area of expertise, but very often they (should I say “we”?) are hopeless at the business side of things. That’s why the first round of advice usually would finish with “look, this idea of yours is cool, but nobody will pay you more than $5 for a fridge with a built-in GPS”. Every so and then, a really interesting idea would be detected, and then the real work begins.

The first part is to compose a business plan. The spin-off hatchery would work together with the academic to create a business plan. For this task, a third party consultant could be necessary. In this case, the hatchery would organise, through its network of contacts, for a consultancy company to work in a deferred payment basis. They help us now for free, and we (the academic) will have to pay them for their services later.

Once the business plan is ready, a second round of assessment is performed. Several parties would evaluate the financial, technical and commercial feasibility of the business. Many nice looking business plans find their end here, but some survive. I must say that the academics tend to be in a permanent state of bliss all along this phases, so a bit of harsh advice and constant reality checks are most needed, and the spin-off hatchery is the one that must take the responsibility for them.

If this second round of assessments is passed, then the company is created. In my experience, the best formula is to have one, two or even three academics (the authors of the research to be commercialised) to own the company, plus the university itself with something between 5% and 20%. It is crucial that the university owns a small slice of the business. First, that means a serious endorsement and the subsequent committment in both ways. Second, the university ensures that a fraction of the revenue obtained from the exploitation of the research results (if it ever happens!) will come back to them.

At this point, the spin-off hatchery can provide a second class of services to the newborn company: cheap office space or factory floor space, secretarial and accountant services, cleaning services, shared phone lines and internet access, etc. Nothing should be free, but slightly cheaper than market rates. When I started my spin-off company in Santiago, the hatchery had rented a huge warehouse in the middle of an industrial area which was later divided into 200 sqm. chunks. Any start-up could rent one of those for very little money, given the location and the bare-bones condition of the place. Still, a great help.

Once the company is running, the hatchery needs to keep an eye on them. Newly created companies run by academics have a nasty tendency to spend all their time and resources in perfecting the technicalities of the future product rather than looking for customers. A nice balance between technical work and marketing chores is needed, and the hatchery must ensure this through monthly meetings with each start-up. Little by little, as the start-ups start having revenue and growing, the involvement of the hatchery starts dissolving. Eventually, the start-up may move to a nicer location, break their links with the hatchery, and even buy back the small percentage of the company owned by the university.

The University of Santiago de Compostela has done an exemplar job in this area. They have gone beyond hatching spin-offs and now offer their own venture capital fund through a different company as well as numerous ancillary services. The spin-off community there is thriving and amazing innovation is coming through. Have a look at Uninova, the hatchery in Santiago, for more information.

Back to Australia. Why don’t Australian unis follow this approach? Australia is a rich country and bright students and junior staff populate the classrooms and labs. I would expect a scheme like this to work successfully. I have my concerns, though. Since the Australian economy is not bad and the unemployment rates are extremely low, most people have no problems in finding a job, and therefore very few people are tempted into starting up their own business. In Spain, for example, unemployment is higher, finding a job is much harder (especially in small cities such as Santiago), and therefore starting your own business is a very appealing prospect.

Anyway. If you are the executive of an Australian university, I would be more than happy to have a chat with you and explain the details of the European model.

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