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Survey: Top 10 Reasons for Failure of University Start-up Companies

23 Mar

We selected forty people to respond to a survey to assure representation from a cross section of individuals in the technology transfer industry. Thirty-six of the forty individuals responded. The cross-section of responding individuals are included at the close of this article.

We asked respondents to respond to one simple question, “What are the top 3 reasons for failure of university start-up companies?” There was no survey form. Respondents were encouraged to respond in their own individual style, and to provide comments where they believed that comments would be helpful. The definition of “university Start-up Company” was “a new company created to commercialize and take to market an innovation(s) arising from the university’s R&D.”

This “survey” was not proposed or promoted as a scientific survey in any manner. Rather, it was a “free-form” attempt to learn from experts their opinions – in a listing and in written statement – regarding the reasons for the failure of university start-up companies.

Much qualitative information was learned from this non-scientific methodology.

The responses shown below are presented in the order of the number of times a reason for failure was cited. All statements received associated with that reason or factor for failure are included beneath the ranked factor. In addition, several individuals chose to provide general (and noteworthy) statements, which are included at the end of this listing. All remarks are anonymous upon agreement with the respondents.

Reasons for failure ranked by the number of times cited by respondents, with comments

Management Failure (cited 22 times)

– Academics seek to be corporate managers (and stay in control far too long)

– Management does not have “start-up experience,” which is a different skill than individuals who have led more mature companies

– Management is not well connected to the university, the inventor, or the technology

– Management fails to assess accurately the company’s needs (capital, employees, product development and technical requirements, cash flow, etc.)

– Management fails to realize that “things take longer than expected”

– Management fails to identify the market opportunity, and therefore misses it

– “Not the right people managing the right company”

– Management does not have the aggressive and “driven ambition” to succeed: “Get the right, crazy, energetic person and he/she will tear the world apart to get the support, resources and technology needed. Without that individual, forget it.”

Failure to Raise Sufficient Capital (cited 15 times)

– Academic start-ups often begin with no capital (“zero stage minus one”), which often is impossible to overcome

– Follow-on investment rounds to the “seed stage round” do not materialize

(a) Company failed to resolve technical challenges

(b) Company failed to reach major business plan milestones

(c) Company was undercapitalized from the beginning

(d) Cash flow crisis occurred before the company had a chance

(e) The original Venture Capitalists (VCs) moved on to other projects

– “While a start-up may survive on government funding programs for a time, government money does not instill investor confidence.”

– “Start-ups typically just “run out of gas” before reaching the market.”

Innovation Does Not Meet a Commercial Need (cited 12 times)

– Laboratory-push versus market-pull

– Entry of the technology into the marketplace is too early or too late

– “$5.00 solution for $.25 problem”

– “Neat Science” – the company “falls in love” with its technology, and fails to identify any market need

– The new innovation simply cannot compete “head to head” with existing products

– The market does not want the new mousetrap. Many times “…the nuclear powered, recycling mouse trap is passed by for the old $1.25 bait and spring, low tech model.”

– The initiative and effort is a logical extension of a professor’s research, not a real market focused innovation

Geography (cited 7 times)

– “Small country start-ups must be successful in their home country before they can think about going international. This is especially difficult when there are no buyers in their home country.”

– “VCs want their portfolio companies nearby, which consequently may limit investment opportunities to in-country VCs.”

– “The market within geographical reach (limited by people, capital, supply chain, etc,) is too small to sustain the company before the cash runs out.”

– “How many multimillion dollar technologies are there? What is the probability of having a block buster invention emerge in a small country with a very limited market?”

– “There is a very limited entrepreneurship management pool in small countries, and even then, the good entrepreneurs are difficult to engage as they are looking for fast and significant returns.”

Cultural Factors (cited 6 times)

– The country’s culture devalues risk taking (“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”)
– “There is a lack of in-country nurturing atmosphere and interconnected community pulling together. This is ephemeral but you know it when you encounter it.”
– “In many countries, failure of a company can damage reputations (professor, university, and managers), while in the U.S., it is a ‘badge of honor’ and has little if any negative impact upon careers.”
– “The dominant social structure impedes success. By that I mean risk aversion, envy of success and a traditional social system that accepts inherited wealth but resents earned or acquired wealth.”
– “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, maximum.”
– “Cultural and legal impediments based upon egalitarian ‘don’t stand out philosophy,’ business versus academic standing, the impact of bankruptcy laws… all of these create negative incentives.”

Government laws, bureaucracy and programes (cited 6 times)

– The low levels of intellectual property rights (IPR) protection available by national laws (such as constraints on protection for computer software and biotechnology in Europe)

– “Government funding programs (such as the Small Business Innovative Research (SBIR) in the United States) actually have a detrimental effect by causing start-ups to be logical extensions of technology-development, not market-pulled technology needs.”

– “Early stage companies started through government programmes tend to rely upon the programmes and not the market. They spend their time writing reports and preparing the next proposal for funding, but cannot find time to complete the product.”

– “Government programs cause start-ups to fail. If the start-up knows that it can stay in business for awhile on the government dole, then it has no incentive to learn how to translate the technology into terms that an investor can understand.”

– “Legislated inducers of entrepreneurship rarely work, as the government does not understand the complex technology commercialization process.”

– “Often a company gets ‘easy money’ in early stage from the government, which saps the entrepreneurial drive to succeed.”

– Poor investment climate nationally (high taxes, environmental restrictions, etc)

In-fighting among the start-up team (cited 6 times)

– There is no common objective between the players – inventor, university, management, investors, and government.

– “Universities, inventors, management and government all evaluate the performance of the start-up differently, which leads to conflict and failure.”

– “The university and/or the inventor fail to give control of spin-off to the management team.”

– “The greatest reason university start-ups fail is the “clash of cultures.” University start-ups focus upon technology because that is the culture of the university. Investors focus upon money because that is their culture.”

– “Management often fails to act cohesively and infighting causes the company to languish and be pulled in different directions.”

Problems in the Portfolio of Intellectual Property Rights (IPR) (cited 6 times)

– Existing patents prevent “Freedom to Operate”

– The IPR is too weak for the foundation of a start-up company or to attract investors (the scope of the claims is too narrow or there is questionable validity)

– In many countries, lack of clarity of IPR ownership impedes investment

– “The IPR estate is too weak without issued patents. 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.”

– Low levels of IP protection available by national laws (such as constraints on protection for computer software and biotechnology in Europe)

– Too much dependency on IPR – “IPR is a means to an end, not the end”

Poor Business Plan (cited 5 times)

– A poor business plan leads to inability to raise capital

– A business plan may have a misdirected focus upon the technology and the IPR, without seeing the market

– A business plan may fail to recognize the risks, and to think through the pitfalls and delays

– “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.”

– “By failing to focus upon a core business strategy, they get seduced by a new technology without having achieved success in their original plan.”

– “The business plan typically focuses upon broad and long term strategies, will address some mid-term goals, but will treat the short term myopically and ignore critical first steps that are the real keys to survival.”

Expectations of start-ups are too high (cited 4 times)

– “Often, when dissatisfaction sets in, the company is doomed for failure as the university tries to intervene in bureaucratic fashion.”

– “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. The risk and failure rate is too high to warrant a significant number of investments.”

Other Reasons for Failure Cited

– Failure of the start-up to network internationally

– Risk capital today is too conservative

– Failure of the start-up to make strategic partnerships

– No support (supply line chains) from the large companies in the country available to the start-ups

– Time – “first-to-market” is more important than a “perfect” product

– Unexpected technical failures – inability to achieve a product for the market

– “One Product Companies” – “Who wants to risk an investment in a company that has all its eggs in one basket? No serious investor. Yet, since we focus many times on one invention coming from one university, that is precisely what we get.”

General Remarks Provided by Respondents as they Desired

– “The way the financial markets react to and evaluate knowledge and skill-based enterprises is still archaic and unenlightened in most places of the world. As an existing business is not motivated by what’s best for the country but what guarantees its bottom line, a fast growing new SME is not a welcome arrival but a potential threat, even if it hasn’t yet invaded that company’s own market. Even financial institutions may resent the growth of a new SME because of the level of their commitment to existing companies that could be threatened by the competition.”

– “Europeans rely upon Mergers and Acquisitions (M&A) for SME ‘growth’ rather than upon internal growth as in the USA. Consequently, the SMEs are just ‘gobbled up’ by larger companies.”

– “Entrepreneurs around the world complain that their biggest problem is the lack of capital – equity and debt. This shows up in empirical studies surveying entrepreneurs and those who work with them. But I ask, is it really a lack of capital or the lack of a compelling opportunity and/or management team? Good venture concepts pursued by a good well-balanced team will find capital in most OECD countries today. Realize that venture capitalists lament the lack of good deal flow.”

– “Universities unconsciously discriminate against entrepreneurs, perhaps for pragmatic reasons. They would prefer to work with the big companies with ‘deep pockets’ for reasons beyond technology transfer (research support, hiring of students, faculty consultancies, etc.) Alternatively, they are more tolerant of their own scientists and engineers commercializing the technology. However, the problem with this approach is that the university scientists and engineers are not perceived by venture capitalists as being entrepreneurial. Universities should not “throw out the baby with the bath water.”

– “There is an assumption that being a SME and not being acquired or having an IPO or other stock exchange is bad. A case could and should be made that a national economy composed of a few large multinational corporations (local and foreign), state enterprise, and local SMEs is stable. Furthermore, the backbone of that stable economy may in fact be the SMEs, not the large corporations. The IPO or acquisition is a wonderful goal but in reality a tiny fraction of firms ever achieves the goal. What is wrong with a dynamic SME-based economy? Nothing. It is probably more flexible and adaptable than a national economy composed of large companies. So, this question is as much about perspective as it is the specific case of a university spin-off.”

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Posted by on March 23, 2011 in Uncategorized

 

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