Steinbeis study in collaboration with the university of Kiel analyzes how spin-offs survive in the market
As entrepreneurially oriented offshoots of science, academic spin-offs do not have it easy. They often lack resources and contacts to important partners, or their business models lack definition. What can be done to enhance their chances of survival in the market? This was the question posed and assessed as part of a Steinbeis Network study conducted by Prof. Dr. habil. Achim Walter, director of the Steinbeis Consulting Center COMMIT and Chair of Entrepreneurship and Innovation Management at Kiel University, with Monika Sienknecht, scientific assistant at the professorial chair.
Academic newcomers often meet with skepticism in trade and industry, despite numerous, often impressive examples of smart, entrepreneurially minded thinkers from universities and non-university research institutions giving German technology and business an important hand in keeping pace with the rest of the world. As rookies in their markets, new business enterprises often lack certain resources and can only point to tenuous contacts to important partners for networking – such as customers, suppliers, providers of funding, and staff. And yet it is precisely these people who play such a crucial role in accessing the resources they need to survive. The literature on entrepreneurship points to a phenomenon called Liability of Newness (Stinchcomb, 1965; Hannan & Freeman, 1984).
Even if the starting conditions of knowledge- or technology-based spin-offs are good for doing initial business – perhaps because of public funding, favorable licensing arrangements through the parent organization, tangible or financial assets, lead users, technology centers or startup hubs acting as incubators, or even personal contacts in industry – that is no guarantee that a startup will survive, even after a successful entry to the market. The phenomenon paraphrased in other literature as Liability of Adolescence (cf. Brüderl & Schüssler, 1990) states that the probability of a firm surviving once it has been set up dips at first and only rises again as business gets underway. Any advantages gained by possessing plentiful resources are quickly exhausted if the business model is vague. Other contributing factors include poor work planning, management structures, and working routines, or badly defined target groups for building a reputation in the chosen sector of industry. Such obstacles can cause a “delayed” breakdown with companies that are still “adolescent.”
So what improves the survival chances of a technology- or knowledge-based spin-off? And what can firms do to ensure they gain a foothold in markets given the aforementioned Liability of Newness and Liability of Adolescence? To find an answer to these questions, Achim Walter and Monika Sienknecht turned to the Upper Echelon Theory (cf. Hambrick & Mason, 1984) and work on Innovation Championing (such as Balven et al. 2018; Walter et al. 2011). According to the Upper Echelon theory, managers base decisions regarding the choices they make (such as implementing product innovations, acquisition, capital injections, and launching new production technologies) on their own specific experience, attitudes, and value systems. “We suspect that because of the experience they gain through collaborative research and development projects, academic business founders from universities and other research institutions are in a position to acquire or build on the specific kinds of competences that work in favor of the special behavior displayed by innovation champions,” says Walter.
Innovation champions are people who pick up on ideas for new kinds of products at a company and inject them with life. At spin-offs of research institutions and universities, this role is often assumed by entrepreneurially minded (former) scientists who have already played an instrumental role within a parent organization in transferring a technology into practice and translating it into a commercial concept. Through innovation championing, academic business founders also make an important contribution to the strategic development of a spin-off by identifying critical resources for an innovation initiative, being the first to instill trust by engaging in pilot projects, and thus not only mobilizing the required resources at external partners (such as clients, suppliers, or economic development agencies), but also setting priorities when it comes to using these resources. Innovation championing means actively getting involved in and getting enthusiastic about an innovation project from the very beginning and driving implementation despite resistance. Innovation champions are prepared to take certain chances and are even willing to risk their reputation for a good cause. They therefore make a valuable contribution by identifying and entering niche markets, acquiring and building development skills at their company, and planning strategic areas of action (for example, by forging strategic alliances). Another thing innovation champions do is to act as a role model and shape social workplace interactions around them through their conspicuous behavior.
ACADEMIC ENTREPRENEURS IN THE STEINBEIS NETWORK: RESULTS OF THE STUDY
Data was analyzed as part of a broad-reaching study on academic entrepreneurs in the Steinbeis Network. Around 150 Steinbeis Enterprises were assessed and a comparison was made between the innovation championing of their founders and the survival rates of spin-offs. On average, the companies that were surveyed were in their fifth year, had six employees, and were mainly involved in mechanical engineering (51%), biotechnology (44%), and electrical engineering (22%) (multiple-choice answers). Roughly three quarters of the spin-offs were still actively involved in business pursuits after ten years. “The results show that all else being equal, companies whose founders assume the role of a champion are 6% more likely to remain active in the market,” concludes Monika Sienknecht. A key factor in the impact of innovation championing is also how well networked a person is. Relationships with the parent organization that the academic founder once carried out (or is still carrying out) research or teaching with, and is still working with directly, also have an impact on the effectiveness of championing. For example, effective championing doubles the likelihood of a firm remaining in the market if founders are also still in close contact with their universities or research organizations.
When it comes to successful regional development and reciprocal gains, universities and other research institutions would do well to stand by and promote their employees when they are implementing science-based innovation concepts. Academic entrepreneurs then find it much easier to build trust and commitment among internal and external innovation partners by acting as innovation champions.
“BUSINESS FOUNDERS ARE SPECIAL KINDS OF PEOPLE”
An interview with Prof. Dr. habil. Achim Walter and Monika Sienknecht
In your article, you talk about some of the stumbling blocks encountered by academic spin-offs. What’s the likelihood of spin-offs from universities and other research institutions surviving in the long term?
It’s difficult to draw comparisons between empirical studies in this area. Generally, the ascertained survival rates are surprisingly high compared to conventional business startups. I estimate that at least half of them make it. This also strongly depends on the sector of industry and the financial commitments involved in implementing a technology. But international studies and our own investigations do confirm that there’s a high survival rate for academic spin-offs: Over a ten-year period, it hovers at roughly 70%.
Also, there is a lot of heterogeneity among business startups. For example, compared to corporate spin-offs, which are founded by business enterprises, academic spin-offs are a little less likely to survive. This is partly to do with the different networks of relationships with the parent organizations, which corporate spin-offs are practically “born into.” This makes it all the more important for academic spin-offs to stay in permanent contact with their parent organizations.
So the chances of academic spin-offs surviving in a market are basically not bad?
That’s right, although you have to take into account the fact that it’s fairly common for research-based spin-offs to get help through funding when they start out. Most spin-offs are also set up after plenty of good thought has been put into them – so not out of some kind of hardship, but based on a carefully thought-through, positive assessment of a market. Academic founders have lots of places to turn to for advice or support, and this prepares would-be entrepreneurs well for their self-employment. If it looks like they won’t succeed, they’re advised not to do it and won’t receive backing. This consultation process goes through multiple stages with a focus on understanding your own strengths and weaknesses, and it often results in a clear understanding of one’s own position before establishing a startup – so that avoids disappointment at a later stage.
You also have to think about the fact that academic spin-offs are often genuine experts in their field – they consciously occupy niche markets based on an exploratory approach. This positioning allows them to ward off excessive competition from established companies.
In your study, you refer to a theory that places tremendous emphasis on the importance of decisions made by so-called key individuals when it comes to the survival of a company, such as business founders and CEOs. To what extent can academic founders influence whether their business will remain strong in the long term?
Business founders are special kinds of people. They shape their company through their behavior and their strategic focus, so they leave behind a kind of footprint that can take years to develop. At the beginning, entrepreneurs provide pointers for corporate development which trickle down more and more into working practices, which are then taken on by staff and handed on.
But why do some academic entrepreneurs become innovation champions while others don’t?
I’d estimate that we find the particular characteristics of an innovation champion in about a third of people that could potentially become one. The most pronounced characteristics of innovation champions are definitely a combination of a drive to achieve something, thinking in terms of feasibility, and a distinct sense of being able to manage themselves. So these aren’t the sort of behaviors you can expect anyone to display, even if they can be captured formally in a job description or position request.
Are there any insights from research into the things that really make an academic entrepreneur?
Insights gained until now indicate that academic business founders are likely to be shaped by people in their social environment – people they are exposed to in the so-called orientation phase. Such orientation phases include preparation stages for their new profession. For example, we already know that the entrepreneurial leaning of PhD and post-PhD students is significantly shaped by key individuals.
What does this tell us about the selection and training of would-be academic entrepreneurs?
It’s quite common for scientists with a penchant for entrepreneurial thinking to start “talking up” technology transfer even while they’re working at a research institution or university. Would-be academic founders can be identified by this kind of behavior and fostered through specific training.
If politicians want more academic entrepreneurship at universities and non-university research institutions, we think they should put funds into deliberately acquiring the personal competences that characterize innovation champions.