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Why academic start-up companies fail

11 April 2011 Inderscience

Many academic spin-out companies face significant difficulties in transforming an initial idea into a wealth-creating and sustainable business, according to an empirical analysis of 160 such companies formed in Italy during a five-year period. Details of the study published in the International Journal of Entrepreneurship and Small Business suggest that a lack of entrepreneurial orientation by the researchers promoting and managing the spin-out companies is to blame.

Donato Iacobucci and colleagues at the Polytechnic University of Marche in Ancona, describe spin-out, or spin-off, companies as new companies that evolve from universities and other academic centres as a result of the process of technology transfer from research to commercialisation of new products or services. They looked at the successes and failures of some 160 spin-out companies in Italy set up during the period 2000-2005. They also assessed the early growth, the governance structure and the entrepreneurial orientation of spin-outs, with a view to understanding why some companies succeed where others fail. They analysed data based on company annual reports after two, four and six years from set up and supplemented this with qualitative information obtained through interviews with owners and managers.

The authors found that only a small percentage of the companies assessed had shown significant growth. This finding is corroborated by international research that shows that in the early years companies have a high-risk of failure. What differs between spin-outs in Italy compared with those in the US and the UK is that there is a low rate of mortality at the three and five year stage but many companies do not achieve high growth even after many years of business.

In organisational and business terms, the analysis identified two main problems: the imbalance of the team towards technical skills and a lack of clarity in identifying an entrepreneurial figure. On the whole, the spin-out companies lack personnel with appropriate management skills to complement technical prowess but recruiting suitable staff is not viable because of limited finances.

The researchers suggests that prior to spinning out a company from academia, effort should be invested in the generation of business ideas in the academic environment that allow a tenable business plan to be created based on verified market potential. Such efforts would reduce the incubation period but only if assistance in raising capital and finding trading partners is undertaken in concert with such efforts.

"The problem is that these initiatives often lack market orientation: in most cases, they perform the simple task of connecting businesses and public research institutions," the team says. "The funds available for these types of activities are rather limited, and further penalise the process of breaking away from the scientific laboratories and the start-up of new companies," they conclude.

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