Many in Europe think like this:
1. Successful companies are all about innovation...
2. Innovation flows from basic research performed in universities...
3. Therefore the route to building successful companies is to spin them out of universities, going from the lab straight to the market.
This is simple, pleasing music to many people’s ears. For most in policymaking and academia, the world of entrepreneurship is a great unknown, and they don’t really know how to best support startup communities. On the other hand, supporting universities is straightforward; they are well-known, established institutions. It sounds nice to think we can simply give them more money to hire more scientists, come up with more cutting-edge research, and spin out more successful companies.
Alas, as VC Nathan Benaich reminds us in an op-ed published in the FT, there are multiple glitches in the system. Spinning out startups from universities comes with adverse peer pressure, multiple administrative frictions, long delays and, above all, excessive founder dilution. The outcome, according to Benaich, is less than optimal: “Of 116 venture capital-backed European unicorns, only four are university spinouts.”
As always, we find the devil lurking in the details. Only a few universities, almost all of them in the US, have a consistent record of spinning out successful companies and being amply rewarded as a result. Therefore if Europe’s universities want to remain world-class, they should have a closer look at these precedents and take a very different approach from their current one.
What Stanford taught us
Take the case of Stanford, the birthplace of Silicon Valley. Back in the 1950s, it pioneered a now well-oiled approach to spinning out companies, with many positive feedback loops:
- The university would contract with a sponsor (typically a government agency or a defence contractor) and commit to researching new things in their laboratories, grabbing huge amounts of research money in the process.
- Once a prototype was deemed satisfactory, students who had contributed to the work were encouraged to take over the research and found their own company. The idea was that they would go right into production, with the original sponsor boosting the venture with a first long-term contract — helping turn the lab-grown prototype into a successful business.
- Students-turned-founders were kept close, however: they had access to cheap real estate at the nearby Stanford Research Park. Hence the university kept an eye on these companies, with faculty members joining their boards or conducting consulting work with them.
- In consolidating the relationship, Stanford’s faculty were able to stay on top of new technology trends, identify new challenges… and sign new research contracts with new sponsors!
The spinouts were a lever to stay up to date, attract the best talent, and continue tackling the most pressing scientific challenges of the time.
All in all, the primary goal of Stanford’s spinning out startups was not to make money out of equity or royalties. Most of the university’s money was made early on by signing contracts to research prototypes, after which the entrepreneurs could keep most of the financial upside. (Although this didn’t prevent successful founders of spunout startups from giving back to their university by making donations.)
Rather, the spinouts were a lever to stay up to date, attract the best talent and continue tackling the most pressing scientific challenges of the time — in other words, become an ever better university.
Where Europe comes up short
Compare this to the current European system. It is almost the complete opposite. As described by Benaich, things are made difficult at the early stage, with many frictions, delays, red tape and strings attached — when it should be about a swift and efficient process. In addition, by claiming a large share of the startup’s equity from the outset, universities make clear they’re interested in the money rather than building an ecosystem like exists around scientific powerhouses such as Stanford.
The stakes are high. The more universities succeed at spinning out successful startups, the more they’ll attract students and researchers with ambition and an entrepreneurial mindset. And the more these university-bred entrepreneurs succeed at growing their own companies, the more they’ll be willing to give back as brand ambassadors, contributors, business partners, and generous donors. In this approach, the spun-out startup’s contribution takes the form of knowledge, insights and connections — a lever for the university to be able to advance and keep spinning out ever more successful companies.
The worlds of entrepreneurs and of universities will continue to drift apart
The alternate scenario is that European universities opt for the status quo, which would mean falling further behind their US (and, increasingly, Chinese) counterparts in many respects: research, attractiveness and money. The resulting negative feedback loop would lead to difficulties attracting talent and less value created in the local economy, as those organisations slide into irrelevance from both a research and an education perspective. What a disappointing vision for a continent, Europe, that has been betting so much on higher education and cutting-edge research over the past three decades.
As long as universities consider researchers-turned-founders as 'problem children' to be shaken down for cash, the worlds of entrepreneurs and of universities will continue to drift apart — with major breakthroughs happening far from university labs, as has been the case with cryptocurrency, for instance.
Europe has an opportunity to maybe even give birth to its own version of Silicon Valley.
If, on the other hand, academic leaders realise that successful spinouts can be a powerful lever to reinvent their university and make it better, then Europe will have an opportunity to emulate Stanford’s approach and, maybe even give birth to its own version of Silicon Valley.
Nicolas Colin is cofounder of VC firm The Family. He writes a regular column for Sifted.
Founders who want to accelerate policy change when it comes to university spinouts can contribute on www.spinout.fyi, which aims to crowdsource and publish spinout deal terms across every university.