While the United States is the acknowledged leader in the creation of research-based spin-offs, Europe and especially Luxembourg lag behind tremendously. The FNR’s Head of Innovation, Andreea Monnat, explains why the country needs both start-ups and research-based spin-offs – and why they need different support measures in order to succeed.
Research-based spin-offs are generally small, new technology-based companies whose intellectual capital and teams originated in universities or other public research organisations. However, despite the promise of new-firm generation from cutting-edge research, spin-offs remain exceptional and their economic impact is rarely studied.
The research landscape in Luxembourg is very young, not older than 20 years, and while governments have hugely invested in building up research capabilities by increasing the funding yearly, we have now entered the “knowledge-transfer” era. Research “made in Luxembourg” is generating excellent scientific output with increased international visibility and intellectual property in domains like computer, -biomedical and material sciences.
It is understood that the transfer of research results to the market, in forms of creation of spin-offs, licencing to existing firms or further applied research collaborations between public and private institutions, is the next logical step in the generation of societal and economic impact for Luxembourg.
Studies have shown that the majority of the spin-offs remain small, slow-growing firms, with few products but longer survival rates than the average start-up. Many research spin-offs are likely to be contract research or consulting boutiques that retain close ties to their parent institutions.
Research institutions are not the “ivory –towers” they used to be and socio-economic impact of their research is vital as contributor to the growth engine that will drive tomorrow’s economy. Research spin-offs have an important place in the innovation process by being often the translators or mediators between public research and industry and contribute to the positioning of Luxembourg as a strong innovator.
Start-ups vs. spin-offs
Luxembourg’s government has lately made impressive investments to improve the environment for start-up creation in general from providing space (incubators and start-up houses) to funding (VC funding) and support services (through Chamber of Commerce and Luxinnovation). While these are very welcomed initiatives, there is a misalignment between the efforts made towards start-ups and the ones made towards research-based spin-offs.
For example, increasing the availability of venture capital will not benefit the majority of the spin-offs unless special funds are created which use other selection criteria than private early stage investment funds. The latter tend to prefer innovative, platform technologies and entrepreneurial teams complemented with experienced managers.
Public seed or pre-seed funds, which do not impose the same requirements as private funds might be useful to finance spin-offs that face a market, which is too small for private funds or which need some incubation time before they are ready for VC injection.
How to promote and cultivate meaningful spin-offs
Entrepreneurs trying to raise venture capital often face a chicken and egg problem: venture capital investors will not invest before an experienced team is in place and, experienced (expensive) managers are extremely difficult to attract without a strong financial basis. Also specially designed incubating and coaching/mentoring initiatives that help research entrepreneurs in working out their business plans and connect them to potential team members and investors are needed in order to increase the success rate of spin-offs to attract finance and to survive the early growth path.
Incubation at the institution, providing not only technical guidance but also business incubation in terms of client contacts, patent strategies, recruitment plan, juridical advice, implementing a stock option plan and search for further capital, is urgently needed.
Once a product market idea is set and is not longer modified – technical learning process is finished at least in terms of R&D – the product should be tested with possible clients and only when the company is ready for market penetration, it is spun off with a significant amount of funding. Besides providing strong support services, the research institutions need to adapt their spin-off strategies.
One idea would be for the research centres to take equity in place of an up-front cash licence fee or a burdensome running royalty fee: this arrangement does not use scarce spin-off capital or create a mortgage on future earnings, and it places a prestigious investor (the research institutions) among the owners of the company.
Currently efforts are being undertaken by different actors like the University of Luxembourg, which attempts to put in place an adequate incubator, a mentoring programme and a seed fund and by the National Research Fund (FNR) by increasing the dialog with all actors involved and the funding towards the commercialization of research results through its “Innovation Programmes”.
Nonetheless, for Luxembourg to become successful in the creation of spin-offs, a comprehensive system needs to be put in place, and it needs to go all the way: special training, adapted venture capital funds, advisory structures and relationship networks. This will be a costly strategic choice but if this is the chosen one, it needs the full back up of all public actors like ministries, public research institutions and other national agencies to become successful.
Start-ups and spin-offs both are critical to the wellbeing of our economy but require different approaches to succeed and thrive.
This article has been adapted from the original French version published in Paperjam on 12 July 2018
FNR INNOVATION PROGRAMMES