October 19, 2010

Spin-Off vs Start-Up

The internet offers a lot of advice for start-ups – some good, a lot of it bad. In fact, giving advice has become a profitable industry all by itself with the inevitable impact on quantity and quality. Much of the good advice is focused on Web2.0 start-ups and often a bit inappropriate when you are a university inventor looking to spin out a venture. Rather than repeating all the general guidelines for successful entrepreneurship, I want to highlight some of these differences and introduce a university founder perspective.

Before delving into the issues, I need to define some nomenclature. Most online advice is aimed at start-ups where a small number of founders get together with a business idea. The idea is usually formed in a vacuum or out of their past experience. The founders will then launch a venture more or less immediately and make it their focus. These ventures are my baseline for the comparison and I will call them “start-ups” for the purpose of this article[1].

University ventures are usually a bit different. First of all, they are commonly the result of longer research projects at the university. The founders are usually the professor or graduate student involved in that project. The nature of university research will also create an emphasis on core technology rather than business model. Let’s call these ventures “spin offs”. The distinction between these two types of ventures is of course a bit artificial and the boundary blurry. But there are some very real differences in the dynamics.

Customer Engagement & Metrics

Customer feedback can be a great way to validate or direct your venture. For that reason there is a lot of focus on customer interaction at most successful start-ups and that’s exactly how it should be. Spin-offs on the other hand have a much harder time engaging customers because core technology takes longer to develop. The concept you are working on might be available to the general public in 5-10 years so the only current “customers” are usually senior executives of large companies (hard to reach, biased in their opinions, and certainly not analysable by Google Analytics). The goals are the same but the methodology will usually be radically different.

Budgets & Payroll

“Lean start-up” has become one of many buzz words in the online community. While the principles are sound, they require a lot of adjustment to map onto university spin-offs. Apart from the issues of customer validation above, spin-offs often need experienced employees more than traditional start-ups. Deeper science, longer product development and higher patent cost all drive the budget of these ventures above the level of less technology focused business (and particularly above Web2.0 start-up budgets). On the positive side, the deeper technical depth and university origin offers a lot of ways to get non-dilutive money into your start-up. Operating without frills and adjusting to new customer feedback is still a good principle, but what this actually means in terms of operational budgets and payroll is in my experience very different from the “sample cases” shown online.

Focus

Passion and focus are key ingredients of a successful start-up. Passion is easy in spin-offs but focus is tricky. University spin-offs almost always have distracted founders: professors who actually have a day job or students who still need to finish their degree. Adjusting to these (usually) higher priorities requires a different approach than the traditional start-up mantra of a few focused co-founders working in a lean configuration. The more obvious issue here is that you will likely need a more diverse group of founders (some at university, some outside and able to actually put in 100% of their hours). The more subtle impacts are the inherent conflicts of interest in the founder base that are hard to avoid: balancing publications vs secrecy, or PR vs scientific information releases. Even deeper, try doing a “pivot” when the project is a PhD that the founder has just sunk 5 years into.

Intellectual Property

Post-mortems for failed start-ups are en vogue right now and one of the resonating comments is that patenting early can be a major cost problem. That’s true but unavoidable for university spin-offs. Unlike customer-facing businesses, university spin-offs rely almost exclusively on their intellectual property and need to treat it as the most precious resource of the company (often times more valuable than cash which is more readily available via research funding and government assistance). Related to this is the inability of spin-offs to fly ‘below the radar’ for a long period of time due to the university requirement to publish. Both of these constraints force a very different strategy for intellectual property.

None of these issues mean that university spin-offs can’t work. Mine did and so do many others. It just means that you need to tweak a lot of traditional start-up advice to make it work in the spin-off concept. I will explore each of these issues in individual posts. Stay tuned.

[1] The currently most common example of “start-ups” in this context are Web2.0 ventures. Most online advice seems to focus on this field. In part that’s because the low barrier of entry for Web2.0 in terms of money and skills has spawned a large number of such companies. Of course another element is that a lot of Web2.0 ventures derive their success from online attention grabbing (e.g. branding, online user conversion, etc.). It is therefore no surprise that the same community also blogs more (and more effectively).

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