The strategic necessity of university innovation tools

Two related discussion items dominated the conversation at the World Incubation Summit hosted by DMZ, the incubator at Ryerson University, and organised by data provider UBI Global last month.

The first topic revolved around whether or how university-managed and university-affiliated incubators could become the primary development tools for entrepreneurs.

The second question was how the support tools for these student and faculty startups and spinouts could become more strategic for their education institutions.

Ali Amin, chief executive of UBI Global, said he had founded the company five years ago out of his own master’s degree research in order to “speak on university incubators’ behalf” and so that corporations did not have to white-label Techstars or other independent incubators and accelerators but instead work with universities.

Discussions at the summit by university incubators indicated that many still felt their mixed strategic and financial goals put them at a disadvantage to these independent platforms, such as the aforementioned Techstars, RocketSpace, which raised $336m from conglomerate HNA in 2016, and Plug and Play.

Holger Meyer, head of research at UBI, in an opening panel talked through the main data points on why this insecurity was often misplaced. With $4.7bn invested in clients of 259 benchmarked university-linked business incubators, they have had a 59% success rate – surviving at least five years – with 72,000 employees among them. This was good news for the more than 15,000 startups being incubated at 700 universities and contrasted with the 75% failure rate for venture-backed startups, according to a study by Shikhar Ghosh, professor of management practice at Harvard Business School.

And the message is being heard by leading corporations. In a series of discussions at the summit, Diego De Biasio, chief executive at incubator Technoport, and Warrick Cramer, chief executive of Tomorrow Street, an incubator co-founded by Technoport and mobile phone operator Vodafone, explored the later-stage opportunities between corporations and incubators, while Shaheel Hooda, entrepreneur-in-residence at Telus-TEC Accelerator, and Amir Sayegh, strategic partnerships lead at telecoms firm Telus, discussed early-stage support and shifting metrics in judging the success to the Canadian company.

Sven De Cleyn, professor in entrepreneurship at University of Antwerp and program manager at Imec.istart, the accelerator of research institute Imec, and Zane Smilga, innovation lab coordinator at consultancy Verhaert, then discussed the corporate-incubator relationship and the power of the community coming together to develop the entrepreneurial ecosystem.

In a presentation by Howard Tullman, former chief executive at incubator 1871 – named after a fire that year – described how its work had helped the entrepreneurs, both those who make it through and those who do not, by reducing their opportunity cost, and Chicago.

Initiated by JB Pritzker, founder of investment firm Pritzker Group, 1871 started by incubating 50 startups in its 50,000 square feet of space using 125 mentors in 2012. Today, it has 500 startups in 150,000 square feet of space and requires some 900 mentors, of which half are women.

Tullman, whose successor as CEO has been named recently as Betsy Ziegler, chief innovation officer at Northwestern University’s Kellogg School of Management, admitted to a 70% to 80% failure rate and said its model required critical mass and so could not be replicated everywhere in order to “manage the collisions”. 1871 is affiliated with eight universities, most of which have dedicated spaces at the facility for students and faculty to develop businesses.

The power of such incubators for regional development is shown in 1871’s case by its member companies and alumni, who have raised more than $280m and created more than 8,000 jobs between them.

Michael Benarroch, provost and vice-president at Ryerson University, had earlier attributed part of Ryerson’s renaissance to DMZ, which UBI ranked number one along with UK-based SetSquared, and its other incubator areas. He said: “In eight years, DMZ has risen to be Canada’s largest commercial startup incubator with more 300 clients and $400m in funding. The DMZ has pioneered student and faculty zone learning.”

Brandon Paschal, incubation manager at LaunchLab, an incubator out of Stellenbosch University, then moderated a panel including Jairo Orozco, associate professor of entrepreneurship at Ean University, Martin Croteau, director of academic entrepreneurship at Ontario Centres of Excellence, and PKB Menon, managing director at incubation services provider Ginserv.

Orozco outlined three of the top five city applications to the UBI awards coming from Latin America as a result of public policies developed over the past 20 years to focus on reducing poverty through entrepreneurship.

Incubators had been one path for university students to find jobs but developing an entrepreneurial culture required everyone’s support, he added.

Menon said the shift in culture could happen relatively quickly. He said Bangalore in India had been regarded as a retirement city but now had 2,500 startups to use the knowledge capital developed from locals working at the 400 or so corporate research and development centres set up in the region. The Indian government tried to encourage incubators as a source of these startups by allowing corporations to back them too. The government mandated that 2% of corporate profits had to be used for socially and environmentally-responsible measures, and incubators were included within this bracket.

Meyer had earlier talked about the importance of diversifying funding for university-affiliated incubators to survive longer-term and Croteau and Paschal touched on their approaches. In Ontario, an important economic province for Canada, its centres of excellence secured state funding but this came with challenges given changes in political governance, while in South Africa, Paschal said LaunchLab had been set up to be self-funding within three years. He said this focus on itself being a startup and on efficiency had in turn helped it serve startups. Similarly, whether incubators took equity stakes in startups impacted their mindset and who they chose to serve. UBI estimated the average incubator received five applications for every client taken on.

As to measuring this success, the following panel of Flavio Wagner, director of the Zenit Science and Technology Park at Federal University of Rio Grande do Sul in Brazil, Chris Lumb, CEO at TEC Edmonton incubator in Canada, Kjell Håkan Närfelt, chief strategy officer at Swedish government-owned research and development funding agency Vinnova, Irene Fialka, CEO of Austria’s Inits incubator, and Agnès Flemal, general manager of the WSL incubator in Wallonia, Belgium, said context was the most important consideration.

The UBI metrics classified absolute and relative efficiency and effectiveness but Lumb said Canada had set up a working group to develop a framework for Canada over the next year.

Närfelt said performance indicators were useful if context applied. Its measurements looked at how incubators changed behaviour by using interviews to see the kind of companies selected and how they had performed over three years. Given the heterogeneity of startups and that entrepreneurship results were influenced by outliers rather than normal distribution curves, it could also take a long time, seven to 10 years, to see the fruits of the policies.

Fialka and Flemal then talked through their similar approaches of trying to match the technology readiness of a startup with the market readiness for the product or se
rvice. Flemal said: “The maturity of a project is key.”

However, most incubators in UBI’s rankings were still effectively regarded as pilots. Monash University, Australia’s largest with more than 70,000 students, set up its incubator last year to take on five clients initially, but demand for places proved so large the cohort was more than doubled.

Simon Bond, innovation director at SetSquared, laid out the lessons for running a successful incubator. The goals had changed since its foundation in 2002 but the key was feeding the machine – that is, finding out what works for its five backing universities, Bath, Bristol, Exeter, Southampton and Surrey.

The UK government had pushed academic institutions to consider the impact of their teaching and research on the wider economy, and changed funding to encourage these policies even though state financing of universities had often fallen in absolute or relative terms.

The Public Funding Observatory, a series of reports into policies affecting institutions across Europe published by the European Universities Association, an organisation representing universities from 47 countries, said funding to universities had been decreasing in 15 of 28 higher education systems between 2008 to 2017. It also stated the European Commission had estimated that an additional €62.4bn ($77bn) would have been necessary to fund all high-quality research proposals for 2014-16 alone.

In the US, the Association of University Technology Managers found federal funding sources for academia fell from 70% in 1990s to 58% in 2016. And Japan had seen a fall in government expenditure since 2004’s incorporation of national and public universities.

While it has been more than 70 years since Myles Mace created the first entrepreneurship course at a university, Harvard Business School, in 1947, student pressure for teaching and education has increased, particularly since the global financial crisis a decade ago.

In 2009, an Organisation for Economic Cooperation and Development survey showed 43% of students were expected to be self-employed within five years of graduating. Development of proof-of-concept funding, startup clubs, accelerators and incubators, alumni and university-managed and affiliated venture funds* and deeper connections between business schools and arts and science courses have deepened since then.

The examples of Stanford University, Massachusetts Institute of Technology and Tsinghua University have shown the potential for focusing on complementing research and teaching funding with entrepreneurship as a strategic priority.

Stanford alumni have started more than 40,000 companies since engineering department head Fred Terman encouraged two students, Bill Hewlett and Dave Packard, to set up IT company Hewlett-Packard in their garage in the 1930s. Since then, the company has been split into two separate businesses, IT company Hewlett Packard Enterprise and computer manufacturer HP.

These 40,000-plus Stanford-affiliated startups now have annual revenues of more than $2.7 trillion, and while Stanford initially tried to avoid direct funding of entrepreneurs due to risks to its now more than $26bn endowment, instead indirectly funding them by committing to venture capital firms on nearby Sand Hill Road, this policy has changed and the university balance sheet is used to support independent-but-affiliated accelerator and fund StartX, which effectively has an open cheque book. The university still benefits from philanthropy and its tech transfer arm, the office for technology licensing.

And as a later Stanford’s school of engineering head, John Hennessy, said: “There are two kinds of technologies in the world – stuff that is patentable and broadly applicable and the right thing to do is to give it to the office for technology licensing.

“Then there is stuff that is more a preliminary proof of a concept. It is not patentable, and the real value is in the people and their understanding of that technology and how it can develop into a useful product.

“The office for technology licensing’s role there is not to get in the way. That is when the right thing to do is to say: ‘Godspeed, go do it’.”

Hennessy correctly realised the value for the institution was often more to be found in its relationship with its intangible asset, the people passing through the institution, than in trying to capture the shorter-term economics from them.

In this light, a strategic threat to universities comes less from online courses, so-called Moocs, given the power of universities to deliver accreditation, but in organisations that can convene and educate groups of people and deliver long-term network effects to them.

In this light, VC or other service providers offering portfolio companies their own entrepreneurship knowledge and networking tools – whether formalised in the way venture capital firm True Ventures’ True University or investor Tim Draper’s Draper University have started to do, or less formalised – reach the core competence that universities have offered society, faculty and students.

As Toronto mayor John Tory said at the World Incubation Summit, his city’s policies were focused on how investing in people to become smarter and expediting immigration to boost a region’s overall brain power can act as a rising tide to lift all boats through collaboration. Universities might ask, with an emergent strategic threat being unveiled, whether they have invested enough in their own tactical asset of entrepreneurship incubation and venture funding tools and people.

* Global University Venturing will be updating its review of university venture funds  ahead of its GUV:Fusion conference held as part of the GCV Symposium in London on May 22-23. Help us improve our knowledge of the community so there is better understanding of its importance to the entrepreneurs, co-investors and society.