University Spin-Out Companies and Venture Capital

University spin-out companies face major impediment ofaccess to venture capital. Using a finance pecking order perspective, thisstudy examines the problems that university spin-out (USO) companies face whenseeking venture capital. Focus is on USOs that are expected to have growthprospects but may face difficulty obtaining financing and resources. A gap has long been recognized between the demand for finance byentrepreneurs and the availability of supply. Triangulating between evidencefrom spin-out companies, university technology transfer offices, and venturecapital firms in the United Kingdom and Europe, problems are identified andpolicy developments are suggested. After a theory is introduced to analyze the equity gap and to examine policyinstruments that have been developed to solve the gap, the article describesdifferent forms of internal funding, debt financing, and equity support.Research draws on survey and interviews of universities technology transferofficers, venture capitalists, and academic entrepreneurs in the UnitedKingdomand Europe in 2003-2004. Explored are three questions: (1) What problems are faced by USOs inattracting venture capital? (2) What procedures are used by venture capitalistsin assessing and screening of USOs for investment, and what alternatives exist?and (3) What policies can be adopted to enable USOs to attract venture capital.Perceptions of high-tech venture capital firms investing in spin-outs arecompared with those that do not. Also considered are venture capitalist viewson spin-outs against other high-tech firms. The study finds a mismatch between the demands and supply side of themarket. Also found is that technology transfer officers and USOs see venturecapital as more important than internal funds early in the process. However,venture capitalists prefer to invest after the seed stage. At both seed and start-up stage, USO proposals had a better chance offunding than non-USO high-tech investments. Policy implications are offered foruniversities, technology transfer offices, academic entrepreneurs, venturecapital firms, and government. (TNM)

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