Startups "Hold Their Own" in Commercializing Early-Stage Inventions
Though they lack business resources and may be overconfident about results, academic entrepreneurs prove surprisingly successful in their efforts to commercialize licensed inventions.
ANN ARBOR, Mich.—University faculty inventors often lack the market knowledge, customer contacts and manufacturing capabilities to bring new products to market successfully. But that doesn't appear to stop them from pursuing their entrepreneurial ambitions, say researchers at the University of Michigan and Carnegie Mellon University.
Their new study forthcoming in the journal Management Science finds that entrepreneurial startups are able to "hold their own" relative to more established firms, particularly in the commercialization of early-stage inventions requiring substantial technological development.
The researchers say, however, that academic entrepreneurs are more likely to continue unsuccessful development efforts for longer periods of time, suggesting that overly optimistic views may override less-than-favorable economic realities.
"Commercializing new technologies through startups instead of more established firms involves important tradeoffs," said Arvids Ziedonis, assistant professor of corporate strategy and international business at Michigan's Stephen M. Ross School of Business. "However, in contrast to earlier studies, we find little evidence that licensing to startups represents a 'second-best' solution. Rather, startups may play an intermediary role in the overall commercialization process."
To compare the relative performance of academic inventors to existing licensees, Ziedonis and Carnegie Mellon's Robert Lowe examined 734 inventions disclosed to the University of California from 1981 to 1999 and licensed exclusively either to a startup (36 percent) or established firm (64 percent). Of those cases, 26 percent were commercialized (licensed with commercial sales), 40 percent were terminated (licensed but the contract was cancelled or ended prior to sales) and 35 percent were ongoing but had no commercial sales by the end of the study.
Ziedonis and Lowe found little difference between startups and established firms in the time it takes to develop and introduce to market a product based on a licensed invention. In fact, the startups in their study generated greater levels of earnings than existing companies for similar technologies.
Relative to established firms, however, entrepreneurs appear to hold on longer to technologies that do not achieve commercial success, perhaps because they are "in denial" about the diminishing prospects for these inventions. Their evidence was not sufficient to conclude that these entrepreneurs were overoptimistic, however.
"The fact that startups do achieve commercialization at a pace and level of existing firms overall suggests that it may make sense for entrepreneurs to continue development, even for technologies that ultimately fail," Ziedonis said. "On the other hand, established firms may have greater opportunities to use development resources and thus impose higher thresholds for continuing development projects. They also may obtain information on the viability of the licensed technologies more quickly, which would explain why they terminate licenses more quickly for products that eventually fail to reach the market."
Ziedonis and Lowe further note that all but two of the faculty/inventor-founded startups in their study that commercialized an invention were acquired prior to commercialization. The greatest return among these independent startups, they say, was from the proceeds of initial public offerings, not royalties based on commercial sales.
"Startups and existing firms may operate as complements rather than substitutes, with inventor-founded firms serving as transitional organizations for technology commercialization," Ziedonis said. "This division of labor, where development is done in inventor-founded firms and commercialization is carried out in existing companies, contributes to a 'first-best' outcome for licensing start-ups from a long-term perspective."
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