Policies to Encourage Start-up Creation

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    Spinning; Source Wikimedia

    While many government officials argue that small business lead to job growth, it is in fact start-ups, spin-offs and spin-outs that increase job growth in a sector, industry, city, region or country. However, depending on the definition you apply, each of these types of firms develop differently. In this article I will use the following definitions: start-up is a firm started that was not associated with a firm or university, a spin-off will be defined as a firm created from another firm, finally a spin-out will be created from a university. Each of these different types of firms require similar yet different types of governmental policies in place to increase the likelihood of their survival. In addition, the policies in place will not always encourage the expected response from entrepreneurs, because of path dependencies within culture and government policies.

    I’m currently conducting research on university based spin-outs for my Master’s thesis, so I’m fairly familiar with the policies that encourage these, however some of these will really help benefit all types of start-ups. In 2010 Phillipe Mustar and  Mike Wright  published an article conducting an in depth analysis of the different policies that have been put into place in France and the UK. The article’s focus is on academic spin-outs so much of the perspective is in an attempt to understand what policies are best to create a university spin-out.

    Why the focus on the universities though? Universities are one of the largest sources of research conducted in a wide range of fields at multiple levels of development any country has. For instance, Eindhoven University of Technology in the Netherlands, conducts research on both applied and basic physics in semiconductors. Much of this research is done in collaboration with corporations like Philips. Since this and majority of universities are publicly funded governments have pushed for universities to begin to “valorize” their research. In other words, license or create a company based on the research to create economic growth in the region. The two most world famous universities for this are without a doubt MIT and Stanford. However, nearly every university is currently engaging in valorization of their research. The differences between the number of spin-outs a university creates is dependent on a number of factors. National policies are incredibly important.

    Gap from Start-up to VC; Source February 12, 2007 | Ride BMX Magazine

    Both France and the UK have a large number of different policies that have been put into place to spur the spin-out process, I’m not going to list them all here but I will include some highlights. The UK offered several different seed fund packages to encourage investment in a spin-out. Seed funds are typically used in the start-up stage between initial proof of concept and venture capital. Many researchers call this the death gap or valley of death. It’s a time when it is very difficult to acquire funding for a venture. These seed funds were dispersed based on competitive merits. Other policies included increasing education on entrepreneurship and firm creation. These policies spurred a large increase in the number of spin-outs created by UK universities. In the UK most of the policies were centered around a market failure in providing capital to the new firms from the universities.

    The French case is slightly different. Historically, French professors were considered civil servants and they were unable to start their own firm. So, France instituted a policy where researchers could request permission to start a company, take a sabbatical and eventually return to work at the university. Other policies created firm incubators to help the firms make a transition into the market from the university setting. Finally, there were policies that helped with funding issues, which were similar to the UK policies but did not require association with a university. The results were excellent for France as well. The number of high tech firms greatly increased. However, these were not academic spin-outs. The other research organizations were creating new companies or these were unofficial corporate spin-offs.

    What did this case tell Mustar and Wright? It demonstrated that even if policies have the same goal of fostering new academic spin-out creation and use similar policy tools, it does not guarantee an increase in the types of firms that the policies were designed to encourage.

    From this example and from many of the policies being implemented recently, such as “Start up America,” many of these policies seem to throw money at the problem. Is this the right solution? Can’t the markets take care of this problem? This is a difficult question to answer because historical development for a region matters. Let’s do a thought experiment. If I was to start a new software company where would it be easier to get money, San Jose or Kansas City? San Jose without a doubt. There could be a number of reasons for this. One, I could have worked at another start-up in San Jose before starting this new firm. There are tons of people that are experienced at working with new start-ups there in the VC world as well as customers to buy my new product. In Kansas City, that infrastructure isn’t there. Likely I would be coming out of school or working on this software on the side but not at a new company. Innovative new companies require innovative companies to purchase their products. Without local innovative companies it’s difficult to get a company off the ground.

    Throwing money at the problem; Source Corbis

    In a place like Kansas City, it’s likely that throwing money at the problem will work. Why? Because there’s a less mature market for the different levels of funding for a software company. Companies with money will not fund a company in a different city unless there is a very good reason to. Even then, they would select a local company over a distant company because they have more control over the company simply through proximity.

    Another policy that seems to work well is incubators. Incubators provide a space for a company to rent cheaper office or manufacturing space, get support through network creation (both suppliers and customers), management training or providing a professional management team and another of other functions that are dependent on the type of incubator and the type of start-up. There’s debate on the actual impact of incubators, which is what I’m actually research for my Master’s Thesis. There’s some debate if incubators keep companies in business longer than they should be.

    Overall though, creating an environment where it is easy for a person or group of people to start a company with easier access to financial backing with management support will increase the number of start-ups. In this article I’ve focused mostly on the broad policies and university spin-outs, but the policies will work well for both corporate spin-offs and start-ups.