How governments seek to bridge the financing gap for university spin-offs: Proof-of-concept, pre-seed, and seed funding

Abstract

University spin-offs often develop early-stage technologies characterised by long development paths and uncertain commercial potential. Private financiers, such as banks, informal investors, and venture capital firms, are reluctant to invest in these ventures at an early stage. To bridge this financing gap, governments have set up specialised programmes, but few studies have examined the rationale and organisation of different types of programmes. We analyse government schemes in six countries and identify three main categories of funding initiatives. Proof-of-concept (PoC) schemes aim to reduce the technological uncertainty. Pre-seed schemes aim to reduce the organisational uncertainty and make the nascent venture attractive to investors. Seed funding schemes provide early-stage equity financing. The seed funding initiatives seek to improve the supply of funding, while there seems to be an increasing number of pre-seed and PoC schemes seeking to bridge the financing gap from the demand-side by increasing the attractiveness of the spin-offs towards investors.

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How governments seek to bridge the
financing gap for university spin-offs:
proof-of-concept, pre-seed, and seed
funding
Einar Rasmussen
a
& Roger Sørheim
b
a
Bodø Graduate School of Business, University of Nordland,
N-8049, Bodø, Norway
b
Department of Industrial Economics and Technology
Management, Norwegian University of Science and Technology
(NTNU), Trondheim, Norway
Version of record first published: 10 Aug 2012
To cite this article: Einar Rasmussen & Roger Sørheim (2012): How governments seek to bridge the
financing gap for university spin-offs: proof-of-concept, pre-seed, and seed funding, Technology
Analysis & Strategic Management, 24:7, 663-678
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Technology Analysis & Strategic Management
Vol. 24, No. 7, August 2012, 663–678
How governments seek to bridge the
financing gap for university spin-offs:
proof-of-concept, pre-seed, and seed funding
Einar Rasmussen
a∗
and Roger Sørheim
b
a
Bodø Graduate School of Business, University of Nordland, N-8049 Bodø, Norway;
b
Department of Industrial
Economics and Technology Management, Norwegian University of Science and Technology (NTNU), Trondheim,
Norway
University spin-offs often develop early-stage technologies characterised by long development
paths and uncertain commercial potential. Private financiers, such as banks, informal investors,
and venture capital firms, are reluctant to invest in these ventures at an early stage. To bridge this
financing gap, governments have set up specialised programmes, but few studies have exam-
ined the rationale and organisation of different types of programmes. We analyse government
schemes in six countries and identify three main categories of funding initiatives. Proof-of-
concept (PoC) schemes aim to reduce the technological uncertainty. Pre-seed schemes aim
to reduce the organisational uncertainty and make the nascent venture attractive to investors.
Seed funding schemes provide early-stage equity financing. The seed funding initiatives seek
to improve the supply of funding, while there seems to be an increasing number of pre-seed
and PoC schemes seeking to bridge the financing gap from the demand-side by increasing the
attractiveness of the spin-offs towards investors.
Keywords: government support; pre-seed funding; proof-of-concept funding; seed funding;
technology transfer; university spin-offs
1. Introduction
Creating university spin-offs (USOs) with the intention of increasing technology transfer and
generating wealth from publicly funded research has become an important objective for policy
makers. Most European countries have tried to emulate the US success in bringing university
inventions to the market. As a result, the number of USOs has increased substantially in many
countries (Wright et al. 2007). According to Mustar, Wright, and Clarysse (2008), three fac-
tors have accelerated this development. First, many countries have enacted Bayh–Dole-inspired
legislation, which grants intellectual property rights to the universities. Second, there has been
increased institutional pressure on universities to engage in the commercialisation of research.
∗
Corresponding author. Email: einar.rasmussen@uin.no
ISSN 0953-7325 print/ISSN 1465-3990 online
© 2012 Taylor & Francis
http://dx.doi.org/10.1080/09537325.2012.705119
http://www.tandfonline.com
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664 E. Rasmussen and R. Sørheim
Third, there has been a significant increase in the availability of public funds to address the
so-called financing gap experienced by USOs.
The use of public financing to boost entrepreneurship and technology transfer is seen among
policy makers worldwide as a legitimate tool for spurring economic growth (Lerner 2009). The
financing gap experienced by USOs is related to the typically large investments needed at an early
stage combined with a reluctance among financiers, such as venture capitalists (VCs), to invest
in such projects (Lockett, Murray, and Wright 2002). As a result, public funds have become an
important source of early-stage funding for USOs.
Despite the numerous studies on technology transfer and USOs, few academic studies have
looked at government funding programmes for USOs. Extant literature is mainly based on studies
of single programmes (Mosey, Lockett, and Westhead 2006) or specific countries (Nosella and
Grimaldi 2009; Rasmussen 2008). Previous studies have performed limited examination of how
these programmes are actually organised to bridge the finance gap experienced by USOs.
This paper reports on case studies in six countries and aims to explore whether specific types
of government programmes can be identified and, if so, how they are organised. We contribute
to the discussion concerning which tools are available to governments when designing support
programmes for USOs (Mustar and Wright 2010). We identify three different types of govern-
ment initiatives with different rationales: (1) Proof-of-concept (PoC) funding aims to lower the
technological uncertainty associated with USOs; (2) Pre-seed funding aims to lower the organisa-
tional uncertainty of USOs; (3) Seed funding aims to reduce the investment risk by improving the
availability of early-stage funding. The rationale behind each initiative has important implications
for how the initiative is organised.
The next section presents the frame of reference related to bridging the financing gap for USOs.
We then present our comparative case study of government initiatives in six countries, followed
by the empirical findings regarding the types of programmes and how they are organised. Finally,
we provide implications for practice and further research.
2. Frame of reference: bridging the funding gap for university spin-offs
2.1. The funding gap for USOs
New ventures face the liabilities of newness and smallness which impede their access to resources,
such as financial capital (Stinchcombe 1965). USOs and other new technology-based firms face
particular problems in obtaining start-up funding (Lindström and Olofsson 2001; Murray 1999).
One cause of the difficulty for USOs in obtaining sufficient funding is related to a high need
for financial capital. USOs typically develop radical, tacit, and early-stage technologies (Shane
2004). As a result, large investments in further technological development are needed before their
products and services can reach the marketplace (Jensen and Thursby 2001).
Another source for difficulty in obtaining funding relates to investor uncertainty. There are
few economic incentives for investors and firms to invest in developing early-stage projects with
high uncertainty and long payback time. Established firms would rather wait until the technology
is further developed (Shane 2004). As a result, USO-type projects struggle to attract investors
until the technology and its market potential is verified. Lockett, Murray, and Wright (2002) find
that even while UK VCs have become more willing to invest in new technology-based firms,
they are still reluctant to invest in the earliest stages of technology development. For USOs,
angel funding represents an alternative, but angel investors will often invest smaller amounts than
would more traditional investors and thus are not often a main source of funding for USOs (Wright
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How governments seek to bridge the financing gap for university spin-offs 665
et al. 2007). This further contributes to the difficulty for USOs in obtaining funding from private
actors.
2.2. Uncertainty and risk associated with USO investments
Reluctance to invest in USOs can be explained in large part by a high level of uncertainty.
Private actors prefer to invest where uncertainty is relatively low and the risk can be managed.
Risk and uncertainty are classically distinguished based on whether or not a rational probability
distribution of a fixed possible outcome is known to the decision makers (Knight 1921). With
decisions under risk, decision makers know all possible outcomes and the possibility of each
one of them. With decisions under uncertainty, neither the number of possible outcomes nor the
probability distribution is known. Knight’s work has developed into a growing consensus that
entrepreneurial activity takes place under conditions of uncertainty while non-entrepreneurial
activity takes place under risk (Alvarez and Barney 2005).
For USOs, the consequence of operating under conditions of uncertainty is difficulty obtaining
external finance to develop their company further. This gap between the need for resources to
develop research into commercial applications and the availability of funding is often referred to
as the ‘valley of death’ (Auerswald and Branscomb 2003). The recognition of a financing gap has
led governments around the world to provide public financing to early-stage technology ventures
(Wright et al. 2006). However, the rationale and effects associated with these programmes are
controversial (Jaaskelainen, Maula, and Murray 2007; Leleux and Surlemont 2003). Lerner (2002)
argues that all government efforts in this arena are based on the assumption that the government
can either identify investments that will ultimately yield high social and/or private returns or
encourage financial intermediaries to do so.
A consensus on both of these claims remains elusive, and the design of government programmes
is still a highly experimental activity. Still, there seems to be a common understanding that the
government should play a role in stimulating the emergence of USOs (Lerner 2009). Publicly
fundedVCs are more willing to consider investing in early-stage USOs than are purely privateVCs
(Knockaert et al. 2010), indicating some level of success relating to the governments’ intentions
of bridging the funding gap.
3. Data and method
Most government funding initiatives are rather new and little systematic research has been done
to investigate the range of tools available for governments. This paper has chosen a comparative
case study approach in an effort to obtain an overview of the initiatives used and how they are
implemented and organised.
The empirical data cover the main government programmes in six countries: Canada, Finland,
Ireland, Norway, Scotland and Sweden. To reduce contextual variation, we selected countries
that have a well-developed university sector; the selected countries are among the top 12 of 30
Organisation for Economic Co-operation and Development (OECD) countries on tertiary level
educational attainment (OECD 2009). Moreover, the major sources of funding for university
research in our selected countries are basic funding and grants from the government (Maass
2003). Furthermore, all selected countries have well-developed national policy schemes for the
commercialisation of research (Lundström and Stevenson 2005).
Finland and Sweden have, together with Israel, the highest gross domestic expenditure on
R&D as a share of gross domestic product among all the countries in the OECD (OECD 2006).
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666 E. Rasmussen and R. Sørheim
The high R&D intensity in domestic industry is reflected in commercialisation policies that focus
on university–industry collaboration. Although significant focus is placed on USO creation, it
seems fair to say that Sweden and Finland have comparatively fewer initiatives and a shorter
history of USO creation.
Canada, Norway and Scotland have a low share of industry R&D spending (OECD 2006).
Owing to limited possibilities for commercialising university research in the domestic industry,
policymakers in Canada, Norway and Scotland have prioritised the creation of USOs. Ireland has
a lower level of government R&D funding but stands out, as does Scotland, as exhibiting a focused
effort to achieve excellence in research and commercialisation in specific industry sectors. This
has led to a more centralised operation of government support schemes.
Data were collected from a broad range of sources. A large number of policy reports, bench-
marking studies, case studies and programme evaluations provided background information
about innovation policy and government programmes in each country. To obtain an in-depth
understanding of the different policy initiatives and how they relate to one another, face-to-face
semi-structured interviews were conducted with well-informed subjects, such as policy makers,
programme managers, policy researchers, university administrators and programme users. In total,
throughout 2005 and 2006, 70 people were interviewed in settings with two researchers present.
Case descriptions were written and later verified by several key persons in each country. All coun-
tries had a variety of programmes at both national and regional level. For instance, one survey
identified 178 government initiatives to promote the commercialisation of university research in
Canada (Gault and McDaniel 2004). Our study includes the initiatives at national level that were
considered by our sources as the most important providers of government funding of USOs at the
time of our study.
Direct comparisons of the various programme initiatives would be difficult, as the differences
in area of operation, other types of initiatives in place, and general context make each programme
unique. Further, it makes little sense to compare the quantitative output from one programme in
one country with another programme in another country because of differences in measurement
techniques, differences in industrial structure, the highly diverse composition of the initiatives, and
differences in scope. Finally, the output numbers are not directly comparable owing to differences
in the definitions used (e.g. definition of a USO). Although most programmes provided output
statistics, none of them had made any impact assessment considering additionality (i.e. the share of
the output that would not have occurred without the government support (Clausen and Rasmussen
2011)). We explored the main characteristics of the different programmes and the organisational
solutions through in-depth discussions with officials at different levels. A team of researchers has
analysed the data inductively, and the findings have been discussed with practitioners at several
workshops and seminars.
4. Types of support programmes implemented
All countries had in place several government initiatives aimed at bridging the USO funding gap.
Some initiatives were targeted exclusively at USOs, while others supported the creation of new
technology-based firms in general. An overview of selected government programmes is presented
in Table 1.
By looking at the target area of each programme, we identified three main types of public
funding. The first type aims to lower the technological uncertainty of the projects at an early stage
by supporting technology verification. This was typically referred to as PoC funding, alternatively
proof-of-principle or verification funding. The second type provided assistance in the development
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How governments seek to bridge the financing gap for university spin-offs 667
Table 1. Organisation of selected government support schemes.
Government Type of
programme or Activity financing
instrument Description and results Organisation available
Business Development
Bank of Canada
Offers financial services, consulting services,
subordinate financing, and venture capital. Takes
more risk than private actors. Technology Seed
Investments set up in 2002 with a CAD 100 million
mandate
23 of 35 investments made
in university or Federal
lab spin-offs
Independent
government
unit
Supply-side: seed
The Intellectual Property
Mobilisation (IPM)
programme (Canada)
Accelerates the transfer of knowledge and technology
from universities, hospitals and colleges. Smaller
amount of funds could be used for PoC (<CAD
15K per project)
N/A Government
agency
Demand-side: PoC
The CIHR (Canadian
Institutes of Health
Research) Proof of
Principle Programme
(POP)
Develops research of uncertain commercial utility
so that it might be of interest to companies and
potential investors. Funding in two phases for
additional targeted research, market research,
investment and business development, particularly
proof-of-principle and prototype development
Established in 2001, total
spending of CAD 19.6
million on 163 phase I
and 9 phase II projects
Government
agency
Demand-side: PoC
Other CIHR initiatives Several schemes for commercialisation of research,
many related to training and competence
development
N/A Government
agency
Demand-side:
pre-seed
The Idea to Innovation
(I2I) programme
(Canada)
Supports researchers to develop an idea in order to
get a company interested or to create a spin-off.
Funding in two phases, PoC and Technology
Enhancement
Established in 2004 Government
agency
Demand-side: PoC
NRC-IRAP National
Research Council’s
Industrial Research
Assistance Programme
(Canada)
Stimulates innovation in small and medium-sized
enterprises. Combined with R&D tax credits, IRAP
support can fund up to 60–70% of the cost in an
R&D project
Many university spin-offs
have received IRAP
support; these spin-offs
perform better
Government
agency
Demand-side:
pre-seed
(Continued)
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668 E. Rasmussen and R. Sørheim
Table 1. Continued.
Government Type of
programme or Activity financing
instrument Description and results Organisation available
The Finnish National
Fund for Research and
Development (Sitra):
PreSeed service
Two initiatives: Introduction to initial investment
market (INTRO) and funding for business idea
development (LIKSA)
LIKSA accept 200
enterprises per year
Independent
public
foundation
Demand-side:
pre-seed
Finnvera plc Seed finance and capital loan for starting up
technology-based companies. Recently developed
an equity instrument
N/A Financing
company
owned by the
government
Supply-side: seed
The National Technology
Agency – Tekes
(Finland)
Capital loan for starting up technology-based
companies
In 2004, two calls pro-
duced 158 applications.
First call investments
of
¤ 2.2 million on 25
decisions
Government
agency
Demand-side:
pre-seed
Finnish Industrial
Investments
Originally designed as a public fund-in-fund
investment instrument. Since 2003, also makes
direct investments in new technology-based firms
40 direct investments in
2004
Government
agency
Supply-side: seed
TULI (Finland) Offers research-based innovations expertise in
commercial development. 100% grant of
maximum
¤ 10 K per project to provide business
expertise by consultants
Supports more than 200
projects a year
Regional agents Demand-side:
pre-seed
Enterprise Ireland
Commercialisation
Fund
Proof of concept support 2004: about
¤ 15 million
funding to 93 projects
Government
agency, panel
review
Demand-side: PoC
Technology development support 2005: about
¤ 13.5 million
funding to 41 projects
Government
agency,
external
review
Demand-side:
pre-seed
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How governments seek to bridge the financing gap for university spin-offs 669
Commercialisation of Research and Development
(CORD). Enable the commercial viability of the
projects
N/A Government
agency
Demand-side:
pre-seed
Commercialisation plus scheme Maximum total funding
¤
500 k
Government
agency,
selected
projects
Demand-side:
pre-seed
Enterprise Platform Programme Training programme Government
agency
Demand-side:
pre-seed
Scottish Enterprise Proof-
of-Concept Programme
(PoC)
Supports the pre-commercialisation phase, maximum
of
¤ 200 K. An ‘outcome’ manager is appointed for
each project
£28.1 million has been
awarded to 172 projects
since 1999
Government
agency, panel
review
Demand-side: PoC
Enterprise Fellowship
Programme (Scotland)
Helps individual academic researchers to develop
spin-out companies. 12 months salary to develop
the idea including business training. Link to
business angels’ syndicates
60 awards at a total cost
of ca
¤3 million
Government
agency,
follow up on
PoC
Demand-side:
pre-seed
SMART award (Scotland).
Add-on programme to
projects with PoC and
Enterprise Fellowships
Funding of 75% of the cost of carrying out a technical
and commercial feasibility study in 6–18 months
Maximum award is
¤
50 K Government
agency,
follow up on
Enterprise
Fellowship
Demand-side:
pre-seed
Scottish Enterprise
Investments (SEI)
(Scotland).
Business Growth Fund (BGF) N/A Private
investment
partners
Supply-side: seed
Operates seed and venture
capital programmes
Scottish Co-investment Fund (SCF) N/A Private
investment
partners
Supply-side: seed
(Continued)
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670 E. Rasmussen and R. Sørheim
Table 1. Continued.
Government Type of
programme or Activity financing
instrument Description and results Organisation available
SMART Equity Scheme
and PoC equity scheme
Fund ideas that receive a SMART award N/A Joint
public/private
programme
Demand-side:
pre-seed
Vinnova’s programme
VINN NU (Sweden)
Aims to make it easier for R&D-based companies to
prepare for a commercial development. Funding
business development activities in new established
R&D based companies
Competition, 20 projects a
year receive an award of
SEK 300 K
Government
agency
Demand-side:
pre-seed
Innovation Bridge
(Sweden)
Promotes knowledge transfer between industry and
academy, including research commercialisation. 7
regional branches, various types of project grants
and seed funding
Re-organised in 2006 Regional agents Demand-side:
pre-seed and seed
FORNY (Norway). Sup-
ports commercialisation
of research-based
business ideas
Commercialisation funds used regionally to cover up
to 50% of the costs of commercialisation projects
Operated by TTOs and
science parks
Regional agents Demand-side:
pre-seed
Proof of concept funds N/A Government
agency, panel
review
Demand-side: PoC
Leave of absence grant. Reimburse salary for
researchers who commercialise an idea
Available from 2006 Government
agency, panel
review
Demand-side:
pre-seed
Note: N/A, not available.
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How governments seek to bridge the financing gap for university spin-offs 671
Table 2. The main characteristics of different types of government USO funding.
Proof-of-concept Pre-seed Seed
Goal Reduce the technological
uncertainty of the
project by verifying the
technological feasibility
of the project
Reduce the organisational
uncertainty of the
project by preparing the
project organisationally
for further investment
Reduce the investment
risk associated with the
project by providing
funding that accept a
higher risk than most
private actors
Approach Demand-side: Increase the
attractiveness of USOs
for investors
Demand-side Supply-side: Increase the
supply of early-stage
funding
Type of government
support
Usually 100% grant-based Usually grant based but
sometimes convertible
to equity
Usually equity or loans
Manager of funds Usually government
agency
Varies, but often regional
agent
Usually private agent
or independent
government unit
Funding decision Usually by application and
panel review, similar to
research funding
Varies, but usually made at
regional level
Investment decision
accepting high risk
Type of activity
supported
Technology development
at project level
Market and management
development by
entrepreneurs or
consultants
Venture launch
Main criteria for
funding
Market potential of
technology
Combination of indi-
vidual and project
characteristics
Growth potential of the
new venture
Anticipated
outcome
USO or license to existing
firm
USO High-growth USO
of business plans, strengthening the entrepreneurial team and networking with external partners.
The rationale behind this type of scheme, which we label pre-seed funding, was to make the USOs
more attractive for external investors by reducing organisational uncertainty. The third type was
set up to accommodate for lack of interest from private actors by providing direct funding to
USOs at an early stage, and is often labelled seed funding.
The different types of government support were highly unique in terms of their size, scope, and
degree of interaction with the commercialisation projects. As presented below and summarised
in Table 2, we identified some commonalities in the goals and main characteristics of the three
types of schemes.
4.1. Proof-of-concept funding
Some form of PoC funding was available in all countries. This funding is typically awarded
as a 100% grant to the project with the intention of verifying the industrial applicability of the
research-based invention. A typical example is the Canadian CIHR Proof-of-Principle Program
(POP), which aims to develop research of potential commercial utility and capture the interest of
potential investors. CIHR POP was established in 2001 in response to a perceived gap resulting
from research-based companies being spun-off too early and a need for funds for additional
targeted research, market research, and investment and business development activities.
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672 E. Rasmussen and R. Sørheim
The funding criteria for PoC schemes often depended on the project’s stage of development.Two
Canadian proof-of-principle programmes (I2I and CIHR POP) awards funding in two phases. The
first phase seeks to develop research of uncertain value to be of interest to investors and companies.
This funding is grant-based and does not require any private co-investment. The second phase
is for projects that have attracted external investment, either from an existing firm interested in
the technology or from an investor supporting the creation of a USO. Some PoC schemes only
provide funding, while other schemes add on competence-enhancing and networking activities.
For instance, the Scottish Enterprise Proof-of-Concept Programme appoints an external outcome
manager to secure a focus on commercial issues.
The PoC initiatives were mainly organised at the national level. A common model to organise
the funding process holds calls that allow academic entrepreneurs to apply for a grant to be
used for a specified PoC project. Because the PoC grants are organised in a similar way to
conventional research grants, a reported challenge lies in making sure that the funding is used
for commercialisation activities rather than for further research. To secure a proper anchoring
of the project in the local support infrastructure, the grants were usually restricted to applicants
approved by the university Technical Transfer Office (TTO). A review panel is typically used to
rank the applications before the funding decision is made by the programme board.
Funding is most often administered by the projects themselves, with no overhead to the uni-
versity or TTO. The TTO is often involved in preparing the application to increase the chances
of a successful competitive assessment at a national level. Thus, for PoC schemes to be effective,
there must be a supportive culture and infrastructure for commercialisation at the university level.
4.2. Pre-seed funding
Pre-seed funding seeks to improve the managerial and organisational aspects of projects with the
aim of making these projects more attractive to investors. In some countries, pre-seed fund-
ing existed as explicit schemes, such as the Sitra PreSeed services in Finland. One part of
the PreSeed service, INTRO, assists the efficient presentation of start-up enterprises so as to
attract both institutional and private investors. It operates through company presentation forums,
focused investment negotiations, and a web service. INTRO is complemented by LIKSA, a
programme dedicated to funding development of business ideas for start-up enterprises and to
international expansion. Enterprises receive a maximum of ¤40,000 to make a business plan
and conduct market research. Sitra claims a first right to invest in the LIKSA cases. Another
Finnish government agency, Tekes, operates the pre-seed programme from business to research
(TULI).
Although not explicitly referred to as pre-seed arrangements, all countries had pre-seed-type
initiatives. In Norway, for example, a project’s business development is handled by regional actors,
such as the university TTOs. These actors administrate government funding granted from the
Forny-programme aimed at developing commercialisation projects with a high potential for value
creation. This is also the case in Canada, Sweden, and, to some degree, Finland, where regional
support actors such as TTOs provide assistance to the projects in the pre-seed phase. Scottish
Enterprise has introduced the Enterprise Fellowship Programme where pre-seed activities are
more integrated with PoC funding.
It is increasingly recognised that the scientist or inventor plays a crucial role in the commercial-
isation of advanced technologies. Some newly introduced schemes support the involvement of
academics, such as the Enterprise Fellowship Programme in Scotland, the Forny leave-of-absence
grant in Norway, and CIHR training schemes in Canada. These schemes do not provide financial
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How governments seek to bridge the financing gap for university spin-offs 673
resources directly to the new venture but provide indirect support by sponsoring the human capital:
the scientists.
Compared with the more technically oriented PoC activities, the pre-seed initiatives are much
more dependent on a project’s regional context, such as the university TTO. This distinction was
particularly evident in Canada, where university TTOs acted as coordinators of public support
by assisting the projects in getting access to the government programmes. Similarly, in Norway,
local TTOs and science parks administered support at the regional level.
While pre-seed funding was often awarded directly to the entrepreneur(s) or the new venture,
another common approach was to use consultants to assist projects in commercial development.
One example is the Finnish TULI programme, which hire business consultants to assist USOs in
conducting market research, partner search, business planning, etc. Other initiatives involved train-
ing programmes for entrepreneurs, such as the Enterprise Ireland EPP. This one-year-long training
and enterprise support programme was set up to increase the competence among entrepreneurial
academics by providing salary, training and counselling. This type of specialised initiative is
dependent on well-developed expertise in the region and a critical mass of projects.
4.3. Seed funding
In all six countries there is a widespread recognition that a lack of seed capital has been a major
obstacle for developing research-based ideas with growth potential. The approach and degree of
governmental commitment to introduce new tools to reduce this perceived ‘equity gap’ vary from
country to country. The seed capital instruments are typically not targeted exclusively at USOs, but
rather encompass a broad range of early-stage ventures with high growth potential. For example,
the Business Growth Fund (BGF) was launched to improve the availability of finance for start-ups
and growing companies in Scotland. Initially, the BGF was set up as a scheme providing loans.
In 2002, an equity option was launched, which meant that young companies could use the BGF
to leverage support from banks and other investors.
Seed funding initiatives were typically set up to reduce the risk for private actors investing
in early-stage commercialisation projects. One approach was to use a ‘gearing’ mechanism, by
way of which private investments were supplemented by public loans or equity. For example, the
Innovation Bridge in Sweden includes a seed-capital element, where regional initiatives receive
matching funds from the Innovation Bridge. Another approach was to set up funds with private
management firms that offered incentives based on the revenue generated. While privately man-
aged seed capital funds usually undertake investments in somewhat more established firms, these
funds were restricted to only make investments in early-stage projects. Some funds have been set
up with formal university ownership, such as Chalmers and Karolinska in Sweden. More com-
mon, however, are attempts to connect with business angels and VCs through formal networks
and networking arenas.
In many countries, seed capital schemes seem to be a result of ad hoc initiatives rather than
holistic planning. In Finland, the public agencies Tekes, FII, Sitra and Finnvera all established seed
funding schemes around the same time, but there was little coordination between the initiatives.
Furthermore, such schemes have limited links to other support activities, such as PoC schemes
and pre-seed activities. In Norway, for example, the agency providing PoC and pre-seed schemes
was not involved in designing a newly launched seed initiative. Also, such schemes exhibit limited
cooperation with professional VCs. Following this, there is a concern that there is not enough
attention to the competence dimension when setting up these schemes, related both to the selection
of investments and the follow-up after the investment has been made.
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674 E. Rasmussen and R. Sørheim
The most systematic approach is found in Scotland. Beginning in 2003, the seed-capital situation
in Scotland has been annually mapped to identify areas in which governmental intervention was
needed (Harrison and Don 2004). This has provided a foundation for introducing new tools and
adjusting existing ones. Scotland also reveals best practices in linking governmental support
programmes and syndicates of ‘business angels’ through the technical and commercial feasibility
studies (SMART) and PoC equity schemes. This is a joint venture between the business angel
syndicate, the Bank of Scotland, several Scottish universities, and governmental bodies. The
projects and proposals are initially filtered by the University Commercialisation Department
for ‘investor readiness’. Then, the business angel syndicate undertakes a detailed review of the
financial projections and meets with the company founders. The initial investment is then made,
usually in conjunction with other governmental support.
5. Discussion
This study identified three different types of government schemes aimed at bridging the funding
gap for USOs, some of which target the supply-side of the financial market while others target the
demand-side (Queen 2002). While most extant research and policy interest has dealt with supply-
side issues (Lindström and Olofsson 2001), we find that current government programmes to a
large extent acknowledge the importance of improving the demand-side by seeking to leverage
the ‘investment readiness’ of USOs (Murray 1999).
For all three types of initiatives, the major trend seems to be a move from a passive to a more
proactive approach to supporting the creation of USOs. An example of a ‘passive’ seed funding
approach is to support fund-in-fund initiatives. Even if these initiatives have increased the amount
of venture capital available, they have not greatly benefited firms in the seed capital phase. For
firms in early stages the problem is not related to the availability of capital; the main challenge is to
gain access to these funds (Lundström and Stevenson 2005). This has resulted in the development
of schemes that support projects more directly via some kind of seed capital, in the form of soft
loans as well as direct-equity investments. Most of these schemes have a ‘gearing’ approach,
meaning that the funding needs to be matched by the entrepreneurs themselves, banks, investors,
development partners, etc. Moreover, the adoption of more active approaches is also evident in the
PoC and pre-seed initiatives, which also seem to increasingly add on an element of competence
development and networking.
5.1. Implications for government support programmes
The unique context of each country, including regional differences, calls for specialised policies
adapted to distinct challenges. Government instruments need to be set up in a value chain in
order to ensure that if a project receives support, there will be available public or private funding
necessary for follow up in the next phase of development. While we believe it is very important to
learn from experiences in various settings, the specific regional context and value chain of public
and private actors needs to be considered in each case.
Grant-based programmes primarily address the first phase of the funding gap, while pro-
grammes in later stages usually require private co-funding and sometimes equity in the USOs.
Many programmes recognise that if the government support organisations take ownership at an
early stage, it will likely impede a project’s efforts to gain additional funding. In the very early
stages, such as those addressed by PoC schemes, the uncertainty is usually considered too high
for any value assessment to be made. Therefore, the criteria for awarding PoC funding are related
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How governments seek to bridge the financing gap for university spin-offs 675
to a high value-creation potential from a societal point of view rather than to any calculations of
present value. As a result, the PoC funds are typically 100% grant based.
Several instruments provide support in phases that require USOs to reach defined milestones
before proceeding to the next support initiative. In later phases, many programmes require risk
sharing with private funding sources, assuming that the private actors are able to make a proper
assessment of the projects. From the government’s perspective, the milestone strategy reduces
uncertainty given that funding can be cut off if the project lacks progress. There is a risk, however,
that a projects will place additional emphasis on achieving short-term milestones as established by
government programmes and do so at the expense of the long-term development of the business.
This calls for flexible solutions that are adaptable to idiosyncratic spin-off processes, such as ini-
tiatives at the university level exhibiting a more long-term focus and TTO enterprise development
support.
Government agencies often prefer funding decisions to be market-based; the programmes are
set up because private actors find it difficult to calculate the market value of early-stage USO
projects. For PoC funding, the solution has come in form of an academic system of peer-review
responsible for making the funding decision. For pre-seed funding, external acceptance in the
form of private co-funding is often required. Seed funding is usually organised such that the
funding decision is made by private actors through private management of public funds or by
‘gearing’ approaches.
All countries have a broad range of support schemes, making it difficult for each USO project
to keep track of all available schemes. The awareness of support schemes is generally low among
new ventures (Gorman and McCarthy 2006). Thus, the infrastructure at university level plays
an important role as mediator between support schemes and USO projects. In countries with a
well-developed TTO infrastructure, such as Canada, TTOs actively seek funding opportunities by
way of, for example, assisting projects in applying to public funding instruments and by actively
networking with public and private VCs. Moreover, government support schemes seek high addi-
tionality (Falk 2007) by not subsidising projects that would have been realised without public
support. Such schemes require tools for project selection and monitoring. One such approach is
to require involvement by the university’s TTO given that the TTO is located near the project and
has long-term interest in providing successful results.
In an effort to bridge the funding gap for USOs, there seems to be a shift from supply-side to
more demand-side initiatives. This may be related to the growing availability of venture capital
in Europe (Murray 2007). Thus the gap is not perceived to be lack of capital, but that few USOs
manage to become interesting investment cases that are able to attract private investors (Mustar,
Wright, and Clarysse 2008). Instead of funding projects that might have been turned down by
private investors, the funding is more recently being used to help make the emerging projects
more attractive for private investors. This relates to the discussion of the knowledge gaps faced
by USOs (Knockaert, Spithoven, and Clarysse 2010) where lack of competencies seems to be
a stronger impediment to USO development than financial constraints (Rasmussen, Mosey, and
Wright 2011).
However, introducing demand-side initiatives is a more long-term strategy that encompasses
a wider range of initiatives, including ‘soft’ activities such as training, networking and cultural
changes. Therefore, engaging the universities and their TTOs seems to be a necessary focal point
if these government programmes are to succeed (Rasmussen 2008). Demand-side initiatives are
closely linked with non-financial initiatives to facilitate competency development in USOs, such
as university strategies (Rasmussen, Moen, and Gulbrandsen 2006; Siegel and Phan 2005) and
entrepreneurship education (Rasmussen and Sørheim 2006).
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676 E. Rasmussen and R. Sørheim
5.2. Implications for further research
The number of government initiatives aimed at bridging the funding gap for USOs is increasing,
and new experiences continue to create a need for further studies. First, a more comprehensive
review of initiatives could reveal more general information about best practices and comparisons
of different approaches. This task may prove difficult because national and regional differences
produce specialised instruments adapted to unique entrepreneurial culture, availability of private
funding, characteristics of the university system, and the organisation of public support.
Second, more knowledge is needed about how government support instruments influence the
development of USOs. Not only the support provided but also the way in which the support
is organised may impact the firm level (Falk 2007). Usually, USOs receive support via several
mechanisms. Longitudinal studies at firm-level are needed to key into these issues. Third, this
study revealed that many of the support programmes combine financial support with non-financial
assistance by providing technological, market, and organisational support. Thus, future studies
should go beyond financial support to also take into account other types of resources provided.
Finally, there is a need for better approaches to measure the performance of government support
programmes. All programmes in our study were struggling to find proper ways to meter and eval-
uate the outcome and impact of their operation. Although some metrics such as number of USOs
and revenue generated by these are commonly used, there seems to be frequent dissatisfaction with
these metrics (Gulbrandsen and Rasmussen 2012). The time lag between the provision of support
and USO growth is also a challenge for measuring performance, especially since many of the pro-
grammes in this study have a relative short history. A combination of quantitative and qualitative
approaches seems necessary to be able to capture the impact of government programmes.
6. Conclusion
We have looked at how government programmes are designed to fill the funding gap for USOs
and identified three main types of programmes. PoC programmes seek to lower the technological
uncertainty associated with university technologies. Pre-seed arrangements address the lack of
business and market competence in the university setting by supporting the development of busi-
ness cases and thereby reducing the organisational uncertainty of the USO projects. Seed funding
is set up to remedy the lack of funding for USO projects in the early stage by promoting funding
sources that accept a higher risk. From an investment perspective, PoC and pre-seed initiatives
are set up to cover the funding gap from the demand-side by making the projects more attractive
for private investors. In contrast, seed funding is a supply-side approach aimed at increasing the
supply of funding.
In all of our selected countries, there is a widespread recognition that a lack of seed capital
financing has been a major obstacle to the development of research-based ideas with growth
potential. Storey and Tether (1998) find few instruments with an explicit focus on new technology-
based firms (NTBFs) in the EU countries. This study reports a number of different government
initiatives to support USOs. Many of these instruments are rather young and specifically designed
for particular industries and needs throughout the USO venture-creation process.
The government programmes seem to have developed from mainly supporting the supply-side
by offering seed funding schemes toward more demand-side initiatives such as PoC and pre-
seed schemes. Therefore, the support programmes are increasingly taking into account the need
for the process of commercialising science-based technologies to span both organisational and
technological boundaries. Increasing the funding available for USOs is not enough; there is also
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How governments seek to bridge the financing gap for university spin-offs 677
a need for initiatives that provide the competencies necessary to make these projects ‘investor
ready’.
Notes on contributors
Einar Rasmussen is Senior Researcher at Bodø Graduate School of Business, Norway. He has been visiting scholar
at Nottingham University Business School, University of Strathclyde Business School and University of Twente. His
main area of research is academic entrepreneurship and university technology transfer. He has published in international
journals such as Research Policy, Journal of Management Studies, International Small Business Journal, European
Planning Studies, TASM, and Technovation.
Roger Sørheim holds a position as professor in technology management at Bodø Graduate School of Business and
Norwegian University of Science and Technology (NTNU). The primary focus of his research relates to early-stage
finance and commercialisation of technology. Sørheim has published in a number of peer reviewed journals, including;
Journal of Small Business Management, Venture Capital, Entrepreneurship and Regional Development, Family Business
Review, and Technovation.
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