Denys G T Cooper

Canadian universities produce strong gazelles

By Dr Denys Cooper

Universities make multiple contributions to society, but in-depth studies of the socio-economics have been undertaken in only one of four main aspects. The leading two aspects for universities are educational leading to higher income graduates and new products and services in firms (and in turn these graduates will pay more in taxes). University consulting and technology transfer to established firms make significant contributions to wealth creation but these have not been quantified. However, university spin off firms, which are the most studied, provide the fourth level of socio economic activity, according to a new NRC study.

The National Research Council study defines a spin off as “A firm formed to commercialize university owned and/or university researcher’s technology”.

It is estimated that worldwide there are over 9,000 university spin off firms if one excludes Germany and Sweden where there are definitional differences to that defined above. Lord Sainsbury (2002 Toronto) claims that the UK with over 1,500 firms has the highest rate of spin offs per $100M research undertaken in the university. In terms of the overall economy, Canada has one of the highest levels of spin off firms — over 1,100 (Niosi 2004). Is this because there is no or low receptor capacity of established firms to receive their technology?

In Canada, the rate of formation of the spin off firms seems to have peaked at 60-70 firms per year.

The NRC study covers 800 university and hospital spin-off firms incorporated before June 1999. Statistics Canada surveyed university technology transfer offices to obtain 878 spin-offs in 2004 (Bordt).

COMPANY STATUS

There are various stages a firm goes through such as closure, survival, takeover, and going public on a stock exchange. Each spin off has been categorized into one of the four groups, but also whether they are slow growth or high growth firms – known as gazelles – which double their employment in a five-year period in the 1990s onwards to at least 20 employees.

A longitudinal study of growth of firms by Statistics Canada (Anderson and Bordt) with NRC-IRAP (Guillemette and Cooper) in 2004, covered 1.1 million firms, and found over 16,000 gazelles. From 1995 to 2000, the disappearance rate of firms was 50%.

University spin offs have an unusually high resilience level. In the NRC study, only 112 closures are reported (14%) over the lifetime span where the majority of the firms are over 13 years old. Statistics Canada found 9% (2001), which rises to 21% if one adds in the inactive firms. Similar low levels of closures, over multi years, are also seen with university spin-off firms in France and Holland, each at 25%, and 37% in the US. So far only one university gazelle in Canada has closed.

However, there is a significant number of slow/low growth university spin-off firms - 31% (i.e. five or fewer employees five years after incorporation). At the other end of firm performance, for all types of firms, the 10-year StatsCan data study had 1- 4% of high growth gazelles. For all firms, the US had 1-9%, and Sweden 12%. Canadian university spin offs at 19% have the highest rate in the world for a sub group.

If university technology is so hot, one might expect to see considerable takeover activity and/or firms going public. So far there have been only 89 takeovers, most of which occurred in the past five years. There are 18 foreign takeovers, mostly by US based companies. Up to 2000, only three of the firms had moved out of Canada but they soon closed down. More recently, there seem to be more cross-border crossings, which will result in loss of jobs in Canada. However, Canada probably has the highest rate in the world of spin-off firms on a stock exchange — initially 93 firms had gone onto one or more stock exchanges, in Canada or on NASDAQ in the US. Currently, 11 have been taken over or closed (6).

SOCIO ECONOMIC IMPACT

The jobs and sales status was known for 585 firms (473 ongoing firms and 112 closures). For 2004, these were known/estimated to account for 29,900 jobs and $6.1 billion sales. Recently, the rate of sales increase is higher than for jobs. This is an indication of maturity that firms are moving from a research-driven activity to commercialization. This will become even more evident as the biotechnology firms move into sales.

Gazelle firms — both public and private — represent the vast majority of the jobs and sales at 73% and 77% respectively, with public firms contributing the most.

Over the past 30 years there has been a dramatic drop in the time that a spin-off firm takes to get onto a public stock exchange. In the 1970s and 1980’s, a firm, typically in the mechanical or chemical fields, would take 15-20 years from the date of incorporation, before it could raise an Initial Public Offering (IPO). By the late 1990s, knowledge-based economy firms, such as software, electronics and biotechnology spin off firms, took only 2-5 years to an IPO.

To meet the shorter time frame, there are key implications for the university and/or research founder. The firm must have strong science and business advisory boards to meet the needs of external scrutiny by investors. But most importantly, the founders must accept the reality of stock ownership dilution. After a low level of IPO activity for two years, things are picking up for the end of 2005. It certainly has helped access by having easier stock exchange regulations and lower costs to launch an IPO.

ANALYSIS

From the Stats Canada study of firm growth, we know in which cities and sectors gazelles are found. But we still know little about the characteristics or human dimensions of who or what are the drivers of gazelles. A number of parameters such as education level, number of universities, research grants, or venture capital used in the community show no significant correlation with university gazelles.

But we do know that, with support from NRC’s IRAP program, university spin offs grow faster in jobs and sales, get taken over more frequently, and produce more gazelles. Further, 12 of the 20 largest gazelle firms are still being led by the original inventor or at least for the first 20 years of the firm. So who says that a researcher cannot grow a firm!

Denys G T Cooper is senior advisor on technology and international with the National Research Council’s Industrial Research Assistance Program — IRAP