Denys GT Cooper, consultant.

Canada excels in university spin off firms

By Dr Denys Cooper

Today there are nearly 1,400 University Spin-Offs (USOs), defined as firms created by universities and staff to commercialize their intellectual property. Canada outperforms even the world's biggest performer, the US, which has over 9,000 of the world's 24,000 such firms. As in the US and in most European countries, the vast majority of USOs are in high tech: life sciences (44%) and software / communications / electronics (28%), with few in the traditional manufacturing and resources sectors where there are more firms as potential receptors for university-based technology.

The number of USOs shows an exponential growth to 2005, then drops off but now appears to be picking up. This growth phenomenon has, for the first time, also been shown for spin offs in the US, Japan and Korea.

High Growth Firms - Gazelles in USOs

These firms were the focus of a previous article in RE$EARCH MONEY (R$, September 2/05). Gazelles are firms which double employment within five-years to at least 20 staff. Gazelles appear predominantly in the life sciences and software/communications/electronics sectors (61% and 26% respectively). In industry as a whole, gazelles represent about 1-4% of all firms. However, the 259 gazelles represent 19% of USOs in Canada. For firms with support from the National Research Council's Industrial Research Assistance Program (NRC-IRAP), the rate rises to 24%, and over 60% when both venture capital and stock exchange placements through an IPO are involved.

Socio Economic Impact of USOs

My longitudinal study covers over 30 years of data and provides for the first time an estimate of cumulated life time jobs at USOs of over 307,000 and more than $62 billion in sales. The annual figures for the latest year of 25,000 jobs and $9.2 billion sales in 410 USOs is understated because data is incomplete for some firms, especially those taken over but which still operate as Canadian subsidiaries.

The total number of current jobs is close to that of 2005, but the recorded sales are up by 50%. The current figures have held up quite well in spite of the downturn in the economy in the past few years. This is primarily because USO gazelles are fairly robust and do not project the fragility of the animal on the plains of Africa. Indeed only 20% of gazelles have closed.

Female Led USOs

The first national break out of USOs led by females (officers and technical managers) and university inventors/founders shows a steady increase from 5% of the total USOS in the 1970s to 11% in the 1990s and 17% today. (This is comparable to the ratio of funded female professors found in 2012 through a study by the Natural Sciences and Engineering Research Council (NSERC).

The lead firm, QLT Inc (a.k.a. Quadralogic) was founded by Dr Julia Levy, and has raised $454 million in capital, and has cumulated revenues of over $1.5 billion. Female led USOs have fewer gazelles at 13% and have significantly lower levels of capital raised through IPOs for a mean of $11.5 million compared with $29 million for all USOs. Of note, a higher percentage of female-led firms has gone public via Reverse Take Overs (RTO), hence have obtained lower levels of capital funding.

Serial Entrepreneurs

The first reference in university annual reports to serial entrepreneurs was in 2005 by the Univ of British Columbia which defined them as a researcher who has created two of more USOs. Today there are at least 85 such entrepreneurs in Canada covering 192 start-up firms. The Univ of Toronto with 22 serial entrepreneurs has 50 USOs followed by 16 UBC researchers with 43 USOs. UBC's Dr Lorne Whitehead and colleagues have created 6 USOs including TIR Systems with its novel light pipe system which was taken over in 2007 by Phillips of Holland for $75 million.

Are spin off firms being created too early or going public too soon? In a joint study in 2008 with Industry Canada's Youne Errounda, we reviewed 2,434 firms which had received $18 billion in VC funding. There was little difference in USOs in the survival and growth with other small firms. With the paucity of venture funds and few IPOs in the past five years, USOs have increasingly turned to strategic partnerships and/or gone public with an RTO. On average, IPO cases have much larger VC placements of funds. However, for IPOs in the US with 170 USOs compared with 88 USOs in Canada, there is a larger difference (3-4 fold) in financing levels (preliminary data from new study underway).

Up to 2005, there were 89 takeovers of USOs. Today, that has risen to 387 USOs. Indeed some have had multiple takeovers. Are gazelles targeted? Yes, with a higher proportion (primarily by US led parents in cases of market opportunity). Some 122 firms that were taken over had valuations of $11.5 billion including 71 life science firms such as ID Biomedical (vaccines for $1.2 billion), and Rimon/Enobia, ON in 2012 by US-based Alexion for $1.4 billion. CREO, BC was acquired in 2005 by Kodak for $980 million – that firm's leaders are now major VC investors in BC firms.

Lag Times

USOs have had a dramatic decrease over the past 30 years in the lag time from the date of incorporation to the first VC, going public via an IPO, takeover and even for closure. Also the lag times to reach certain jobs and sales levels have been dropping – even more dramatically so for gazelle firms. As a result, management of USOs must be prepared for significant changes. That said, of the 20 largest firms, 12 of them have been led by the founder.

University Student-Created Firms

This study was extended to include the first national attempt to look at firms started by undergraduates and those in postgraduate programs (60%) compared with 27% which formed a firm within one year after graduation. At 250 firms, the numbers are likely to be considerably understated.

NSERC and NRC support is gratefully acknowledged for parts of the study.

Denys GT Cooper is a consultant in Ottawa. He spent 37 years with the National Research Council's Industrial Research Assistance Program.