University Spinoffs and Wealth Creation
New Horizons in Entrepreneurship series
Chapter 11: The Financing of University Spinoffs
This chapter explains how the founders of university spinoffs acquire the capital that they need to exploit their new technologies. As the previous chapter explained, most university spinoffs need to engage in both technical and market development before they can sell new technology products or services. As a result, they need to finance the development of their companies. While the entrepreneur can provide this financing from his or her own savings, the cost of developing university spinoffs can reach many millions of dollars, making self-financing difficult for many entrepreneurs to undertake. As a result, in many cases, the entrepreneur acquires capital from external sources, including business angels, venture capitalists and government agencies. When the entrepreneur seeks capital from an external source, two important factors – uncertainty and information asymmetry – influence the process. The founders of university spinoffs often have much more information than other parties about the technical and market potential of their technologies, particularly at the very early stages when the companies are first founded. Moreover, the spinoffs that exploit these technologies face considerable uncertainty because no one knows for certain whether a market for them exists or if the technologies can be converted into commercializable products or services. Because of this uncertainty and information asymmetry, the financing of university spinoffs demands specific actions by entrepreneurs and their investors. The first section of the chapter explains the importance of capital acquisition for university spinoffs. The second discusses the financing gap that many spinoffs face, and explains why public sector funding...
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