University-based accelerators (UBAs) were the main topic of the Public Policy Forum on Venture Capital and Innovation held in Quebec City. Ajay Agrawal, a Toronto University professor and co-founder of the Creative Destruction Lab, opened the session by asking: “Why do we have university-based accelerators?” After all, a university’s mission is the creation and dissemination of knowledge. Why would a university engage in building businesses? His answer: there is a type of market failure that impedes the migration of university inventions from academia to the economy.
The inability of inventors and entrepreneurs to develop the judgment needed to build their businesses is at the root of this problem. While their inventions are based on outstanding research, and the best among them have the skills and dedication to become entrepreneurs, they lack the judgment to set the priorities and milestones that will allow them to build their businesses. They run out of energy and capital. They fail because of bad choices.
Many teach judgment without necessarily having it. Those who do are the entrepreneurs who have succeeded in building thriving businesses. However, there is no efficient market for buyers and sellers of judgment to link those who have it with those who need it. In Silicon Valley, this market is very effective because many individuals who have judgment have also held liquidity events, have the capacity to invest and have become angel investors. Once they put capital in a business, incentives are aligned to transfer their judgment.
Creative Destruction Lab
Creative Destruction Lab was designed to address this type of market failure. It recruited seven of the most compelling entrepreneurs in Toronto – the G7 Fellows, individuals who have taken university prototypes to major liquidity events. The lab’s job is to transfer judgment to selected university-based entrepreneurs. It is particularly suited for early-stage, science-based technology companies, especially those with links to research conducted in the university setting. One of its cornerstones is its focus on business and technical milestones.
The G7 Fellows carefully identify milestones that increase the chances of success. The main objective of meetings taking place roughly every eight weeks over a nine-month period is to set new targets. Tenacious commitment to achieving them is of paramount importance for each venture admitted to the lab. Individuals who are not fully committed to achieving their goals are periodically weeded out during the programme, with fewer than half of those admitted in September still standing in June.
New tech ventures face three types of challenge:
- Technical risk – will it work at scale?
- Market risk – will customers buy the product?
- Entrepreneurial risk – can this person deliver?
The lab mainly addresses the third factor. Normally, halfway through the programme, either ventures have been dropped or a G7 mentor concludes that he has seen enough to become an investor. Incentives are then fully aligned for the transfer of judgment, sending out a strong positive signal to other investors inthe tech community that:
- A young entrepreneur has been identified by a seasoned one.
- That seasoned one has followed the entrepreneur for several months.
- He or she has become an anchor investor in the new venture.
The Bionym and OTI Lumionics stories, two companies that went through the lab, illustrate its role as an instrument for transferring judgment from seasoned to potential inventors or entrepreneurs. In both cases, university PhDs had developed disruptive technologies and were trying to license them without knowing what direction to take and how to interpret signals from the market and potential technology acquirers. Private, early meetings with G7 Fellows were pivotal and led the new entrepreneurs to change their business model and make choices that were subsequently funded by G7 Fellows and other investors, thus putting their companies on a fast track. These meetings were not one-time events, but critical moments in the development of a support relationship.
The lab relies on the G7 Fellows’ commitment, which involves an all-day meeting every five to six weeks in addition to half-hour bi-weekly sessions with entrepreneurs. These initial sessions develop into a relationship with some of the entrepreneurs. This process has yielded outstanding results, but none of it would have been possible without the lab’s initial screening and preparation of start ups for meetings as well as the establishment of the right process for sharing of experience and judgment.
Comparing with other models
Other UBA models were presented and discussed, specifically the Martin Trust Centre for MIT Entrepreneurship, the NYU Entrepreneurial Institute, and Ryerson’s Futures and Velocity (University of Waterloo). Although they may differ in many ways, they all aim at addressing failure for lack of judgment through training and mentoring and aiding university-based entrepreneurs to become investment-ready for experienced and specialised investors, mentors, business angels and venture capital (VC) funds. The accelerator team’s roles are to set up the process, attract and select entrepreneurs, identify mentors and facilitate the linking of entrepreneurs with mentors and funding sources.
An important question remains: what distinguishes UBAs from commercial accelerators? The former tend to address needs not easily served by the market. They provide university-based entrepreneurs – students, researchers, and faculty – with support at an earlier stage than would the commercial incubators, they leverage university resources and equipment and support entrepreneurship in deep science domains not normally served by commercial incubators, and they benefit from non-dilutive funding – philanthropy, university, governments and corporations. Moreover, the best UBAs complement commercial incubators as successful companies transition from UBAs to the likes of Y-Combinatorand Techstars.
Validation
Since university organisations are not usually adept at demonstrating whether an individual is a capable entrepreneuror has built a solid business, how would UBAs go about validating whether they are doing an adequate job? Proof lies in a company’s ability to access top commercial incubators such as Y-Combinator and Techstars or attract funding by recognised VC funds.
New York University (NYU) has proposed a comprehensive set of metrics to assess UBAs:
- How many start ups has the centre supported? Getting more entrepreneurs out of NYU is one of its primary objectives.
- How many teams transitioned to first-tier commercial accelerators?
- How many were funded by VCs?• How many jobs were created?
- How many students and faculty moved to NYU because it has a good commercialisation programme?
Now in its eighth year, the Public Policy Forum on Venture Capital and Innovation (PPF) has evolved into the premier gathering of public policy designers and industry leaders – general partners (fund managers), limited partners (investors in funds), academics and other experts – from all major economies responsible for encouraging high-potential entrepreneurship and venture capital. It is a by-invitation-only international platform that provides participants with an opportunity to exchange views, experiences and concerns regarding public policies in support of a buoyant venture capital ecosystem for financing emerging technology companies.