1 Introduction
Entrepreneurial exit is an important event in the life of a new venture, yet it remains relatively understudied (DeTienne,
2010). Exits, in the past, were often confused with failure and often grouped together irrespective of their intentions and/or outcomes (Headd,
2003; Jenkins & McKelvie,
2016). More recently, entrepreneurial exits are treated as a multi-level concept—encompassing both an entrepreneur’s exit from the venture as well as a new venture’s exit from an industry or market (DeTienne & Wennberg,
2016). Scholars have explored various modes of exits both conceptually (DeTienne,
2010) and empirically (Balcaen et al.,
2012;Headd,
2003 ; Wennberg et al.,
2010) leading to an increased understanding of the phenomenon, including the potential positive aspects of exit. Exits can be due to financial distress or for financial or emotional gain and there are many exit routes to achieving these ends (Headd,
2003; Wennberg et al.,
2010). Studies show that there are various strategies driving the exit decision—financial harvest, stewardship, and voluntary cessation (DeTienne et al.,
2015). Despite this progress, Wennberg and DeTienne (
2014) in their review of the exit literature assert that “it is surprising that there has been little qualitative work used to explore, challenge and build theory on exit” (p. 12). This indicates the need for a greater understanding of how various factors interact and lead to the exit event. In this paper, we take up this challenge.
Research-based spin-offs (RBSOs)—new ventures established to commercialize research from universities and research institutes—are important sources of new knowledge, knowledge-based employment, tax revenues and societal impact (Fini et al.,
2018; Shane,
2004). Still, the significance of RBSOs has been questioned because they tend to remain small firms (Criaco et al.,
2014; Salvador,
2011) with limited growth (Hayter,
2011; Wright et al.,
2006) and limited direct economic impact (Harrison & Leitch,
2010). RBSOs in general tend to have higher survival rates (Rothaermel & Thursby,
2005; Toole & Czarnitzki,
2007) and lower profitability than new technology-based firms (Bonardo et al.,
2010; Ensley & Hmieleski,
2005; Salvador,
2011), which may be due to the long and complex process needed to convert scientific inventions into profitable businesses (Fini et al.,
2018).
Despite great interest in the developmental patterns of RBSOs, one relatively common outcome for these firms is surprisingly under-investigated—exit via trade sale (for a recent exception, see Woolley,
2017). This lacuna is surprising as exit through trade sale is often the preferred option among entrepreneurs and investors in RBSOs (Mathisen & Rasmussen,
2019). Moreover, RBSOs are critically dependent on complementary assets and competencies to reach the market (Rasmussen et al.,
2011), suggesting that trade sales to industry incumbents is a mechanism to achieve further development and growth rather than a terminal outcome of the business. In addition to being largely overlooked by the RBSO literature, particularities such as long and complex development paths and innovative technologies, make the trade sale of RBSO particularly suited to study entrepreneurial exits.
To better understand the enablers of exit via trade sale of RBSOs, we particularly examine the factors enabling a successful exit event. We draw upon a comprehensive dataset using secondary archival and qualitative sources to document the development of the population of RBSOs in Norway, established between 1999 and 2011. We use this data to identify nine cases of trade sales and we conduct 52 semi-structured interviews to get in-depth insights into these nine exit events. This empirical approach is unique because such transactions are not visible in any registers and rich data concerning such transactions usually are confidential and difficult to obtain, especially for RBSOs acquired at an early stage of development.
Our study makes contributions to two key literatures within the field of entrepreneurship. First, our findings inform the entrepreneurial exit literature by explicating how the various dimensions, i.e., synergy potential, credible alternatives, and uncertainty reduction, influence the completion of an exit event (i.e., trade sale). We separate the potential for a trade sale from the likelihood of trade sale, thereby focusing on how different enablers have the potential to impact an eventual trade sale in different ways. While prior research has extensively examined the impact of exit and some of the factors that may lead to developing exit strategies (DeTienne et al.,
2015), there is limited work in regards to the enablers that lead to a successful exit. In doing so, our approach considers the bilateral nature of the dynamic relationships between the buyer and seller. This contrasts with the extant work adopting a singular perspective of exit (i.e., Botelho et al.,
2020; DeTienne & Cardon,
2012; Graebner & Eisenhardt,
2004; Wennberg et al.,
2010) or that focuses on the financial performance antecedents leading to exit (Balcaen et al.,
2012; Headd,
2003). Based upon our rich qualitative data, we are able to develop propositions outlining how synergy potential and credible alternatives influence the exit event, while uncertainty reduction comes into play only when the event has advanced to a potential trade sale and can influence the resulting exit. We believe this nuanced explanation of the exit enablers and the distinction between the potential for and the likelihood of a trade sale can advance the entrepreneurial exit literature.
Second, we contribute to the science commercialization and academic entrepreneurship literatures with a rare study of trade sales of RBSOs. To our knowledge, the only studies on RBSO trade sales have focused on RSBOs that have gone public (Bonardo et al.,
2010; Cattaneo et al.,
2015; Meoli et al.,
2013). This is notable as RBSOs typically exit at much earlier stages in their lifecycle where there is still founder control (Wright et al.,
2006). The involvement of universities and the commercialization of advanced technology that has taken multiple years to develop adds an important level of complexity to the understanding of exit (Fini et al.,
2018). In recent years, trade sales have become both more common and preferred even by VCs as a route to exit compared to an initial public offering (IPO) (Achleitner et al.,
2012; Clarysse et al.,
2013; Gerasymenko & Arthurs,
2014; Mason & Brown,
2013). In this study, we broaden the understanding of RBSOs by demonstrating how trade sales can act as a distinct event in a potential longer-term path towards commercialization and impacts of research (Fini et al.,
2018). Consequently, our findings pave the ground for future work on entrepreneurial exit and the development and impact of RBSOs.
5 Discussion and implications
Our study provides novel insights into exit through trade sale by RBSOs. As illustrated in Fig.
2, we identified three main dimensions that influenced the potential for and likeliness of RBSO trade sale. First, the synergy potential is a key enabler of trade sales. When synergies are expected to materialize in the combination of the two firms, either by the RBSO having scalable assets or the buyer having complementary resources, the potential for trade sale is higher. Second, the presence of credible alternatives, for both the RSBO and the potential buyers, will enable the trade sale. The trade sale is more likely to happen when buyers are highly motivated to complete the transaction because of few alternative options. Third, our analysis illustrates that to facilitate a trade sale RBSOs must reduce the uncertainty of their knowledge resources and transform them into firm level competencies and routines. More specifically, in the context of exit through trade sales, the idiosyncratic dyad of the firm and its buyer plays a critical role to enable the trade sales. In other words, there are important and dynamic mechanisms related to both the seller and the buyer that also takes into consideration the unique characteristics of the RBSO.
Our study makes contributions to two key literatures within entrepreneurship. First, our findings inform the entrepreneurial exit literature by explicating how various dimensions—synergy potential, credible alternatives, and uncertainty reduction—influence the potential for and likelihood of a particular type of exit–exit through trade sale. While prior research has extensively studied some components of entrepreneurial exit, with an emphasis on the financial performance antecedents of exit and modes of exit (Headd,
2003; Wennberg et al.,
2010), understanding the dynamics through which the buyer and seller interact and the conditions involved in at trade sale has been scant. We empirically derive propositions outlining how synergy potential and credible alternative influence the potential for an exit event, while uncertainty reduction makes the trade sale event more likely to happen. As a consequence, we begin to derive theoretical insights about the enablers that allow exit through trade sale to take place. To this end, we are able to examine more detailed aspects of an event that have been difficult to explore empirically, since the type of exit we study is considered private and access to data limited. This is one advantage of our qualitative approach. Our findings indicate that there are dimensions that influence the potential of the trade sale event and others that influence its likelihood of occurring. This further separation of dimensions that—when combined and potentially in sequence—lead to an eventual exit event advances our understanding of how exit through trade sale can be more deeply studied in the future. We detail this further in the future research section below.
Second, we contribute to the science commercialization and academic entrepreneurship literatures with a rare study of trade sales of early stage RBSOs. To our knowledge, the only studies on RBSO trade sales look at RSBOs that have already gone public (Bonardo et al.,
2010; Cattaneo et al.,
2015; Meoli et al.,
2013). This is surprising as RBSOs typically exit at much earlier stages in their lifecycle (Wright et al.,
2006). Furthermore, we broaden the current conceptualization of the organizational development of RBSOs by demonstrating how exit through trade sales can act as a distinct mechanism to help their development. We find that RBSOs can influence exit in significant ways to achieve a positive outcome for their firm. Particularly, we find that RBSOs can not only increase the potential of an exit possibility (using structured processes with advisors, attracting multiple buyers, keeping alternate financing options at hand), but also increase the likelihood of the exit event (reducing dependence on founders, gaining early customers and respected certifications) by their actions. Our separation of enablers of exit into possibility and likelihood provides important insights for RBSO founders, investors, as well as policymakers. RBSOs commercialize new technologies that make their development and performance long and uncertain. Exit through trade sales is an important exit mode for the realization of the technology’s impact. Considering the growing recognition of non-economic motives behind RBSO founding (Lam,
2011), our findings may explain some of the performance heterogeneity exhibited by RBSOs (Mathisen & Rasmussen,
2019). These insights increase our understanding of RBSO development paths, especially during their early stages, and lead to several implications.
6 Managerial and policy implications
Our findings provide several insights for practice. First, our study suggests that entrepreneurs can significantly influence exit through trade sale by taking specific actions such as: reducing the dependency on founders/key employees, having strong client/partner relationships, increasing early customer traction, and gaining technical certifications. For investors in early-stage new ventures seeking to exit their investments (Botelho et al.,
2020), these results point to the importance of strategically developing the venture to be an attractive acquisition target by established firms. Establishing partnerships with industrial firms at an early stage can be beneficial to RBSOs, but this can also restrict the opportunity of exit through trade sale by excluding potential options with other partners.
Second, for buyers interested in accessing the technologies and competencies of early stage new ventures, our results indicate that buyers can access such unique technology and know-how by engaging and networking with research environments. This will enable buyers to assess the quality of early stage privately held new ventures, which generally remains complex and elusive. The acquisition of RBSOs clearly depends on the dyadic interaction between buyer and seller, to first develop the potential for trade sale and then reduce the uncertainty to make it likely for the transaction to be completed.
Finally, since there is increasing pressure on universities and public research institutes to commercialize knowledge (Fini et al.,
2017), we also see value of our findings to policymakers and university administrators for better understanding how exit through trade sale, and the specific enablers of such transactions, can be used as a mechanism for achieving impact of research (Fini et al.,
2018). We are cautious as to not over-reach our implications for practice given our research methodology and focus on the enablers of the completion of an exit, rather than a focus on long-term shareholder value creation and societal impact.
7 Limitations and implications for future research
Our study has several limitations offering opportunities for future research. First, while our focus has been on the successful completion of a trade sale, we did not examine any other attempts for a trade sale that were not completed. In other words, we do not compare and contrast “successful” and “failed” attempts. To that end, adopting a comparative approach comparing successful and unsuccessful trade sales may add further insights into understanding entrepreneurial exit.
Second, our theoretical sampling was done in the context of a national population of RBSOs. Norway has a limited public market for small technology-based firms. RBSOs in other economies (e.g., Germany and the USA) may find IPOs—or other exit routes—a more realistic opportunity. How the structure of small-cap capital markets affects trade sales is a promising area for further research, especially in the context of RBSOs. Since IPOs and other modes of exit cannot achieve the same strategic synergies as a trade sale, research is needed to understand if there are different mechanisms leading to different types of exits, and whether the valuations and outcomes differ.
Third, most of the trade sales in our sample occurred when the target firms were in a relatively early stage of development. This is particularly important in the context of RBSOs that often grow comparatively slowly. However, it is unclear if our propositions will hold in trade sales comprising larger or more established technology-based firms. Although financial considerations clearly play a more central role in these circumstances, trade sales are rare and complex decisions where strategic factors are likely to play important roles (Zollo,
2009). As such, extending beyond our specific context may capture additional factors at play. For instance, further research should provide more nuanced perspectives on how strategic, social, and financial mechanisms interact in leveraging trade sale events. It may also be important to explore how the motivations of entrepreneurs and owners influence exit decisions during trade sale (Botelho et al.,
2020).
Fourth, although we identify trade sale as a successful exit event simply by being completed, we did not investigate what happens after the transaction is completed. Additional research is needed to understand how a trade sale affects the acquiring firm and its business activities, especially how factors determining exit affect post trade sale performance and integration. It may be interesting to explore if the factors that enable the completion of a trade sale have similar or different effects on long-term performance.
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