When do start-ups that exploit patented academic knowledge survive?

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Abstract

Researchers have generally suggested that new technology firms should exploit radical technologies with broad scope patents to compete with established firms, implying that new firms founded to exploit university inventions will be more likely to survive in all industries if they possess these attributes. However, the existing empirical evidence indicates that the effectiveness of these two dimensions of new firm strategy is contingent on the industry environment, specifically industry concentration. In this paper, we explain why this industry-specific relationship should exist and use a unique data set of new technology ventures originating at Massachusetts Institute of Technology to test our arguments.

Introduction

Universities have traditionally been considered an important source of new technology (Barker, 1985, Jaffe, 1989, Rosenberg and Nelson, 1994). For example, the Internet originated as an electronic discussion group for a community of physicists in Switzerland. Similarly, the ideas of nuclear fission and fusion were first discussed at Columbia University. Moreover, in recent years, the role of universities in commercial technology development has become even more important as partnerships with the private sector (Siegel et al., 2002, Siegel et al., 2003, Hall et al., 2003) and technology licensing (Thursby and Thursby, 2002), have grown.

One of the most important developments in university technology commercialization in recent years has been the significant rise in the creation of new companies as vehicles to exploit university inventions (DiGregorio and Shane, 2003, Feldman et al., 2003). In fact, many university technologies, from Genentech’s use of recombinant DNA to Lycos’ Internet search engine, have led to the creation of new technology companies (Zucker et al., 1998).

Despite the high profile of a few of the most successful of these university start-ups, many of them have not been very successful. This article seeks to explain why some new companies founded to commercialize patented university inventions survive when others do not. While many explanations have been offered for the differential survival of university start-ups, including the psychology of the founders (Roberts, 1991), their social ties (Shane and Stuart, 2002), or the university from which they come (Saxenian, 1990), no researchers have examined the effects of the technology exploited by the start-up on its survival.

Several researchers have found that the nature of a firm’s technology base influences its survival (Lerner, 1994, Tushman and Anderson, 1986, Henderson, 1993, Utterback, 1994, Christensen and Bower, 1996). However, these researchers have focused on explaining why established firms fail in the face of technological innovation, rather than on explaining why new firms survive entry. For example, Henderson (1993), in a study of the photolithographic industry, found that entrants are more successful than incumbents at exploiting radical new technology, while Tushman and Anderson (1986) found, across a range of industries, that competence-destroying new technologies tend to be exploited by new companies. In their study of the disk drive industry, Christensen and Bower (1996) found that established companies tend to be replaced by new companies when a new technology was not valuable to their mainstream customers. Nevertheless, it is entirely possible that the nature of firm’s technology base explains why established companies fail, without offering any explanation for why new companies might survive entry.

While the studies mentioned above do not directly test the factors that influence the survival of new technology firms, they do suggest the following argument: new technology firms are likely to survive if they exploit radical technologies that cannot be imitated in the founding period when a firm’s marketing and manufacturing assets are being established, thereby allowing the new firm to undermine the advantages that established firms have in pursuing incremental technologies (Merges and Nelson, 1990, Teece, 1986). Therefore, new firms founded to exploit university inventions should be more likely to survive if they exploit radical technologies with broad scope patents (Shane, 2001).

However, even casual observation of the empirical evidence on the survival of new technology companies suggests that the benefits of these attributes appear to be quite industry-specific. While the exploitation of radical inventions with broad scope patents appears to allow new firms to survive competition with established firms in some industries (Christensen and Bower, 1996, Foster, 1986, Romanelli, 1989), this strategy appears less effective in others (Gans and Stern, 2000, Teece, 1986).

We believe that industry differences in the effectiveness of a new firm strategy to exploit radical technology with broad scope patents can be explained by considering the nature of industry concentration. The survival of a new technology company requires the creation of the marketing and manufacturing assets necessary to exploit the technological opportunity, and the possession of a valuable technology that undermines the advantages of established firms and that can be protected against immediate imitation by others (Gans and Stern, 2003, Venkataraman, 1997). Holding the possession of a radical technology and broad scope patent protection constant, the concentration of an industry inhibits the survival of new firms by making it more difficult for their founders to create the marketing and manufacturing assets necessary to exploit the technological opportunity. As a result, even if the new firm possesses a radical technology that undermines the competence of established firms and broad scope patents that protect the technology, in concentrated industries, firm founders are often unable to create the set of assets necessary to serve customers in a way that allows the firm to survive (Teece, 1986).

We provide support for these arguments by conducting an empirical test of the survival of 128 new technology companies founded between 1980 and 1996 to exploit MIT-assigned inventions. Our results show that new firm survival is enhanced by radical technology and broad scope patent protection only in fragmented industries.

Section snippets

Radicalness of technology and industry concentration

The standard explanation for the effectiveness of a new firm strategy to exploit new technology is that the firm will be successful if it exploits a radical technology. Radical technology undermines the advantages that established firms have in making incremental improvements to technology, undermines firm competence, and turns existing customer relationships into liabilities rather than assets (Utterback, 1994, Christensen and Bower, 1996, Tushman and Anderson, 1986). However, this explanation

Scope of IP protection and industry concentration

New technology firms begin without any competitive advantages other than that embedded in their new technology itself. Yet, as we indicated above, to survive, new firms must develop manufacturing and marketing assets that are used in conjunction with their new technology. Therefore, to survive, the new firm uses intellectual property protection to defend the new technology against imitation until such time as its marketing and manufacturing assets can be put into place (Teece, 1986). Broad

Research methods

The data used for this paper were collected from the Technology Licensing Office (TLO) of the Massachusetts Institute of Technology. Like many other research universities, MIT often patents commercially useful inventions that are developed by their faculty, staff or students and that emerge from work making material use of MIT resources. The TLO’s objective is to commercialize MIT technology. Both established and start-up companies license MIT technology. Given our research question, we focused

Results

The descriptive statistics are reported in Table 1, while Table 2 reports the results from the event history analysis predicting firm survival.

Models 1 and 2 in Table 2 predict the hazard of firm failure as a function of concentration and technological radicalness and patent scope, respectively. These models indicate that overall new technology firms are less likely to fail if they exploit radical technology and have broad scope patents. Model 3 includes the interaction term between

Discussion

This article examined the interaction between radicalness of technology and patent scope and industry concentration on the likelihood of firm failure for university start-up companies. We examine a unique data set of 128 firms founded to commercialize technologies licensed from MIT between 1980 and 1996 and show that technological radicalness and patent scope reduce new firm failure only in the context of fragmented markets.

Acknowledgements

We thank Ajay Agrawal and John Scott for helpful comments on an earlier draft of this paper.

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