Resources and Signalling to attract Venture Capital: University Spin-Outs in the UK

Abstract

This study explores why some university spin-outs (USOs) are able to attract first venture capital (VC) investment. Furthermore, factors including first VC investment are associated with USO’s superior firm performance. The resource-based view (RBV) of the firm is replicated and extended with signalling theory. VC firms (supply-side seeking to reduce uncertainty and information asymmetry problems request positive ‘signals’ from entrepreneurs and firms (demand-side). Entrepreneurs can provide such ‘signals of quality’ relating to their own as well as their firms’ resources. Hypotheses were derived accordingly.
This is the first nationwide study using cross-sectional data from British USOs on a firm and founder level related to attracting first VC investment and firm performance. A population of 505 British USOs founded between 1990 and 2007 that were still active in 2008 was identified. Founders of 125 USOs participated in an online survey (25% response rate). No response biases were detected. Secondary data sources provided information on financing and performance. Hypotheses were tested with regression techniques.
Key findings on the attraction of first VC investment support the joint framework of the RBV of the firm and signalling theory. The most prominent signals of quality were experienced and reputable founding teams (specific human capital), network links to VC investors (networks), firm-owned IP, patented IP (intellectual capital) and founders who were professor (general human capital). USOs with public backed equity (finance) avoided an ‘equity gap’ when seeking less than £500,000 of VC. USOs with radical innovation (intellectual capital) were less likely to attract generalist VC firms.
Key findings on factors related to superior firm performance suggest the importance of USO’s internal resources as implied by the RBV of the firm. Strategic alliances (networks) and USOs with VC investment reported superior firm performance. However, generalist VC firms performed better than industry specialists. VC investment reduced the direct influence of experienced and reputable founding teams (specific human capital) and founders who
were professors (general human capital) related to firm performance. Former important signals to attract first VC investment such as patented IP, firm-owned IP (intellectual capital) and public backed equity investments (finance) were not related to firm performance.
Best practices and recommendations on how USOs can overcome barriers to attracting first VC investment and achieve superior firm performance are made for several practitioner groups. Limitations and areas of future research are discussed.