Innovation study outlines essential conditions for development of high tech start-ups

October 7, 2003

Brussels, 06 Oct 2003

Highlighting the fact that research grants do not attract many growth-oriented companies, a study published by the European Commission on 'growth paths of technology-based companies in life sciences and information technology' outlines the provisions and conditions necessary for the founding of high tech start-ups.

The study was funded under the innovation section of the Fifth Framework Programme and carried out by an independent expert group. Among the key findings are that high tech start-ups in the life sciences and information technology industries are not a homogenous group of companies, but that their development is dependent upon a region's entrepreneurial climate.

The availability of pre-seed capital, incubation services and the development of an entrepreneurial community are all pre-conditions for the existence and success of start-ups, claims the study.

'In regions where high-tech start-ups are mushrooming and contributing significantly to economic growth, the three dimensions are very well developed. In those regions where few high-tech start-ups are found - despite the availability of technological research - the three dimensions are not developed at all,' states the paper.

Reliance on research grants, instead of pre-seed capital, is not sufficient, according to the study: '[research] funds do not require the start-up to pass the test of commercial reality. Instead, they often allow the start-up to continue its research-oriented activities. In short, R&D [research and development] grants do not attract growth-oriented companies.'

Pre-seed capital is now available in many countries and regions, although the study claims that 'exchange of experience tends to be limited and best practices do not exist yet.'

Incubation capacity is divided into two categories: physical incubation and technical incubation. A region must have the necessary infrastructure for housing high tech start-ups. However, this is not enough on its own, and should be complemented by technical incubation activities, such as patent scanning and incentive schemes for contract research.

The third dimension identified in the study as a typical feature of an entrepreneurial climate is the community dimension - 'the extent to which different actors in a region interact and learn from each other'. The establishment of a community often begins with small events such as breakfast sessions, bringing together members of research-based spin-offs in a particular region. More developed communities include representatives from large companies from the same industrial cluster, as spin-offs can learn a lot from such organisations.

The study also identifies three archetypal forms of start-up: technological small and medium sized enterprises (SMEs), prospectors (providing mainly consultancy or technical services to local customers), and venture capital-backed enterprises. The dominant type of start-up in a given region will depend on the entrepreneurial climate. For example, in entrepreneurially poor climates, technological SMEs tend to prevail, while venture capital-backed firms are a rarity.

The study provides a number of policy recommendations, including the provision of complementary sources of capital alongside research grants so as to encourage growth. The paper also suggests that regions seek to increase their potential in steps. 'Models that want to skip one of these steps and create a highly developed region from scratch usually fail,' warn the expert group. Finally, regions should also develop a model appropriate to the environment, and not seek to emulate 'ambitious, usually US-based models, which are founded on a rather limited degree of real hands-on experience.' Further information on is available from the following web address: http:///www.cordis.lu/innovation-policy/s tudies/gen_study10.htm

CORDIS RTD-NEWS / © European Communities

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