ETH Zurich spin-offs: survival and high returns
New book details economic impact of ETH Zurich spin-offs
ETH Zurich spin-offs create more jobs, have higher survival rates, attract more funding and provide higher returns on equity than the average of all Swiss start-ups, a recent study reveals. The study looked at 130 ETH Zurich spin-offs from 1998 to 2007.
For their MSc in Finance thesis at the London Business School, Alexander Schläpfer and Ingvi Oskarsson produced a study of spin-offs, concentrating on the economic impact and success of those created by ETH Zurich. The study’s results revealed that ETH Zurich spin-offs are more successful than other start-ups in Switzerland and highly beneficial to the local economy.
Economic impact
Between 1998 and 2007, ETH Zurich spun off 130 new companies. In 2007 alone 21 spin-offs were founded. It was a record year for ETH Zurich and one that put them on a level with Stanford University and MIT (Massachusetts Insti-tute of Technology) in the US where some of the best-known university spin-offs have been created. Within the period studied only 68 percent of university-created spin-offs in the US survived versus 88 percent of ETH Zurich spin-offs: 115 of the 130 ETH Zurich spin-offs are still active.
When compared to start-ups in Switzerland, ETH Zurich spin-offs not only dem-onstrated significantly higher survival rates, but a higher level of job creation as well. Company clusters, common among technology companies, may be the reason. More than seven new jobs were created by every ETH Zurich spin-off, resulting in a total of 918 positions - nearly twice what the average Swiss start-up creates. Altogether, ETH Zurich spin-offs created approximately 1500 direct and indirect jobs between 1998 to 2007. A good portion of the positions were for highly qualified personnel, as over forty percent of spin-off employees are ETH Zurich graduates.
Risk capital key growth factor
One of the central revelations of the Schläpfer and Oskarsson study was that ETH Zurich spin-offs grew faster, created more jobs, attracted 6 times more Venture Capital/Angel backing, generated higher returns, and demonstrated lower rates of failure compared to the average of all Swiss start-up companies. Venture Capital (VC) and Business Angel backing appear to be key factors for spin-off growth and value creation. Another revelation was the 37.5 percent pooled returns for Venture Capitalists and Business Angels who invested in a ‘hypothetical fund’ of ETH Zurich spin-offs. In the study’s ten year period, the returns were clearly higher than the top quartile of US and European VC funds and represent abnormal returns (Alpha) of 20 to 25 percent over expected VC investment returns in Switzerland.
Investment was an area of clear difference between spin-offs from leading uni-versities in the UK and those of ETH Zurich. Close to 60 percent of the UK spin-offs received VC / Business Angel backing versus 27 percent of ETH Zurich spin-offs. However, for ETH Zurich spin-offs that did receive backing, the amounts of investment raised were 20 percent higher than were those for the average UK spin-off.
Funding gap
Four major categories have in recent years emerged as most popular with Ven-ture Capitalists and Business Angels: Life Sciences, IT, Communications and Cleantech. Only 54 percent of ETH Zurich spin-offs find themselves in these mainstream areas, and could be a reason for their lower amounts of VC and Business Angel backing (27%), the study said.
Yet, another notable result of the study revealed a funding gap that is experi-enced by ETH Zurich spin-offs in the important initial seed stage. It took just under two years from a first round of financing through, for example, personal networks, for the spin-offs to obtain their first VC or Business Angel backing.
Professor Peter Chen, ETH Zurich Vice President Research and Corporate Re-lations said that “ETH Zurich’s spin-off success reflects an ongoing and funda-mental change in thinking that increasingly is entrepreneurial. We will continue to create and refine the conditions needed to found viable and competitive com-panies, and sharpen our focus on attracting more risk capital in the seed phase.”
Areas for improvement
For the spin-offs to be able to increase both their proportion of and ability to compete for investment funds, Schläpfer and Oskarsson suggest that ETH Zu-rich expand its international network of contacts and deepen relationships with Venture Capitalists and Business Angels who are interested in investing in the fields of ETH Zurich technologies. The authors also recommended educating spin-off founders as early as possible on the extent to which venture capital can have a beneficial effect on the future success of their spin-off. ETH Zurich itself is encouraged to continue its practice of taking equity stakes at the start-up stage of incorporation in exchange for part of the normal license fees.
Original publication: Oskarsson I., Schläpfer A., The performance of Spin-off companies at the Swiss Federal Institute of Technology Zurich. ETH transfer 2008.
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