An application of lemon theory to the case of university spin-offs

Julio Pombo-Romero, María Jesús Rodríguez-Gulías, David Rodeiro-Pazos


Purpose: Policies implemented by different government administrations to promote the transfer of research results have significantly increased the number of university spin-offs created and their survival rate. However, these companies are frequently perceived by investors as less market or commercial oriented than non-academic start-ups. This paper test this hypothesis and discusses in the framework of Akerlof ´s lemon market theory the implications of the evidence found for the growth, performance and capacity of attracting private investors to these companies.

Design: We analysed a sample of 20 USOs of the University of Santiago de Compostela, Spain, using their financial statements and the R&D grants received during their initial five years. We carried out an analysis of conglomerates to identify the market orientation of the USOs, and the moment when it is clearly developed.

Findings: Evidence shows that some of these companies appear to have been set up to provide continuity to research projects, rather than to exploit research results. In these companies most of the revenues are consistently mainly obtained by obtaining R&D public grants. This introduces "orientation risk" in addition to the common risks of start-ups in general.

Practical Implications: To solve this problem a series of measures used in other lemon market situations can be adapted to the university spin-offs issue. This includes the promotion of commercial activities over R&D grants and reducing agency problems between academic entrepreneurs and professional investors among others.

Original Value: We find that the market orientation of USOs cannot be identified in their earlier stages by conventional financial analysis and discuss the implications for attracting investors to these companies.

Keywords: lemon theory; university spin-offs; Akerlof; market orientation; agency problems

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