Crash Course in Commercialization

As more universities start tech transfer offices to commercialize faculty research, they need to understand the risks as well as the rewards.
Crash Course in Commercialization

WHILE UNIVERSITIES have always been tremendous sources of knowledge and ideas, they haven’t always been equipped to turn faculty scholarship into practical inventions. But that’s been changing in recent years as more schools make it their goal to become launching pads for new companies built around faculty research. In the U.S., this trend started in 1980 when Congress passed the Bayh-Dole Act, which gave universities the right to commercialize any inventions that came out of federally funded research. At the time, only ten American universities had tech transfer offices (TTOs); today that number exceeds 100.

Even so, it’s only within the past five or ten years that a large number of universities have formally invested in startups as a way to get technology out the door—and they don’t always understand the
obstacles they might encounter.

Essentially, there are two ways a university can bring technology to the marketplace: It can license the research innovation to an established company like IBM or Pfizer, or it can form a startup company in which a faculty member typically partners with a businessperson to co-found the venture. Licensing the technology to another entity gives the university access to expertise and capital. But launching a startup brings a host of benefits: It creates more motivated inventors, it can offer a greater return on investment, it provides a means to develop immature technology, and it allows the university to burnish its reputation.

At the same time, founding and maintaining a thriving TTO can be a serious challenge for university administration—and for the business schools that are often deeply connected to the TTO. (See “State of Development.”) Potential pitfalls abound, and there’s always the risk of conflicts of interest. To succeed in this bustling new entrepreneurial space, universities need to understand how TTOs can help fledgling startups—and how to avoid potential problems.

CREATING THE TTO

Many components go into designing support programs that will increase the likelihood of creating successful startups through the university. Three elements are essential: access to capital, connections with outside entrepreneurs, and commitment from university leaders.

Access to capital. Any new business needs money, and inventions that are at the proof-of-concept stage need funding before they’re ready for direct investment. A TTO needs to develop close ties with venture capital firms that are willing to fund some of the opportunities. In addition, in recent years, some universities have been creating their own internal sources of capital. For instance, last year the University of North Carolina in Chapel Hill formed the US$10 million Carolina Research Venture Fund to invest in startups based at UNC. It will be managed by a local venture capital firm—and it will have a low bar for investment as a way to encourage more professors to work with the TTO.

Connections with the external startup community. Many TTOs are staffed with science PhDs or attorneys, but they also need the participation of local entrepreneurs—people who have managed, invested in, or evaluated startups. These outside experts will help TTO leaders decide whether a piece of technology deserves further funding, so they can give an informed “No” when an idea has no commercial value or the risk is too high. If an office can’t say no, it will suffer from what entrepreneurs call the peanut butter effect, where it spreads resources too thinly.

Commitment from university leaders. Bringing all these elements together requires a certain institutional will. It’s not enough for the staff in the TTO to be committed to entrepreneurship; support must come from the very top. The president or the chancellor has to buy into the idea that commercialization is good for everybody and that the university must follow the necessary steps to make it happen.

REMAINING REALISTIC

As mentioned above, a TTO offers a university a number of benefits, from bringing in new revenue to sparking an entrepreneurial spirit in faculty. But administrators must be realistic about both of those goals or they might squander some of their greatest opportunities. They should always keep two caveats in mind:

A TTO is not just a way for a university to get rich. There have been clear winners in the tech commercialization space, and everyone wants to be on that same train. But one of the biggest mistakes a university can make is to set up its TTO as a profit center. An administrator should never say to the TTO office, “We’re banking on the idea that every couple of years you’re going to receive some licensing revenue, and every five years you’re going to hit a home run.” That’s a fallacy. In reality, a TTO is a cost center where a university can make an investment and expect an outcome from the investment, but the actual revenue is just gravy.

The Carolina KickStart program was started at UNC seven years ago, and only last year did it have its first real success: securing US$18 million in Series A venture capital for a startup company that makes a drug to treat cystic fibrosis. Even so, it will be years before the university will see revenue either from the
sale of the product or through a company acquisition. But this is still a win for UNC, because without the university’s investment, that drug might have sat on a shelf for years and never gotten out the door. If the university can say, “We helped cure cystic fibrosis,” it shouldn’t care how much money it makes.

For that reason, a university should focus on rewards other than the monetary ones. A TTO enables faculty to push research projects farther than they ever could on their own. A TTO unlocks innovation.
If a school is lucky, a TTO brings in revenue, which the school then can invest in other components of its mission to train young minds. For instance, it might pour the money into scholarships for the wider university; it might keep the money at the TTO to provide proof-of-concept funding for future inventions. But revenue from the TTO shouldn’t be put into the budget as a source of income.

A TTO can attract top faculty—or drive them away
. Universities that have robust entrepreneurial cultures, complete with thriving TTOs, can attract young entrepreneurial faculty who have plenty of ideas. But many universities seem determined to squelch invention through their restrictive policies and
their insufficient support.

A TTO is not just a way for a university to get rich. One of the biggest mistakes a university can make is to set up its TTO as a profit center.

For instance, some schools don’t even consider intellectual property contributions when determining tenure and promotion. If a faculty member can say, “I brought a product to market” or “I raised $5 million for my new company,” shouldn’t that be at least as valuable as securing an NIH grant? But
in many places it’s not.

At other schools, faculty find the TTO too difficult to work with, or assignment of intellectual property rights too unfavorable, and they give up the notion of starting a company under university auspices. If they have developed the tech at the university, they have to work with the TTO to commercialize it—but
when the process is too unpleasant, some of them just surrender the chance altogether. They choose to publish their research and put it in the public domain rather than working through the TTO to commercialize it. And that represents a lost opportunity for everyone.

But a university that wants to create an attractive environment for entrepreneurial faculty can’t expect the TTO to do all the heavy lifting. The university itself must undertake a cultural change to show that it values the commercialization of intellectual property.

For instance, at UNC there’s been discussion about creating a one-year sabbatical that allows faculty to devote time to their startup companies. This could serve not only as a great motivator for existing faculty, but also as a real incentive for new faculty who are considering joining the school.

At Weill Cornell Medical Center in New York, a similar sabbatical program is in place. There, the center held a faculty position for a year for a neurosurgeon who spent the time working as a chief medical officer at a startup company. When he returned to the school, not only was his venture in much better shape to move forward, but he also had acquired a great deal of valuable experience. Such sabbaticals benefit the individual, the company, and the university.

AVOIDING MISTAKES

Even when universities stay realistic about the potential benefits of establishing entrepreneurial TTOs, they can encounter many obstacles. Two of the thorniest are dealing with intellectual property rights and managing conflicts of interest (COI).

Intellectual property. Many universities struggle with the details surrounding intellectual property and assigning rights to it. The interested parties in these discussions typically include the university, the TTO, the relevant department chair, and the inventors. All parties need to receive significant shares of the IP to motivate them to stay in the game. Perhaps the greater challenge is understanding that intellectual property is an investment that might not pay off on a year-by-year basis. The fact that universities work so differently from the way corporations work has tremendous impact on the tech transfer process. In industry, for example, most companies can wait to file for protection of intellectual property until their ideas are fairly well developed. This works to their advantage because once they file, they have a 20-year window of exclusivity; obviously, the longer they can delay the start of that window, the better.

But universities don’t always have the luxury of waiting. If a faculty member is writing about an idea, full disclosure will be made as soon as the article is published, so the professor has to file for IP protection before publication. And that’s often early in the lifecycle development of the technology, which means there’s a higher risk associated with the venture. The university has to be open to funding that level of risk.

One way for universities to mitigate this risk is to allocate about half of the money they now use to
fund patent budgets to conduct proof-of-validation experiments on new technologies. Then they can
invest twice as much money in the technology that looks most promising.

Business schools, particularly those with a focus on entrepreneurship, have natural synergies with TTOs, and they should find ways to strengthen connections.

Conflicts of interest. These fall into several categories. First there’s the conflict of commitment, in which a university tries to track where its faculty are spending their time. Are they giving enough hours to their teaching and service, or are they spending all their time on their startups?

But conflicts of interest go even deeper. For instance, in the medical research field, there are really three buckets. The most serious is the therapeutic space. If a professor has launched a startup that is taking a therapeutic drug into human clinical trials, he should not be involved in the trial because there’s a conflict between the scientific integrity of that trial and his or her financial outcome. That’s one where all the red flares go off, and most universities manage that quite well.

The next layer down would be in the student education realm, especially when doctoral students are working on tasks related to the startup. The university doesn’t want these students working on something that can’t be published because it’s proprietary to the company; being able to publish about their research is a critical way for them to build their careers. Faculty members must decide if they won’t involve doctoral students in their research or if they won’t publish the material.

The third type of potential conflict arises when the startup company has produced a product that the university wants to purchase or the professor wants to publish. This creates conflicts around purchasing and the financial connection between the faculty member, the product, and the ownership in that company.

The university needs to have some mechanism in place to promote transparency in these areas while managing existing conflicts of interest, potential conflicts of interest, and the appearance of conflicts of interest. And those conflicts should not just be managed, but managed well as the university positions
the TTO as a place where faculty and administrators come together to collaborate on ventures.

FOR THE WIN

Business schools, particularly those with a focus on entrepreneurship, have natural synergies with TTOs. To strengthen those connections, business schools should find multiple ways to engage with the TTO. For instance, they can call on their relationships with industry to facilitate the TTO’s interactions with the external entrepreneurial community. They can educate faculty from other colleges about how to be good partners with entrepreneurs. They can educate graduate students about the steps necessary for translating research into products and services, so that if these students become academics, they already will have a strong understanding of commercialization. Finally, they can help both faculty founders and entrepreneurs with the nuts and bolts of business, such as putting together a business plan, developing a go-to-market strategy, and raising funds.

Commercialization can be an exciting development in an academic setting. It tends to crystallize around successful individuals who inspire others to develop entrepreneurial spirits themselves. For universities, the key is to identify the entrepreneurial champions and shine a light on them so everyone else understands that commercialization is a game anyone can play.

Even so, commercialization is a team sport. Many pieces lie inside the institution and many lie outside, and they all have to come together. Many faculty who are trying to commercialize their ideas have significant knowledge gaps. They can fill those gaps by taking business courses or even pursuing MBAs—or they can work at universities that will partner with them in launching their ventures. When faculty bring their ideas to the university TTO, it sparks an exciting process of discovery in which inventors see just how far their ideas can go. When the TTO helps them launch successful companies, and when those companies bring exciting new products to market, everybody wins.

Don Rose is director of KickStart Venture Services in the Office of Commercialization and Economic Development and an adjunct professor of entrepreneurship in the Kenan-Flagler Business School at the University of North Carolina in Chapel Hill. Cam Patterson is chief operating officer at New York-Presbyterian Hospital/Weill Cornell Medical Center in New York City. They co-authored Research to Revenue: A Practical Guide to University Start-Ups, which was published earlier this year.