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Understandingtechnology

transfer

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Understanding technology transfer

Contents

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THE FOCUS ON TECHNOLOGYTRANSFER

Attention is increasingly focused onthe role of the universities in thecreation and commercialisation ofinnovation. People and passion arethe main ingredients of success.

Page 6

RESEARCH: PREREQUISITES FOR SUCCESS

Understanding the elements ofsuccessful transfer requires anunderstanding of the funding andstructure of university research.

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EMPOWERING RESEARCHERSAND UNIVERSITIES

For disclosure of an invention to leadto commercialisation, bothresearchers and universities must beincentivised.

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THE PATH TOCOMMERCIALISATION

More patents do not necessarilymean more licences and morerevenue. Could universities do abetter job of picking the winningtechnologies of tomorrow?

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THE ROLE OF VENTURE CAPITAL

From the perspective of most venturecapitalists, university inventions taketoo long to become viablecommercial propositions. There isbroad consensus on the need toexpand public seed-fundinginitiatives further.

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IN CONCLUSION

Universities cannot do it all. Theexpertise of outside professionalsshould be systematically leveraged.

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ACKNOWLEDGEMENTS

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PREFACE

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EXECUTIVE SUMMARY

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This report was prepared by Apax Partners with the help ofthe Economist Intelligence Unit. We would like to thankNick Valery, Dominic Ziegler, Daniel Franklin, AndrewPalmer and Mike Kenny of the Economist Intelligence Unit.

For their significant contributions to the report we wouldalso like to thank following people at Apax Partners:Christian Reitberger, Alexander Wong and Torsten Krumm.Siobhan Loftus and Clare Sillars produced the report.

Our thanks also go to a number of outside individuals andinstitutions for their time and insights. We wouldparticularly like to thank the following:

■ Stephen Allott, founder, Cambridge Computer Lab Ring

■ Scott Carter, Office of Technology Transfer, CaliforniaInstitute of Technology

■ Charles Irving, co-founder, Pond Ventures

■ Laurent Kott, VP for Technology Transfer, INRIA; CEO,INRIA-Transfert

■ Kenneth Morse, Managing Director, MITEntrepreneurship Center

■ Amnon Shashua, School of Engineering and ComputerScience, Hebrew University of Jerusalem

■ Dany Star, Intel Capital – Israel Innovation Center

■ Ajay Vohora, Policy Research Manager, Library House

■ Miranda Weston-Smith, Case Executive, CambridgeEnterprise

© 2005 Apax Partners Ltd/TheEconomist Intelligence Unit. All rightsreserved.

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Nothing in this publication is intended toconstitute an offer or solicitation to buyor sell investments of any description inany jurisdiction. Apax makes norepresentation that the information ormaterials in this publication areappropriate for use in all locations, orthat any investments or services whichare referred to in this publication areavailable in all jurisdictions, to everyone,or at all. You are responsible forcompliance with local laws or regulationsand for obtaining your own legal, tax andfinancial advice before entering into anytransaction.

All the information in this publication isverified to the best of the authors’ andpublisher’s ability, but we make norepresentation that it is accurate, reliableor complete. All such information andopinions are subject to change withoutnotice. You must in any event conductyour own due diligence andinvestigations rather than relying on anyof the information in this publication. Wecannot accept responsibility for lossarising from decisions based on thispublication. The investments or servicesreferred to in this publication may not besuitable for everyone. If you have anydoubts as to suitability, you should seekadvice from an investment adviser.

ACKNOWLEDGEMENTS

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The ability to innovate is widely recognised as acritical source of competitive advantage foreconomies. Universities are increasingly pivotalplayers in the process of innovation, and the past twodecades have seen the emergence of structuredmechanisms for transforming university inventionsinto commercial products and services. Thesemechanisms are critical elements of universitytechnology transfer, the process by which discoveriesmade on the laboratory bench are transformed intocommercial products, and the subject of intensivescrutiny by policymakers, academics, businesspeopleand the investment community.

This report aims to inspire a deeper understandingof this critical area by examining the enablers andhallmarks of best practice in technology transfer infive countries—France, Germany, Israel, the UK andthe US. As part of our research, we carried out asurvey of technology transfer offices at 16 of theworld’s leading universities into the factors, outsidethe university and within it, that drive successfultransfer. To compare their views against those of theinvestment community, we also conducted in-depthinterviews with a number of early-stage venturecapital firms. The institutions that participated in thesurvey are listed on this page and our thanks are dueto all respondents for their time and insights.

The report has five main sections. The firstassesses the intensifying focus on universities aswellsprings of innovation. The next three broadlyfollow the process of technology transfer, from initialresearch, through disclosure and patenting, tocommercialisation. The fifth chapter analyses thefinancing challenges that university technologytransfer poses and assesses the role of venture capitalin this process. A conclusion offers some finalreflections.

PREFACE

Survey: Participating institutions

UniversitiesBrunel University, UKCalifornia Institute of Technology, USCambridge University, UK Carnegie Mellon University, USDresden University of Technology, GermanyGeorgia Institute of Technology, USThe Hebrew University of Jerusalem, IsraelImperial College, London, UKMassachusetts Institute of Technology (MIT), US Oxford University, UKStanford University, USTechnion, Haifa, IsraelUCLA, USUniversität Stuttgart, GermanyUniversity College London, UKUniversity of Manchester Institute of Science andTechnology (UMIST), UK

Venture capital firms

Amadeus Capital Partners

Apax Partners

ARCH Venture Partners – Southwest

PolyTechnos Venture-Partners

Pond Venture Partners Ltd

Wellington Partners Venture Capital GmbH

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In a knowledge-based world, innovation is king.Everywhere you look, money from public as well asprivate coffers is being heaped on efforts to hastenthe innovation process along—in a bid to spur prof-

its, employment, regional development and nationalcompetitiveness.

In recent years, spurred by the experience of the USin particular, policymakers, enterprises, investors andacademics throughout the industrialised world havepaid increasing attention to the role of universities asdrivers of innovation. Ironically, the principal contribu-tion that universities make in this regard is often over-looked—whether attracting the entrepreneurs oftomorrow to study in a particular country or supplyingstart-ups and established companies with smart,problem-solving graduates, universities are criticalactors in importing, refining and supplying the humantalent upon which economies ultimately depend.

This report focuses on structured forms of technol-ogy transfer. Many universities have established for-mal offices and processes for identifying promisingdiscoveries made within their walls and turning theminto revenue streams through licensing or spinouts.

The results are not to be sneezed at. By 2000, USuniversity and college patents accounted for 2% of allUS utility patents granted and 4.4% of US corporate-owned utility patents, discernibly up on figures of0.5% and 1.1% respectively in the mid-1980s. Netlicensing income flowing to US universities toppedUS$1.3bn in fiscal year 2003. Other countries arecatching on: licensing income to UK universities grewby more than 20% in 2002.

University technology transfer is extremely difficult,however. Universities wield a competitive advantagein basic research, experimental work that has no par-ticular outcome in mind. The combination of technicaland commercial knowledge required to identify andnurture new discoveries into commercial products

demands a set of exceptional skills rarely found withinuniversities. The time required to take an embryonicinvention to market is longer than the lifespan of mostventure capital funds and there is a scarcity of privatefunding in this space. The experience of even the mostsuccessful and sophisticated US research universitiesis that technology transfer accounts for only a smallproportion of overall revenue and that very few tech-nologies deliver significant revenue.

Technology transfer has a better chance of success insome industries than others. Life sciences is one fieldthat is better aligned with university research activities,for example, thanks to its dependence on basic science,increasing reliance on out-of-house innovation andstructured development processes. But a sense of real-ism is necessary—technology transfer from universitiesis tough, expensive, constrained by environmental fac-tors, and likely to fail more often than succeed.

This report, imbued by this sense of realism, pointsto the issues that need to be adressed, by policymak-ers and universities, to improve the odds of technologytransfer success. Most underscore the importance ofpeople.

More specialist early-stage capital. There is a struc-tural financing gap at the heart of university technol-ogy transfer that is mainly bridged by governmentfunding mechanisms. Larger venture capital firms willcontinue to steer clear of this extremely high-riskinvestment area but there are a number of specialistinvestors active in identifying and exploiting universitydiscoveries. These investors are critical links in thefinancing food chain, as sources of knowledge as wellas money. Business angels are another vital source offinancing and expertise.

Better communication and networking. It is impracti-cal for even the very largest and richest universities to

EXECUTIVE SUMMARY

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hire the requisite commercial and technical skills thattechnology transfer entails. It is similarly unrealistic toexpect too many academic researchers to combine thetechnical and commercial skills that new venturesdemand. Our survey shows that leading institutionsmake concerted and conspicuous efforts to set upstructured networks and communication forumsthrough which they can draw on the advice andinsights of venture capitalists, industrialists, mentorsand alumni as they identify and progress discoverieswith genuine commercial potential.

Meaningful measurement. The success of technologytransfer is too often measured solely by absolute num-bers of patents, licences or spinouts. These metricscan encourage overly aggressive patenting and do notaccurately reflect the long-term commercial impact oftransfer activities. Internal incentives and externalfunding that reflect average licensing revenue or spin-

out survival rates and product sales will drive universi-ties to focus on the discoveries with true potential andhelp ensure that research in other areas can continueunimpeded by legal barriers.

University technology transfer is all about transform-ing the fruits of university research into commercialvalue. But it is worth noting that the other great mis-sion of universities, that of teaching, also has its partto play in this process. In countries where entrepre-neurial values are engrained, such as the US, busi-ness and innovation topics are widely taught. Inother countries, most graduates and academicresearchers lack such skills. If successful innovationdepends in part on cultural attributes, and if univer-sities are important channels for disseminating cul-tural values, they can do much themselves toimprove the wider context in which technologytransfer occurs.

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1THE FOCUS ON TECHNOLOGY TRANSFER o

Innovation accounts for more thanhalf of all economic growth indeveloped countries.

University technology transfer takesmany forms, primarily the annualmigration of university graduatesinto the wider commercial worldand the publication of researchfindings. There is increasing interestin structured processes fortransferring technology throughlicensing and spinouts.

US universities are the benchmarkfor the structured processes oftechnology transfer. Income fromthese activities has grown markedlyin recent years but the barriers tosuccess are still formidable.

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Until the late 1950s, when Robert Solow, aneconomist at the Massachusetts Institute ofTechnology (MIT), questioned the thesis, itwas widely held that the output of an econ-

omy–and hence its productive potential–rested uponjust two inputs: labour and capital. Solow won hisNobel prize for realising that there must be a missingingredient in the productivity brew to explain a post-war economic expansion in America, followed byEurope and Japan, that was over and above the levelsuggested merely by the sum of capital and labourinputs. This missing ingredient is now better under-stood to be the application of new technologicalknowledge–innovation.

Innovation is now reckoned by a whole new schoolof “growth” economists to account for more than halfof all economic growth in developed countries–andnowhere has this been better underlined than in thegrowth trajectory of the United States since the early1990s.

There is a growing interest in the role of the univer-sity in the alchemy of innovation.

Evidence from America, Japan, South Korea andIsrael shows convincingly that waves of technicallytrained young people—steeped in the latest theories,exposed to advanced research tools and experimentaltechniques, and honed by some of the smartest mindsin science and technology—do more for raising acountry’s industrial competitiveness than all the taxbreaks, development aid and government initiativesput together. This annual migration has long been atthe core of what universities are all about, and willlong remain so. It is so fundamental to what universi-ties do that it is often taken for granted.

In addition, universities transfer their discoveriesand inventions to the outside world by publishing sci-entific papers in academic journals. They impart newknowledge to the public via extension courses and edu-

cational programmes designed to keep outside profes-sionals abreast of the latest developments. In somecountries, academics are expected to work as indus-trial consultants during the summer break, transferringtheir findings in the process while gaining useful indus-trial experience to enrich their academic work.

Some of the most significant innovations in recentyears can be traced back to basic research in universi-ties or other public research institutions. ■ Stanford University and the University of California’s

Cohen/Boyer patent for the technique of recombi-nant DNA cloning, or gene-splicing, is said to be themost valuable and influential academic inventionever patented. Licensed use of the technology hasyielded products ranging from insulin treatments fordiabetes to growth hormone for children withgrowth deficiencies, and the invention is regardedas the midwife of the biotechnology industry.

■ University-led breakthroughs were central to theemergence of fibre optics. The development ofimaging bundles by separate groups of scientists atImperial College London and the Technical Univer-sity of Delft was a key stepping-stone to today’scommunications environment, in which more than80% of the world’s long-distance voice and datatraffic is carried over fibre-optic cables.

■ University research has also revolutionised agricul-ture by developing vaccines and treatments thathave eliminated or controlled plant and livestockdiseases. University researchers are heavilyinvolved in efforts to develop genetically modifiedfoods.

Defining technology transferThe focus of this report is on structured efforts torealise and capture the commercial value of suchbasic “blue-sky” research in universities. The formalprocess of technology transfer describes the process

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whereby new ideas embodied in academic inventionsand discoveries are transformed (“translated” is oftenthe word used) as they move from laboratory bench tothe commercial mainstream.

There are a number of routes to commercialisation: ■ Licensing. Licensing know-how to establishedfirms seeking to incorporate the technology into theproducts they sell is the most common practice.Licences can be exclusive, granting the sole right to asingle company in a single country, region or marketsector, or non-exclusive.

Exclusive licences are usually granted when inven-tions require significant private investment to reachthe marketplace or are so embryonic that exclusivity isnecessary to induce long-term investment.

Non-exclusive licences tend to be used where theunderlying technology is some form of enablingprocess or diagnostic method that is likely to beused widely in laboratories and workshops. Forinstance, if Stanford University and the University ofCalifornia at San Francisco had granted an exclusivelicence to the Cohen/Boyer patent to the first drugcompany that expressed an interest instead of offer-ing non-exclusive rights to all-comers, the worldwould have been a poorer place (not to mention thetwo universities). A more telling point is that, hadthat happened, biologists reckon internationalprogress in molecular biology, genetic engineering,drug design, gene therapy and forensic science

would have been set back as much as 15 years.■ Spinouts. A spinout can be defined as a start-upcompany whose formation is dependent on the intel-lectual property (IP) rights of the university and inwhich the university holds an equity stake. Often, butnot always, these firms are founded by the academicresearcher responsible for the invention.

Spinouts are riskier than licensing technology toestablished companies but they have the inestimableadvantage of bringing together a focused, passionateteam of researchers and business-minded managers.According to Robert Langer, the Kenneth J. Germe-shausen Professor of Chemical & Biomedical Engi-neering at MIT and a prolific inventor: “It never workswell with big companies. They focus their energy onshowing why the new technology won’t work. I alwaysprefer to start a new company: it will deliver totalfocus, energy, passion, and commitment.”

Importantly, the approaches of licensing and spin-outs are not mutually exclusive. MIT, one of the mostsuccessful transferers of technology in the world, forexample, regularly licenses inventions to spinouts inreturn for an equity stake in the company. That bothhelps the new firm by not hoovering cash out of theventure and aligns the interests of the universitysquarely with those of the entrepreneurs.

Almost all the respondents to our survey of technol-ogy transfer professionals stressed that a formulaic,rigid approach is inappropriate. First, the involvementof the inventor is the most important element. “If hewants to stay on at university, then you are very fool-ish to push for a start-up,” says Peter Hiscocks, ActingDirector of Cambridge Enterprise in the UK. A secondfactor is the nature of the innovation. If an “incremen-tal” one, licensing to an established company makesmore sense; if a “fundamental” one, the argument forsetting up a company is stronger. Third, the decisionshould take into account the level of concentration inthe market for which the technology is being consid-ered: if you have a clever new cashpoint machine, youdon’t found a new bank; you sell it to existing ones.

The growth of technology transferInterest in structured forms of technology transfer is onthe rise, largely thanks to the example of the UnitedStates. The Bayh-Dole Act of 1980 allowed US uni-versities not only to license their inventions and dis-

Numbers of US university patents

1969–86

1990

1995

2000

As % of total US utility patents

As % of US corporate-owned utility patents

Source: USPTO

0.5

1.1

1.3

3.3

1.9

4.3

2.0

4.4

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coveries, but also to grant exclusive licences to individ-ual firms. That was rarely possible when the intellec-tual property resulting from publicly funded researchwas owned by the government, as had been the casebefore. Companies that license university know-howhave to take a big gamble and commit considerableresources. One expert interviewed for this study esti-mated that US$1,000 worth of academic intellectualproperty (IP) needed between US$1m and US$10mof development effort to turn it into a usable product.Even then, there is no guarantee that the company willget its money back in the marketplace. It is the abilityto acquire exclusive rights to a new piece of technol-ogy that gives companies the confidence to make thekind of investment needed to bring a licensed inven-tion or discovery to market five or ten years hence.

The results have been striking. There has been asurge in the number of patents issued to US universi-ties: figures from the US Patent and Trademark Office(USPTO) show an increase from 250-350 new ones ayear before 1980 to more than 3,200 in 2001. Uni-versity patents still account for a small percentage ofoverall patents, but the proportion has grown percepti-bly over the past two decades.

Income to US universities from technology transferis substantial and growing. In its most recent annualsurvey, the Association of University Technology Man-agers (AUTM) in the US found that US universitiesincreased the number of licences and options exe-cuted by more than 20% between the 2001 and2003 fiscal years. The AUTM survey also showed thatoverall net income from licensing reached more thanUS$1.3bn in the 2003 fiscal year, up from just overUS$1bn in 2001. The US numbers dwarf those ofother countries, but growth in technology transferactivity is also striking elsewhere—UK universitiesreaped licensing income worth £22.4m (US$40m) in2002, an increase of 21% on the previous year, asthe levels of technology transfer activity, funding andstaffing grew.

Other governments elsewhere are sitting up and tak-ing notice. In 2004 Germany unveiled its High TechMasterplan, for example, whose elements include pro-grammes to promote university spinouts and toencourage collaborative research between small- andmedium-sized enterprises and public-sector researchbodies. In France, the government’s 2003 Plan for

Innovation also aims to strengthen links between pub-lic research bodies and private firms, in part by propos-ing tax credits for private seed investors.

Around the world, universities have adoptedbroadly similar approaches to technology transfer.Taking their lead from the early pioneers at Wisconsin,Massachusetts and California, they have built organi-sations that rely on these crucial steps—disclosure,patenting and commercialisation through licensing orspinouts.

Increasingly, responsibility for this process is beingcentralised in an office of technology transfer. Thenumber of such offices has reached nearly 300 in theUnited States, while 117 UK universities had staffdedicated to commercialisation activities in 2003.Israel’s six university technology transfer offices soundlow by comparison, but not when one considers thecountry has eight universities in total.

Top patenting organisations receiving US utility patents in 2004Number of patents

International Business Machines Corporation

Matsushita Electric Industrial Co., Ltd.

Canon Kabushiki Kaisha

Hewlett-Packard Development Company, L.P.

Micron Technology, Inc.

Samsung Electronics Co., Ltd.

Intel Corporation

Hitachi, Ltd.

Toshiba Corporation

Sony Corporation

University of California

California Institute of Technology

Massachusetts Institute of Technology

Source: USPTO

3248

1934

1805

1775

1760

1604

1601

1514

1311

1305

422

135

132

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Unravelling the processA sense of perspective on the part of government anduniversities alike is critical. Universities are not theengine-rooms of commercial innovation. The US uni-versity with the largest number of US patents in2004 was the University of California. Its tally of 422was almost eight times fewer than the 3,248 patentsracked up by IBM, the most prolific patenter thatyear. The contribution that technology transfer makesto universities’ overall income remains tiny—licensingequated to 4% of US university research spending in 2001.

Universities are vital components in innovationenvironments and it is right that more systematicefforts are made to unlock the commercial value thatexists within academic discoveries. But even in theUS, where the ecosystem that supports commercialinnovation is world-class and experience of universitytechnology transfer is far greater, the going is tough.

Organising technology transfer is neither cheap noreasy. The kind of IP generated by university professorsand researchers is usually in such an embryonic formas to be practically useless to anyone apart from otherscientists in similar fields. As a result, outsiders—andinvestors in particular—often need a good deal of con-vincing that a new technology, developed under therarefied conditions of a university laboratory, can bescaled up and made to work reliably in the commer-cial world.

Moreover, technology transfer does not take placein isolation. The national economic, regulatory andcultural environment, the internal university environ-ment and the availability of seed financing are all criti-cal determinants of, and challenges to, the transferprocess. In the following chapters we consider thehurdles, and solutions, that exist in technology trans-fer. Our natural starting-point is the structure andfunding of university research in general.

The technology transfer process

External environment: Taxation, culture and regulationsInternal environment: Culture, incentives and technology transfer support

Flow of moneyFlow of people

Research

Funding systemsR&D activityResearch institutions

Disclosure

Incentives to discloseOwnership of IP

Development

FinancingTechnology transfer office supportPatenting

Commercialisation

LicensingSpinoutMonitoring

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2RESEARCH: PREREQUISITES FOR SUCCESS

The amount of R&D beingconducted in the country as awhole, and within academia inparticular, is a determinant of theamount of technology that is likelyto be transferred.

Funding systems that rewardcollaboration with business shouldnot be at the expense of researchexcellence.

Universities wield a strongcompetitive advantage in multi-disciplinary, basic research, asindustries such as life sciencesclearly recognise.


The success of university technology transferdepends not only on processes within universi-ties but also on the external environment. Fac-tors such as the overall intensity of R&D

activity in the economy, the wealth and funding of uni-versities, and the structure of research systems set theframework within which technology transfer occurs.

Drivers of demand: The R&D environmentLow levels of R&D activity in the wider economy havean adverse impact on levels of demand and fundingfor new products and services sourced from academia.Universities are less likely to develop and transfer newtechnologies if companies, governments and investorsare not seeking to finance and acquire them.

In R&D activity, as in so many areas, the US wieldsdisproportionate punch. Overall R&D expenditure inthe United States alone accounted for roughly 44% ofall OECD member countries’ combined R&D invest-ments in 2000. More money was spent on R&D activ-ities in the United States in 2000 than in the rest ofthe G7 countries (Canada, France, Germany, Italy,Japan and the UK) combined.

Although universities actually account for a smallerproportion of total R&D in the US than is the case inthe UK, Israel, France and Germany, the absoluteamounts of money flowing into the system are vastlyhigher. With this volume of cash flowing into the sys-tem, much of it into life sciences, scale alone is amajor factor in explaining the relative success of UStechnology transfer.

US universities can further top up this bounty withtheir huge endowment funds. Of research and devel-opment undertaken in US colleges and universities in2000, 58.2% was funded by the federal government,7.3% by state and local government, 7.2% by indus-try, and 19.7% (some US$6bn) from the institutions’own funds. Research by the Sutton Trust, a UK edu-

cation charity, in 2003 showed that 39 US universi-ties have an endowment of more than US$1bn; thatonly five UK universities have endowments worth atleast £100m, compared with 207 US universities;and that the average top 500 US university has about15 times the endowment of the average top 100 UKuniversity.

Wealth brings multiple advantages, from quality ofresearch infrastructure to the quantity of projects beingundertaken and, critically, to the remuneration of indi-vidual researchers. Gaping disparities in pay scales (a2002 study showed that average academic pay atpurchasing power parity stood at £21,800 in the UK,£24,800 in Germany, £34,500 in France and£56,100 in the US) help explain why more than 20%of science and engineering doctorate holdersemployed at US universities and colleges are foreign-born. It stands to reason that any university systemthat is able to attract the best researchers will producebetter research.

Academic employment of US science and engineering doctorate holders% of foreign-born doctorate holders

Source: National Science Foundation, 2004

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11

12

13

14

15

16

17

18

19

20

21

22

1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001

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1 “Bio2010:TransformingUndergraduateEducation for FutureResearch Biologists”,Committee onUndergraduate BiologyEducation to PrepareResearch Scientists forthe 21st Century,National ResearchCouncil, 2003

The funding of university researchSheer quantities of cash are important to the volumeof research that gets done, but the methods by whichfunds are allocated are also critical in determiningwhether that research can be commercialised.

Funding mechanisms that pay particular attentionto multi-disciplinary research are likely to be moresuccessful in this regard. Modern healthcare research,for instance, demands not only intense knowledge ofgenetics, chemical engineering and medicine, but alsothe development of information technology tools thatenable rapid sifting and interpretation of vast amountsof data. Similarly, creating neural computer systemsrequires the combined efforts of computer scientists,psychologists, engineers and linguists.

Funding mechanisms should take multi-disciplinarity into account. The seven UK ResearchCouncils that hand out project grants to universities,for example, stand accused of focusing on their ownareas of specialisation and neglecting the multi-disci-plinary research that increasingly matters to business.

The importance of multi-disciplinary research issomething for curriculum designers to think about aswell as grant bodies—a National Research Councilpanel in the United States issued a 2003 report1 call-ing for undergraduate biology education to incorporate

mathematics, physics, chemistry, computer scienceand engineering until “interdisciplinary thinking andwork become second nature”.

The extent to which funding is concentrated on a rel-atively small number of world-class research universitiesalso has ramifications for technology transfer. A concen-trated approach is sensible in promoting and sustainingcentres of excellence, and enables the lucky few to com-pete for the best talent more effectively.

But there are trade-offs, given research into theimportance of the physical proximity of research insti-tutions to small and medium-sized enterprises (SMEs).Technology transfer to the SME sector is likelier to hap-pen via local higher education institutions, where rela-tionships are easier, and cheaper, to form andmaintain. Research in the UK shows that firms whosemarkets are primarily local choose to work with localuniversities almost all of the time. With this in mind,the 2003 Lambert Review of University-Business Col-laboration in the UK recommended the establishmentof a modest new stream of university funding specifi-cally aimed at business-relevant research, designed toreward less glamorous institutions with a strong trackrecord in co-operating with the private sector.

Even so, simple economics suggest that not everyuniversity should have its own transfer infrastructure.In the UK, a 1998 National Health Service report esti-mated that R&D expenditure of £20m per year is nec-essary to cover the costs of a technology transferprofessional office. Fewer than 25% of UK universitieswould meet this threshold, yet 80% are now trying torun their own operations. Developing shared servicesbetween universities in certain areas of technologytransfer, such as market research and licensing nego-tiation, is an obvious way for smaller institutions toovercome problems of scale.

Back to basicsTying funding aggressively to commercialisation activitywould carry another, more fundamental risk: that of dis-tracting universities’ resources and energy away fromthe field of basic research. With teaching duties at aminimum and unfettered by the commercial impera-tives of the business world or the strategic missions ofnational laboratories, researchers at leading universitiesare generally free—as they are nowhere else—to pursuepure, as opposed to applied, research. Universities

R&D activity US$m, 2000/01

% of R&D performed within higher education

Germany

France

UK

US

Germany

France

UK

US

Total R&D expenditureR&D performed within higher education

Source: US National Science Foundation, 2004

64,424

10,333

38,693

7,255

31,579

6,561

273,565

33,295

16.0

18.8

20.0

12.2

15


would doubtless strive to make more money from tech-nology transfer if their funding was more closely linkedto commercialisation, but at what cost to the nature ofuniversities as a whole?

Universities in some countries do not necessarily playa leading role in research at all. Some 80% of France’spublic research budget is devoted to organisations suchas the basic research agency CNRS, the medical agencyINSERM and the CEA atomic energy commission; amere 5% or so goes to university research. In Germany,too, public research institutes are substantial recipientsof public funding, with the Max-Planck-Gesellschaft(MPG), a non-profit society conducting basic researchvia its own network of 81 institutes, and the Fraunhofer-Gesellschaft (FhG), a society focusing on appliedresearch and working closely with industry, being two ofthe biggest research networks. Current annual researchincome for Fraunhofer Institutes is in excess of €1bn,with two-thirds coming from research contracts and one-third from the federal and Länder (state) governments.

From a technology transfer perspective, does itreally matter whether universities or other publicresearch institutes conduct research? After all, theFrench and German systems confer benefits of spe-

cialisation, and Germany’s in particular endowsresearch initiatives with regional strength in depth.But there are indeed drawbacks.

■ Compared with Israel’s extremely centralised sys-tem, for example, Germany’s layers of research net-works encourage a confusing proliferation of fundingmechanisms.

■ Any system that creates a structural dividebetween basic and applied research is likely to minimisethe amount of contact between basic researchers andindustry: it is noticeable that the majority of our surveyrespondents tend to draw on the informal contacts ofresearchers to find potential investors.

■ The energy and creativity inherent in an environ-ment that mixes teaching and research and studentsand academics is also lost, as are potentially usefullonger-term relationships. As one respondent to our sur-vey observed: “Most faculty have trained students andpost-docs who are now in industry and those contactsare invaluable to the process of transferring technology.”

The importance of networking to technology trans-fer is a topic to which we return later in this report, butfirst we examine the incentives for researchers anduniversities to participate in this field.

The challenges posed by university technol-ogy transfer are immense, but they do varyin scale between industries. The field of lifesciences, for example, has some inherentcharacteristics that increase the odds of suc-cessful university technology transfer:

■ Basic research. The industries that investthe most in basic research are those whosenew products and services are most directlylinked to advances in science and engineer-ing, such as the pharmaceutical industry andthe scientific R&D services industry. Themajority of expenditure for academic R&D in2001 went to the life sciences, whichaccounted for 59% of all academic R&Dexpenditure. Growth in US academic patentshas occurred primarily in life sciences andbiotechnology; the technology area that hasexperienced the fastest growth—chemistry,molecular biology and microbiology—increased its share from 8% to 21% betweenthe early 1980s and 2001.

■ R&D activity. Although big pharmaceuti-cal companies wield enormous R&D budg-

ets, their success rate in developingapproved products has dipped—the num-ber of new medicines approved by the USFood and Drug Administration (FDA) in2003 was about half that approved in1996. As a result, big pharma’s pipeline ofnew products is drying up. Its emergingresponse is to turn to outside sources tosupply new drugs and drug-discovery tech-niques. The structure of innovation in lifesciences is increasingly geared towards thelicensing or acquisition of out-of-houseinventions.

■ Structured processes. Drug developmentis not a quick process—the average timebetween initial discovery and marketingapproval is estimated at almost 15 years—but it is a well-trodden one. The steps thatneed to be taken to bring a new drug to mar-ket are transparent and well understood,which means that technology transferoffices have a better idea of the context inwhich to present discoveries to investors. Inother fields, such as IT, there is no agreedroadmap from discovery to market, which

makes it harder for offices to structurefinancing and commercialisation processes.

It’s worth noting that the US has some spe-cific advantages in the field of life sciencesR&D, and pharmaceuticals in particular.According to research from the Boston Con-sulting Group, the US accounted for 60% ofthe industry’s global profits of US$121bn in2002. Since the large majority of drugdevelopment costs—such as clinical tri-als—are incurred once the initial stagedevelopment is complete and need to beconducted in the drug’s key prospectivemarkets, drug companies are understand-ably keen to concentrate much of their R&Dactivity in the US.

Just as important are the clusters of sci-entific, investment and commercial expert-ise that exist in specific places such asBoston and the San Francisco Bay Area.The decision by Novartis to move its R&DHQ from Switzerland to Massachusetts, forinstance, was in large part driven by thequality and quantity of scientific talent inthe Boston area.

The life sciences advantage

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3EMPOWERING RESEARCHERS AND UNIVERSITIES

Handing ownership of the IP ininventions to the university andgiving universities freedom tonegotiate exclusive licences hasbeen the cornerstone of successfultechnology transfer in the US andelsewhere.

Ensuring the active involvement ofthe researcher in the technologytransfer process is critical.Universities should enable andencourage researchers to participatein commercialisation by permittingsabbaticals and offering generousroyalty and equity terms.

Entrepreneurialism is in large part acultural attribute. Universities cando their bit to encourage itsdevelopment by routinely teachingbusiness skills to science studentsand faculty members.

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Broadly speaking, commercialisation of newtechnologies is not the primary objective ofacademics or of universities. In order for insti-tutions and researchers to invest time and

resources into technology transfer, they need to beappropriately incentivised. It helps, of course, if entre-preneurial values run through the institution and thewider economy too.

Incentivising universities: The lessons of Bayh-Dole The puzzle of how to motivate universities to engage intechnology transfer has largely been solved, thanks toa piece of US legislation known as the Bayh-Dole Act.

Before the passage of the Bayh-Dole Act in 1980,few governments bothered to spell out whether thegovernment owned the commercial rights topatentable inventions generated under publicly sup-ported research, or whether the rights were to be leftwith the contracting university or even the actualresearcher. The inevitable result was that there was ahodgepodge of patent policies everywhere.

In the US, for instance, each of the 26 federalagencies that funded academic research had its ownset of IP rules. Making ownership of any potentialintellectual property even more complicated, fundingfrom different grant-giving agencies was often co-mingled. The result was such a nightmare for firmstrying to negotiate rights to a piece of government-sponsored research that few bothered.

In simply transferring the ownership of the intellec-tual property embodied in research done at taxpayers’expense from the government agency funding thework to the institution and researchers doing it, theBayh-Dole legislation gave universities, national labo-ratories and individual scientists working for them apowerful incentive to see their work commercialised.It also enabled universities to assign exclusivelicences to new technology, smoothing negotiations

with industry and investors. The results have been striking. University patents

have surged since the passage of Bayh-Dole. Roughly250-350 patents were granted to US universities annu-ally in the 1970s; that number had risen to over 3,000per year at the start of this decade.

The Bayh-Dole Act is not wholly responsible for thisrise in US patenting activity. Other factors, includingthe rise of research-intensive industries such asbiotechnology and the strengthening patent regimes,have also played their part. But the fact that the uni-versities automatically had title to any inventionsmade with government funds clearly unleashed a newwave of commercialisation.

The act also gave universities the impetus to hireprofessional licensing staff and establish technologytransfer offices for marketing their intellectual property.Channelling the commercialisation of IP at a universitythrough a single office helps speed and clarify theprocess. As Lita Nelsen, head of the technology trans-fer office at MIT, arguably America’s most successfulresearch institution, says: “I think a specific office withclear authority of IP is critical. Only then can the organ-isation learn and improve. Too much dispersion ofresponsibility leads to confusion on the part of indus-try, and makes it impossible for the organisation tolearn and grow from its experience.”

In the years since the legislation went into effect,the Association of University Technology Managers(AUTM) has swollen from 50 to more than 3,000members. “The Bayh-Dole Act was the most criticallegislation to enable universities to establish technol-ogy transfer offices,” says Sally Hines, an administra-tor at Stanford University.

Bayh-Dole is not immune from criticisms, somemore telling than others. Social critics ask why con-sumers should pay twice (first, as taxes used for aca-demic research and, second, as purchase prices) for

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new drugs, devices or other products that originated ingovernment-supported laboratories. But the benefits ofthe Bayh-Dole reforms in America have made it clearthat there is an even greater cost to the public if inven-tions and discoveries, made at the taxpayer’s expense,remain on the shelf. When research ideas are turnedinto economically useful and often life-saving goodsthat would not have existed otherwise, the taxpayingpublic is still a net beneficiary, even after paying acommercial price for the product.

More of a concern is some evidence to suggest thatthe desire to patent and license new technologies mayrisk delays in the publication of research results. A1997 survey of over 2000 US life sciences facultymembers showed that 20% of them delayed publica-tion of results for at least six months, and half of thisnumber did so with an eye on protecting patentabil-ity2. Given that other research has shown that R&Dmanagers regard publications, conferences and otherinformal channels of communication as more impor-tant outlets for knowledge transfer than patents andlicences, the potentially adverse impact of increasedpatenting warrants further study3.

Replicating the provisions of the Bayh-Dole Act out-side the US may not be appropriate for more country-specific reasons. To take one example, the legislationdid away with the distinction between research grants(for a researcher’s investigations in general) andresearch contracts (for a piece of targeted research).As a result, US universities automatically own the IPin any joint research with industry that receives federalfunds. In the UK, where IP can end up resting witheither party depending on negotiations, introducingsuch a provision would arguably risk disrupting exist-ing collaboration with industry more than it would fos-ter new innovation.

But the Bayh-Dole Act’s success in encouraging tech-nology transfer by creating clarity of ownership in IPholds fundamental lessons for all countries and hashelped trigger upheavals in industrial policy internation-ally. IP rights are being reassigned not just from govern-ments to institutions, but from researchers to institutionsas well—for example, Germany abolished the “profes-sor’s privilege”, the right of university professors to ownintellectual property generated by university-fundedresearch, in 2002. In the UK, only Cambridge Univer-sity, which is re-evaluating its position, still hands IP

rights to its faculty under certain circumstances. InIsrael, inventions belong to employers by law; in France,institutions normally, though not always, retain title.

Not all countries are heading in this direction: Italyawarded IP ownership to researchers in 2001, forinstance, and Sweden continues to grant researcherssole title to their inventions. But the presumption thatinstitutions are likely to be more efficient interlocutorswith business and investors, will have lower transac-tion costs, and offer greater legal security to investorsthan individual academics is a sensible one.

Incentivising the individualUniversities should drive the process but the chancesof licensing success or spinout survival are greatlydiminished without the vigorous participation of theinventor. The mantra of venture capitalists the worldover is that they invest in people, not technology.Miranda Weston-Smith of Cambridge Enterprise in theUK says that the best technology transfer happens“when the chemistry between company and academicworks well”.

At universities, in particular, the new technology isusually “raw”: that is to say, it needs a lot more workbefore it is commercially applicable, and, along theway, the use to which the technology is put maychange significantly. Several early applications mightbe tried but be ruled out until the best one is found.This search process is badly hobbled in the absence ofthe original inventor who understands best the possi-ble applications of his or her technology. “Many inno-vations”, says Jonathan Page of Imperial CollegeInnovations, “are of a ‘platform’ nature. That is to say,they are not developed, linear fashion, into a specificproduct. Rather, they are innovations with a numberof applications. It often takes a long dialogue withindustry and with market researchers to reach theright application.”

Academics, of course, go into academia to conductresearch rather than get rich. Involvement in a spinout,in particular, is not an obviously appealing prospect formany career academics. According to the AmericanAssociation of University Professors, the average age forreceiving a PhD is 33 and the average age for gainingtenure in the US is 40. The years in between requireacademics to knuckle down hard in order to attaintenure. As one technology transfer executive puts it, why

2 “Withholding ResearchResults in Academic LifeScience: Evidence from aNational Survey ofFaculty”, Journal of theAmerican MedicalAssociation, Blumenthalet al, 1997

3 “Links and Impacts:The Influence of PublicResearch on IndustrialR&D”, ManagementScience, Cohen et al,2002

19


give up the prospect of promotion or tenure in favour ofa spinout, with all its attendant risks? After tenure isgiven, the allure of the spinout looks shakier still. Butuniversities can motivate researchers at all levels to par-ticipate actively in commercialisation activities.

■ Provide support, not red tape. “At the level of work-ing relations with our staff,” says Ami Lowenstein atthe Technion in Haifa, “we aim to give innovators areal service, and not just be a burden to them whenthey want to apply for a patent. The worker is boundby his contract to disclose a potential patent to theadministration. But if the technology transfer office isjust another burden in the way of the inventor goingand selling his idea, then he will do everything in hispower to evade it.” Most of the university administra-tors we surveyed agree that it is sensible to have prac-tical guidelines and forms available, and to conductregular training seminars to show academic staff howto make a formal disclosure.

■ Tie commercialisation to career development. Pro-gressive universities make sure that researchers getthe message that disclosure is not only part of theirjob, but can also advance their career considerably. Insome institutions, the number of potential patents thatan academic has disclosed to the university authoritiescan be more important than the number of researchpapers he or she may have had published when itcomes to being awarded a chair, made head ofdepartment, or granted tenure.

■ Allocate revenue and equity fairly. Another criticalimperative is to ensure that the inventor gets a mean-ingful cut of possible future revenue from licensing, ora fair equity stake in any spinout. Some universities goas far as sharing licensing revenues and royaltiesequally with the inventor, although in most cases theuniversity gets the bulk. At Carnegie Mellon Universityin the US, for example, half of the university’s netincome from technology transfer is shared with theresearchers (unless they choose to take executive posi-tions with a spinout company).

■ Enable researchers to carve out sufficient time fortheir inventions. In more forward-thinking universities,faculty members are allowed to take leaves of

absence to form new companies without fear of losingtheir university positions.

■ Consider establishing incubators. Increasingly,incubators take the physical form of space on campusgiven to fledgling companies, inventions or even, inthe words of Amnon Shashua, head of the School ofEngineering and Computer Science at the HebrewUniversity of Jerusalem, a person “with a piece ofpaper and a bright idea”. Usually, seed money (publicand private, more of which later) is needed to bringinventions to the prototype stage. Sometimes, space isalso given to local venture capitalists or businessangels alongside university start-ups. “There is nothingbetter”, says one technology transfer office head,“than for inventors and investors to pass each other’sdoor each day, or chat over a cup of coffee.”

The entrepreneurial societyThe incentives that motivate researchers to participatein commercial activity are not all in the gift of universi-ties, of course. The most perfectly designed universitytechnology transfer processes will come to nothing ifthe wider environment is not supportive of entrepre-neurs (for a broader discussion of these themes, pleasesee our previous report, The Double Helix).

Taxation regimes act as one powerful incentive toentrepreneurial activity, for example. Technologytransfer professionals in the UK reported an abruptfall-off in spinout activity in the wake of tax rules intro-duced in 2003—since hastily repealed—wherebyacademics risked being charged income tax on anyshares they own in spinout companies, even if thosecompanies were not yet producing cash. Previouslythey were only charged capital gains tax on any profitsthey made when they sold their shares.

Issues of culture are also critical. According to ScottCarter at California Institute of Technology’s Office ofTechnology Transfer: “A cultural willingness to takerisks and accept the inevitable failures supports tech-nology transfer efforts in the US. Foreign-born entre-preneurs in the US often remark at the relative lack ofstigma for entrepreneurial failure.” To reinforce hisview, a recent Eurobarometer opinion poll showedthat 44% of timid-minded Europeans agreed that “oneshould not start a business when there was a risk offailure” against just 29% in the US.

20


Changing culture is a notoriously elusive goal. Butas well as the substantive actions described above,universities have a vital role to play in achieving thisobjective through the teaching of business and entre-preneurial skills. As so often, US universities areahead of the game in this regard. Kenneth Morse,Managing Director of the MIT Entrepreneurship Cen-ter, outlines a “mosaic of activities” designed to instilland encourage entrepreneurialism, among themplacements of graduate students in high-tech start-ups; mentoring services for entrepreneurs; and mostcelebrated of all, the MIT $50K EntrepreneurshipCompetition, whose 16 years have spawned over 60

companies with a combined value of US$10.5bn. Europe, by contrast, has far further to go. A 1999

survey of PhD students by the UK’s Engineering andPhysical Sciences Research Council (ESPRC) showedthat, whereas more than 60% of respondents thoughtthat training in innovation and entrepreneurship wouldbe valuable, fewer than 20% expected to receive suchtraining from their universities. One venture capitalistin Germany points out that science and engineeringstudents there graduate without any business orfinance skills, and urges universities to educate stu-dents on commercial basics, such as writing businessplans and analysing market potential.

The importance of people to successful technology trans-fer is not disputed. But many argue that the biggest contri-bution that universities can make to economicdevelopment is not the transfer of lab technology into thecommercial mainstream, but the transfer of people.

Stephen Allott, founder of the Cambridge ComputerLab Ring, the association of Cambridge computing gradu-ates, and former president of Micromuse, has coined theterm “people flow” to describe three ways in which univer-sities shape, supply and mingle the human capital thatcreates wealth:

■ Importing and retaining entrepreneurs. Universities areoften the means of attracting people from overseas—usu-ally postgraduates—who will go on to become tomorrow’ssuccessful entrepreneurs. Whether these people end upfounding companies based on university IP or not is lessimportant than the fact that universities lure exceptionalpeople who will create significant wealth later in theircareers. Awarding scholarships on the basis of entrepre-neurial aptitude, awarding bursaries to entrepreneurially-

minded postgraduates, and marketing on the basis ofentrepreneurial values are all approaches that universitiescan take to compete in this market.

■ Supplying start-ups with talent. Entrepreneurs whofound start-ups often locate their companies close to theiralma mater and employ technical graduates from the uni-versity.

■ Supplying industry with research skills. The applicationof existing research to known business problems is a surerroute to successful R&D activity than the development ofnew technologies. The overall flow of graduates from uni-versities into the employment market is most importantnot because of the new technologies they have discoveredor will discover, but because such people are capable oflooking up scientific research in their field—whether con-ducted locally or worldwide, contemporaneously or in thepast—to solve valuable customer problems. “PhD gradu-ates provide a science-on-demand service when employedin industry,” says Mr Allott.

The power of people

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4THE PATH TO COMMERCIALISATION

Technology transfer success shouldnot be measured solely in quantitiesof patents filed, or even licencesnegotiated or spinouts launched.Actual commercial success is atruer test of technology transfer.

The range of skills required to pickthe technologies with the greatestcommercial potential is daunting.The best universities draw onnetworks of investors, alumni andindustry professionals to leverageexternal expertise.

Many technology transfer officesstand accused of having unrealisticcommercial expectations. A strategyof seeking to maximise revenueimpedes the development of repeatbusiness and (often more lucrative)sponsored research.

23


In the previous chapter, we saw how the passage ofthe Bayh-Dole Act triggered a surge in patentingactivities at US universities. As universities in othercountries also seek to beef up their technology

transfer processes, similar spikes in patent applica-tions can be expected.

The reason is not hard to fathom. Every dean orprovost now lives in hope that the next disclosure tocome through the door will be another “recombinantDNA”. Over its lifetime, the recombinant DNA patent(which expired in December 1997 and ceased gener-ating income the following year) returned no less thanUS$225m to the co-inventors and their respectiveinstitutions, Stanford University and the University ofCalifornia at San Francisco.

Patents cost money and do not necessarily deliverrevenue, however. A truer test of successful technologytransfer is the amount of money generated throughlicensing and spinouts. And the evidence suggests thatonly a very small proportion of technologies accountsfor the bulk of US universities’ transfer revenue.

■ The 2003 AUTM survey found that just 1.4% ofall licences generating revenue for US universities andother research institutions yielded more than US$1min income in fiscal year 2003. The average universityinvention that makes it successfully through thelicensing process to become a commercial product orprocess earns the university and its inventor theprincely sum of US$120,000 over the course of itslifetime.

■ Yale University reviewed its 850 invention dis-closures from 1982 through 1996. One percent (10of 850) of total disclosures led to 70% of US$20.4mreceived, and 4% (33 of 850) of disclosuresaccounted for 90% of the total licensing income.Almost nine out of ten disclosures (748 out of 850)generated less than US$10,000 each, the approxi-mate cost for processing one invention disclosure.

■ Despite its blockbuster success with the recom-binant DNA patent, even Stanford is an illuminatingexample of the hit-and-miss nature of technologytransfer. Only eight of the 2,000 or so patents thatStanford has managed to license over the years havegenerated more than US$5m. Fortunately, there weremore than 30 others that earned in excess of US$1mapiece

Some universities have higher hit-rates. ColumbiaUniversity, for example, was granted a comparativelymodest average of only 34 patents per year from1994 to 1998 but scored highly in terms of overalllicensing revenue. If universities focused more timeand resources on fewer, higher-potential technologies,could they create more value?

A more selective approach does pose practicalproblems. Technology transfer offices are wary ofapplying criteria that discourage researchers frombringing their inventions forward in the first place.Maybe so, but if researchers thought a successful dis-closure genuinely signified a good chance of commer-cial reward, they might be more incentivised todisclose.

Others point out that the time and expense ofassessing and identifying inventions with real com-mercial potential may outweigh the costs of filingpatent applications on the marginal ones as well.Picking winners isn’t easy, certainly, but the processcan at least be smoothed if universities can tap inter-nal and external expertise.

Leveraging internal and external expertiseA rare blend of skills is needed to identify and nurtureacademic inventions into commercial products.Almost all of the technology transfer officers we sur-veyed pointed to the lack of managerial and commer-cial skills within universities as a fundamentalchallenge. The “rawness” of university technology

24


argues for the ability to spot potential discoveries:nothing worse than to have what later proves to be awinner slip through your fingers—it has happened fartoo often. Protecting IP needs special legal skills.Licensing requires a keen sense of market awareness,deep technological understanding and good negotiat-ing skills. Creating spinouts requires knowledge of,and links with, investors (business angels and venturecapitalists) and experience in business formation.

The trouble is, anyone with all or any of these skillscan earn several multiples of a university salary inbusiness or venture capital. A 2003 survey of licens-ing executives in the US and Canada showed amedian base salary across all industries ofUS$127,500, some US$30,000 more than themedian salary for public-sector licensing professionals.Licensing executives in pharmaceutical and medicalproducts—key areas of academic research, remem-ber—earn even more.

Many top technology transfer executives arerecruited at a later stage in their career, at a point

when they can afford to take a salary cut in return forrewarding work. “I gave up a lot of salary,” says one,“but my kids are grown up, and I could afford to. How-ever, now I’m getting a lot of calls from headhunters.So I know my staff are too.” The lesson is that univer-sities are going to need to invest a lot more in theirtransfer operation, including paying more to hire theright skills. What that means in practice is that gov-ernment funding aimed at the facilitation of technologytransfer will need to be focused on attracting bettertalent.

There is another view. Some venture capitalistsargue that universities miss the point when they“package” new, raw technology in an attempt to makeit more marketable. Technology at universities is usu-ally so “raw”, so untried, that to dress nascent compa-nies up with business plans is, in the words of CharlesIrving, co-founder of Pond Ventures, a specialist early-stage technology investor, “to dress babies up in Sav-ile Row suits, when all we want is to see them inswaddling clothes”.

What the venture capitalists who hold this viewwant of universities is simply the chance to be able totake a good look at the new technology and then todeal directly with its inventors. For such investors, ahyperactive office of technology transfer is usually nota help, but a hindrance; and business plans for younguniversity companies with no revenue are not worththe paper they are written on.

The kind of environment that suits the venturecapitalist like Mr Irving is found in very few, luckyplaces, however. He would perhaps recognise it atMIT, where the technology transfer office chieflyinvests in patents (it gets more than one disclosure aday from academics) and puts innovators in touchwith business.

But such a hands-off approach lends itself most toan environment where an outstanding and highlyentrepreneurial research body sits close to a geograph-ical hinterland rich in entrepreneurs and tech-savvycompanies (such as Stanford University and SiliconValley, or MIT and Boston). “We are blessed thatKendall Square and Route 128 are a giant incubator,”says Kenneth Morse of the MIT Entrepreneurship Cen-ter. Not all universities have this hinterland of risk-taking venture capitalists to spot and invest inearly-stage technologies.

Licensing executives compensation, 2003Median base salary by industry sector, US and Canada, US$

Public sector (incl universities)

Transportation

Energy/chemicals

Consumer products

Computer software

Telecommunications

High technology

Electronics

Computer hardware

Biotechnology

Pharmaceuticals

Medical products

Multimedia

Source: Licensing Executives Society, 2003

97,500

97,500

112,500

112,500

112,500

127,500

127,500

127,500

127,500

127,500

142,500

142,500

187,500

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Relationships, not money Greater interaction with investors would help addressone vocal criticism voiced in our survey—denied withequal vehemence by many universities, it should benoted—that universities hold out for unrealisticrewards for their new and usually untested technology.Again and again, financiers say that universities over-rate the commercial value of their discoveries.

There are risks when universities sell too low, ofcourse. Researchers may be less incentivised to com-mercialise innovation. So, too, the office of technologytransfer itself. And it is only with the external valida-tion of funding on competitive terms that a project canbe taken seriously by all involved.

But one of the worst, rather than best, practices inrunning a technology transfer operation is to seek tomaximise licensing revenue. It is noticeable that themost experienced universities settle for a (sometimesmuch) lower cut than the less experienced ones: 2-3%of revenue from licensing, for instance, compared withdemands of up to 10% of revenue from others.

The important thing for universities to focus on isnot to make pots of money, but to get their technologyout into the world. And that means not haggling,according to MIT’s Ms Nelsen. “We realise that ourlicensing terms have to be quite ‘gentle’, in recognitionthat our technologies are very early.” The developmentof an agreed technology licensing framework thatembraces “standard” contract terms is one way ofsimplifying negotiations.

Says the head of the office of technology transfer atanother American university: “We recognise that inmost cases a start-up company will have few cashreserves, and so we try to make deals that provide a

fair return to the university while leaving flexibility forattracting future investors; these deals usually haveboth an equity and a royalty component to them, butrequire little or nothing in the way of up-front pay-ments from the new company.”

Fostering relationships is more important than max-imising revenue. Monitoring and feedback—the key tomanaging the licensee relationship—are crucial parts ofthe whole technology transfer process. Unfortunately,few universities pay anything like as much attention asthey should to monitoring how a piece of their licensedtechnology is progressing in the customer’s plant.

It is in the university’s own interest to ensure that alicensed invention is successfully commercialised, andthat the company involved makes money out of theventure. If a piece of licensed technology runs intounforeseen difficulties as it is being scaled up for pro-duction, the university needs to be ready to renegoti-ate the licensing fee—and even offer to undertakeadditional laboratory work for free to get the projectback on track.

Doing so is the surest way of nurturing friendly rela-tionships that can lead not only to repeat licensingfees, but also to direct contributions to the university’sresearch budget and facilities. Encouraging industry toinvest money—in the form of grants that support a sci-entist’s research in general, rather than for specifiedpieces of development work—is one of the best,although often ignored, reasons for engaging in tech-nology transfer. Says one technology transfer executiveof a large US research university: “We take in US$3min licensing a year and US$330m in research grantsand contracts. We’d be foolish to lose research forlicensing.”

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5THE ROLE OF VENTURE CAPITAL

The lack of seed funding ofembryonic inventions is a keybarrier in technology transfer.

There is an equity gap that only afew specialist investors andbusiness angels can bridge,although innovative models aregradually emerging to unlockventure capital.

Leading universities neverthelessrecognise the worth of developingrelationships with venturecapitalists as a source of advice andexpertise.

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On the face of it, technology transfer ought tobe fertile ground for venture capitalists.Universities have an asset (innovation) thatcan be translated into desirable and some-

times ground-breaking products, while venture capi-talists have the money and, just as importantly, thebusiness, managerial and marketing expertise todefine the need for such products and to bring themto market. But the gaps between universities andinvestors in high-tech spinouts are not easily bridged.

Professor Shashua at the Hebrew University ofJerusalem says of universities and venture capitalists:“Our goals are contradictory. Venture capitalists areonly interested in the short-term gain on an investment.It fundamentally contradicts the aim of a university.”

The equity gapUniversities face severe structural problems in access-ing venture capital funding to help technology spinoutspast their very earliest phases. “Good ideas,” saysJonathan Page of Imperial College Innovations in Lon-don, “are going to the wall because of a well-docu-mented lack of money; or if they don’t fail, they takeforever to get going.”

The reasons are both cyclical and structural. Thecyclical reasons relate to the lingering effects of thetechnology bust of 2000, which has seen privateequity firms move even more of their activity to later-stage investment activity, such as management buy-outs. Data for the UK show that only 3% of totalprivate equity investment was invested at the start-upstage in 2001, and only a further 5% in other early-stage investments.

Far more important in explaining the relative lack ofventure capital funding of university technology transferactivities, however, is the structural disconnectbetween universities and venture capitalists—namely,the fact that university technologies require financing at

their embryonic stages which venture capitalists are notwilling or able to give. Almost all respondents to oursurvey pointed to the lack of seed funding of embryonicinventions as a key barrier in technology transfer. Thereasons for this funding shortfall, which is known as theequity gap, are twofold:

■ The time gap. Universities’ technologies are newand raw and a clear exit strategy is a long way off.According to the AUTM, much university technology inthe US gets licensed at a point when it is seven ormore years from being embodied in a marketableproduct. A typical venture-capital fund is open for tenyears, but the pressure is on to be fully invested in thefirst three or four years. That leaves insufficient timefor the tech company to prove itself in the market tothe point where it can be sold or floated in a way thatreturns can be redistributed to fundholders.

■ The finance gap. There is a point beneath which itis not worthwhile for venture capital firms to investmoney. High transaction costs, related to due dili-gence of the investee company, as well as ongoingrunning costs related to management of the company,reduce the viability of smaller venture capital invest-ments. Whereas many venture capital companiesdraw the line at investments of US$1m or below, uni-versity technologies typically require smaller amountsof money to reach proof-of-concept and prototypestages of development.

What is more, even when funds do take the risk ofearly-stage investments, in return for the prospect ofhigher returns, they all too often get heavily dilutedby second-stage investors, if they are not prepared toput up pro-rata amounts of fresh capital. Becausemany business angels and smaller venture-capitalfunds making early-stage investments have got“washed out” in this way in recent years, they have

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proven unwilling to return. Investing in the earlystage, says one UK technology transfer official, “is avery horrid place to be.”

Correcting market failureThere are some specialist seed investors focusing onvery early-stage technologies, such as Pond Ven-tures in the UK and Arch Venture Partners in the US,but they are thin on the ground. “I have sympathyfor technology transfer offices,” says Mr Irving ofPond Ventures. “There aren’t many qualifiedinvestors like us.”

Since venture capitalists can’t supply it in sufficientquantities, universities have a grave need for othersources of early-stage funding. Occasionally, universi-ties themselves have sufficient endowments to financethis stage themselves. Stanford University, forinstance, has a funding pool of US$25,000 per inven-tion for prototype development. Caltech runs a pro-gramme that provides funding of up to US$50,000 tobring concepts closer to the prototype stage. At MIT,the Deshpande Center for Technological Innovation,among other activities, makes small awards thatenable very early-stage, promising research to reachthe proof-of-concept stage. But most universities, par-ticularly outside the US, lack the funds.

Others have sought strength in numbers: BrunelUniversity in the UK heads WestFocus, a seven-uni-versity consortium forming a co-ordinated innovationframework with business and industry, and incorpo-rating a £1m early-stage fund and a £5m follow-onfund. The union between the University of ManchesterInstitute of Science and Technology (UMIST) and theVictoria University of Manchester is raising high hopesthat greater scale will attract more interest from out-side financiers at all stages of the investment contin-uum, especially at the equity gap stage, according toClive Rowland, CEO of UMIP Ltd, the super-university’s new IP commercialisation company.

Often, early funding is provided by the innovatorand his family. Business angels, high-net-worth indi-viduals willing to invest their own capital in new ven-tures, are another important source of seed funding forvery early-stage ventures.

But the most effective way to right what constitutesa market failure is government funding. In the UK, forinstance, the University Challenge Fund competitionwas set up in 1999 specifically in response to the“equity gap”: by 2002-03, 101 projects wereapproved for funding, at an average investment of£126,000. In the US, the Small Business InnovationResearch (SBIR) programme offers a large number ofgrants and contracts to new businesses. In Israel, theOffice of the Chief Scientist (OCS) has created a net-work of 24 technology incubators to promote technol-ogy transfer from academic institutions to industry.Respondents to the survey undertaken for this reportwere agreed on the need to continue to expand publicseed-funding initiatives.

Stage of development of licensed inventions by US universitiesSurvey of 62 research universities, 1998 (%)

Stage of development Invention disclosuresProof of concept but no prototype 45.1Prototype available but only lab scale 37.2Some animal data available 26.7Some clinical data available 9.5Manufacturing feasibility known 15.3Ready for practical commercial use 12.3

Source: J Thursby, R Jensen, and M Thursby, “Objectives, characteristics and outcomes of university licensing: A survey of major U.S. universities”, Journal of Technology Transfer 26:59–72, 2001

Stages of investment

Risk

R&D

3–7 years

Equitygap?

Idea, patent Prototype Firstproduct

Marketentry

IPO/Trade sales

Post-IPO

Value

Universities Equity investment Equity + debt funding

Source: Adapted from Siemens Venture Capital

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The value of VCsEven if most venture capitalists are not throwing cashat embryonic university technologies, they may do solater. And in the meantime, they can substantivelyimprove the process of commercialisation by con-tributing their expertise.

Many technology transfer offices do not use thesame set of criteria for selecting inventions to patent asoutside investors would. Most of the universities wesurveyed for this report are fairly clear-headed in theirapproach, focusing first on the inventor’s track recordand second, on the potential size of the market. Often,however, too high a priority is given to non-commercialconsiderations such as the inventor’s reputation in thefield of discovery and the likelihood of further inventionsor discoveries in the field being made by the researcher.

To address this problem, Mr Irving of Pond Ven-tures argues for government funding to be channelledthrough a proof-of-concept fund, nationally or region-ally administered, with VC representation on its board.Wherever public money is available, matching fundscould also be required, so that young ventures do notquickly become “fat and lazy”.

Some universities have tried their own approach,drawing on venture capital and sometimes govern-ment money. For instance, Israel’s Technion, in effect,sold its incubator in 2003, privatising it to four ven-ture funds that sit with the university every few weeksto decide which technologies to support. For thefunds, this kind of scheme is still a higher risk thanlater-stage investments, but the risk is mitigated bythe office of technology transfer undertaking the hugeinvestment in managerial effort that early-stage aca-demic ventures require.

Also in Israel, the trade and industry ministry’s sci-ence office can choose to put up to the equivalent ofUS$400,000 as seed money in new university ven-tures, in return for an equity stake. But since there isan option for other shareholders to buy out the govern-ment’s equity within five years, there is a strong incen-tive for venture capitalists to put in their own money.

In the UK, one VC company, IP2IPO, has investedin Oxford’s chemistry department, King’s College Lon-don and the University of Southampton. Offeringmanagement expertise with the money, the companygets a stake in the universities’ technology-transferbusiness. Imperial College has taken another tack,

selling 29% of its technology transfer arm in a privateshare placement and announcing plans for a publicflotation within the next three years.

Heads up = head startOur survey clearly underlines that, even if venture cap-italists do not provide financing during the heart of thetechnology transfer process, developing relations withVCs is still taken very seriously at the best universities.

Georgia Tech takes interesting technologies on anannual roadshow to San Francisco and Boston, forexample. Carnegie Mellon University holds roundta-bles of five to seven people from the university,industry and the investment community. Participantsare invited to help review technologies and to adviseon the commercial potential of thosetechnologies–even though most VCs do not usuallyinvest in the university’s spinout companies untilyears later. Carl Mahler of the university’s technologytransfer office is enthusiastic: “[The roundtable]seems to meet everyone’s needs effectively. It givesVCs early notice of our technologies, provides oppor-tunities for our faculty to network with VCs and givesthe tech transfer office the benefit of the VCs’ knowl-edge of relevant markets.”

More proactive universities have developed particu-lar relations with certain firms. At Cambridge Univer-sity, there is no exclusivity, but there is a list of venturecapital firms that the university will call if there is apromising investment candidate. A condition of beingon the list is that a firm must agree to a meeting withthe candidate if the university asks for it. Of the last30 companies that have been presented to investorsin this way, all have got funding.

With the possible exception of a small country likeIsrael, it isn’t practical for every university to forge sig-nificant relationships with venture capitalists, particu-larly in countries where the latter is a rare breed. Oneventure capitalist suggests running nationwide univer-sity spinout competitions in which the leading tencompanies present to VCs in an annual event.

Venture capitalists in continental Europe say uni-versities there are missing a big trick. “What I findcurious”, says one, “is that I’m never asked by anyuniversity representative for advice. They seem to havethese closed circles for advice. Neither I nor my equiv-alents at other firms have been asked to join an advi-

30


sory board, or even to be a guest once in a while at aTT office’s strategy session. Yet we are very willing todo this. We are all enthusiasts of technology, all ex-scientists or engineers. We are a resource that univer-sities could tap into that has never been utilised.”

The interests of universities and venture capitalistsare closely aligned. Venture capitalists rely on officesof technology transfer at least to publicise, and inmany cases to help nurture new ideas until they do

reach commercial maturity; universities benefit fromthe advice, expertise and (eventually) money that ven-ture capitalists can bring to the table. Successful rela-tionships between universities and venture capitalfirms need not be measured directly by financialrewards—keeping open channels of communication,networking and sharing risks is a more realistic wayfor these two critical innovation communities to co-operate and thrive.

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6IN CONCLUSION

The arguments for promoting university technol-ogy transfer are compelling. From the perspec-tive of the economy at large, valuable IP willlie unutilised without specific mechanisms to

push it into the commercial mainstream. From theperspective of companies, major universities are a nat-ural source of breakthroughs in research, particularlyin basic research. And from the perspective of univer-sities, technology transfer offers the potential for addi-tional revenue.

But the difficulties involved should not be underes-timated. Despite a surge in documented patentingactivity, revenue from technology transfer is small,compared with overall university income. Even in theUS, where there is greater experience with academiclicensing than anywhere in the world and the widerexternal environment is arguably more propitious thananywhere else, the average university technologytransfer office is widely believed to lose money.

The inherent difficulties of commercialising newtechnologies aside, our research suggests a number ofstructural difficulties that will always make this activ-ity particularly testing:

■ Lack of skills. Academic researchers too often lackthe commercial skills to go with their technical expert-ise—successful transfer depends on creating a team ofpeople that combines research and business acumen.Within the technology transfer office itself, the com-mercial, technical and managerial qualities required tochoose high-potential inventions and shepherd themthrough to commercialisation are both rare and highlyregarded. To overcome these problems, universitiesneed to create and access fluid networks of committedpeople whose talents, knowledge, money and ideascan be pooled and leveraged.

■ Lack of financing. Seed capital is always going to

be hard to unlock when inventions have not evenreached the proof-of-concept stage. Governmentfinancing schemes such as the University ChallengeFunds in the UK and the Small Business Innovation-Research (SBIR) programme in the US are an obviousway to nurture technologies to the point where venturecapital firms and other investors can conduct substan-tive due diligence on commercial prospects. But out-side commercial expertise is still needed to determinewhere the money is allocated.

■ Lack of incentives. There is consensus that theactive involvement of the inventor is critical to the suc-cess of the licensing and (especially) spinout process.Faculty researchers need to be actively incentivised toparticipate in technology transfer; postgraduates needto be encouraged to stay on at universities and placedin an environment in which their entrepreneurialinstincts can flourish.

■ Lack of scale. The cost of technology transfer ishigh: the AUTM’s 2003 survey reports that 193member institutions in the US spent US$205mbetween them on legal fees alone. The world’s leadinguniversities may have the staff, the infrastructure andthe funds to make the economics of technology trans-fer work, but many smaller universities do not.

Experience garnered mainly in the US, but elsewheretoo, highlights some of the ways in which these chal-lenges can be overcome—through university policiesand cultures that reward academics for their involve-ment in commercialisation, through a legislative andregulatory framework that assigns IP in universityinventions to the university itself, and through thebanding together of universities’ transfer activities tocreate scale. But two more fundamental messagesalso emerge from our research:

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■ Less is more. Too many patents don’t turn intolicences; too few licences turn into significant earners.Technology transfer offices ought not to be profit cen-tres—that is only likely to encourage unrealistic nego-tiating terms—but they should still be measured onmarket-driven criteria, such as spinout profitabilityand product sales. Such measurement, perhaps rein-forced by top-up funding awards for the best perform-ers, is likely to encourage universities to focus theirenergies on the inventions with the greatest potential.

■ Look outside the institution. Technology transferoffices cannot do it all, even if some try to. Universitytechnology transfer should not be the purview of uni-

versities alone—the expertise of venture capitalists,business angels, alumni, industrialists and other pro-fessionals should be systematically leveraged to iden-tify and nurture the technologies with the highestcommercial potential.

Although the challenges of university technologytransfer are arguably greater than commercialisationin the private sector, the principles of success are nodifferent. A handful of the world’s leading researchcentres may be able to rely on the overall quality oftheir disclosures to justify a scattergun approach topatenting and licensing. But for most universities, thesniper is needed.

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