University Startups and Spin-Offs: Guide for Entrepreneurs in Academia (2015)
Part II. Strategies for Universities
Congratulations—you made it through the first part of this book. Maybe you are an entrepreneur, or perhaps you think about how your university could enable more startup success. Either way, you have seen by now what it means to launch a company out of a university. It may have surprised you that little theory is necessary for that purpose. That a startup has more to do with tinkering and incremental product development than careful grant-proposal writing may also have been news to you. With a fresh approach to communicate ideas, startups engage third parties with actionable next steps to build on synergies for their success. The most important part of the process is to begin and to collect individual experiences and feedback as soon as possible.
Just as launching a startup has a great deal to do with experimentation, so does setting up a startup track at a university. Think about the process of building the entrepreneurship program at your university as a startup in itself. You will need the very same skills to make it work.
Universities are magnets for smart people. Traditionally, they have educated students in specialized domains and critical thinking. However, graduates and researchers often struggle to apply their knowledge in their first job in the real world. All the way up to the doctorate level, they have acquired deep theoretical knowledge that makes them stand out. Entrepreneurial experience in their own startups can greatly improve their skill sets. In light of stricter requirements in the job market today, universities may want to think about extending their role. They can prepare graduates with the full spectrum of skills that help them become more successful, both in the workforce and in their own companies. Establishing a stronger foundation for entrepreneurship is an effective way to do so. The most important building blocks exist already; they are just waiting to be assembled.
Universities enjoy a privileged position. Governments, businesses, and other organizations love to collaborate with them, either on research projects or via in-house R&D. Academia provides a walled garden for acquiring knowledge and going about your affairs undisturbed. This safe-haven function should extend to launching startups as well. Building a bridge to the market and people outside of academia will expand the reach of university research. The motivation for launching a startup out of a university should be the desire to make a measurable impact on peoples’ lives. Through the mechanism of the market, this is possible. It will allow promising technology to influence the lives of people where it matters most. Giving you a better understanding of what it takes to access this mechanism is the goal of this book.
To quote Peter Drucker, this means “if you want something new, you have to stop doing something old.” There will be setbacks along the way. Experts inside and outside of your university will tell you with considerable authority how you should set up your startup program. Some people may fear for their jobs. Others may feel threatened by the new wind that is suddenly blowing through the institution. Much confusion will ensue, and staying the course will require strong conviction. With persistence, you will eventually uncover an individual setup that works for your university. Set out on the path to find what works best for you with the mindset of an entrepreneur.
In the long run, universities need to integrate entrepreneurship one way or another. It will no longer suffice to try to launch startups. Success must be measurable. When that time comes, it will be too late for some institutions, and they will miss the boat. If this is not the fate you have in mind for your university, then please read on. The suggestions in this part of the book may stimulate your thinking along the path of introducing entrepreneurship at both the degree level and the research level. Some of the things I suggest may already be in place at your university. Others may seem too simplistic, too cumbersome, impractical, unrealistic, or not feasible. Remember, this part of the book is a collection of thoughts to keep the dialogue going about university entrepreneurship. There is no definitive answer of how to do it. One thing is certain, though: doing nothing will never enable more startup success.
Many universities already have some startups and talk about the numerous spin-offs that have launched out of their institution in the past. They may have an entrepreneurship class and refer to grant X and startup program Y, which is supported by the government. But how is the success of these initiatives measured? By the number of students attending a specific program? By the number of startups collecting grant funding? Or by the number of startups registered as companies? Unfortunately, most of these metrics are vanity metrics. They may result in good-looking statistics, but the real impact disappoints. After all, does grant funding guarantee startup success? Of course not. Just wanting to be an entrepreneur hardly means you will have entrepreneurial success.
Despite their best efforts, most startups fail. Focusing on good-looking numbers may deliver satisfaction in the short run, but when attention shifts to the bottom line, things will get uncomfortable. How many customers have your startups reached? How much revenue have they earned in their first, second, and third year? I am not saying that universities and governments deliberately close their eyes to the real numbers behind their current startup support; but when it becomes common practice to show measurable impact, they will be forced to catch up fast.
Your university may have to achieve certain key performance indicators (KPIs), which is why you are reading this book. Or more researchers and students may be asking for advice for their startup ideas. Or it may interest you personally to make this complex property called entrepreneurshipwork. Just as in part 1, where we looked at strategies for startup entrepreneurs, part 2 collects approaches that have worked for other organizations when creating a favorable startup environment. These are not only universities, but also private organizations and corporations. When it comes to commercializing innovation, the private sector has a leg up on universities. We’ll take a look at their playbook and see what we can borrow to power up university entrepreneurship.
As you may have guessed, the task of setting up a startup track and measuring its success hardly happens over night. If a change agent comes up with ideas that “break all the rules,” the people responsible for things running smoothly may put up a defense. To avoid such a fate, it is often best to avoid proclaiming that you have all the answers. Prescribing sweeping reforms is the wrong way. Don’t be the bull in the china shop. An entrepreneurship program needs to grow incrementally, just like a startup. With this in mind, the Lean Startup method can be used to set up the program in phases. Think in terms of minimum viable products: carry out a small change, test it, review it, and adapt it. Do this repeatedly, and you will achieve more than going for a home run right from the start.
Some of the ideas in the following chapters come from the world of venture capital, and some from corporate R&D. Universities use some of them today, whereas others are new to academia. Wherever you are on the path of integrating more entrepreneurship in your institution, I encourage you to keep an open mind.
Should Universities Care About Startup Success?
Historically, most universities had little motivation to compete in the market, and by their own admission, they still are not all that interested in the commercial success of their research. There is no urgency to change, at least in universities with access to ample state funding. Framing the startup debate purely in terms of money ignores the fact that more than profit encourages founders to launch companies. Real-world impact beyond academia is equally important for many entrepreneurs. If a technology can make a difference, it should be available as a product or service. If it has the potential to save lives, then even more so.
Academic research often addresses pressing issues of developing countries that are in desperate need of innovative solutions. However, when a PhD or postdoc program ends, research teams disband and their intellectual property evaporates. In the best case, the university has patented their technology and makes it available for licensing through the technology licensing office (TLO). Universities’ passive approach toward commercialization leaves it up to the private sector to find the proverbial needle in a haystack, so most academic research has a small impact and therefore no relevance to most people outside universities. Framing the discussion about startups purely in commercial terms therefore misses the point.
When stepping off the well-trodden path, universities often fear that startup initiatives may pose a risk to the institutions’ good reputation if they fail. Will universities become the subject of ridicule if it turns out they promised too much with their entrepreneurship initiatives? Will their reputation suffer if they launch a startup program that fails to bring forth the next Mark Zuckerberg? To make matters worse, unexpected success brings its own problems, because high market returns can cannibalize a university’s government funding. The budget should show a deficit at the end of the year to justify an increase the next year. Massive startup success is therefore disruptive to those with an interest in preserving the status quo. At the same time, university KPIs are beginning to demand a certain number of startups to justify research funds spent, which puts universities in a bind. They must find a compromise between incorporating more entrepreneurship and keeping their funding from the public sector as high as possible. In any event, universities have a lot of catching up to do with their startup initiatives. They are becoming more open to advice on how to set up startup programs and incorporate more entrepreneurship into their operations.
The amount of money sunk into research at universities is staggering, with some annual university budgets in the billions of dollars. In Europe, universities have traditionally relied on state funding almost exclusively and have had a tendency to look down on commercial ideas and efforts to commercialize their technology themselves. But their American counterparts have a long history of seeking links to the private sector and their own successful alumni and are therefore more entrepreneurial, with a track record as startup hubs. Modern
Asian campuses are also more open to commercializing their research and seeking a return on investment, but they often lack the flat, democratic structure and independent critical thinking that help startups achieve momentum. In addition, they are often more bureaucratic and risk-averse than other universities, despite their stated goals of aiming for high-impact commercialization and aggressive monetization of research. But again, their KPIs demand a certain number of startups or spin-off companies per year, so they need to satisfy their statistics one way or another.
It is important to reiterate that it is not the intention of this book to reform universities and the way they work now. I respect the current system and see its many benefits. Nevertheless, when presenting commercialization ideas to universities, I have heard statements like, “I think these are good ideas, but the board will never approve.” And, “The university is not a hedge fund.” As much as I understand these concerns, thinking about how university startups could launch in a better way is important. If more successful startups came out of universities, everyone would benefit. Their research can make a measurable impact on people’s lives, and the university can gain new network effects in addition to those it already enjoys. It is in the best interest of universities to care about their startups and take the necessary steps to improve their chances at success.
Chapter 15. How Do Universities Measure the Impact of Their Research?
University startups have existed for a while, but it has become easier in recent years for students and researchers to launch a company. Startup grants, entrepreneurship programs, a drastic decrease in the cost of IT technology, and rapid prototyping beckon researchers to take the plunge into startup life. Students and researchers are beginning to take advantage of lean methods. I applaud this trend and think it paves the way for a promising future. At present, however, the startup initiatives of most universities still amount to little measurable impact in the market. How much relevance does university research have outside academia? How many university startups launch products and achieve profitability in the real world? Universities rarely collect impact-driven metrics, and it is still the revenue from patent licensing that validates a technology as a commercial success.
This overlooks a whole new breed of lean startups composed of fluid teams who never even think of patenting their ideas. Facebook launched out of a university dorm room but bypassed all existing infrastructure aimed at startup support. It licensed no technology, applied for no grant, and sought no permission. The environment of the university enabled the founders to test their ideas in the walled garden of Harvard University. Yet Facebook is hardly a poster child for the success story of a Harvard startup.
Author Melba Kurman recommends that universities update their performance metrics and include the following measures (among others)1:
· Ability to turn research into public benefit
· Impact on industry—that is, ability to add value to the industry
· Commercialization impact
Such upgraded metrics should paint a more realistic picture of how exactly research translates into public goods. Lord Kelvin sums up the entire debate: “When you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot express it in numbers, your knowledge is of a meagre and unsatisfactory kind.”2
Most research projects never have an effect on the taxpayers who funded them. They never attempt to solve the challenges they study in the developing countries where they could make a difference. This is a serious matter, and the managing directors of some university research centers have taken notice that the status quo of commercialization lacks measurable impact. The first step is to upgrade their metrics and get a clearer picture about where research projects stand on the impact scale. This will simplify the discussion in moving toward a more entrepreneurial ecosystem at universities.
Patents and Tech Transfer
Without talking about patents and technology transfer, a discussion of the impact of research would be incomplete. Traditionally, universities have thought in terms of patents to commercialize their research. After all, research is expensive, and there should be a means to recoup at least part of the cost. If a technology is patentable, the university hires an attorney to file for patent protection. The in-house technology transfer office (TTO) or technology licensing office (TLO)—both names are used interchangeably—licenses pending and granted patents to those who are interested. Protected intellectual property is accessible to industrial companies that can license the technology and integrate it in their product lines.
Alternatively, the research team that invented a patented technology gets a license from the university for its own use and ventures into business by itself. This model works for university entrepreneurs if they have the wherewithal to transform the technology into a real business. Because most academic spin-offs of the past centered on patents, the TLOs of many universities became the overseers of startup and entrepreneurship programs. And that is where the problems begin. Licensing is seldom the main issue with startups; rather, the issues are time to market and approaching the venture from a solid business standpoint. When the TLO is in charge of startups, entrepreneurial advice is often limited to workshops or theoretical support by the TLO staff or the business faculty. As a result, commercialization efforts fall short of expectations. Lack of mission of the TLO is the core problem. It is unclear what it means to achieve “effective university technology transfer.”3 As long as the TLO can make the point that they are within historical benchmarks, then any extra effort introduces risk into their daily business. The bar is set low at 1% of all patents ever finding a licensee, in the best case.4 Leaving startup programs to those in charge of patents can be counterproductive. Filing a patent has little to do with innovation, let alone entrepreneurship.
Despite the fact that they cost money and perform poorly, universities are proud of their patent portfolios. The number of patents filed sometimes even stands in as a synonym for innovation. This appears to be a trend especially in Asia. For example, with the goal to declare Singapore the IP Hub of Asia,5 the government of the city state pointed to the many patent filings by domestic universities. This seems to make the point for Singapore as hotbed for intellectual property, as long as nobody is asking about the amount of licensing revenue or the quality of the patents. The liberal approach taken by the intellectual property office in Singapore has led to rapid growth in the number of granted patents over the last ten years, including patents with little or no real merit.6 Certain key performance indicators (KPIs) for universities and the government may check out, but it is doubtful that such portfolios will ever attract the interest of potential licensees. The patent revenue could be exactly zero—nobody knows for sure. Realizing the flaw of mistaking the number of patent filings for innovation, Singapore vowed to improve patent quality with a “positive grant” system at the beginning of 2014 that requires a positive, substantive examination report before a patent is granted.7
Singapore is no outlier when it comes to patents with low commercial value. Research shows that university patent portfolios are performing poorly. A report from the Brookings Institution makes recommendations for increasing support for startup formation but implies that most university TTOs are not self-supporting through patent-licensing income. As Brookings shows, universities spend most their licensing revenues rewarding inventors or funding new research, not supporting technology transfer.8 An older study came to similar conclusions, arguing that most American research universities lose money on patenting and licensing technologies.9 Almost 75% of universities in America and Canada with TTOs have difficulties to cover the costs of filing patents and their own operations with licensing revenue. About 15% barely break even, recouping less than 4% of university research spending, and an estimated 99% of patents never make any money.10
To boost their performance, TTOs often ask for additional funds. If only they had more funding, they could hire new staff who would undergo entrepreneurial training to coach students and researchers about launching a startup. I doubt this approach will solve the problem, because a larger bureaucracy will hardly spawn more entrepreneurial success. Only a mind shift can get the debate about university research’s lack of impact out of its rut.
Open IP promises to replace the drive to patent by making technology freely accessible. Under this notion, researchers immediately publish their findings and thereby release any intellectual property into the public domain. This so-called bazaar approach, a term borrowed from open source software development, should spawn more collaborations between industry and research teams and therefore hopefully improve market impact.11 In the software world, open source has become a huge success. Some open source projects like Linux are competing head to head with industry giants.
Whether open source has resulted in a larger impact by university research is up for debate. When universities talk about open IP, the term comes with strings attached. Ownership of projects is often unclear, with several research parties claiming that a certain technology was invented by their faculty.
If open IP were on the rise, then the number of patent filings per year should be decreasing. But the opposite is happening, both in industry and at universities. According to a report by the World Intellectual Property Organization (WIPO), international patent applications filed through the Patent Cooperation Treaty (PCT) have rebounded strongly since the global economic crisis. Growth in the number of filings has picked up by 5.7% in 2010, 11% in 2011, and 7.1% in 2012. The total number of filings made via the PCT system amounted to 195,308 in 2012, which is more than double the figure recorded in 2000.12 Data from the U.S. National Research Foundation (NSF) shows the same trend. U.S. universities filed 18,163 patent applications in 2009, with a positive annual growth rate between 0.10% and 12.25% between 1999 and 2009 (see Figure 15-1).13This is hadly proof of fewer patents, nor is it a case for open IP taking off on a large scale. There is no evidence that this trend will reverse in the coming years.
Figure 15-1. Number of university patents filed (data source: U.S. National Research Foundation)
Open IP is a noble idea in theory, but many universities are less open with their intellectual property than they could be.
1Melba Kurman, Tech Transfer 2.0 (Ithica, NY: Triple Helix Press, 2013), 103.
2Sir William Thompson (1st Baron Kelvin), Popular Lectures and Addresses Vol. 1: Lecture on Electrical Units of Measurement (London: Macmillan and Co., 1889), p. 73.
5IP Steering Committee, Intellectual Property (IP) Hub Master Plan (Intellectual Property Office of Singapore [IPOS], 2013).
6Lau Kok Keng, “S’pore’s New IP Regime a Boost for Businesses,” The Business Times, June 20, 2014, www.businesstimes.com.sg/premium/editorial-opinion/opinion/spores-new-ip-regime-boost-businesses-20140620.
8Walter D. Valdivia, University Start-Ups: Critical for Improving Technology Transfer (Washington DC: Center for Technology Innovation at Brookings, 2013). http://www.brookings.edu/~/media/research/files/papers/2013/11/start-ups-tech-transfer-valdivia/valdivia_tech-transfer_v29_no-embargo.pdf
9Dianne Rahm, “Academic Perceptions of University-Firm Technology-Transfer,” Policy Studies Journal 22, no. 2 (1994).
11Eric S. Raymond, The Cathedral and the Bazaar: Musings on Linux and Open Source by an Accidental Revolutionary (Cambridge, MA: O’Reilly, 1999).
12World Intellectual Property Organization (WIPO), World Intellectual Property Indicators – 2013 Edition (Geneva, Switzerland: WIPO, 2013), www.wipo.int/ipstats/en/wipi/.
13National Science Board, Science and Engineering Indicators 2012: Patent-Related Activities and Income (Arlington, VA: National Science Foundation, 2012), www.nsf.gov/statistics/seind12/c5/c5s4.htm#s5.