University Entrepreneurship Topography

Successfully Navigating the Topography of University Commercialization

University Entrepreneurship Topography

Universities around the country are launching initiatives to promote “commercialization” and “entrepreneurship”. But those terms cover a lot of ground. Initiatives that fail to tease out the differences between them are likely to fail, disappointing critical constituencies and leaving important opportunities fallow.

At Research Bridge Partners, we developed a framework that captures the topography of university commercialization and entrepreneurship.  It is useful in making commercialization decisions, especially early in the process when path dependencies and lock-in occur. You need to know where you are starting to know where you are going.

We look at the commercial activity at a university along two axes:  who creates an innovation at a university, and who owns that innovation.  Here is our 2x2 university entrepreneurship topography framework:

Who innovates:  as a university leader, you have different duties to students and faculty, duties that contextualize your relationship with them regarding commercial matters. In our framework, the left two examples were launched by students and the right two examples by faculty.

Who owns:  the university has different claims on the innovation that gets commercialized on its campus depending on a number of factors – most importantly who funded the innovation, where the innovation happened, and what contractual relationship(s) the university has with the innovator. In our framework, the bottom two examples are owned by the inventor and the top two examples are owned by the University.

The stakes for you, as a university leader, are higher in some boxes than others.  In particular, faculty-generated/university-owned innovation can be especially high stakes.  Commercialization activities in this box have outsized potential to:

  1. Change the world in ways that are directly aligned with the university mission – the advancement of science in the public interest and the promotion of human health, for example.
  2. Generate significant licensing revenue.
  3. Expose the university to significant cost (from, e.g., patent prosecution) and risk (from, e.g., litigation).
  4. Directly impact faculty satisfaction, which gets reflected in recruitment and retention.

(Despite the institutional criticality of the upper-right box, it seems that a disproportionate amount of university effort goes towards supporting the lower-left box:  student innovators/no university ownership.  We are puzzled by this … but then again, we were not early investors in Microsoft, Dell, Facebook, or Snap.)

Let’s go more deeply into each box of the university commercialization landscape framework.  As examples, because they have been well publicized, we will use company examples from Stanford’s entrepreneurship experience.

Lower-left box: Student inventors, non-university-owned IP

Snap, Inc.

When it comes to students, most of us involved in commercialization and entrepreneurship seem to agree:  the university’s education obligations are paramount.   It is wonderful that Evan Spiegel and Bobby Murphy could come up with and evolve the idea for Snapchat while at Stanford, but Stanford’s core duty to them was pedagogical, not commercial – to the students, not to their innovation.

This box is filled with good news.  Your campus and your local ecosystem probably offer an abundance of solutions and support.  National partners, such as Blackstone and MassChallenge, can provide best practices, links to mentors, and potentially institutional startup capital.  Also, alumni are waiting to be asked to mentor your students.  There is a pretty good playbook here, including both curricular and co-curricular initiatives:  entrepreneurship classes, incubators, business plan competitions, etc.  Our advice is to implement as much of that playbook as possible, package these initiatives with success stories from your campus, and send the resulting student startups special delivery to the Development office for fundraising wins.  (Be careful, though:  this playbook doesn’t work very well for the other segments in the commercialization landscape.)

Lower-right box: Faculty inventors, non-university-owned IP

Aplia

In the 1990s, Paul Romer, an economist, had an idea for an education tools company.  Although this idea grew out of his work as a Stanford professor, the university did not have a claim on the underlying intellectual property.  Romer formed the company, Aplia, in 2000 and raised $10 million of launch capital, which allowed Aplia to hire a strong team.  Aplia grew quickly and was eventually bought by Thompson Learning.

Aplia is a great story – not only was it successful, it was successful doing something that advances the mission of universities (education), and the faculty member who started it went on to win a Nobel Prize!

However, this box can be dangerous.  Here is why:

  1. Faculty sometimes pretend that they are in this box, when they are really in the upper-right box (university owns the IP.) Maybe they want to do commercialization without the hassle of dealing with the university’s compliance architecture or without sharing value with the university.  Maybe they just don’t know how to use the university’s commercialization apparatus, or the commercialization bureaucracy is really difficult to use.  Regardless, if they are wrong about university ownership of the underlying invention, then it can be extremely expensive to clean up after the fact … and it can expose both the university and the faculty member to significant risk.
  2. Faculty who start here are usually on their own. For Paul Romer, that worked, in part because he is super capable, had a great idea and, in part, (frankly) because he had the Stanford brand behind him and was located in Silicon Valley.  Most faculty don’t have those advantages.  They might benefit from the supportive know-how and time relief their university could provide as a collaborator.

We love this box for its opportunity and flexibility, but as a university administrator, you need to make sure you gate it properly.  Administrative conflict issues should be narrowed down early, and this won’t always be collaborative.  When it comes to commercial work, most conflicts between a university and its faculty are due to ownership and use of IP.  Calling out these conflicts is important.  But when you do this, reach out as a colleague rather than with a reprimand.

When faculty who we work with seem to be roaming down this path, our message is: “Engage the university, because if you don’t launch this company well from the start, you’re killing your options. The world of autonomy you are picturing probably does not exist.”

Upper-right box: Faculty inventors, university-owned IP

Genentech

One of us, Isaac, grew up on the Stanford campus, and he remembers dinner table discussions when Norm Cohen (Stanford) and Herb Boyer (Berkeley) were launching, based on their recombinant DNA and restriction enzyme technologies, what became Genentech … and with Genentech, the entire biotechnology sector.  At the time, patenting the IP from basic research, not to mention putting that IP into a startup and spinning it out, was extremely unusual and not universally approved.  Fast forward to now, and Genentech is the poster child for university spin-outs.

The university – not the inventor – owns innovations in the top row.  This ownership creates hard obligations formalized in the Bayh-Dole Act and soft (but real!) expectations from other key stakeholders that the university will move innovation rapidly and effectively into the public markets.  It also creates compliance, conflicts management, and other oversight obligations.

Unfortunately, this ownership position can put the university into an adversarial relationship with the faculty inventor.   Although there is no way around these difficult conversations, some universities seem to have them more productively.  These universities emphasize support over compliance in their relationships with faculty – acting as colleagues rather than cops.

This box is where Research Bridge Partners does most of our work.  We have developed some counterintuitive perspectives.  For example, we think that the trend is for universities to create too many spin-out companies, that many EIR programs are wastes of money, and that fast-track licenses can be a disaster.  We will cover these perspectives more deeply in other blog posts.

In general, though, our core view of this segment of commercial activity:  if done right, it should be a powerful tool to attract and retain outstanding faculty and directly advance the university’s mission.

Upper-left box: Student inventors, university-owned IP

Alphabet, Inc. (Google)

Alphabet, Inc., is one of the world’s most valuable companies, with a market cap pushing $1 trillion.  Famously, though, when Brin and Page disclosed their search ranking algorithms to Stanford’s TLO, they were greeted with no fanfare and (if anecdote is to be believed) did not even make the office’s “top 10 list” for the year.

This box is hard:

  1. This population of entrepreneurs – especially, the post-doctoral students – have low status at most universities, and as a result often have a hard time getting mindshare from the university’s entrepreneurship programs and licensing bureaucracy.
  2. On the flip side, post docs often have the past experience in industry, the combination of personal maturity and networks, and the risk preferences (read: career desperation) that make them likely to be more effective as commercializers – not just inventors, but entrepreneurs.
  3. Some universities have not clearly defined the rules for student IP ownership, even for graduate or post-doctoral students. As a result, there can be extra confusion and tension in this box.

A lot of value gets left on the table, here.  Since, in our experience, few university programs are tailored to these inventors, and few administrators understand how to value the importance of these co-founders in licensing deals, undervalued or lost opportunities are common.

We handle this box by making the lab – not the IP – our unit of analysis.  We look for IP-plus-post-doc combinations as the core of the spin-outs that we will help catalyze and invest in.  This is not a natural act for most universities; in fact, it’s part of the value that good VCs with deep experience in academic spin-outs bring to the table in the markets where they operate.

***

One last point, about people.  Our university entrepreneurship topography framework emphasizes that the most important action that a university can take to support entrepreneurship and commercialization, is to curate the university community.  The common action that Stanford University took in all four of the example cases discussed above?  It got those people onto its campus.  It takes Cohens to make Genentechs.  If you want Snapchats, admit Spiegels.  For any university administrator, that’s job one.


Paul Romer's Nobel Prize - Why we do what we do

Paul Romer was awarded the 2018 Nobel Memorial Prize in Economics for demonstrating "how knowledge can function as a driver of long-term economic growth."

 

Last Monday, 8 October 2018, Paul Romer won the Nobel Prize in Economics for his contributions to our understanding of economic growth. The theory he developed helps explain why we do what we do.

Economic growth is really, really important. From the beginning of human history up until the Industrial Revolution, there pretty much wasn't any. You could take the average person from the Year 1 and put her in 1740, and she would find it in many ways familiar … familiarly grim and hard.

But if you took a person from 1740 and dropped her here, today, it would blow her mind.

The reason is economic growth. Growth is pure oxygen. It's what has given us longer and healthier lives and enhanced opportunities for the flourishing of the human soul without hunger or terror or bondage.

In the 1950s and 1960s, economists like Robert Solow (Nobel Prize, 1987) worked out the theory of economic growth: growth is a function of labor, capital, and ideas. Labor is people, you and me. Capital is stuff like the machine that I am typing this on, tools that make us more productive than we would be on our own. Ideas are ways to do things differently - new ways to organize people, new machines, etc.. Solow and others took these simple insights and rigorously and elegantly modeled them, laying a theoretical foundation for the analysis of economic growth.

This was incredibly powerful. One of the insights of these theories is that growth stalls when we run out of people and out of productive uses of capital. The growth curve inevitably flattens as an economy matures. The way to keep the growth rate up - the only way - is for new innovation to keep being introduced into the economy, increasing productivity.

But although growth theory highlighted the importance of innovation, it did not have much to say about it. Innovation, knowledge, ideas … for the economists of the 1950s and 1960s, they were just sort of out there, floating around, for anyone to use. So even though ideas are the drivers of productivity, in a weird way they were treated as outside of the economic system by the architects of growth theory, rather than as part of it.

Intuitively, that's not right. Inventions don't just happen. Inventions are invented by inventors. We are the authors of ideas, not just their beneficiaries.

The legal and cultural context also matters. Ideas are often owned or private. Patents and trade secrets and know-how - those ideas are not just "out there" and available for anyone to use. Other ideas are not proprietary, but they are built into systems that are really hard to copy, like social customs or legal regimes. Growth theory didn't have much to say about this.

This was a problem for growth theory. Romer solved it.

Romer brought innovation into the longstanding models for economic growth. He described how ideas are both products of the economic system and influencers of that system. Patent rights, for example, increase the incentives for certain kinds of innovation.

Knowledge is cumulative. We can, and do, make more. And we can structure society so that we get more and more knowledge, more and more innovation, more and more growth. We can do things and set up systems and make investments that are likely to encourage people to invent things or systems that make our lives better … and that themselves lead to more innovation.

To me, this is one of the most optimistic findings in all of social science.

It means that our future doesn't have to be a dystopia where all the growth has drained out of our society, with our grandchildren's lives governed by zero-sum competition for a fixed pool of resources. Our future doesn't have to be the human version of the heat death of the universe, whose energy will gradually dissipate until … nothing.

The future can be better. People behave differently when the pie is growing than when it is static or shrinking. In this way, growth enables generosity. We all have to fight parts of our natures in order to be virtuous, otherwise virtue would not be praiseworthy. Growth helps to align virtue a little bit more with self-interest.

Economic growth also builds hope. Hope for the alleviation of poverty. Hope for cures for diseases. Hope for solutions to environmental problems. Hope for more people to be able to freely follow their spiritual course and calling.

Before Romer, economics viewed growth as kind of like a lottery or a cargo cult where society waits passively for a new box of ideas to wash up on shore to fuel the growth machine. What Romer said was, "We can build those ideas ourselves; we can fuel our own growth machine; it's hard work, but with deliberate effort, we can do it." A virtuous cycle of growth driving the creation of new ideas driving more growth … that, not heat death, can be our future.

We heard you, Paul. That's why we do what we do!

The world has never seen a system that produces innovation at the rate of America's research universities. Romer writes about their uniqueness: the combination of the Morrill Act in the 19th century (the Morrill Act created America's distinctive land grant university network) and the post-World War II federal research grant system (which institutionalized federal support for mission-oriented basic research) were two of the great meta-innovations of human history. The land grant schools and federal research funding are innovations that create more innovation.

But that alone doesn't generate growth. We also need tools to drive that university innovation into the economy, or else the innovation will lie fallow. The nation's startup clusters, especially Silicon Valley and Boston, do that amazingly well. These clusters metabolize about 4 out of every 5 dollars of early-stage funding. They are another important, American-made, meta-innovation: a new way to scale ideas rapidly through an economy.

The challenge is that most of America's research doesn't happen in those clusters. 74% of American university research, by dollars invested, happens in states other than California, Massachusetts, and New York. As a result, the rate of startup creation out of most heartland universities is a lot lower than at the universities in the states with technology hubs, and the startups that do get formed are often significantly undercapitalized compared to startups in the hubs, which probably contributes to lower success rates and lower impact of heartland science on the national economy.

This seems like a waste. It's like a whole cargo container of ideas drifting past our island.

So we built Research Bridge Partners as a bridge out to that big container of ideas, to get them into our economy for the benefit of all of us.

Hat tips and further reading: Paul Romer, Tyler Cowen, Alex Tabarrok, Joshua Gans, Ross DeVol