Research universities like Colorado University Boulder and the University of California Davis long have been hotbeds of technological innovation and development, especially in the realms of medicine, microbiology and biology, computer science, electrical engineering, chemistry and agriculture. The fax algorithm was developed inside Iowa State University, Gatorade came to life at the University of Florida, and Michigan State University developed and patented two cancer-related drugs.
Though the potential for revenue is great – MSU brought in $160 million with its cancer drugs, while UF earned $37 million by licensing Gatorade and ISU grossed $27 million for its discovery – moving technology from inside academia and out into the marketplace is often an unwieldy process.
“What happens when technology reaches the point of being patented? With any number of patents that come through the door in a university’s technology transfer office, in a small percentage, there’s a very obvious placement for the patent. The university builds relationships with a handful of large companies that license the technology in their main area of focus, so the technology moves easily from point A to point B,” CU Boulder’s Amanda Harris explains.
Harris, who helped form a new organization called the Interdisciplinary Technology Commercialization Consulting Group (ITCC) at CU Boulder, is also the vice president for new ventures with the Graduate Entrepreneurs Association. “There are a good number of patents that if a little more effort went into doing the commercial due diligence, researching the potential commercial applications of the technology, and just probing into it a little bit further, there’s an incredible potential for revenue. But there’s a lack of funding and a lack of resources.”
Chris Wellborn knows all about that. The chief executive officer of Vestrada Solutions, in Davis, Calif., has the technology and the vision but not the access to capital. Wellborn, a graduate of UC Davis and a member of its Connect program for start-ups, has been able to lure clients and contracts with his company’s suite of computer virus recognition and avoidance products.
But as of late, efforts to link arms with the VC community to commercialize academic research, streamline the technology transfer process and develop viable businesses that will generate revenues for the university are beginning to sprout on campuses like CU Boulder and UC Davis.
“I’m a great believer that you can get technology into a business plan,” says Catharine Merigold, a principal with Vista Ventures in Boulder and a board member at the Boulder Technology Incubator and the University Technology Corp., the University’s technology transfer center. “Incredible value can be created from technology.”
Bridging the Gaps
To be sure, investors are learning to tread carefully around campus. Focusing too many resources on turning a profit and developing commercial applications for research-based technologies can present a conflict of interest for many universities, especially public ones. Not only must investors match limited university resources with their own expertise, but they must also learn to bridge the cultural gap between academia and entrepreneurship.
UC Davis’s Connect, established as an internal networking and training program for entrepreneurs, is evolving into a regional player, nourishing start-ups alongside local partners. Recently Connect joined Sacramento’s Metropolitan Chamber of Commerce and the Golden State Capital Network as an equal partner in the Emerging Technologies Institute (ETI), an affiliate of the Sacramento Chamber charged with creating a regional business climate that fosters the growth of start-up and early-stage tech companies. ETI is being endorsed by the partners as the applicant organization for the proposed new state-designated regional technology alliance – like LA’s LARTA or the Bay Area’s BARTA.
At the University of California at San Diego, the school’s Connect program is partnering with still-unnamed local VCs to create a seed-stage investment fund targeting university researchers. Although the program will not be formalized until year-end, its directors are already working with the University’s School of Medicine to identify viable business proposals. A dozen deals are already in the pipeline.
The project creates a win-win relationship between the university and the VC community, says Dr. Fred Cutler, director of the UC San Diego Connect program. “The money is allocated to university-based projects by design. The process is put into place to move technology to commercial uses, while keeping it on campus. You negotiate the rights to the technology up front, and when it’s spun out at the end, the process goes smoothly and quickly, and the money comes back into the school.”
While technology spun out of universities and into the marketplace may prove lucrative for both the institution and its roster of affiliated VCs, the partnership is anything but natural.
“It’s a different mindset, I would think,” says Jon Gregory, president of the Golden State Capital Network. “It’s a unique type of person that works in a research setting, and it’s a very exciting lifestyle and undertaking, but they’re not the same characteristics that drive an entrepreneur who’s go, go, go all the time.”
The passage of the Bayh-Dole Act in 1980, a Patent and Trademark Act Amendment, transferred the responsibility of patenting federally funded research from the funding source to the research institution. The act, according to the Association of University Technology Managers (AUTM), created a uniform patent policy that enabled small businesses and nonprofit institutions like universities, to retain title to inventions made under federally funded research programs.
While the Act created a surge of patent-protected technology to emerge from university labs – 250 patents were issued to university technologies in 1980 while recent surveys by the AUTM average 1,600 patents issued annually – it also shifted the burden of proof to the university. Few universities had either the expertise or the resources to devote to a lucrative technology transfer program.
Not only must a university have a talented faculty capable of bringing federal and corporate sponsorship to its labs, but it also must have the in-house legal expertise to protect its own intellectual property, file patents and propose lucrative licensing deals with third parties that may include recurring licensing fees or an equity stake in the licensing company.
More important, there must be a commitment at the top level of the university to create a strong technology transfer program. It must draw from a wide base of university resources – management expertise from the business school, intimate knowledge of faculty research projects and sales and marketing support – and also have access to outside sources of capital, connections to the local VC community, and a base from which to draw management teams to sustain a viable business.
A university is motivated on three levels to pursue technology transfer opportunities, says Larry Fox, director of UC Davis’ technology transfer office. Not only does technology transfer make the research and scholarship available for public benefit, but it is also possible to leverage that technology through licensing activities to drive revenue to provide for more research activities, and finally, technology transfer drives revenue streams.
The Massachusetts Institute of Technology, for example, has had more than 1,000 U.S. patents issued. Its Technology Licensing Office had revenues of almost $20 million in fiscal year 1999, according to the National Business Incubator Association in a book published last month called Why U.S. Universities Are Incubating Companies: Technology Commercialization Through New Company Formation. In Fox’s two years as director of the University’s technology transfer program, eight companies have emerged from UC Davis’ research efforts. Of those, all but one have received some sort of private equity financing.
Striking a Balance
While a venture firm needs to have a visible presence on campus with ties extending into the faculty, administrative and student base in order to capitalize on those opportunities, the drive to lure those investors must still come from within.
“Technology that comes out of the university tends to need a little more work. The professors have never been in business, let alone entrepreneurs,” says Vista Ventures’ Merigold. “When something is just at the technology phase, it’s hard to get involved. We’re pretty busy and we see a huge amount of deal flow. Before a VC can look at the project, [researchers] need to get the answer to who needs it and why. With some help they can translate that technology into a business plan.”
At the University of Southern California, on-campus incubator Egg Company 2 is working with the University’s Office of Technology Licensing to reach out to faculty and student entrepreneurs to encourage them to work together to develop business plans and make inroads into the local venture community. Similar efforts are underway at UC Davis.
Still, when a university must balance its academic role with its desire to capitalize on the marketplace for technology, conflicts do arise. Public universities must be especially careful in protecting their charter: They are established to increase and disseminate knowledge and devote all their resources to doing so. It must also remain autonomous and not allow its research efforts to be swayed by the whims of the market
“Every university zealously guards its academic freedom,” says UC Davis’s Fox. “It’s particularly important for students and post-doctorate students who need to publish to further their career, so it’s critical that the university not participate in proprietary or secret research. Instead, [it is essential] that university research creates a platform and then a company applies it to a specific example.” A university must be careful not to confuse the boundaries between scientific merit and commercial viability when pursuing research funding.
Indeed, the conflict between pure academic research and potential commercial applications is problematic for VCs as well.
“We’re very supportive of the idea that universities can produce commercial technologies and products from the research we’re doing and a perspective we like – it’s a win-win situation when it works,” says Tom Washing, a partner with Boulder-based Sequel Venture Partners. Washing is on the board of CU Boulder’s business school and its center for entrepreneurship, a joint venture between the business and engineering schools. “Our role [as a VC] is to be supportive inside, to be teaching entrepreneurship and the VC process. Because of our presence there, they’re aware of us and when they’re looking for advice, they go to us.” Sequel has funded four companies in the last three years that have emerged from CU Boulder’s biotech and molecular chemistry labs.
If the universities – their administrations, faculties and students – can commit to entrepreneurship as an academic goal, one that drives revenue while building prestige for the institution, its professors and its students, then VCs are ready to bring out the dessert. With all the right resources in place, the university may prove to be a sustainable source of deal flow and also breed the next generation of venture investors.
Contact Carolina Braunschweig at: