I get asked from time to time what the standard ‘deal’ is for transferring technology out of universities. I am not an expert on this topic, but have seen enough deals out of Georgia Tech and talked with enough folks at other universities to know that the answer is all over the map. I’ve also seen enough to think the current system is broken. Many times IP is years away from being ready for commercialization – either because further development is required or because of market timing. To encourage more startups from research activity, universities should approach commercializing this IP more like venture capitalists. Change the system to capture more upside on the ‘hits’ and place less emphasis on protecting small returns across the board.
While heading ATDC (the Advanced Technology Development Center at Georgia Tech), I don’t think I saw any two deals that were the same – but they did have similar structures. The deals are structured as licensing deals, with varying degrees of exclusivity. The terms were influenced by several factors including:
- Who is licensing the IP? For example, terms might be different for a company that funded the research than they would be if a professor and student were starting a company.
- Value of the IP. How large of a market opportunity the IP might impact.
- Degree of exclusivity. The more exclusive, the higher the cost.
They all consisted of the first two basic components below, and sometimes the third:
- An upfront cost. This cost was about re-capturing the expenses to date protecting the IP being licensed.
- A royalty. The royalty was usually a % of revenue. There is sometimes a ‘cap’ that once you’ve paid a certain amount, no further royalties were due. There was also sometimes a minimum associated with a timeframe such that if the minimum wasn’t hit, the licensee either had to make up the difference or lose the license. That enables the university to license it to a party that may produce better results.
- And sometimes there was an equity component. It varied to such a degree, I’m not sure what it is based on.
The time, uncertainty, and friction it takes putting these deals in place is a significant dis-incentive for professors and advanced degree students to commercialize their research (or outside startups to license the technology). The individuals in the licensing office have an impossible task in trying to assess the value of such a broad range of IP. It is a very inefficient market – the outside world usually has little or no visibility into what IP the university is sitting on. Outside of life sciences and biotech, research universities report very modest returns on these efforts and only a small percentage of the patents are licensed.
A better method would be to offer licensees the option of exchanging equity for these fees and royalties. Like venture capital, universities may be better served in having unlimited upside in the ‘hits’ rather than protecting small returns for the ‘misses’. In many cases it would reduce the legal costs on both sides of negotiating the transactions. This would have the benefit of fostering more positive relationships with the licensees than the current model where they feel they ‘paid for it’. This may lead successful benefactors of university research to be more likely to make significant contributions to the university.
With increasingly tight university budgets, the upfront investment in moving to this method may be the biggest barrier. Short-term cash flow from these activities offsets the expenses of the technology transfer activities. This would also require a different mindset and skillset in technology transfer offices. Rather than just measuring success on how many patents are licensed, measure success on the number of (successful) companies created out of research activities. I believe this would increase commercialization, be a more sustainable model, and put more money in university coffers.
If you know of any universities doing this I’d love to hear about them!