How to Herd Cats — Commercialising University Research

This post was, inspired by a recent article by James Alexander from Incubate.org.au where he compares wrangling academics to herding cats.

Organising researchers is often said to be like herding cats. Answer = move the food bowl

Recently I attended a few events about the strategic direction of research in Australia and how to improve research outcomes including commercialisation and innovation.

Clearly there are issues with this in Australian Universities but we are not alone.

The authors of “Keys to the Kingdom.” recently published in Nature Biotechnology compared spinout deals and commercialisation policies at universities in the US and the UK.

For spinout companies in the US, the Universities equity stakes range from 0% at the University of Wisconsin, Madison to 100% at the California Institute of Technology with some universities allowing for negotiations.

In the UK, disclosed equity stakes range from 20% to 67% depending on the University with many of the equity stakes being non-negotiable.

The article also describes some of the challenges for entrepreneurs including, long negotiations, inexperience, lack of funding and access to experienced legal counsel.

The companies surveyed felt Universities who took large equity stakes tended to make academic contributions or overestimate their offering.

However, one of the more tangible benefits from the Universities was more research funding and resources (this generally required further negotiations and legal fees for new inventions).

It is important to remember that early stage laboratory results cannot always be replicated in a commercial environments, accordingly deals should be structured so the academy is remunerated if the technology really works.

ED: Having cleaned up a number of University VC funded spinouts where technology & staff didn’t work as planned I can say that this would have been a nightmare to define and measure. It doesn’t matter anyway as without working technology the companies where worthless.

The main purpose of this article is to attempt to suggest improvements and determine best practice. According to the “Keys to the Kingdom” regions with the best track records also had TTOs that took the smallest piece of the pie:

Notably, the regions attracting the most life science investment and with the most successful life science spinouts rewarded the academics and investors the most. The data would suggest that TTOs taking less upfront and leaving more to the academic and investors who will actually carry the idea forward pays off in the long-term.

Simply put: holding a smaller piece of something is still more valuable than a large piece of nothing.

So what has all this go to do with Australia? Well if you are trying to figure out what sorts of deals Australia universities and publicly funded research agencies are doing then have a look at their annual reports and financial statements.

It’s reasonable to conclude Australian TTOs are robbing themselves of commercial returns by demanding too much equity and taking too long to do a deal when there is so much development work still to be done and funded.

Universities largely overestimate the value of their contribution, often making the TTOs role much more difficult.

So what is the Australian academic innovation system to do?

Move The Food Bowl

The innovation system does not exist without a steady flow of inventions and a will to commercialize them.

Typically, there is very little incentive for the majority of academics to take the personal risk of launching a startup, their KPIs are structured around publications, disclosures and any commercial services income or grant funding awarded.

Further to the Cat food bowl analogy, perhaps funding could be tilted a bit more to commercialisation outcomes than publication citations.

Simple, Easy to Execute Deal Terms

TTOs should move towards simple, easy-to-execute deals and clear, performance-based terms.

The best example of this might be Peter Thiel’s Breakout Labs offering up a standard NDA and terms sheet for early-stage science startup capital that also encourages the founders to maximise capital efficiency while moving quickly.

This model rewards the Thiel foundation for creating successful startups by returning significant but not excessive contributions to the foundation, which is then used to fund the next generation of companies.

Y-Combinators also offers similar documents, which are designed to allow startups to maximise the value of investment in the shortest period of time.

Standardised Term Sheets, Shareholder and funding Agreements save startups and investors money in legal fees and reduce the time spent negotiating the terms of the investment.

Fund Raising

Money can be difficult to find in Australia for University Startups and the size of our deals is significantly smaller than the US.

For example, early stage funds for Australian science startups is in the low to mid six figure range (e.g., Zenogen and Clarity Pharmacueticals) whilst US science startups can range from millions (e.g., Perlstein Lab and Cytovale) to hundreds of millions (e.g., Juno Therapeutics and Calico).

Early rounds for Australian science startups are small, but they do have the little known advantages of being able to leverage matching funds from the Entrepreneurs Infrastructure Programme and other funds such as the NSW Medical Device Fund and various R&D Tax Incentives.

Inadvertently, this makes our startups relatively inexpensive for overseas investors due to the lower valuations, lower burn rates (e.g., from lower salaries) and the current exchange rate.

An Innovative Australia Exists

So how does the Australian academic innovation system work out the above issues? Adopting the simple, easy to execute deal terms can be accomplished by downloading the ones linked above and using them. The rest is a bit more difficult, but not impossible.

To provide some context, Stanford is a household name when it comes to innovation. The Stanford TTO funnels technologies from a network of 1,600 academics with total returns of $1.33B from 1970 to 2010 and $65.5M in revenue for 2010. Stanford churned out Google — Google has 53,600 full time employees. And, Columbia University made $790M for its gene delivery technology. Academic technologies can be quite valuable from a financial perspective while also having tremendous impact on society and the economy.

A good estimate for the number of STEM academics in Australia can be obtained from the National Collaborative Research Infrastructure. NCRIS supports 35,000 academics with 1,700 employees across 222 institutions in research areas that generated the highest returns for early-stage capital over the past decade.

Despite these facts, a TTO executive explains “we [Australia] are the worst” according to OECD statistics.

Once could point the finger at the Australian TTOs — over the past two decades 13% of TTOs surveyed by the Association of University Technology Managers broke even. That, however, is not the purpose of the article.

Let’s get back to the point. The purpose of the article was discuss the challenges for academic entrepreneurs in an Australian context and propose the first step. This can be accomplished by adopting simple, easy-to-execute deals that reward entrepreneurs and high-risk capital more than anywhere else.

Australia is already set up to do this — exchange rates are favourable, rounds are smaller and funds can be government matched.

As demonstrated by the Nature Biotechnology article discussed above, good deals attract the most cash and best talent.

It is likely that a few good deals will have follow-on effects. Making deals easier to execute and rewarding the academics who take the risk more than anything else will help Australia benefit from the unusually large volume of STEM academics supported by a single organisation.

Image CC from Kathleen Murtagh