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11 September 2017

A university should be as generous as it can afford to be

Tom Hockaday, founder of Technology Transfer Innovation and former head of Oxford’s commercialisation office, looks at why a university should be as generous as it can afford to be in matters of technology transfer.

Author: Tom Hockaday, founder of Technology Transfer Innovation

The introduction of impact as a measure of university research excellence in the UK government’s 2014 Research Excellence Framework (Ref) has changed the way universities in the UK think and talk about technology transfer. There is now far more emphasis on the impact of university activities on the outside world and less on the potential income to the university and others from these activities.

To many people involved in technology transfer this is not a change. We have known for decades that technology transfer is not the answer to a university’s finances. Our priorities for decades have been to transfer technology first and to make money second.

However, this is a change in the thinking of senior university administrators. Ref impact has emboldened them to praise the non-financial aspects of technology transfer and allowed them to ease the pressure placed on technology transfer offices to generate a profit.

The change is recent and incomplete. Discussions continue on the consequences, which raise important practical questions for a university.

The next Ref exercise is due in 2021, with plans to increase the impact weighting from 20% to 25% of the total points available, with potentially significant direct financial consequences.

This article discusses a number of questions, and concludes by encouraging a university to be as generous as it can afford to be in matters of technology transfer.

How do you manage spinout equity?

This is a very popular topic for discussion and action.

Imperial College London and its technology transfer affiliate Imperial Innovations, managed by commercialisation firm Touchstone Innovations, have very recently announced the launch of the Founders Choice program, as reported by Global University Venturing last month: “In addition to Imperial Innovations’ existing spinout program, which provides roughly equal equity stakes to the TTO and to founders, academics will now also have the opportunity to retain 95% of equity.”

The choice for founder academic researchers at Imperial appears to be about 50% and a lot of help or 95% and some help.

This is an example of a university choosing to be more generous, because it believes more good things will happen as a result – more impact, never mind about the money. It is a very good idea and Imperial is to be congratulated.

With Imperial having “only 5%” of founder shares, it moves alongside global superstars Stanford University and Massachusetts Institute of Technology, often praised by investors and lobby-prone government for wanting “only 5%” of their startups’ equity.

The challenge for Imperial College and the others involved in Founders Choice will be how to resist supporting those who choose not to have the support, but find they need it. There is likely to be a gradual increase in those exercising the Founders Choice to own more shares, without the expected decrease in resources the TTO consumes in helping. The Imperial offer is described as a pilot, for 18 months initially. Assuming the “academics rule”, as they usually do in top universities, in a couple of years Imperial College will be holding a large number of small shareholdings, and as Imperial is smart, it will have found a way to invest in follow-on rounds in the ones looking good. This may fit nicely with the ending of the Imperial College pipeline deal with Touchstone in 2020.

It is getting complicated, in some ways, but simpler in others – a gradual realisation that founder shares do not make much money in companies backed by multiple investment rounds. So the thing to do is worry less about them and focus more on having an interest in follow-on investments managed by professionals.

Elsewhere an example of this flexibility did not work out particularly well. A spinout founder team of researchers at a different university did not want help, were adamant they did not need it, and all they wanted was for the TTO to grant the intellectual property licence to the startup. The university involved agreed to a lower-than-normal university equity share. It turned out the planned company was not quite as ready as the researchers thought, the researchers were not quite as ready as they thought and the TTO involvement was as time-consuming as usual, if not more so.

Another university suggested a menu approach, where researchers select type a, b, c or d support from a menu of types of help. “We will have the helpful introductions to investors please, but then no need with any help negotiating the terms, and an espresso to finish.” – “Very good, that will be 22%, please.” This is a complicated idea, may be difficult to explain and is certainly open to gaming by any researchers who may be mistrusting of central support.

How do you pay for the tech transfer program?

Now that senior university administrators can openly admit that their TTO program is unlikely to make money, as this is not its raison d’être, the question of how to pay for it is being revisited.

HEIF (the UK government’s Higher Education Innovation Fund) is an important source of funding for knowledge and technology transfer. The large research universities receive close to £3m ($3.9m) a year, enough to fund a decent TTO, depending on patenting budget and TTO financial models. However, universities share out their HEIF award across many different support functions and initiatives.

When HEIF support started in 2000, it was not really on universities’ financial radar and the TTOs had access to most or all of it. As HEIF awards grew in size and the global financial crisis of 2007 onwards led to universities hunting down all sources of income, the money has been spread across an increasing range of innovation initiatives.

If tech transfer is seen as an important central service, like the libraries and research administration for example, should it become part of the central charges levied on departments, however the university may manage cost allocation, and all that. The total amount spent – or “invested” – in technology transfer could be set as a sensible proportion of the university’s research volume. Should the central charge to departments then be somehow linked to research volume, numbers of active research staff, or indeed at the whim of a current head of department whether the department wants it or not?

TTOs should retain a proportion of the income they generate, but how much? Overexcitement about future possibilities usually leads to discussions concerning at what level of levy and success the TTO will become self-funding. It is pursuit of this goal of self-funding and the inevitable forecast rise of the curve into profitably that has changed. It is almost certainly not going to happen, so let us stop planning on the basis that it will.

It would be far better for the TTO to be fully funded as an important central service, with the university deciding how to distribute the income it generates afterwards.

How do you manage licensing royalties?

There is very little discussion about this.

It seems to be settled that licensing income is shared about equally between three groups – the researchers involved, the departments involved, and the university centrally – after external costs, mainly patenting, have been recovered. Professional association PraxisUnico offers resources and training around this process.

The debates about equity have not spilled over into royalties.

How generous can a university afford to be?

Universities want more money. The Greek department wants more money to do important research and teaching, the epidemiology department wants more money to do important research and teaching, the administration departments want more money to improve practices and provide more support, and so on. Universities see tech transfer, spinouts, licensing and all that as a possible source of money, and they are not willing to let it all go.

The Easy Access IP initiative – formalised by Glasgow University, King’s College London and Bristol University to offer research with low technical readiness for commercialisation by third parties – was a bold and revolutionary step along his path, launched back in 2010.

Ref impact has pointed the spotlights at how all the different ways universities engage externally generate benefits for the university, rather than money. Although, of course, impact scores contribute to Ref ratings, which translates directly to government funding, so maybe it is still about the money, just a different model. What is the exchange rate between a department’s share of a possible spinout bonanza and the quality-related funding for a higher Ref grade?

There are, of course, issues for the university to consider. Can it afford to be different to its peers, comparators, competitors? Yes, to an extent, if convinced and willing to show leadership. Can it afford to fall foul of charity law, in terms of use of its assets? Of course not, but this is more of a distraction than a policy-defining issue.

Universities are changing their attitudes to the benefits of technology transfer. They will change again. Imagine a UK university so confident in the overall benefits that come from a properly resourced TTO that it was willing to fund it year in, year out, retaining only modest and uncontroversial shares of royalties and spinouts, fearless of accusations of missing out on the big one, reaping the plaudits of academics, business, industry, investors, government, peers around the world. Imagine…

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