How University Capitalism Suppresses Business Opportunity

The Washington Business Alliance has just posted a discussion of the University of Washington’s Center for Commercialization. The WBA still presents C4C’s published information on startups as facts, but then offers some alternative, even contrarian, perspectives on the claims–something that no-one in the press has been willing to do, not at Xconomy or GeekWire, not at the Seattle Times, and certainly not by UW’s own press office, which has been in full rah-rah mode.

Given that the local mainstream press is unwilling or disinterested in examining the underlying fundamentals of university IP management and startup activity, it is good to see that the WBA is taking a look. Certainly there are challenges, as Egils Milbergs points out in the WBA discussion. In addition to finding funding for prototypes, and for scaling prototypes into viable commercial products, there is also the issue of whether university administrators, by demanding ownership of research intellectual property, make the search for funding more difficult, and expand the number of projects competing for early stage funding from investors. 

For instance, in the state of Washington, companies can seek funding from (among others)

  • the W Fund, a for-profit company that makes early stage equity investments using money from state government and the University of Washington, among other investors;
  • the Commercialization Gap Fund, a UW-administrated pool of funds to support research desired by C4C;
  • the Life Sciences Discovery Fund, which makes grants to state and non-profit research institutions in support of research proposals from companies (and so, essentially, the grants are free money to the companies, though appearances are maintained in the granting process); and
  • the federal government in the form of SBIR and STTR grants as well as subcontracts and side deals (such an exclusive right to future improvements) on research grants made to faculty investigators.

If UW is “starting” more companies, and those companies in turn pitch the LSDF, then they are competing for LSDF grant funds with established companies and new companies created by private entrepreneurs. University faculty who otherwise might support those companies instead are enlisted to support the companies in which the University has taken an ownership position.

The state ends up funding itself, looking out after its equity positions to the exclusion of private initiatives. If the state is pouring millions into such companies–and Washington state certainly is–then it is little wonder that a unit such as C4C would not want to publish its equity positions, or its returns on investment, or the number of jobs that have been created simply because the state has been induced to spend more money on itself, to prop up its startup companies as a little state-funded oasis in a desert of opportunity.

The problem with state capitalism of this form, on a small scale as sovereign wealth funds go, is that when the research grants run out, the companies generally wither away. At the federal level, the lack of commercialization follow-through is a huge problem for the SBIR and STTR grant programs. Companies win Phase I and Phase II grants, spend the money, report their progress–and then nothing. No products, no sales, no public benefits. Why? It is easier to get more SBIR and STTR grants than it is to raise the money needed to produce actual products. No doubt entrepreneurs, at least those with inside connections, are now finding it even easier to get Washington state money than to apply for SBIR and STTR grants.

That is, the ready availability of state-managed money, combined with a review process based (presumably) on a written application, produces an environment in which appearances count more than actions, and a proposal citing the work of experts in universities can catch up resources, even if nothing happens with those resources other than that they are spent. The problem, then, is deeper than lack of money–the money is there. The problem is who gets access to the money, and what gets done with it. University licensing operations such as C4C at the University of Washington do not want to report on what their companies actually do with such money. Instead, these licensing operations treat their success in winning state money away from private entrepreneurs as an endorsement that university discoveries are better than the business ideas that others might come up with. Their “success” actually means that appearances mean more than outcomes, and the people trying to choose the “winners” depend on appearances to place state money.

Economic development should not mean “expansion of the state’s bureaucracy in the form of administrating company-like entities to spend money that would otherwise support private initiatives.” State-started companies should expect to find their money through private investors and through sales. Especially state-started companies. Yes, that’s difficult, but the very difficulty points to the difference between an idea that looks good in the laboratory and an idea that anyone independently might either want to see as a product or be willing to fund to become a product.

When a state starts handing out money as a subsidy to the venture investment community, one has to wonder just why it is that wealthy investors need welfare. If wealthy investors refuse to fund the ideas pitched by state administrators, is that a “market failure” or is it that the ideas are simply inappropriate for development as commercial investments?

Could it be–yes!, yes!, the answer will be yes, it could very well be!–that no amount of prototype development money can change such ideas from inappropriate to appropriate? It is not that research insights are not good insights, but that they generally form a class that is best deployed through methods other than monopoly control, other than to be developed unilaterally in an investment scheme designed to produce a product with “maximal” wealth production for those lucky enough to have an ownership stake in the company that pulls off this feat. Steven Johnson calls the alternative “networked, non-market” innovation. Matt Ridley points practice-based innovation. Nassim Taleb argues that historically the flow of new ideas has generally been from industry to education, not the other way around.

The effort of the past thirty-five years by university administrators has been to force “innovation” down a pathway of institutional ownership and control of research, for the purpose of maximizing the return to the institution for those few companies that succeed in establishing a monopoly position and developing a viable commercial product and providing early investors with an opportunity to “exit”–to cash out the value of their shares. Without an exit, there’s no return on the investment. The more general problem is that the companies feeding off state support never have to rely on their products to stay afloat–their product is attempting to make innovative product–perpetually.

This is “research as an industry”: it is easier to put on a show of effort than to make and sell new product. State funding is just as good, financially. One almost pines for the ambitious entrepreneur, not satisfied with pulling a salary from measly state funding, year after year, hopping from startup to startup, a kind of chronic entrepreneur bred to successfully separate state granting administrators from their public purses. But one ought to pine for is an environment in which the state stays out of business formation, does not subsidize the wealthy, and does not try to produce the appearance of markets where there are none, and certainly not by using monopoly methods, such as patenting and exclusive licensing. In such an environment, the state plays an important role, one it cannot play when it is trying to be the venture investor: mediation of disputes. This role of government goes back to the Code of Hammurabi, echoes through Locke’s Second Treatise of Civil Government, and swirls through Jane Jacobs’s Systems of Survival.

The Bayh-Dole Act created the opportunity for university-based inventors to retain ownership of inventions made with federal funding. The law was crafted so these inventors could convey rights in their inventions to organizations that would help them achieve practical application–use!–of these inventions. To do this, Bayh-Dole also had to open the possibility that the inventors would convey rights to their host universities. What Bayh-Dole and its implementing regulations did not do is make it clear that the universities had no right to force assignment of inventions, simply on the basis of handling the federal money allocated to faculty-proposed research and providing the lab space that the universities had already committed, contractually, to the project as a condition of the federal money and paid for by the federal government with indirect cost payments directly to the university administration.

Once university administrators saw the opportunity to take ownership, as they had under the old Institutional Patent Agreement approach, they could not help themselves. Faculty inventors were vulnerable, their inventions were easy to take, the opportunities for wealth creation through patenting and monopoly licensing appeared endless, as if Vannevar Bush had written “Monopoly Licensing the Endless Frontier.” The administrators rewrote Bayh-Dole for faculty and public consumption to require university ownership of faculty research, to mandate it, to make such ownership a public good, one that had no downside–an unqualified public good. An administrator’s thumb in every innovation pie, now as an unqualified public good, beyond discussion.

When university administrators are capable of holding back their desire to own the work of others, when they are ready to resume their role as mediators and guardians rather than investors and manipulators, then they have the opportunity to assist faculty in participating in the work of developing research ideas for broader practice, whether through commercial channels or otherwise, whether making money for the institution or otherwise, whether obtaining venture capital funding or otherwise, whether improving the economy of the state that happened to host some bit of the research or otherwise. Rather than being forced by litigation or legislation or shame to do so, why not take the civil way, the thoughtful way, the reasoned way, and do it for the good of the university, entrepreneurs generally, and the economy?

As it stands, university capitalism works against private business opportunity, for startups and established companies alike. Whatever “success” C4C might achieve comes at the general expense of the greater business community. Every government dollar C4C channels into its own companies takes a dollar way from infrastructure support for business generally. It is as if the contractor hired to build roads decided it was better to build toll gates on everyone else’s roads, “to fund, nay to create a sustainable financial model, for all future roadbuilding.” It is good, then, for the business community to take an interest in what has been happening in university technology transfer, and ask questions the press does not think anyone cares to ask. The answers may surprise and inspire.

 

 

 

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