The $100M Rain Dance

A basic premise of university technology transfer is that research conducted at a university produces discoveries and inventions that otherwise would not be made, patents are issued on these discoveries and inventions, and the patent position induces investors and companies to develop commercial products in reliance on the patent rights, paying royalties to the inventors (and especially to university administrators). That is, a university startup company, to be called a “university startup” or “university spin-out,” depends on research-originated findings. It is not simply any company that might happen to start in the general vicinity of a university. Those companies do start all the time, but they do not take a research finding from basic research to translate into a commercial product.

Similarly, university faculty may offer services such as publications, consulting, training, software, and reference materials. Any of these may be privatized and made to take the form of a company. That is not done all the time, and for good reason, as the public is often served best by keeping distribution neutral, free from any particular need for proprietary positions, for owners to “extract” value, such as by driving up the price or by creating false scarcity or trying to drive competing products out of the market.

Beyond these considerations, however, is the problem that efforts to privatize public services, even when appropriate, generally do not meet the basic premise of university startups–that is, taking research and building a new product.

Commercialization or Privatization?

In the case of existing university services, the product often has existed for years. The change to a startup in such cases is not “commercialization” but rather “privatization.” For there to be “commercialization,” something new would have to be developed, not simply following the same line of improvements that the existing service contemplates. And the program at the university would continue–that is, the commercial product would have to do better for a given service community than the publicly supported version. There are good reasons to consider “privatization” of services–to expand the service to a scale beyond what a faculty-led university project is capable of managing, for instance, or to establish a neutral base to serve a number of organizations, as happens when a project transitions to a private non-profit foundation.

Peripheral Companies

Beyond the “university startup” that meets the basic premise outlined above, one can consider other, peripheral candidates: recently formed companies that use university resources, or that sponsor research at the university, or that take a license to some university invention, or that include university personnel or recently separated university personnel. Any company that has yet to release a product, or has only recently released its first product, is fair game to be labeled as “startup,” even if it has been around for two, three, five, ten years. All that matters is that a new relationship is struck up with the university, and there are prospects that a new product or service might someday be developed.

Shell Startups

More directly, a university can create new companies simply by filing paperwork for incorporation and getting someone to agree to fill the requisite positions in each company. No need for these people to be full-time, or know the details in any depth, or even have “skin in the game”–if the company does not get funding, or uses up all its funding, it is not a problem. This sort of startup is a “shell” company. It exists so that the university can do business with itself, or nearly so. Once the company is in place, then the university can license inventions to the company, transferring to the company the obligation to reimburse the university for its patenting costs, which can easily exceed $20,000 per patent application. Since the company exists to receive the license paperwork, the issues of arm’s length negotiations, such as verifying that the company has the capability to develop the technology under license, are neatly avoided.

A shell company is low-cost, no-risk, and does remarkable things if one is trying to game public metrics. First, it is technically a company, in the same way that a dog is technically a wolf. So the shell company can be claimed as a “startup,” even if it means nothing economically. Second, the university gets to log a license to a startup, enhancing its productivity numbers further. Under AUTM’s definitions, last I looked, a “commercial” license is any agreement paying $1,000 or more. A low threshold, to be sure. It’s an easy thing to pass $1,000 around to get back to the university as a license fee. Third, because there is a company with a license and future obligation to reimburse patenting costs, the expense of filing those patent applications is justified–there’s a company formed, and a license, and loads of “potential.” The university can offset any other actual expenditures by the shell company by registering its domain names, building its web site, giving it space in university facilities, writing its business plan and its press releases, recruiting its officers, and writing SBIR and STTR proposals for it. Essentially, these shell companies are an extension of the university, often with the university holding a significant equity stake and financial interest in the company. Add in additional state funding to support the company’s research and testing, and the shell company is a kind of mop to sweep up available support for small business and entrepreneurs.

In essence, university shell companies are predatory on entrepreneurs: they are not themselves entrepreneurial, though the faculty and graduate students who populate them may think otherwise. They are an administrative convenience, represented to the public as evidence of “commercialization.” The University of Utah used this approach, and was finally, after six years, called out for it. The University of Washington is using this approach now, claiming as startups both peripheral companies and shell companies of its own making. Along with these companies, there are also a handful of companies that legitimately represent the basic premise of entrepreneurs seeking to make commercial versions of discoveries and inventions made by faculty and students hosted by the university.

If the success of a university technology transfer program is measured merely by the number of companies that have incorporated around some gobbet of university-held intellectual property, hundreds of university research projects could be “commercialized” each year–that is, made to appear commercial, with the trappings of a company, with a buzzword name (especially one with “medical” or “therapeutics” in it, or common words spelled goofy or run together with odd capitalization), a web site, and with “investment” in the form of university capitalism–“startup funds” from an account controlled by the university, so no private, independent, thinking investors have to actually be bothered with considering the company for investment.

 

Why Universities are Tempted by the Shell Game

After all, private, independent, thinking investors probably would not fund such companies, and hence “market failure” is given as a justification to use public money, rather than raised as a warning against vanity funding. It is not that the market won’t fund good things; rather, it is that where there is no market, it is not possible to buy one into existence with small-scale outpourings of public money used as “venture capital.” Why would venture firms participate in such games? One reason is they fear being excluded from access to future venture deals that they really want to do. The price for being on the first call list is throwing bits of seed money at the university to plump up its shell company portfolio. The university, in turn, uses the fact of investment to report economic development to the state, champion its apparent success, and pitch for more university and public funding for its operations. That’s okay with venture investors who otherwise want to stay on the university’s good side, and don’t mind the idea that the state might provide subsidies for their work, which is simply gravy.

In the state of Washington, the University of Washington is ready to soak up funds from the Washington Research Foundation (a private organization established to manage IP developed at UW), the Life Sciences Discovery Fund (a state fund using tobacco settlement money), the Commercialization Gap Fund (provided to UW by the WRF), the Royalty Research Fund (funded by royalties on licensed inventions), Innovate Washington (the private manifestation of the Washington Technology Center, which UW apparently ran out of town in order to get its main building, Fluke Hall), and various economic development programs run by the state, such as the recently defunded STARS program. If UW did not create shell companies, these various funds would focus on private entrepreneurs and research of merit independent of any particular administrative vision of making huge bucks through commercialization or privatization.  UW appears to have adopted the policy that these funds were better spent on UW’s shell companies, to improve the metrics of its technology transfer program, which counts dogs as wolves, and then pitch the idea of UW’s culture of innovation as a way to get more money out of the state–money that otherwise would go to other state purposes.

Josh Lerner in Boulevard of Broken Dreams discusses this pattern of dealing in “regulatory capture.” Whatever the source of funds, institutions will adjust their practices to capture easy public money. UW does not advocate for public funding to go to worthy projects in the private sector; does not advocate for public money to go to, say, community colleges or to cities and towns to spark local development; does not advocate for public money to support programs such as the Edward Lowe Foundation’s economic gardening. UW does not spend any of its own money on such efforts, either. UW’s shell companies, like the University of Utah’s, are a form of quantitative rhetoric, designed to deceive the inattentive. What these universities are doing may not be illegal, but it is surely unethical. Worse, the effect of diverting–in effect, stealing–resources from other public programs means that for every shell company announced, the university is taking money that would go to other initiatives in the state. That might be tolerable if in turn the university’s use of the money created a world of opportunity for companies, entrepreneurs, and citizens–not just those willing to play the university’s game to distort the metrics. The outcomes, however, do not appear pretty. If they were pretty, the universities certainly would have reported the outcomes. At UW, it appears that millions in public money has been captured to create a program that excels at producing shell companies. This, apparently, is what the UW president meant when he joked that UW could now teach Stanford “how to do this.” I fail to see what Stanford has to learn from UW on this front.

Buying Appearances vs Buying Market Influence

If a government wants to buy market influence, it looks like the going rate is on the order of $300M–and even then, as in the case of the USTAR program in Utah, nothing is assured. Anything much less is, well, a non-therapeutic dose–good for show, but not for economic change. The only limitation to petty state capitalism in the form of privatizing public work as “companies” is the amount of public money available to dress up public service as entrepreneurship, so that whatever faculty were doing before with their ideas, with research, with training, with public service, their work now can be repackaged as “startups” and the university can look to extract “value” from these startups as a “new source of revenue.”

At C4C, even the premise of revenue has been abandoned. It appears to be sufficient to argue that only the number of startup companies matters–count them willy-nilly by the dozen, shells stuffed into corners of university controlled “incubators” and fed by university and public slush funds. C4C would like the volume of startups to somehow stand for performance, for economic impact. C4C would be happy for the public to equate many startups with many jobs, new products, sales, growth, investment, tax revenue, creativity, optimism, a new world, a world remade on the shoulders of C4C.

Nice, but wrong. Some of the new companies forming do have important roles to play, and the university and entrepreneurial people behind them are serious, well-intentioned, determined, and putting their careers and personal money into their efforts. Good for them–may they succeed! But C4C is being disingenuous, if not deceitful, in attempting to equate its activity with economic development. At best, C4C might argue that its activity is promoted to look like economic development, to look like the outcomes that the linear model of university technology transfer predicts will come about, if only states put more money into expanded research facilities, proof of concept centers, prototype development funds, patenting, commercialization offices, and paying the expensive salaries of “seasoned business professionals” who otherwise somehow cannot be bothered to start “high-value, success-bound” companies unless they are subsidized by the state to make the effort. Boy howdy.

The Art of Appearing Too Important to Dismantle

No, there is something else going on, more personal and increasingly more desperate. From the information I have, C4C has bloated to a budget of over $15m a year. Its income stream cannot justify that level of spending. The big budget was premised on investment now (say, in 2009) to reap the benefits years later (say, about now, in 2014)–but it is clear, there are no such benefits. There could have been. In a random world, there is always luck. And C4C apparently has been “unlucky.” That is the charitable way to put it. “Incompetent,” “foolish,” “manipulative,” “inattentive,” “delusional,” “wasteful,” “undisciplined,” and “self-promotional” are also candidate explanations–ones that C4C certainly will not raise in its introspection to figure out how $100M could disappear so inconsequentially over five years.

The immediate problem for C4C is simply how to survive without the legacy royalties of the Hall patents to provide free money for any and all schemes. This problem is not new: C4C knew this was time was coming when it dismantled UW TechTransfer in 2009. Rather than map a course to scale back operations if another “big hit” deal did not come online in the next five years, C4C has doubled down and spent ever more wildly. It is as if, when a drought is predicted for five years from now, a farmer goes on a shopping spree to buy more tractors than he needs rather than build, say, water storage facilities. The tractors look flashy, but are worthless for the circumstances.

C4C has used announcements of startup companies to appear important–too important to be allowed to fail, too important not to receive more public subsidies for another five years of wild spending. Here is another premise of university technology transfer: it should be stand-alone and self-sustaining unless there is a public purpose served. Subsidizing wealthy entrepreneurs and venture investors would seem to be remote from any meaning of “public purpose.”

This premise of benefiting the public through the development of research findings using the resources of companies has been perverted into the idea that the public purpose, foremost and always, is met when a university tries to make money on the equity value of “startups” that hold exclusive licenses to university-claimed research results. C4C, however, ought to operate at a scale proportional to its income. That income is not continuous and incremental–it is often random and one-off. Thus, the need for a reserve fund. But C4C spent much of that fund, too. It burned its seed corn, it ate every green leaf, and suprise of surprises, just when the money runs out, its leader leaves the dusty brown field for still-green pastures. As Robert Jackall has it, one of the virtues managers of a certain ethical bent develop is the ability to outrun their mistakes.

It appears that C4C is trying to puff itself up so that the University can justify funding it from sources other than its share of royalty income. C4C is pitching the idea it is too important to dismantle. Yet, if one looks at C4C’s actual productivity–not the bustle of filing millions of dollars per year in patent applications, not the number of licenses (however strangely counted), not the number of actual startups (routinely misstated)–these are all measures of activity, of bustle, of dressing things up and gaming the system so long as there is money for tractors and cleverness. These are appearances that money can buy.

Getting the Right Metrics: Bustle or Productivity

No, productivity drives to fundamentals. In financial terms, what is the return to C4C from its bustle–where are the equity exits, where are the royalties, where are the grants, where are the donations from the entrepreneurs made so very, very, very, very, very wealthy? C4C does not report these figures, as far as I can tell. I do not believe institutional modesty is the reason for withholding the information.

In public impact terms, where are the new commercial products? Where are the real jobs? Where are the benefits of the new products to the citizens of the state (in improved health, safety, general welfare)? Where are the new tax revenues that fill the state’s funds, from which to pay for social goods such as universities?

The Bayh-Dole Act, even with its watered down accountability, asks that universities be ready to report, for each invention made with federal support and owned by the university, the date of the invention’s first commercial sale or use. C4C does not report this information. As far as I can see, C4C does not track this information, does not care about this information. For all I know, federal agencies, too, don’t care. Research is an unqualified good. The linear model will provide. No need to actually look for productivity.

Rare, Nearly Random Events

Here is the deal. If we look at university innovation activity from a historical perspective, it appears that maybe once every decade, or maybe every twenty or thirty years, a prepared institution has the opportunity to present an invention for commercial development and make deals that create significant royalties. Stanford, a high performing university in the heart of the world’s venture capital community, reports three such deals in 36 years. The University of California did a handful of such deals across ten campuses and three federal labs over a couple of decades, and then cannot seem to do even more, despite putting more and more resources into the effort. An internal document put the historical odds of a UC-managed invention making it to commercial product at 0.1%–and we are not talking lucrative commercial product. Even WARF, now with a billion-dollar fund of accumulated royalties, appears to have had only a handful of “big hits” in its 90-odd years of existence.

The University of Washington has had one “big hit” invention in 35 years, despite increasingly frenzied efforts to conceive another one. And the “big hit” invention it does have was presented to it by its inventors, not demanded along with 350 other reports of invention, to be pawed through and divvied up among buddy venture capitalists. The big hit invention was developed without significant university technology transfer apparatus or expenditure, with a bunch of hard work by a few individuals willing to make a go of it. The same is true for Cohen-Boyer, for Axel, and other big-hit inventions managed by other universities.

Consider this: it may well be that such opportunities for lucrative, royalty-bearing “commercialization” are nearly random. Not entirely random, but sufficiently so that they favor the prepared mind (and prepared institution) but do not come any faster because the institution attempts to turn their occurrence into an input-output process, where the more administrative feeding and bustle, the more economic “value” will come pumping out the other end. The effort to turn university innovation into a process, to install administrators over its operations, to take ownership and control of creative class insights, privatize publicly entrusted services, to extract revenue from each and every transaction–all of these activities, claimed as perfectly reasonable if not mandated for the public good, may well work against university innovation and suppress or destroy opportunity for the rare event.

Rain Dance, $100M; Integrity, Priceless

Folks, you can dance for innovation rain, and eventually it will rain. It may even come in a form you expect. You can bustle about making a show of university control of innovation opportunities, and maybe once a decade, or twice a century, there will be an opportunity for wealth-making and wealth-taking. Maybe. Despite the rain dance. The mistake is not dancing, even for rain. Let it go–whimsy is good, and social forms help to stabilize narratives in a difficult and changing world. Tech transfer offices play as good a role as any in framing such narratives. The mistake is in a university attributing its rare good fortune to its own administrative bustle. If that self-promoting attribution is going to be made, it should be made carefully, and should have good support. Otherwise, it is not even mysticism–it is simply self-serving bluster. It may even be that intense university controls on intellectual property and overproduction of startup companies compete with rare events, and drive them away.

If university startups that make a fortune are rare, then one ought to respect the dynamics of rare events, the stuff in the fat tail, the one in a thousand, or one in a million event. How does one create an environment that attracts an impossible event, or one in a billion event, so that it becomes, say, one in hundred thousand, so that somewhere, across American universities, every five to ten years, it is recognized, and cultivated, and becomes something? Pounding away at producing scores of university startups per year did not do one lick of good for Utah’s economy. It won’t help Washington’s either.

There is, of course, always the chance that a new sparkly Amazon or Starbucks might start near UW, and if so, if UW administrators have been spending money wildly on commercialization, there’s a chance some of that money might have touched that shiny new startup, and if so, then there is also the chance for some UW administrator to claim credit for the startup and try to package that into a pitch for more public money to create more shell companies. But spending money in this way is a deceptive effort to look good, to take credit for rare events as if they have come about because some administrators were running a reckless, expensive, self-promoting, creativity-hording program that finally, luckily soiled something emerging that turned out to have value.

C4C is working the system, announcing metrics that make it look good to folks disinterested in checking the facts or asking about the metrics of productivity on which C4C’s reason for being is predicated–revenue to support UW, economic development from making new commercial products based on university-hosted research. C4C does not report any of this, but appears determined to take an ever-bigger piece of public money to spend in an effort to appear useful to the university, to the public, to innovation. What it shows up as is a $100M boondoggle. What makes it a fraud is the repeated, inaccurate, negligent, fabricated public reporting. In any publicly traded company, this would be securities fraud. Apparently, the University of Washington is happy as a lark to have wasted $100M.

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