Sparrows, Mockingbirds, and Crows

Walter Valdivia at the Brookings Institution has a new report out, noted by the New York Times, on how to improve “technology transfer.” Valdivia is one of the more astute commentators on university licensing behaviors, and it’s valuable to consider his point of view. His general point is that, in a survey of university patent licensing programs, a lot of them do not appear to be “profitable.” This may be true, but there is a big disconnect in the move from the title emphasis on “technology transfer” to “profit-making” by a licensing office. Let’s try to get at these issues. In this first part, I will deal with the models. In the second, I will work with statements from the Brookings report and the New York Times article.

“Technology transfer” can mean any number of things. At its most basic, it means something akin to what it sounds like it should mean–the movement of “technology” from one place to another, such as from a developed country to an less developed one, or from an industry in which a technology is mature to one in which the technology is new, or from a lab making a discovery to others wanting to apply and use the discovery. A “technology” is a means of doing something, typically something useful, often involving tools of some sort. But technology is more than just physical items–it may include methods and know how and logistics. To introduce tractor technology to farming in an undeveloped area means more than just landing a tractor in a field–there has to be a supply of fuel, and spare parts, and training for those using the tractor or servicing it, and the fields have to be dry enough to use the tractor, and there has to be something for the tractor to pull, like a plow, and a place for the tractor to be parked so it is out of the weather, and won’t get stolen. And, yes, for somethings, there also must be permissions and licenses to use the technology, assuming that one has patent positions in the target jurisdiction for the proposed new use.

Technology transfer, in short, is about diffusion of use, and often requires a robust infrastructure. The more infrastructure needed, the more difficult the transfer may be.  

The Bayh-Dole Act is overtly about this sort of technology transfer. Bayh-Dole seeks to use the patent system (a property regime) to promote the use of inventions made with federal support. The idea of the law is rooted in a version of the linear model–that basic research, especially at universities, will produce inventions and discoveries that will lack practical application and development within the context of federal support. The idea then is that federal agencies are required under Bayh-Dole to use a standard patent rights clause in their funding agreements with universities (and with other nonprofits, and with small businesses, and now extended by executive order to all contractors). This standard patent rights clause places limits on what a federal agency can require by way of invention rights as deliverables in a research relationship, and limits on agency requirements if inventors seek to retain ownership of their inventions made with federal support. The standard patent rights clause also places requirements on any invention management agent to which inventors assign ownership of their inventions. The core definition in Bayh-Dole is that of “practical application” of inventions. “Commercialization” is one consequence of practical application–but making products for sale is not the focus of Bayh-Dole, though it can be one way of achieving Bayh-Dole’s goal of promoting use of inventions.

But this discussion of technology transfer and practical application bears little connection with the usage of “technology transfer” by university administrators, and apparently by Walter Valdivia.  University administrative usage of “technology transfer” is notoriously sloppy. On the one hand, the usage carries all the aspirations of getting discoveries into use, as we have just discussed. On the other, however, the usage is actually about exploitation of the patent system to seek profits. Actual use of the underlying invention “protected” (or “held hostage”) by the patent is not nearly so important as that there is money to be made.

Thus, a “technology” can be “licensed” to a company for an up-front payment with various milestone payments based on “development” activities, and money changes hands without ever a product being made, or without the technology being used. Similarly, a university could take an equity stake in a startup to which the university licensed patent rights, and the startup could then raise money and build an entirely different product, become mildly valuable, and be sold to a bigger company, again without ever having used the invention licensed from the university. About half of the university startups that I have been involved with have gone this route. A university might even profit simply by selling its stake in such a startup to a new set of investors, enraptured by the idea of getting the chance to plump the company into shape to be sold to a big company–a kind of speculative arbitrage. If a particular patent right becomes less attractive, it can be sublicensed to another company–for consideration (and thus generating royalties to the university)–all without ever producing a product or using the underlying invention.  In all of this activity, the value being traded is that of the “potential” of the patent rather than the “practical application” of the invention. In the language of Bayh-Dole’s objectives, it is using the patent system to promote the exploitation of patents, not the utilization of inventions. But university administrators are content to call all of this activity “technology transfer.”

Oddly, the origin of “technology transfer” in university usage appears to stem from the efforts of Research Corporation. As Research Corporation came to be the primary agent for university faculty seeking to develop their inventions, Research Corporation found that it could not be on every campus enough of the time to build working relationships with faculty and find all the good, juicy inventions that would be worth patenting and developing with industry. So Research Corporation started a program of encouraging universities to create “technology transfer” offices. These offices were set up to educate faculty about patents and Research Corporation’s services, to identify inventions that might be sufficiently juicy, and convey information about these inventions to Research Corporation to be reviewed for possible management. The “technology transfer” conducted by these offices was to move invention rights from the inventors to Research Corporation!

When the University of Washington created its “Office of Technology Transfer” in the early 1980s, it used just this model, substituting the private Washington Research Foundation as the primary invention management agent. The Washington Research Foundation, in turn, had been created in consultation with a former senior officer of Research Corporation. When University of Washington officials talked about “technology transfer” they may have let people believe they were all about getting stuff out of the lab and into use, but officially, and technically, they meant handing invention ownership to the WRF for review and possible management. The University made money when the WRF made money, and inventors made money when the University made money (but after the University’s expenses were paid, of course).

For a university, then, it is convenient to permit the public to assume “technology transfer” means getting stuff from “bench to bedside”–out of the lab and into widespread use, while setting up internal policy and operations directed at money-making. This disconnect is at play in Valdivia’s critique of university patent licensing programs. If the programs were focused on practical application of research results, there would be good reasons to expect that universities might not rack up profits doing so–at least not from licensing revenue. In such a situation, universities might expect to underwrite the costs of placing technology with capable audiences and teaching them how to use it, as a service to the public. A university following this approach might expect to establish a leadership position, resulting in offers to sponsor research and requests to assist in framing roadmaps for industry development, and might establish goodwill, leading to donations and happy legislators voting for more funding for the university. These lines of benefit would not be reflected on the licensing balance sheet, but rather in development offices, and grants offices, and in legislative allocations.

University technology transfer offices that actually attempt to build working relationships with industry based on practical application find that they are blindsided by the kind of analysis done by Valdivia. University administrators come to expect that huge revenues will come from patent licensing, and any office not making $50m/year is lazy, clueless, or disorganized. Their response is to kick out the licensing leadership, reorganize the office for money-making, and throw a bigger budget at the office, now called an “investment” rather than a “subsidy”–reflecting in a very real way that the purpose of owning patents is to make money, not to support a public mission that might have an impact. The public mission of the profit- seeking patent licensing office is profit-seeking. Not technology transfer. Technology transfer in this context is marketing copy, a kind of happy public rhetoric about the use of research results. The metrics of the university, however, are not about public impact of the use of discoveries and inventions, but about the money coming from the licensing of patents, net over expenses.

Valvidia works this disconnect to argue that university licensing offices are not making adequate profits by trying to license to industry, so they instead should put more resources into starting companies and playing for equity value rather than royalties on sales. One such proposal is reportedly being floated at the University of Pennsylvania, where an “alunni fund” of $25m would be created to invest in startups, using the money from “exits” (that is, profit from sale of stock to other investors, or to an acquiring company, or via an IPO) to invest in more startups. In this approach, investment money fuels startups, but the money made–if there is any–goes back to the investment fund, not to research, not to instruction.

I don’t see that Valvidia has run the numbers on how lousy universities have been at the startup game when they try to turn it into an administrative process and run up the numbers to impress the dullest of economic development officers. Simon Fraser University tried this scheme in the 1990s, bragging that it was starting more companies per research dollar than any other university in Canada. It does not appear Simon Fraser’s companies have gone on to develop the inventions licensed, or make SFU a pile of money, or even stimulate the regional economy. University of Utah’s much bally-hoo’d startup program, running more than six years, produced  by its own account more than 1oo “startups.” Most of them have no funding, no operations, list their company address as the technology transfer office, and had their web sites created by the University. The University of Utah used this “success” in starting companies to get another $93m from the state to build infrastructure to do even more. At the end of five years, they could identify only 4 companies and 13 employees and were reduced to discussing impact in terms of how much to multiply the expenditure of $93m of state funds in the state as if it had merely been handed out rather than building a dynamic, innovation ecosystem in which new products flowed out like milk and investment poured in like honey. The University of Washington, adopting the University of Utah’s president and approach, has done even worse than the University of Utah and has cut the number of startups in half over past practice, while doubling the office’s budget. Washington has been reduced to fabricating numbers about patents and startups in an effort to impress the state legislature.

Over at UCLA, the vision of Newco as a private company to which UCLA cedes control of its IP portfolio so private investors can dictate the flow of patented inventions into the startups of their speculative interest, has many of the same properties, but less given to such silliness as claiming that more startups means more economic activity. At UCLA, those behind Newco have no interest in trying to weedle more money out of the state legislature for infrastructure–they are interested in using UCLA’s patents and UCLA’s reputation to create startup companies that they can then sell to other investors, or to big companies. Call them krill companies–made to be eaten by whales, but at a wonderful profit. This is the approach that has been used by the Alfred Mann Foundation for a number of years, with a string of valuable companies created, using publicly funded inventions, and spun out, typically with real products, for substantial private enrichment. Such an approach requires investments in the area of $100m, running five to ten years, with a laser focus on an area of market potential and a strong arm to control assets that might assist, or undermine, the goal. This approach produces results, just as the railroad tycoons built the transcontinental railroads, and in doing so persuaded governments to cede vast swaths of public lands to their ownership, and when all the investors had been successfully thwarted, the profits were in the hands of the companies the tycoons had built to construct the railroads, not the companies that received the public investments to operate the railroads–those largely went bankrupt, by design.

One might sense, then, that in the Newco model, private investors will make loads of money, and there will very likely be actual product on the market, but universities will not see much of any of that money. In a typical invention management arrangement, the agent takes costs plus 40%. If the management agent is dealing direct with the inventors, then the royalties to the inventors are part of the costs. If the management agent is dealing with a university that takes ownership of faculty and student inventions, then the inventors’ royalties are part of the university’s share. Compare these figures, then, with a situation in which a university licenses a patent to a startup and may get only a 2% (less if biotech) or maybe 5% royalty (in some areas of engineering). If Newco investors startup targeted companies, and those companies act as patent management agents–essentially non-practicing entities operating as general contractors with regard to licensing–then the private infrastructure gets 95% or more of the upside, not just 40%. Of course, this analysis is generous compared to the Mann Foundation approach, under which the university gets a share of the investment (cast, typically, as a gift, even though IP is apparently obligated back to the Foundation)–but the universities and its inventors get nothing back from any subsequent commercialization, sale of company equity, and the like. I have first hand experience dealing with this approach, from the university side.

So here we are with multiple approaches. One of them makes discoveries and inventions available in a rather random way–but aims to help people adopt, even if it costs the university something to do it. This is the library approach. The inventions are like books of technology, and the technology transfer office is the compiler of these books of technology, to make them available at need. Just as a university operates its library at a substantial cost, which it does not call a “loss,” so also a technology transfer office can document inventions, clarify rights and interests in the inventions, and make the inventions available to be “checked out” by people expressing an interest. But the library approach has a difficult time showing huge income from licensing, as the benefit often flows through other channels.

A second approach is to try to make money from patenting, placing the emphasis on the deal, while using public use as marketing text. Call that the “Royalties” approach. That’s the approach Valdivia says isn’t working, and he’s spot on about that. Universities are grabbing up all inventions in a desperate attempt to find the ones that will be hugely valuable, and in doing so are destroying goodwill, personal initiative, opportunities for collaboration, and opportunities that arise because there is early adoption without the overhead of institutional contracting apparatus and process, and without a constant demand for payment, which tends to attract a number of less desirable business partners.

The third approach is to cede the effort to wealthy speculators, taking their investment in operations and giving them control over outcomes, and giving up on both the idea of public access and of making money, but being able, perhaps, to point to stuff that has actually been produced. Call this the “Private Enrichment” approach. It appears to produce companies that become valuable and even build a product, but it does not produce a return to the universities or the inventors. There is no financial gain to offset, say, tuition charges. There is little in the way of goodwill directed at the university for doing early research. No, the university turns exclusive control over to the private venturers, who take all the value, and garner the reputation for doing things.  In this model, these are natural outcomes of an ecosystem in which it falls to people with lots of money to make more money, and to public institutions to be their foils and servants.

One might wish for some other way, much as one might wish for a new species of urban bird, one that’s pretty to look at, has a nice call but never after dark, and doesn’t poop on windshields of parked cars.  Instead we have sparrows, mockingbirds, and crows.  There is a huge niche available for a new species, but it will take a big mutation–a punctuation of the present equilibrium–not incremental evolution, to fill it.

Valdivia calls for universities to vary their mockingbird approach by starting more companies as a way to make money. While universities might make money when some sorts of companies start, I don’t believe Valdivia can show that turning universities into puppy mills of startups will make the universities more profits, transfer technology, have a beneficial effect on investment in new enterprises, or be a good use of government money earmarked for economic development and support of small businesses. In the call for universities to move aggressively into the space of entrepreneurs and government support programs, one finds an implicit critique of the situation: entrepreneurs are not starting enough or the right kind of companies (and universities can); investors need a better betting pool from which to reap huge returns (and universities should have a mission to supply this pool); and government funding is there for the taking (and universities can compete successfully against private parties for this money, pocketing a significant share laundered through their startups, patent licenses, stock subscription agreements, and sponsored research agreements).