Adapting to the rise of university spinouts

This is Part 1 of a two-part blog article

Recent trends and challenges among tech transfer offices

AUTM is getting ready to publish its 2023 licensing survey results. If the last few years have been any indication, it’ll tell us that the role of university spinouts and startup licensing has grown even more, and may now even be the dominant channel for commercializing university IP.

Tech transfer offices that have embraced startups have seen licensing volume increase significantly. While more licensing activity and startup engagement are generally things to welcome, there are significant risks to startup licensing programs if they aren’t managed effectively. Licensing IP to university spinouts takes far less work than finding and engaging corporate partners upfront. But they often require just as much, if not more effort post-license to maximize returns.

In the second part of this two article series, I’ll offer my recommendations on how tech transfer offices can successfully navigate this new landscape. In this part, we’ll cover the history behind it and the case for taking a different approach.

The evolution of the university tech transfer “customer” from corporations to startups

Historically, corporate R&D programs were ideal partners for commercializing university research. They could sponsor research to shape requirements, then license the resulting innovations to adapt them for their particular use cases. Even though these partnerships were rare and difficult to forge, they usually paid off for universities.

As dedicated corporate R&D programs at industrial giants like GE, HP, and Xerox (PARC) have disappeared, corporate licensing outreach has become even more difficult. Simultaneously, or perhaps directly related to this shift, startups have flourished as a commercialization channel thanks to expanded infrastructure, access to capital, and more robust mentoring. Startups are well-suited to develop university inventions for market readiness, making them natural partners for tech transfer offices.

By 2020, over 33% of university tech transfer licensing and options were issued to startups versus large companies. Licenses to large companies declined 23% in the last five years. According to Tech Transfer Central, “creating start-ups out of university IP has become as central to their work as licensing to established companies, if not moreso.” And indeed, for some universities like Caltech, Maryland, and UCLA, over 50% of their IP is licensed to startups. As startups have boomed, so have licensing deals.

It’s tempting to think that more startup licenses means greater success. However, unlike corporate licenses, ROI from startup licensing is often uncertain, and almost always deferred given the immaturity of the technology at the startup phase. In working with startups, universities need to enter a different calculus than they did when their partners were corporations.

The hidden risks of university startup licensing

Startup licensing numbers can be a misleading indicator of success and actually a negative if the process is not managed well. Each startup licensing deal incurs new overhead and complexity to an office’s workload in addition to opportunity costs that may not justify the cost of IP.

Management challenges Stories are emerging of universities struggling to keep track of the hundreds of startup licensing deals they’ve made. Too many startup licenses can be especially painful from a compliance perspective. If an office can’t check up on a startup to see whether they’ve hit royalty milestones, it’ll miss revenue it’s owed. One university in the Northeast recently discovered nearly a million dollars in uncollected royalties across its startup portfolio.

Opportunity cost Many startups become “zombies” that tie up valuable resources and IP without ever making it to the market. In general, most startups fail, but university startups come with additional challenges. University spinout founders may never fully commit to their startups, continuing their work as professors instead. Universities can also require license structures that prevent startups from raising money or scaling. In some cases, startups push universities to file patent families in more countries and then fail to cover the expenses. All these scenarios not only fail to realize ROI, but also preclude a university’s ability to partner with other interested parties that could’ve generated them revenue.

Look for value, not volume, in startup licensing

To avoid the outcomes outlined in the previous section, technology transfer offices should measure the success of startup licensing not by license volume, but tangible metrics of value like equity value and royalty revenue. While it’s impossible to predict startup success with perfect accuracy (that’s why we have VCs!), there are certainly steps universities can take to triage startup partners. They can also work with startups post-license to maximize likelihood of a positive outcome for both parties. These are the steps we’ll explore in the next part of this series.