One of the original intentions of the Bayh-Dole Act of 1980 was to make federally-funded U.S. university research more readily available to small businesses. It worked. Today, three decades later, universities do a brisk business licensing patents to small, technology-based businesses. Each year, roughly half of the patent licenses that universities sign are to small technology-based firms managed by regional entrepreneurs. These small firms employ fewer than 500 employees, offer their regions high quality technology jobs, and transform early-stage university research into innovative products or services.
The chart in the upper right shows the university patent licenses to small businesses, start-ups and large companies – data source: Association of University Technology Managers (AUTM).
What many people don’t realize is that these small businesses are not the Googles or the “get rich quick” whiz kid start-up that comes up with a radically new product, successfully navigates the shark-infested waters of venture capital, and then goes public in a blaze of fiscal glory a few years after signing its first patent license. No, most of the small businesses that come looking for university patents have been around for a few years, live nearby, will never end up on the NASDAQ or hone their elevator pitch at cocktail parties. These small businesses don’t have equity to give to the university since there’s no “exit strategy.” These small business entrepreneurs don’t dream of big riches. They dream of being their own boss, making payroll, feeding their families, and spending their days doing something that matters.
In the rush to build a certain type of high-growth start-up, it seems that our public dialog on entrepreneurship has forgotten the small business entrepreneurs who transform early-stage university inventions into commercial products, jobs and a revenue stream that grows moderately each year. It seems that every few months, universities, the government, and the private sector launch yet another program aimed at high tech start-ups. These programs offer advice, business plan competitions, seed funding, or incubator space to fledgling high tech start-ups with high growth potential (sometimes called “gazelle start-ups”). Highly publicized and well-resourced programs such as the StartupAmerica Partnership and 500 Startups are a great start, and should be applauded. But where are the programs, the investigations into business barriers, the funding, and assistance to aid these “other” small entrepreneurs who rely on university patents, and whose goals involve modest and sustained growth?
Just to play devil’s advocate for a second: why does it matter if the entrepreneurship programs created by the powers-that-be overlook moderate-growth technology-based small businesses? After all, these forgotten entrepreneurs seem to be doing ok despite the paucity of bootcamps, networking events, business plan competitions, mentoring and other such standard fare that are regularly offered to their high-growth brethren. Given the large numbers of patent licenses, universities seem to be doing a good job getting inventions out to these low-profile firms. Does it matter that we know very little about the downstream impact of standard university licensing terms on a small business’s ability to move forward? Why bother to delve into the details of how universities structure their patent deals, or how much a university patent will cost a small, technology-based business?
Because maybe these small moderate-growth tech businesses would benefit from entrepreneurship programs custom-tailored for them. Maybe more small businesses would benefit from access to university inventions than are currently being served. Maybe universities need to evolve and update how they license patents to these small firms. Maybe universities can continue to build onto their success with small businesses and explore other sorts of innovation partnerships.
Here’s Why it Matters:
1. Small technology-based businesses outperform larger companies in generating innovative products and services
Small technology-based businesses are very productive when they license university-owned patents that originated in federally funded university research. There’s not a whole lot of data available, but according to the Association of University Technology Managers (AUTM), over the past few decades, small businesses that licensed patents from a university have generated more than 5,000 new products, 153 new drugs and vaccines and have created about 280,000 new jobs. Their impact on the U.S. gross domestic product is nearly $190 billion. I couldn’t figure out from the AUTM documentation whether these figures also include the gazelle university spin-offs. But even if some of this data includes the rare university spin-offs that actually made it to the commercial marketplace alive, the sheer volume of activity here indicates that small companies play a critical role in bringing university patents to market.
On average, small technology-based businesses (including those that do not license university-owned patents) outperform large companies in generating innovative technologies. For example, businesses with fewer than 25 employees on average generate more patents per employee than do larger firms; the patents small businesses create tend to be of higher technological value and originality (see the Small Business Administration report by Breitzman and Hicks). Clearly, small technology-based businesses make productive use of innovative technologies.
2. Small technology-based businesses are more likely to work in high-growth, cutting-edge technology fields – the same fields that federal research funding sponsors in university research labs. The same fields that the government wants to foster growth in.
In general, small technology-based businesses are more likely than large firms to specialize in high tech, high growth industries, such as biotechnology, pharmaceuticals, information technology, and semiconductors. These high tech industries form the foundation of our nation’s high tech economy. In addition, small firms tend to cluster in the same innovative industries that receive the lion’s share of federal funding that fuels the research in university labs. Technology-based small businesses gravitate towards the same research areas that end up going into the university’s patent portfolio.
3. Universities may be missing some of the small business market that pays to acquire externally-produced intellectual property.
According to data from the Kauffman Firm Survey, technology-based small businesses spend on average, $110,000 a year on acquiring intangible property. On average, universities license patents to fewer than 3,000 small businesses each year – a fraction of the technology-based small businesses in existence that could be potential candidates to license a university-owned patent.
4. Venture capital and the high-growth start-up game favors white males. Woman-owned start-ups are second-class citizens when it comes to attracting venture funding.
When we overlook the needs and contributions of the small regional firms that aren’t aiming for big money, we also overlook the value and activity of woman entrepreneurs. Our nation’s current programmatic focus on a very specific type of tech start-up privileges activities associated with high tech start-ups, namely attracting venture capital. Today, an estimated 5% of VC investments are in woman-owned start-ups (see the report “An Investigation of Women-led firms and Venture Capital Investment” by Brush, Carter, Gatewood, Greene and Hart). While VC investments in woman-owned firms have risen a few percentage points in the past decade, progress is slow.
It’s true that venture funding tends to concentrate in industries such as computer software and hardware, and medical and biotech industries where there are fewer woman-owned businesses (according to the Small Business Association, 51% of female-owned businesses are in the service sector and 18% in retail). However, even correcting for the predominance of male-owned start-ups in industries preferred by investors, in an analysis that spanned 1957 to 1998, the report points out that women-led software start-ups received only 2.4% of total money invested while men-led software start-ups received 36%. Seems pretty unbalanced, but maybe I’m missing something. Data on VC investments by gender is scarce, and the data given here is several years old (btw, if anyone has more up-to-date data on VC investments by gender and ethnicity, I’d love to hear about; I couldn’t unearth anything newer than this).
Let’s Get This Conversation Started
We need to start a new national conversation about small, moderate-growth technology-based businesses. Right now, universities and policymakers are largely focused on developing high growth tech start-ups. However, our nation cannot afford to under-serve thousands of highly productive and innovative moderate-growth small businesses whose economic contributions include significant numbers of jobs and new products and services. Nor can we adopt a too stringent focus on high growth start-ups if the risk is that women and minority-owned businesses are pushed offstage, despite the growing presence of female and minority business owners who are successful technology entrepreneurs.
We can start by learning more about patent licensing arrangements between universities and small, tech-based firms.
First, let’s start by praising the university staff that have completed thousands of patent licenses to small, low-profile businesses. With that said, it’s possible that our current university patent licensing method could be improved and updated to reflect changing times. For example, it’s not well understood whether standard license fees and terms mandated by most universities have an impact on a small business’s ability to form product development partnerships, adapt quickly to changing business conditions, and to operate efficiently in today’s open innovation ecosystem. For example, a common patent license is a reach-thru rights clause that gives the university the right to collect royalties on any downstream products a small business may develop using the university patent. Another typical term whose impact is poorly understood is that of sub-licensing royalties that are several times higher than the percentage of royalties.
Second, let’s give these small businesses a voice. While anecdotal evidence exists that small businesses are impacted by university licensing terms, fees and reporting requirements, exactly how are they impacted? Patent licenses aside, there are significant numbers of small, regional businesses that tap into university expertise via informal channels such as knowledge spillovers or grant programs such as STTR. In addition, there are thousands more technology-based firms outside the university ecosystem that are comfortable licensing externally-intended technologies, yet never approach a university as a potential innovation resource. Why not?
Finally, what do small business owners want? University patents appear to be intimately intertwined with the innovation strategies of small, regionally-based tech firms. These firms have demonstrated high levels of productivity and capacity for innovation. However, over the years, few universities have systematically collected and shared direct feedback from these forgotten entrepreneurs about their unique challenges, product development methods, preferred intellectual property strategies and budgets. There’s work to be done. Our nation’s conversation about entrepreneurship needs to include more voices of people who own and manage moderate-growth small technology businesses.
Melba Kurman writes and speaks about innovative tech transfer from university research labs to the commercial marketplace. Melba is the president of Triple Helix Innovation, a consulting firm dedicated to improving innovation partnerships between companies and universities.