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Action needed to ensure fairness around spinouts

THE WORLD OF high-technology, high growth start-ups is a challenging one. Would-be entrepreneurs have to cope not only with developing a product based on a new technology, often for new markets; they then usually have to somehow persuade investors to put money into their company. 

 

All of this is quite difficult enough, without the huge problem which will undoubtedly arise if you also have to agree a license for your technology from a university. Many new business ideas are inspired by research conducted at a university and, although this work will usually have been funded by one of the UK’s Research Councils, it is the individual university which grants the licensing rights to any commercial exploitation.

It’s often a very unbalanced situation, where the entrepreneur will often be alone and financially stretched and will be faced by the well-resourced forces of a University with its teams of lawyers and technology transfer officers. 

 

It is very difficult to value the contribution that basic research contributes to a new enterprise – no two cases will be the same. However many entrepreneurs are shocked when their university demands what they believe to be a disproportionate share of the proceeds – in equity in the business, licensing fees, or royalties. The result is that fewer companies get formed than might otherwise be the case.

 

I last wrote about this topic in January this year: Scottish education minister, Mike Russell, had instructed the Scottish Funding Council (SFC) to find a way of setting up a ‘single knowledge transfer office’ for all Scottish universities which would try and create a much simpler process. Unfortunately after a two year effort from a working party, they were unable to come up with any effective solution. I was rather critical of this outcome.

To his credit, Mike Russell has asked his officials to think again, and they are currently undertaking a fresh consultation. 

 

The problem often lies in the rather arbitrary way in which these matters are decided. Because the exploitation rights reside with the university in which the research was  done it very much depends on the attitude of each individual university as to how each deal will be handled. Some enlightened institutions seek to create as many spin-out companies as they can, whereas others still see them as a potential cash cow to be milked.

 

Unfortunately there is no ‘one size fits all’ solution to this problem. Some substantial academic research projects have been undertaken by large teams of researchers over many years, using expensive laboratory time and equipment; the university may even have paid for patent protection. In these situations a university really does deserve a large chunk of the resulting business. 

 

More commonly, however, the results of the research will just be a concept which the exploiting company will have to spend a great deal of time and money to turn into a commercial product. In such situations the most that should be claimed is a small stake in the equity.

 

So what is the answer? I think the SFC should set up an appeal body to which the budding entrepreneur should be able to refer their case for rapid independent resolution;. And in return for the significant public funding that they receive, universities should agree to abide by the decisions of such an body.

 

As a result the huge amounts of public funding that goes into research could lead to the creation of many more exciting high-growth companies. And surely that is what we all want to see.

 

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