Should universities profit from their start-ups?

Every year in Switzerland, dozens of start-ups entering the market do so holding the results of scientific research most often financed exclusively by the state. Should universities be able to cash in on the success stories?

(From "Horizons" no. 105, June 2015)

Yes says the politician Jean-François Steiert.

In the past 20 years, Switzerland has experienced considerable success in setting up some 1,000 firms. While most of them may be small, most are also successful. And this is despite the fact that investors willing to take real risks are fewer in number in Switzerland than in the USA, for example. Swiss start-ups are mostly supported by universities using taxpayers’ money – offering scholarships, coaching services and helping with their infrastructure and social networks. The aim of such public investments is primarily to promote Switzerland as a workplace and as a centre of research.

If support from public monies means that innovative patents can be sold for a profit counted in the double-digit or even triple-digit millions, then the public investor has to be able to claim a portion of this back, not just so that the state or the university can earn money, but so that it can reinvest the appropriate funds in the work of the next generation of researchers. This is especially true in times when the federal government and the cantons are having to introduce austerity programmes because of excessive tax cuts. The commercial exploitation of these innovations can generate additional finances to help other young researchers.

When selling such patents, it shouldn’t be about maximising returns, nor about siphoning off profits according to any fixed formula. Universities need room for manoeuvre in order to optimise how they go about levying profits. Getting start-up companies off the ground and managing them can be an attractive proposition, but we also need a commensurate reinvestment in the next generation of researchers. What we lack today is transparency. If universities want to earn the trust of the taxpayers, then they have to be open about how much money they get back from successful start-up companies. The universities owe this to taxpayers, because they rightly want to know how efficiently their taxes are being used, even in the field of research, which is so existentially important for Switzerland.

Jean-François Steiert (Socialist Party) has been a member of the Swiss National Council since 2007. He is also a member of the Committee for Science, Education and Culture.

No says Hervé Lebret, start-up fund manager at EPFL.

In 1993, when Marc Andreessen launched Netscape, it was one of the first web browsers. But the 22-year-old American chose starting from scratch over signing a license agreement with the University of Illinois, because he judged their conditions to be abusive. The University of Stanford, however, maintained less tense relationships with the founders of Google, holding a modest 2% of its stock (worth $336 million, six years after the company’s stock market debut). It also admits that the founders of Yahoo developed the site in their own free time and so the university has asked them for nothing. Some years later, and after one of the founders of Yahoo saw fit to donate $70 million to Stanford, Andreessen still doesn’t want to have anything to do with his alma mater.

These examples show clearly what happens when the relationships between universities and companies become tense because they do not hold the same perception of value in the transfer of knowledge. It is often free in the area of education; but when it comes to creating a company, the overwhelming majority of people think it shouldn’t be. Yet there is already an indirect return: first, in the form of taxes, and, even more importantly, through the hundreds of thousands of jobs that are created by start-ups. At the end of the day, the value of this is much greater than the tens of millions of dollars brought in every year by the best universities in America thanks to their range of licenses.

So how can we best repay universities in a manner that’s fair? It’s a touchy subject, but one that is also poorly understood, particularly because transparency is lacking across the board. In 2013, I published an analysis of the terms of public licences for some 30 start-ups.1 It shows that, on average, universities take a 10% share in the stock of a start-up, which dilates down to 1 to 2% following the first rounds of financing.

But it is impossible know the potential of any given technology on the market ahead of time. What’s most important is not to penalise the company by using excessive licensing terms. Abusive conditions can destroy the entrepreneur’s motivation at the outset and put off investors.

Hervé Lebret is a member of the Vice-Presidency for Innovation and Technology Transfer at the Ecole Polytechnique Fédérale de Lausanne and a director at Innogrant, an EPFL innovation fund.