Barriers to Cranking More Startups Out of University of Hawaii

from the blog www.stuckincustoms.com

In the many calls and conversations I’ve had with accelerator execs from across the country, many of those in “off-market” areas (i.e. not Silicon Valley) have frequently mentioned the support and involvement of their local universities. Alpha Lab, in Pittsburgh, has a very tight relationship with local universities, and that has been a boon to their accelerator program, allowing them to pull educated entrepreneurs and technical expertise, cutting-edge research, and mostly-baked intellectual property and ideas into their accelerator program.

UNIVAC from Stuck in Customs
Source: Flickr CC "UNIVAC" from Stuck in Customs

In Hawaii, I’ve heard much admittedly second-hand talk about University of Hawaii’s lack of visible involvement in the startup ecosystem, the extreme difficulty in extracting IP and research from UH, and a “me first” approach to business relationships by their researchers and grad students. While I hope to gain more insight from the stakeholders at UH (I’m meeting with Peter Quigley next week, who’s heading up UH’s Innovation Initiative and aims to create $1B research industry in Hawaii), I came across a recent article related to Carnegie Mellon University’s approach to technology transfer and their innovative model for accelerating startup creation (disclosure: I’m a CMU grad).

One push has been to get researchers to take a market-focused approach to research, so that fewer end up with a solution searching for a problem. A second, more critical push has been to ease the actual privatization process – the uncomfortable negotiations to determine who gets what and how much stake the university retains (and at what terms). Aptly-named the “Five Percent, Go in Peace” program, here’s the crux:

  • The university limits its equity to 5%.
  • There are clear royalty guidelines.
  • There is a three-year delay in payments to allow incubation time.
  • There is no university interference in the operation of the company.

The article begins on page 10, but here are the key sections that describe the program (with my highlights in red):

“Most universities view start-ups primarily as money-makers,” Arthur A. Boni, director of the Don Jones Center and the John R. Thorne Chair of Entrepreneurship, explains. “It is very difficult to put a value on an early-stage technology. And that leads to an incredibly tense environment where, every time a faculty member or student wants to spin off a company or commercialize a technology, they have to negotiate against their own university. Who owns what, how do royalties shake out, which rights revert to whom, and so on.”

Or, as Joel Adams, Carnegie Mellon Trustee and prominent venture capitalist, explains, “At most other universities, the number of strings attached to any start-up makes the investment not worth it. It’s just too painful and hard to unwind.”

So, in 2004, the university implemented a policy it called “Five Percent, Go in Peace.” Under this approach, the university expressed a greater interest in fostering start-ups generally, rather than profiting off any one individually, and in providing faculty, students and investors with clear, consistent guidelines and an environment of unconditional encouragement. The university would limit its equity in any for-profit endeavor to 5 percent capped at $2 million (far below any peer institutions), with clear royalty guidelines, a three-year delay in payments to allow incubation time, and virtually no university interference in operations.

“The goal of Five Percent, Go In Peace is to create a transparent, expedient and easy-to-understand process that minimizes extensive negotiations,” said Carnegie Mellon Provost and Executive Vice President Mark Kamlet. “We have simplified our approach to free entrepreneurs so they can do what they do best.”

The results were nearly instantaneous. Since the policy was implemented, the rate of university spin-offs doubled, increasing from 15 or so companies a year to almost two new patentable ideas every week. This Five Percent, Go in Peace policy rapidly became a national model. McCullough was asked to testify before a U.S. House of Representatives Subcommittee on Technology and Innovation to explain its enormous impact, and, with a measure of irony, it has itself been called one of Carnegie Mellon’s great inventions.

From 15 spin-offs per year to 100! I don’t have a calculator handy, but those are amazing results.

Carnegie Mellon further provides support through various other initiatives which, for example, assess an idea’s potential business and commercialization opportunities, match entrepreneurs with investors, mentors, grants and incubation space, and connects entrepreneurs with a fund which provides early-stage capital.

Back to Hawaii, UH’s Innovation Council’s recommendations report includes great steps for improving the situation, but doesn’t mention anything related to easing the commercialization process, royalties, revenues, equity, or related “privatization” issues.

If innovative research is being produced at an accelerated rate and with a large influx of research investment, and students are being educated in entrepreneurship, yet UH forces complex, archaic, selfish limitations on the act of creating a private entity or licensing the IP, then what’s the use?