Start-up companies sometimes strike it rich, but most founder, earning little revenue for the “U.”

Nathan Halverson

Marty Blumenfeld was fed up with the incessant search for research funding. So, 15 years ago, the University genetics professor pulled the plug on his own work.

“If you’re in science, you spend your entire life hustling grants,” he said. “You’ve got to keep going for more grants and more grants.”

The tenured instructor spent the next seven years teaching and writing autobiographical books about a disgruntled professor.

“And not very good novels, believe me,” he said. “Never got published, fortunately.”

After his research sabbatical, however, Blumenfeld found new inspiration for returning to his research – more grants. But instead of coming from the government, the funding source was a local nonprofit called Sota Tec, which sought to commercialize Blumenfeld’s discoveries. In return for the funding, Sota Tec gets the first rights to license the technology, while the University maintains ownership.

Sota Tec’s investment paid off, and by 1999, Blumenfeld was a co-founder of Blizzard Genomics – a company designing gene-mapping technology.

“Oh man, I will tell you. It’s been a lot of fun,” he said.

But chances of Blumenfeld’s start-up company succeeding are slim – 1-in-100, if history is any indicator.

In fact, most spin-off companies generate little or no revenue for the University. But one successful business can bring in millions of dollars for the institution.

The process is long and strenuous. It takes extreme patience – especially in this part of the country, where investors are harder to attract than on the East and West coasts. In the end, turning research into a new business is a personal decision for a researcher, one that could include temporarily or permanently leaving the University.

An Association of University Technology Managers survey released last spring ranked the University fourth among the top 142 research institutions for spinning off start-up companies based on data from the year 2000.

Between 1998 and 2002, University research resulted in 40 new companies. Those businesses now make medical devices, pharmaceuticals, computer software and even skate ramps. Total University revenue from start-up deals approached $11 million for those five years.

And University officials say it’s still early in the game. Until the 1980 passage of the Bayh-Dole Act, universities were not allowed to patent and sell technology developed using government research grants.

Considering the amount of time research can take to go from its basic stages to something that can be sold on the market, 20 years is not that long, said Tony Strauss, director of the University’s Patents and Technology Marketing office. As a result, he said he believes the University’s technology transfer potential is still growing.

‘A big hit business’

“No matter where it goes, it still will be a top-heavy kind of thing,” Strauss said. “It’s just the nature of the beast.”

More than 70 percent of the University’s start-up company revenue between 1998 and 2002 is attributed to one spin-off – Net Perceptions. The now-struggling software company was founded in 1996 using a University-developed program that helps retailers analyze consumer buying habits.

In fact, the top three revenue generators accounted for 90 percent of the University’s start-up revenue.

“The bulk of the revenue and the bulk of the business potential occurs in a very small number of companies,” Strauss said. “It’s very much a big hit business.”

Most start-up companies create relatively little financial return for the University and do so only after years of struggling to break even.

“It’s a long time for some companies,” said Dick Sommerstad, a business development liaison in the Patents and Technology Marketing office.

In general, he said, it takes companies at least three years to become profitable. That time can double if the company deals with medical devices or pharmaceuticals that require Federal Drug Administration approval.

Money is even more important than time. Until a start-up company becomes profitable, it is run entirely on faith and funding from venture capitalists and “angel investors” who put money into new companies, hoping some day they will blossom.

Time, patience and money

Sommerstad’s primary function at the University is matching up researchers with venture capitalists. It’s not an easy task, especially in Minnesota, which has less venture capital than areas such as Boston and northern California.

“I think that we’ve got a little more conservative business climate here,” Sota Tec President Jerry Okerman said. “We know it takes a long time and a lot of patience. Frankly, I don’t think it would be healthy to be as aggressive and dynamic perhaps as those areas.”

Instead of catching up with the coasts, Okerman said minimizing the number of missed opportunities is important.

“I don’t think we get our proportionate share given the amount of innovation that takes place here,” he said.

Sota Tec also provides financial support to University scientists with promising ideas and serves as a networking club for researchers and venture capitalists to meet one another.

“If it weren’t for Sota Tec, there would be no Blizzard,” Blumenfeld said. “I’m a professor. I don’t know anything about business.”

Culture shift

The scarcity of venture capital is not the only factor preventing the University from creating more businesses.

Many professors are not sticking with their discoveries and developing them into commercially viable products. Instead, many researchers publish a paper about their work and move on.

“The internal structure (to start a business) is here,” said David Hamilton, interim vice president for research. “But it’s the perception of faculty Ö It’s a cultural thing. And that is what we are trying to change.”

Hamilton said the University, and the Midwest in general, are behind the East and West coasts in starting up companies because professors do not yet understand that creating a business is an option.

“We’re not touching enough areas of the institution yet,” he said. “We are probably missing things that (researchers) don’t know have the potential for doing a company.”

The University sponsors events intended to increase faculty awareness.

On Feb. 27, the University hosted an event called “Research Into Products.” Administrators want professors to consider whether discoveries have practical uses that should be developed.

Refocus fears

Some professors worry the University is focusing too much on developing marketable research.

“A lot of people who are not in sciences were fearful that the institution was putting too much emphasis on commercialization and not enough emphasis on the core needs of the University,” Hamilton said. The University has no “central policy” to shift its research focus to marketable technology, he said.

Another concern is the University might force professors into starting businesses, but Hamilton, a genetics professor, rejects the possibility.

“We don’t want to force anyone into anything,” he said.

Strauss said decisions to start businesses are left to researchers.

“It’s really a personal decision by the faculty members involved. They really have to decide that themselves, in light of their own careers and expectations,” Strauss said.

Incentives

However, this laissez-faire approach can mean missed opportunities, potentially costing the University money and depriving the state of economic growth.

To drive this point home, Carlson Venture Enterprise director Doug Johnson, points to the first Internet browser ever developed.

The Gopher browser was created at the University and was being used by 1990. But it was never commercialized.

Conversely, the second browser – which was created by the University of Illinois – was commercialized. The browser technology, which was called Mosaic, was spun into a start-up company by its university developers, who called it Netscape. Today, the company pays the school $3 million per year in royalties, Johnson said.

The University provides its researchers with incentives to commercialize their technology.

Researchers receive 33 percent of University royalties generated from licensing a technology. Another 25 percent is designated for ongoing research. Researchers can also get paid as a business owner if the business makes money.

The University allows professors a two-year leave to start their business.

Conflicts of interest

Professors sometimes run into problems as a result of their ongoing relationships with the company licensing their technology.

Public researchers can find themselves in situations of questionable ethics.

One potentially compromising scenario can occur when a company pays for the inventor’s University research and is also paying a researcher royalties for a previous discovery, said Dick Bianco, assistant vice president for regulatory affairs.

That relationship can create situations where there is an incentive for the University researcher to cater to the company’s needs because increasing the success of his previous invention will boost his royalties.

“In that case we would develop a management plan. We’d make the investigator make a decision: Do you want to be a principle investigator for the University or do you want to be a businessman or consultant to the company? You decide, because you can’t do both,” Bianco said.

The University also runs into conflicts because start-ups often pay for licensing rights with stocks in the company.

The University hired Credit Suisse to manage the equity it owns in start-up companies so the school has no input on when stocks are sold.

“If we did have influence on that, then that would be an institutional conflict of interest because we would be trying to maximize the price we got. And we would be doing things probably to make sure that company’s stock didn’t fall before we sold it,” Hamilton said.

Better every year

Two decades after the Bayh-Dole Act was passed, University faculty and the business community are still working to maximize the opportunities it created.

“I would say it’s still in a growth phase,” Strauss said.

He said universities like Columbia and Stanford that had previously received $15 million annually in technology-transfer revenues have now started approaching or breaking $100 million.

But Okerman said the University should not get anxious about matching those numbers.

“I don’t think we ought to create huge expectations about business creations out of the University. That’s something that will come naturally,” he said.

Johnson said business development is better every year, and University research might provide the next innovation supporting the state’s economic growth.

“The next wave is bio-tech,” he said. “It could be the industry where (information technology) left off. And that could be really good for the economy.”