APPENDIX 20
Memorandum from Dr Ian Ritchie
RESEARCH COUNCILS AND KNOWLEDGE TRANSFER
BACKGROUND
Ian Ritchie founded a software business (OWL)
in 1984 based in Edinburgh and backed by Venture Capital funds
from Canover, Syntech, 3i and Scottish Development Finance. The
company commercialised research work originated at the University
of Kent at Canterbury. It opened its sales office in Seattle in
1985 and was sold to Matsushita (Panasonic) in December 1989.
For the last 15 years he has been an active business angel, working
mostly with start-up technology teams, often with research connections
to academic departments, providing initial seed funding and helping
them develop their management teams, their business plan, and
with the process of raising their Venture Capital funding. These
companies have included Voxar (sold to Barco in 2004 for £26
million), Orbital (floated in 2001 for £50 million, then
merged with Sopheon), and Digital Bridges, currently Europe's
leading supplier of games for mobile phones.
He has been a member of the Particle Physics
and Astronomy Research Council and is currently a member of the
Scottish Funding Council for Further and Higher Education. He
has been a board member of Scottish Enterprise (1999-2005), and
is currently a board member of the Scottish Institute for Enterprise
and the Chairman of Connect Scotland, both dedicated to encouraging
entrepreneurship in Scotland's Higher Education sector.
INTRODUCTION
My concern lies in the field of start-up and
spin-out businesses. Occasionally, research teams in University
may develop a technique or an innovation which might have commercial
prospects. These will often be projects which are too underdeveloped,
or too risky, or too early stage, to be of interest to established
corporations, but which might be developed by a small team into
a potentially commercial proposition.
It is from such start-up companies (like Google
in the USA, or ARM in the UK) that tomorrow's giant corporations
emerge, and so the UK needs a steady flow of spin-out businesses
to create the new cutting edge businesses that add so much dynamic
to the economy.
EXISTING SYSTEM
1. The UK enjoys a considerable resource
in its Research base. The various funding councils, aided by the
Research Assessment Exercise, have helped created an internationally
competitive research community, often working at the cutting edge
of new science and technology. There has, however, been regular
criticism about the lack of engagement between academic research
and potential commercial exploitation in the wider economy, and
various efforts have been made to modify the Research Assessment
Exercise to give commercialisation efforts a higher priority in
the goals of research activity.
2. Research-intensive Universities gain
much of their funding from the dual-funding system, where the
national funding councils provide basic infrastructure funding
to a formula based on RAE results, and the Research Councils provide
specific funding won by competitive bids.
3. Although University research is largely
funded by the state through the Funding and Research councils,
the commercial exploitation rights of any research is left to
the individual Universities.
4. This process is usually managed by executives
in the University commercialisation department. These are often
individuals who are levels below Vice Principal and who often
don't feel empowered to "give away" what may be regarded
as potentially valuable University property.
5. This process often results in extended
negotiations between the University and the potential new company
where the University asserts ownership over IPR. It may seek its
return as an equity stake in the new company and/or a royalty
flow from any revenues generated.
6. During this process the potential entrepreneurs
are under extreme pressure. They need to settle with the University
before they can attract investment from other sources. They will
also be trying to attract and retain key staff for the new business
and delays can often mean that these key individuals are lost.
It is not unusual for the potential company to fail to agree term
and to not proceed.
7. Usually, Universities will have a fairly
unrealistic view of the value of a potential spin-out business.
In most cases the research team will have identified a potential
commercialisation area, but will not yet have a product. The spin-out
team will need to create a prototype and test the market, and
then it is fairly common to build a pilot for a limited distribution
before a product is finally developed. It is quite usual that
the final product owes little more than an "original concept"
to the research team. In the meantime, they will need to build
or acquire management and marketing skills. The IPR value of the
original idea will often be quite modest.
RECOMMENDATIONS
1. In most cases, start-up businesses do
not represent a meaningful potential source of revenue for Universities.
The economy as a whole would be best served if start-up companies
were positively encouraged to spin-out, and not constrained by
the unrealistic expectations of commercialisation departments.
2. Universities are very oriented to financial
reward. If you wish them to behave in a particular way, it is
best to find a funding method that will achieve this. This is
the lesson of the RAE system.
3. A new scheme should be developed which
would encourage such businesses to be created in as quick and
easy a process as possible. It should be in the interest of Universities
to see as many of such companies succeed as possible.
4. I propose a scheme which would reward
start-up businesses which spin-out of a University with a bounty,
paid for each graduate the company employs over its first five
years.
5. This is similar to the bounty paid to
inward investment companies, but these ones would have the benefit
that most of them would become heavily embedded in the local economy
and because they will employ skilled graduates doing knowledge
intensive work, they will not be subject to transfer abroad later
(unlike many historic inward investment projects).
6. If there was a £10k bounty to be
paid for each graduate job created over the first five years,
split 50/50 between the University and the company, a company
which employs 50 graduates in its first five years would attract
a £250k grant to the company and a £250k grant to the
University.
7. This would ensure that University commercialisation
departments would concentrate on encouraging knowledge transfer,
and would begin to work towards making sure that these companies
succeed, such as helping with building management teams.
8. This scheme would only be applicable
where the University waives ownership of equity or royalty (perhaps
a token 5% equity might be permitted). If the University believes
that the IPR is significantly more valuable, they would retain
the right to negotiate alternative deals. This would ensure that
valuable IPR can still be properly rewarded.
March 2006
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