In Search of…Startups Emerging from Industry Sponsored Research

We were asked by UIDP to contribute a chapter for their upcoming book on University-Industry Collaboration with a focus on how Industry impacts the lab to market journey through new venture formation and market success. In preparation, we surveyed and interviewed over a dozen representatives of universities and corporations to shed some light on several areas including what programs produce high quality spinouts (startups that emerge from research projects) when Industry (corporates and VCs) gets directly involved. In planning the chapter, we hypothesized that some small percentage of the billions of dollars ($5.7B in FY 2022) spent annually on industry sponsored research would lead to a new venture once the research was found to be promising but still too early to bring inside the corporation, even if that venture is largely controlled by the corporate sponsor through governance and investment. This path undoubtedly spawns spinouts in some rare cases but apparently it is so rare we did not uncover specific examples in our research. It was like chasing a Yeti, where people have heard they exist but never witnessed one firsthand in the wild.

There is a good reason for this scarcity. The goal of the sponsor (ie, a corporation) is to utilize the research for proprietary purposes, such as de-risk some aspect of their R&D, develop an incremental enhancement to an existing product line or gain insights into new technologies that could disrupt their products. Because the University will almost always preserve their right to publish the findings, the sponsor is careful about their existing IP getting into the mix and thus the scope of the research is a piece of the puzzle and not a foundational technology. Whatever the end goal for the research, they typically require that the resulting intellectual property will not be used by a competitor now or in the future. As such, the licensing agreements with the University will protect their investment and collaboration by giving them exclusive rights to the usage or commercialization of that intellectual property and at least some guarantee of governance in a spinout. The primary motivation is for the IP to feed into the sponsor’s R&D pipeline, not to exist outside of it.

This tie-up of the resultant IP makes it difficult for a spinout to be nimble and innovate since there is now a significant limitation in how it operates such as restrictions on who can buy or sell their products. The restrictions also limit the spinout’s potential sources of operating capital since outside investors see that IP restriction (and cap table if the sponsor is an equity holder) as a red flag. Without access to capital markets, the spinout is reliant on the original sponsor organization for its funding while it scales to reach profitability or an exit. Since corporations have a tendency to change priorities via annual budgets, new leadership with fresh mandates, and success metrics that don’t align well to startup lifecycles, these types of investments and projects often get snuffed out before they have the chance to succeed and become self-reliant. 

From the research faculty’s side, the encumbrance on the IP is essentially a poison pill that makes a successful exit unlikely which hampers their motivation to make the difficult leap to entrepreneurship. And from their perspective, life is good: their research is getting funded, they are generally allowed to publish their findings (often a motivation of the sponsor to validate their product) and their research has a fighting chance to make its way into the world due to the collaboration with industry – all of this without the faculty taking any startup risk. Simply put, the incentives are not aligned for spinout creation and therefore it makes sense that this is not a robust pathway for startup success. If you do see one succeed in the market despite these structural barriers, please take a non-grainy photo with ample light and send it to us (not the tabloids).