How University Spin-Outs Bring Research to Market

By Brett Schultz ’25, Associate

Introduction:

The United States higher education system is widely recognized for its research capabilities, specifically in the fields of healthcare, renewable energy, materials science, and more. However, there remains a significant issue with how this process works, as only 5–10% of university-developed technologies ever reach the marketplace. This is often done through the work of a spin-out, which is a company designed to commercialize an invention developed at a university, federal laboratory, or similar institution. Before analyzing how we can incentivize entrepreneurs to form more spin-outs, it is first important to look at how this process works in detail as well as its benefits and drawbacks.

What is a spin-out?

A spin-out is a company designed to bring technology developed in a public (or in some cases, private) laboratory to market. A majority of spin-outs are formed with the goal of commercializing university research, but not always. Spin-outs can also be formed with intellectual property developed by government institutions such as NASA, the National Institute of Health, and the Department of Energy. Although the processes involved with obtaining a license from these laboratories have some differences, they always involve working with a technology transfer office (TTO). TTOs are responsible for marketing inventions developed by the institutions they serve and handle negotiating licensing terms. This process can take upwards of two years, as federal legislation provides TTOs with a lot of flexibility on the terms they can negotiate. TTOs can receive payment through royalties, fixed payments, and/or equity, and can also modify the licensee’s jurisdiction of where they can operate. Licensees can negotiate for an exclusive license, non-exclusive, or field-limited exclusive license, giving the company the ability to have sole rights to the invention in specific use cases.

Benefits:

One of the biggest benefits of our current technology transfer process is that it helps transform research into real-world impact. Over 3,000 patent licenses were issued for university-developed intellectual property alone, showing the potential for spin-outs to change many high-tech industries. Spin-outs also encourage researchers to create technologies that they believe will have the greatest public benefit to society, as most universities and government laboratories provide researchers with a portion of royalty payments. While specific percentages vary on a case-by-case basis, most institutions provide researchers with 2–10% of all funds paid to the laboratory with no maximum limit. Furthermore, university intellectual property is often known for being too early stage for a company to justify developing, and thus this process allows for startups to engage in this high-risk research with even higher rewards.

Drawbacks:

There are many drawbacks that limit the success of spin-outs and having sponsored research reach the marketplace more broadly, with one being that over 50% of university spin-outs are founded by the professor responsible for their invention. While this can often be beneficial as it ensures the founding team is well-versed in the technology, it can create problems given faculty’s limited ability to grow the company while maintaining their full-time job. Only a small fraction of university spin-outs involve the professor leaving the university, and thus it can be hard for investors to believe in the founding team’s ability to execute. Furthermore, there are many critics that are skeptical of the concept of an exclusive licensing agreement, as it provides the licensee with a monopoly over an individual invention. This has created challenges such as with Xtandi, a prostate cancer drug that is priced at over $160,000 per year. While there is legislation that enables the federal government to revoke an exclusive license at their discretion, it has never been done throughout the 60+ years the technology transfer process has existed, and this will likely remain given the lack of explicit language that allows the federal government to use this right as a method of price control.

Conclusion:

While spin-outs can create ample benefits for society, there are many legislative challenges that restrict their potential. Many experts argue that researchers should be barred from conducting independent research if they are to form a spin-out, and others also believe that the government should use their power as a method of price control specifically in the healthcare field. Regardless, the numbers show that spin-outs can create public good and get research out of the laboratory, making technology transfer policies an interesting topic for discussion.

Brett Schultz is a senior pursuing a degree in Business Administration with options in Finance and Marketing, while completing a second major in Sustainability. This last summer, Brett interned with the United States Department of Energy, where he helped researchers at the National Renewable Energy Laboratory develop go-to-market strategies for their technologies. On top of this, Brett has worked as a sustainability consultant for local, regional, and national businesses, and has experience in software development, artificial intelligence, and offshore wind. Outside of academics and professional work, Brett is actively involved on campus as a Lead Changemaker Coach, Paul Scholar, and member of the University’s Honors Program.