Business accelerators have become fashionable, and for good reason. They offer aspiring entrepreneurs access to expert mentors, marketing and media resources, funding opportunities, and office space. In part 5 of this multi-part article series I describe intellectual property concerns needs that existing and future business accelerators will need to address to better serve Life Science entrepreneurs. The goal is to help academic research institutions learn what works and what doesn’t as they begin to construct incubator programs of their own.
To read the previous articles in this series please visit the links below:
- Building on the accelerator model – Introduction (part 1)
- Building on the accelerator model – MassChallenge (part 2)
- Building on the accelerator model – MassCONNECT (part 3)
- Building on the accelerator model – unmet needs (part 4)
A major difficulty for biotech start-ups spinning out from academic research labs is the acquisition of their intellectual property. Different institutions vary in their approach to managing IP, but typically any research stemming from an academic centre (regardless of who funded or performed the work) is owned in its entirety by that academic center. This clause is included in employment contracts and is often non-negotiable. As a result, scientist-founders must “buy back” their IP through a licensing agreement with the institution.
Licensing agreements typically include an up-front license issue fee, reimbursement of the institution’s legal expenses for patenting the IP, an annual license fee (broken into pre- and post- commercial sale) including an annual minimum royalty, milestone requirements and associated payments, royalty and sublicense income, and equity. This represents a highly attractive option for academic institutions that are otherwise forced to sit on their patent portfolios, the vast majority of which rarely see returns on their filing costs (Universities struggle to make patents pay). Licensing agreements need not be complicated and drawn-out, although sometimes can be. Universities that push aggressive terms on the startup with the hopes of maximizing their profit margins, however, quickly find themselves without a partner.
Academic institutions need not file patents at all, which are often supported entirely by taxpayer dollars. If they do so however, the catch is as follows: academic institutions must file said patents on breakthrough technology before submitting their landmark findings to peer-reviewed journals; which constitutes a public disclosure, after which inventions can no longer be patented. This happens very early in the discovery process, and the subsequent validation work is typically not covered by most basic research grants (this is one place where federal funding programs can be improved!).
Early-stage technologies are often (by definition) premature for licensing to larger private companies, which is often where great ideas stall. To attract angel investors or venture capital, scientists can choose to found their own company. Private investment is usually tied to acquisition of the intellectual property by the company, and both the licensing agreement and investment contract must therefore be negotiated simultaneously. Since investors at this stage need to see a potential return on their investment given the significant risk of the venture, they are also typically unwilling to accept particularly harsh terms by the academic institution.
Current university license agreements provide negligible returns to inventors, with the institution taking the lion’s share of the resulting revenues after recovering their legal and administrative costs. Filing IP does, however, limit the freedom other scientists will have to practice the invention, and investigators who are not entrepreneurially minded, and are not otherwise interested in handing over the fruits of their intellectual labor to a specific party to drive in their stead should strongly consider not filing IP, thus making their inventions publicly available to everyone. Universities will (ironically) dissuade this behaviour, and you should ensure that their reasons for doing so align with your research goals before deciding to file new IP.