A licence to print money

Not everyone can produce a Google, but universities are looking with interest at the revenue possibilities of equity deals

When graduate students Larry Page and Sergey Brin took a leave of absence from Stanford and started Google in 1998, the university received nearly 2 million shares in exchange for an exclusive licence to the software patents they had developed. When Stanford sells that stock, it could net around $550 million (€460 million) for its computer science and engineering research budgets. Stanford's entire research budget for the year 2004/2005 was just $600 million.

It will be the biggest gain any university has ever enjoyed from technology licensing in a single year. Google will also be paying royalties until 2011, when the patents expire. Payouts like this are an anomaly. But equity windfalls - if not of Googlean proportions - may become more common at Stanford and other American universities.

US and Canadian universities are more successful than most at making money from inventions. A study by the University Companies Association in the UK last year concluded that UK universities generated $11 million in royalties per $1 billion spent on research in 2002, while US and Canadian universities averaged $31 million.

Stanford has long been the pioneer in technology transfer. In the 1930s, Professor Frederick Emmons Terman of Stanford's Department of Electrical Engineering, concerned that his graduates had to leave for the East Coast to find good jobs, decided to try and spawn a local industry in radio engineering. He brought together two of his former students, William Hewlett and David Packard, and convinced them to start Hewlett-Packard.

An industry is born

In the 1950s, Terman created Stanford Industrial Park, leasing offices on Stanford property to technology companies. He lured William Shockley, co-inventor of the transistor, to the office park and a Stanford professorship. Most of the chip companies in Silicon Valley trace their roots to Shockley Semiconductor. He also recruited the chemists William Johnson and Carl Djerassi, inventor of the contraceptive pill, setting off a chain of events that led to a local industry in biology and medicine.

The next pioneer in technology transfer at Stanford was Niels J. Reimers, who joined Stanford as Associate Director of its Sponsored Projects Office in 1968. He made a proposal to the university president to start an Office of Technology Licensing, replacing a system that had relied on an outside consulting firm and had netted the school just $5,000 in 15 years. In its first year as a pilot programme, OTL brought in revenues of $55,000.

Reimers's success was the result of several innovations in technology licensing. Primarily, he focused on marketing inventions, not in patenting them. University technology transfer offices then were almost universally staffed with patent attorneys. Reimers hired people with degrees in science and technology, preferably with industry marketing experience. Filing for patents is a commodity service, so he farmed it out to contracted law firms.

Reimers also gave the OTL's  individual licensing associates significant authority to make their own decisions. Today, an associate takes an invention through the entire process, from deciding whether to file for a patent to contacting potential buyers and negotiating deals, to following up on progress afterwards, sometimes hiring auditors to confirm progress and ability to make royalty payments.

Sharing the royalties

Finally, Reimers decided to give the inventors incentive in the form of a healthy share of the royalties. Today, after taking a 15 per cent fee, Stanford OTL gives a third of stock or royalties it receives to the inventors. The remainder is split between the department and the school where the work was done, to fund other research.

Reimers also took an active role. After reading in the The New York Times about a new technique called "gene splicing" in 1974, invented jointly by Stanley Cohen of Stanford and Herbert Boyer of the University of California, he convinced them to let him patent and license the process on which the whole biotechnology industry is based. By the time the patent had expired in 1997, the universities' share of the royalties had come to $255 million.

This approach is still controversial. Critics argue that it may encourage students and faculty to look for commercially lucrative areas of research, rather than pursue important areas of basic research. Except for the rare big hit, licence revenues seldom amount to even 10 per cent of a university's funding.

Licensing patents and other intellectual property may also limit the spread of government-funded research to a few companies, when many feel it should be in the public domain. (Google has exclusive rights to the patents its founders created at the university.) "The amount of good you do for the economy is not measured by the amount you squeeze out of licensees," says Jeff Skinner, head of the European association of university technology transfer officers and commercial director at University College, London.

Katherine Ku, director of Stanford OTL, argues that most patents produce so little income for universities or their inventors that it is not worth re-focusing their research. "Recognition from peers is what university researchers are after," she says. And she argues that many inventions, such as Stanford's Cohen-Boyer patent, would have been licensed to very few companies if it had been developed in industry instead (Stanford licensed it to over 400 companies.)

But equity, rather than licence royalties, may be the path to riches. It generates less consistent income, but is often easier for cash-limited startups. If the venture fails, nobody cashes in, but a Google-sized success generates enormous profits for everyone. Stanford decided to look for more equity when its patents on gene splicing expired in 1997, removing about $30 million a year from its research budgets. At that time, the dot-com frenzy had started, showing the potential of equity ownership. Before the Google windfall, Stanford had collected $22 million from equity sales over the last 34 years, as against $596 million from royalty payments.