Optimizing the commercialization of university research

By Dr Peter Morand

For the past few years the federal government has been steadily increasing its investment in university research. From 1997 to 2005 about $11 billion in federal research funding has flowed to the universities, 70% in the last four years. In 2002, the federal government launched its Innovation Strategy and, to engage a national dialogue, posted two major policy papers on its web site: Achieving Excellence: Investing in People, Knowledge and Opportunity and Skills and Learning to facilitate the consultation process. With more accountability built into this increased government support for research, it is not surprising that universities were more anxious than ever to demonstrate the social and economic benefits that accrue from the advancement of knowledge.

Consequently, the Association of Universities and Colleges of Canada (AUCC) unveiled an Action Plan in which the universities collectively accepted the responsibility to document the value to Canadians of the investment in university research. More specifically, AUCC member institutions committed to achieve, by 2010, a tripling of commercialization performance and a doubling of research carried out. Intent on improving Canada's international ranking as a knowledge-based economy, the federal government, for its part, undertook to double its investment in research by 2010. These commitments were formalized in the Framework of Agreed Principles on Federally Funded University Research released in 2002.

According to the indicators used in the AUCC's recently published Momentum report on university research and knowledge transfer, the universities appear to be well on the way to meeting their targets. But how effective are we in commercializing the results of research performed in Canada's universities and health research centres?

Most of these institutions have developed mechanisms, either in-house or with the help of a partner, to commercialize the results of research performed by faculty members, students and research associates. The capabilities and level of sophistication of these commercialization units vary widely from one institution to the other.

However, there is a built-in tendency to license rather than to create companies based on technology platforms (e.g. the AUCC report shows an 82% increase in new licences from 1999 to 2003 compared to a 25% increase in spin-off companies for the same period). This approach, while providing short-term benefits to universities and hospital research centres that are hard-pressed for operating funds, does not have the degree of impact on Canada's economy when compared to the creation of globally competitive knowledge-based companies. As well, licensing often leads to moving Canada's limited intellectual assets to the US and to other countries that compete with Canada for the same markets.

How then can universities and hospital research centres be encouraged to facilitate the creation of knowledge-based companies that would provide more tangible and significant returns on their largely publicly funded research? There are existing and emerging mechanisms and models such as the Business Development Bank of Canada (BDC), PARTEQ at Queen's University, the MaRS Discovery District in Toronto, Univalor and MSBi in Quebec, University Technologies International in Calgary and TEC Edmonton. Other mechanisms include university-affiliated research parks that support the creation and development of viable knowledge-based companies. What is being proposed below is a new mechanism that would enhance the existing commercialization infrastructure and provide a means to accelerate Canada's innovation agenda.

NEW MECHANISM NEEDED

There is increasing criticism that universities are becoming too focussed on commercialization per se rather than on their primary mandate of teaching, research and intellectual leadership. The challenge then, is one of ensuring that universities and hospital research centres continue to be supported at the highest level possible while creating a climate that promotes a made-in-Canada knowledge industry infrastructure. You can't have one without the other.

Why not make it possible for universities and hospital research centres to "sell" their equity in spin-off companies once an arm's length valuation has been established? The buyer of this equity would be a dedicated federal government fund (Canada Seed Fund) that would act as risk taker for such early stage companies. The purchase of university equity by CSF would be on a competitive basis. And to encourage private venture capital funds (existing and new ones) to invest in such early stage companies, CSF would share the risk up to, say, 20% for up to $1.5 million of private financing. The effect of this would be to put money in the hands of universities and hospital research centres as soon as possible and to induce private venture capital groups to invest in these companies at an earlier stage since government would share part of the risk.

On exit, the government's gains and losses would be tracked and, on a regular basis (every five years?), universities and hospital research centres that have provided the government fund with net gains would receive additional payments based on an established scale. The balance of net gains would be used to offset losses and to increase the fund's financing capabilities. The initial size of CSF should be of the order of $200 million and could involve participation by pension funds.

Where does that leave the Business Development Bank with its biotech seed fund and other forays in early stage financing? Since the BDC does not operate strictly as a venture capital fund, it does not fit the proposed model. Either the BDC could be given responsibility to administer the proposed Canada Seed Fund with its specific mandate or, if the CSF were created as a separate entity, it would need to operate in a complementary manner to the BDC.

The proposed CSF would provide a means for the federal government to play a more direct role in optimizing the return on its investment in the advancement of knowledge and would help to create a better climate for the successful launch of advanced technology companies across Canada.

Peter Morand is past president & CEO, Canadian Science & Technology Growth Fund Inc.