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Metrics of University Spinouts
Allen Dines Allen J. Dines
Assistant Director
Office of Corporate Relations
University of Wisconsin
Madison, WI

Often, simple questions lack simple answers. The University of Wisconsin-Madison, like most major universities, works with faculty and researchers to help move ideas from the laboratory to the commercial market. New companies are formed, creating jobs in the community. Those who help with this process give the name "spinouts" to all these new university technology-based startups. And sooner or later we are inevitably asked "What is the 'hit rate' for receipt of seed investment by university technology-based spinout companies?"

At one level the answer to the "hit rate" question is very simple: 100%. Most universities that facilitate startups will not grant licenses to the fundamental enabling technology until the founders show they have secured appropriate management talent and financing. Here at UW-Madison, all our patenting and licensing is handled by an independent foundation, the Wisconsin Alumni Research Foundation (WARF). WARF has policies that cover situations where it takes equity in lieu of cash for licenses to startups. The policies include the requirement that the startup show it has funding that will enable it to commercialize the technology.

However, all of this ignores a fundamental reality: research-based university spinouts span a wide range of commercial opportunity and come into contact with the private financial markets in a variety of ways. So to determine success with investors we need to look at a couple of operational definitions:

1) Seed investment is investment from an outside, financially-motivated investor. This does not include friends, founders or family but does include VC's, angels, corporate partners and acquiring companies.

2) A university technology-based startup with spinout potential is a company formed that is based on university research, or a company formed by a university faculty or student that is based on ideas derived directly from the founder's university experience. Note that this definition does not necessarily require that at its inception the company be granted a license for the intellectual property by the university.

At the University of Wisconsin-Madison we did a scan of UW-spinouts in the broad sense defined above and identified 121 companies founded between 1960 and 2002. Many of these companies licensed university technology from WARF, but many others did not. Some of the companies that did license WARF technology paid cash for their licenses, meaning WARF never needed to take equity. What is the "hit rate" for this broader universe of university startups? 47 out of 121, or 39%, received seed investment as defined above.

Based on this, at UW-Madison university startups appear to be relatively successful. However, the implicit assumption in the "hit rate" question is that all 121 companies needed seed investment to be successful. In fact, our list of companies spans quite a range of commercial potential. Some might have what it takes to become home-run companies (the kind VCs seek), but the majority are of more modest commercial potential. In terms of commercial potential, the diversity of companies coming out of UW-Madison research over a 40-year period is probably not fundamentally different from those that other research institutions may spawn.

Results? Of UW-Madison "non-home-run" startups, some have grown into a niche and remained small serving their limited markets; some were acquired; and a few have grown to become large businesses. Most have established sales and a viable base of revenue that more or less meets the expectations of the founders. All have generated jobs and economic growth while transferring university research to the marketplace.

The "hit rate" question seeks to put some context around the role of the university in economic development. One could argue that emergence of fundamentally new technologies leading to significant changes in the way we work and live will most certainly require substantial investment dollars along the path to commercial viability. Thus, the receipt of investments could be an interim measure, a proxy, if you will, for university startups that have the potential to become the next Google or another Microsoft or Amgen. Perhaps, but while attracting angel and VC investment to university startups is important, nurturing the startups that can grow and prosper on modest investment should not be ignored.

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