Cash-Strapped Universities Turn Entrepreneurial

By Thomas K. Lindsay & David Sym-Smith

(CC image of Texas A&M campus via Flickr user StuSeeger)

Universities are up against it. Last month, Moody’s released a pessimistic report about the future of American universities, including elite research schools. According to the study, “The U.S. higher education sector has hit a critical juncture in the evolution of its business model. Most universities will have to lower their cost structures to achieve long-term financial sustainability and to fund future initiatives.” Another study, published last summer by Bain and Sterling, finds that, in the past few years, a growing number of colleges and universities have put themselves in financially unsustainable positions. The extent and rapidity of this dysfunctionality threatens America’s historical global leadership in higher education, warns the report. Through overbuilding, overspending, and overexpanding, at least one-third of America’s colleges and universities have left themselves unmanageably complex, sluggish, and mired in debt. For example, average university debt is increasing 12 percent a year, more than twice the rate of teaching-related expenses.

With personal disposable incomes down, state budgets strapped, and the federal government struggling to cut a $17 trillion national debt, the old sources of university revenue are tapped out. The only recourse left is to develop alternative revenue sources.

The good news, at least for research universities, is that there are available to them a number of such new sources, perhaps the most promising of which are the licensing of intellectual property (IP) and industry-sponsored research.

Properly conceived and executed, the commercialization of intellectual property by research schools forms a self-reinforcing cycle: The cycle commences with the receipt of funding for research in new market- and industry-driven technologies, practices, etc., the results of which give rise to new start-up companies, for which the research provides the rationale for venture capitalists as well as corporations to lend support. Once up and running, and, if successful, the start-ups begin to show a profit, a previously-agreed upon portion of which returns to the university’s coffers. With this, the circle closes and a new cycle begins. The school can now use its portion of these profits to begin still more industry-creating research.

The strategic plans of those universities looking to begin to explore or expand on the opportunities provided by IP licensing should, of course, be guided by this key question: Does the proposed research have the potential to create meaningful revenue for the university? In attempting to answer this question, schools need to examine the potential benefits of collaboration with each industry under consideration. They should begin this appraisal by reminding themselves of the happy fact that companies move naturally to where the technology development and talent are. Also, under the prospective collaboration, it will be the companies that both fund the research and license any intellectual property produced therefrom.

In this enterprise, the role of venture capitalists and corporations is crucial, for, in practice, it will be the venture capitalist and corporations who license the IP. It will also be the venture capitalist who builds the new research-spawned company. Often, the venture capitalist will build the new company locally (because, as mentioned earlier, companies tend to locate where the talent is). This will bolster the economy of the locality in which the university resides, thereby enhancing what is labeled the school’s “town-gown” relationships. Finally, venture capitalists possess both the motive and the means to assist the university in identifying market potential, thereby better ensuring that the schools will reap a meaningful return from the new company their research spawned.

Another necessity, but also another benefit, of schools getting in the IP-licensing area, is that its success both depends on and, in turn, attracts top-flight faculty and students from around the country and—in today’s global marketplace—the world. The best and brightest of the faculty and students in these areas of research are naturally drawn to the opportunities provided by IP commercialization and research.

But to entice such first-rate scholars and students, it is essential that they be given the opportunity to benefit themselves from licensing. This can take many forms, one of which is the chance to work, at least temporarily, with or for the new start-up. In this we find another self-reinforcing cycle, one which yields benefits for universities beyond the acquisition of new revenue. In attracting better faculty and students, universities climb in the US News and World Report college rankings, which is the Holy Grail for academics. This rise in rank, in turn, attracts still better faculty and students. The happy cycle, once begun, takes on a momentum of its own.

SPONSORED RESEARCH

Regarding the second prominent potential source of alternative revenue for research universities, sponsored research, the opportunities it offers are analogous to those of IP licensing. Today, 62 universities belong to the American Association of Universities (A.A.U.), which consists of the top research schools in the country. Here in our home state of Texas, the public University of Texas at Austin and Texas A&M University, along with the private Rice University, are AAU members. At these schools, with their proven research track records, already-established, wealthy corporations have an interest in funding directed university research.

Fortunately, sponsored research’s potential funding is not limited to Fortune 500 companies. In addition to established industries, venture capitalists again can prove to be a source of support. Moreover, both state and federal governments have an interest in supporting such research, as each discovery promises to create new jobs and build the local and state tax base. Finally, research universities themselves have set aside funding to support sponsored research initiatives; these funds give them “skin in the game” with prospective corporate funders, which entitles them to a greater share of the fruits of any subsequent collaborations.

Make no mistake: The earth has moved beneath the feet of higher education. Exacerbating the exodus of traditional funding sources is the new entry of online learning, $10,000 degrees, and the rise of competency-based college credits. These innovations will alter forever the cost and method of the delivery of learning. If research universities hope to survive these disruptions, they must become disruptors and/or market leaders themselves. They must break the mold of traditional education through capitalizing on innovative methods to raise new revenue. Our research universities’ quest for survival stands a far better chance of success if they devise a systematic, market-driven strategy to pursue IP licensing and industry-sponsored research.

A number of research institutions have of course begun this effort. Stanford University provides the model. Between 1970 and 2011, according to its Office of Technology Licensing, Stanford accrued roughly $1.4 billion in cumulative royalties. A number of other research universities also are capitalizing on this alternative revenue source. Given the breadth and depth of the challenges universities face, the time for the rest to embark on such strategies is past due.

Thomas K. Lindsay, PhD, is Director of the Center for Higher Education at the Texas Public Policy Foundation and former Deputy Chairman and COO of the National Endowment for the Humanities.

David Sym-Smith is a Partner and Executive in Residence at Mobility Ventures. David is a 20-plus year wireless industry veteran who has served as senior executive of global corporations as well as at several startups.

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