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Academia (vs. Industry)

What Happens to University-Based Biotech Startups – And Why

Here’s a useful article that looks at the fate of university-licensed startup (ULS) life sciencecompanies over the last few years. There are more and more such companies (a greater than tenfold increase in their number since 1990), but a comprehensive look at success rates (and how such rates vary according to the universities involved) has been harder to come by. A lot of work went into this overview, and I’m glad the authors were able to assemble it. They spent a lot of time digging through tech-transfer records and contacting universities to make sure that they’d covered everything, checking venture capital announcements and state corporate registrations, and searching through press releases, LinkedIn pages, and more. The data that they have produced look like the best we have on the subject.

So here’s the overall picture. If you take the fifty top patent-producing schools over the last fifty years as your cohort, those are responsible for about 70% of all university patents with a long-tail distribution thereafter. Formation of new life science companies is, if anything, even more top-loaded. Only 47 of those 50 schools produced any such new firms at all during the 1980-2013 period. The top five universities produced one-third of the new companies, and the top ten produced half, while the bottom seven school produced 3% of them.

What fates did all these companies meet? 13% of them were eventually acquired by another company, and 10% of them had an IPO, so those are the successes. There’s an ambiguous category after that, of companies that have at least one entry in the Dun & Bradstreet Data Universal Numbering System, which is probably the most comprehensive registry of firms that appear to be (or have been) going concerns. 30% of the companies fit that, but with no apparent acquisition or IPO. Meanwhile, 18% of them show up in DUNS but appear to have only one or two employees, 22% show up but have either definitely failed or cannot be proven to still exist, and 7% never applied for a DUNS registration at all. Overall then, a generous reading would be roughly 23% success, 47% likely or definite failure, and 30% “work in progress”.

Interestingly, the number of ULS startups that seem to be active but show little evidence of actual progress has been increasing over the years. The authors have no problem naming what they’re seeing:

The walking dead represent symbolic action by universities, a transfer that made the TTO and others look good in the short term, the time horizon of annual budget fights and resource allocation decisions. Over the long term, however, no real business or economic development occurred. We saw the significant rise in the number of these firms as driven by university administrators attempting to game the system, to claim, but not create, economic development.

I find that very plausible indeed, unfortunately. As an illustration, the paper notes that in 2008 the two universities that (on paper, at least) formed the most startup companies were MIT and the University of Utah. Sadly, it turned out that the majority of the Utah companies listed the university’s tech transfer office address and phone number as their corporate headquarters and its director as a corporate officer, neither of which are signs of a successful spinout. And neither is this sort of behavior (which I would call “performative technology transfer”) peculiar to Utah.

Meanwhile, the venture capital firms seem to be doing a reasonably good job with their dollars: VC activity was very disproportionately centered around those companies that were eventually acquired or had an IPO. You can regard some of that as self-fulfilling prophecy, but at the same time, VC firms are also going to vet companies for their chances of achieving such exits before they invest at all, and they are definitely not going to be able to take a random sample of firms and achieve those same numbers. Not even in the current funding environment!

Finally, geography. The authors have location data covering 1990 to 2011, with 498 companies represented. 23% of those were founded in the well-established biotech clusters around Boston/Cambridge, the SF Bay area, or San Diego. Overall, 68% of those 498 companies stayed within 60 miles of the founding university, while the rest migrated. Firms founded in those clusters experienced success twice as often and failure half as often – there’s a reason that these things come to exist and to perpetuate themselves. The paper’s study of companies that have moved in and out of various locations suggest, as one would well believe, that it’s not so much that being in such a cluster makes a company successful as that more successful firms are more likely to form in such places in the first place. “Assortative matching” best fits their results – the idea that firms succeed because they have access to the resources that they need, and that they move in order to maximize these fits. Indeed, the lowest success rates were found among those firms that started off in a non-cluster location and never moved at all.

Overall, the authors suggest that the current system’s incentives, at least in many locations around the country, are misaligned. University administrators and state legislators are hoping for new economic activity and the benefits thereof, but they reward startup formation itself as if it were necessarily connected. And it isn’t. The “walking dead” examples mention show just where such a disconnect forms. Tech transfer offices should report better data, and should not be allowed (by universities, but also by outside observers) to simply report numbers of new firms “formed” or technologies “licensed out” without context. Longer time horizons for such things would be a good first step: has anything actually come of all these announcements?

The paper also points out that emphasizing economic development and achieving investment returns are two primary goals of university tech transfer offices, but that these may well be incompatible. Many IPOs, for example, provide employment and wages but also have negative returns for investors, whereas out-and-out acquisitions can show the opposite: little extra economic activity once the small company is swallowed up, but definite returns on the initial investment. Tech transfer offices should realize this, be more open about it, and make up their minds about which goals they find more important.

Finally, the authors have an interesting recommendation. They say that the two most likely ways for a region to fail in building a life-science ecosystem are either launching things into a vacuum and trying to compete with the big clusters (but just on a smaller scale). Instead, the paper argues, smaller areas would do well to pick some particular niche and try to become excellent in that area. Boston/Cambridge and the Bay area can fling startups all over the place – oncology, diagnostics, technology platforms, gene therapies, neuroscience. Try to replicate that from scratch and you’re going to be in trouble. But on the other hand:

Assortative matching implies that becoming a ‘micro cluster’ — a community with sufficient and well-developed resources that support a specialized technology or product area — should be sufficient to help local firms prosper and invite in-migration. Communities should not focus on being good in the ‘life sciences’; they should create and develop resources around some narrow slice of the sector and become best-in-class in that area. Universities should focus less on building strong colleges (for example, life science or medicine), and specialize more on outstanding departments (for example, genetics or ophthalmology).

We’ll see if anyone takes them up on the recommendation. In the meantime, I can strongly recommend this paper to anyone interested in the whole topic of university-based startups. There’s a lot of good information here that’s hard to come by anywhere else.

26 comments on “What Happens to University-Based Biotech Startups – And Why”

  1. Ron Richardson says:

    “Acquired” doesn’t mean that it was a successful exit–most acquisitions are fire-sales for parts/IP or reverse merger shells. And plenty of IPO’s and later acquisitions aren’t successes either (see Neon therapeutics).

  2. JB says:

    My experience with our TTO was terrible. They were completely incapable of getting over sunk costs and constantly trying to not only recover costs, but also to generate some profit. The only problem is that potential stake holders who’d like to try your technology aren’t going to fork over giant sums of cash just to try it. It was really frustrating finding good leads who were interested in our tech only to be blocked by the TTO who wouldn’t allow a potential interested party to try a little test of our tech without paying large fees. Guess what? The lead just ends up dying and the university now gets no fee money AND has killed a lead that was difficult to get all because they got too greedy trying to make business decisions to try to collect back sunk costs. Making decisions on sink costs is a business 101 no no. I got frustrated by the whole university TTO and startup system and just quit. The university spent thousands of dollars on a patent and lawyers to generate it, now they’ll lose everything because they have no one anymore who’ll take it and try to commercialize it after they were being so inflexible. I know the quality for tech transfer and startup spinouts varies from university to university, of course, but I was extremely off-put by our university’s handling of our tech that completely suffocated our entrepreneurship.

    Also, I have a lot of experience in regulatory product development. The preclinical programs for a ton of univesity startups are often very deficient and/or are still very early stage ideas. There is still a huge amount of work to be done even if you have a few POC studies in animals that worked. Many of these small start ups still require millions of more dollars of basic science testing to have any impactful meaning. Of course this is obvious, but it can be very difficult to tell which picks will win that are worth the dollars. It’s also a classic case of the valley of death for funding where you need tons more cash to get the required data, but you can’t get cash unless you have the data to convince people – it’s a catch 22. There are also many smaller programs that don’t seem like they have the faintest clue on how to develop their products either, in terms of studies needed to clear regulatory hurdles so that they can reach big regulatory milestones.

    1. John Wayne says:

      I’ve seen this happen myself. Some tech transfer offices act like every patent they have is gold and charge large up front costs; this is stifling for a small business. Other offices have a somewhat more long term view of things and demand an undilutable royalty stream that is more reasonable.

      Buy me two beers and I’ll tell you which Boston area schools are which.

      1. Andy II says:

        Sorry, no need to buy you beer. we all know who they are.

        1. John Wayne says:

          I’ve been surprised how many people don’t know who they are. It feels like a lack of diligence, but it might not be that simple. There are some schools with otherwise good reputations that are a TOO nightmare that seem to catch people off guard.

          1. Skeptical says:

            I’ll say it: I have no idea which schools are which. Give us a hint…

  3. Matt Gruner says:

    Bay Area and Boston have a near inexhaustible pool of fully trained PhDs (in many cases desperate for work). Start-ups in these “super-incubators” incur essentially no cost for recruitment or training. And the people that came to these places to get training don’t want to raise their families in the fly over states. The educational opportunities available to a kid growing up in California or Massachusetts are much much higher than for example my home state of Nevada.

    1. Hap says:

      It depends what areas though – my state (OH) has some decent schools but is highly economically segregated so that you can get a good education at a low cost-of-living, while in others not so much (requiring some local knowledge). In terms of job security (the ability to get another job), I don’t think it’s great, and those low taxes mean that things aren’t being done that should be, but living in such a place is not a unalloyed curse.

      I like the idea of specialization, but I don’t know if it allows for the infrastructure that administrations want and if it is susceptible to disruption. It seems like a situation in which states other than MA, CA could compete for jobs and technological expertise and would help with the general national segregation of jobs.

      1. James Millar says:

        In Canada, the system called equalization sometimes has a perverse effect of maintaining provincial imbalances because it dilutes the benefit of economic growth (“have nots” still net gain from closing the gap, but not as strongly).

        Since the blue coasts subsidize the rest of the states*, is there some of the same effect there?

        *admittedly, debt spending is also a huge “subsidy.”

        1. Hap says:

          Maybe. The intrastate segregation is unusual (we were the second most economically segregated city in the US) – the school funding system has been ruled illegal for more than 30 years but hasn’t been fixed, and the lack of cultural alternatives is likely due to lack of investment (although my city tends to fund sports teams well, whether we want to or not). So a lot of this is our fault. On the other hand, the self-sorting of people is not going well for us (the US) at the moment and it would help to have less of it so that we can deal with one another better than we are now.

          Economics always values something over something else, but if you need everything, then it tends to be a problem because no one wants to be making the lower-valued stuff even though everyone needs it. In theory, the lower-valued stuff gets more valued, but with lots of things that never seems to happen (because we aren’t willing to let some go without schools for example). In the end, everyone has something useful to bring to the table and it would be good to find it.

  4. Emjeff says:

    What this goes to show is that academics have a hugely inflated view of themselves. Just because you never left school doesn’t mean you know anything about developing and running a business.

    1. Hap says:

      If administration is included, maybe – the implication is that administrators want businesses started (whether or not anyone knows how to run one) to get funding for more administration. Likely the professors have incentives to start businesses because the administrators make the incentives.

      Academia has never been short of arrogance, though; I wonder if Einstein was wrong about stupidity being the only infinite resource, since there’s a lot of arrogance in academia and yet academia shows no signs of having a monopoly on it (despite in some cases their ambition).

  5. anon says:

    How do they fare against non-university-based startups?

  6. Zee Bendelstein says:

    And that even the 23% that had a putative success may not have been financial successes, let alone future development/regulatory/commercial successes. So arguably the actual proportion of successes can only be far smaller, though separate layers of factors for sure.

  7. ChairmanMao says:

    Make sure the start-up scientists from the University get legal representation and that their TTO is transparent with the research and development contract. You will get screwed once big money is involved and they bring in a CEO with the ethics and demeanor of a third world dictator- and trust me- they do not care about you and the academic partner, and Ive met very few CEOs who aren’t in it for themselves and display negative phenotypes eventually.

    All scientists in academia in start-up mode need education in contract law, patent law, and human behavioral psychology so you can be on the same footing with CEO miscreants.

    1. eyesoars says:

      Given that non-medical tech CEOs first, last, and all places imbetween believe in themselves, it seems probable that medical tech CEOs are an order of magnitude worse. I can only imagine.

  8. myma says:

    As an actual small business co-founder located in close proximity to a Biotech hub, I can tell you with assurance that University Tech Transfer Offices are nuts. They all think that their golden patent is the next Genentech, so the initial proposed terms for something that is very pre-pre-pre-clinical have a hefty upfront with annual milestone payments and royalty payments worldwide already defined should this thing make it to licensure and the market if/when that should ever happen. And along the way, the company has to provide commercialization plans updated every so many months, or else there is some other penalty clause. Meanwhile, the licensee has little idea if this golden patent will actually work in practice 6 months from now. And then every year or two, the TTO has a staff turnover and a completely different philosophy and set of terms equally nutso.

    No thank you.

    The only patent we actually licensed from a TTO was from a decent size midwest research university, where the terms was $10k per year to have a look-see plus actual patent prosecution costs incurred those years charged as a pass-through, renewable annually for some number of years (3?) before the real trigger was pulled, and hand it back if we didn’t want it further. We gave it a try for two years and then handed it back – not surprising for the readers of this blog there were off-target issues in pre-clinical.

  9. matt says:

    My experience, far far away from either Boston or the Bay, is this. I heard about a new biotech startup growing in a small nearby suburb tech park, which rather surprised me because I thought the suburb could barely support a city council and basic services, much less a tech park. How naive of me. Anyway, I tried googling startup pharmaceutical companies in my area, and lo and behold! there was one down the street from me in my subdivision! How had I missed this?

    Turns out, the office building housing the homeowner’s association also has a “virtual office” company. A secretary takes phone messages, they collect the mail, and there’s a handy conference room if you need to meet clients or conduct business in-person occasionally. Searching LinkedIn for employees of that company shows six or seven people, mostly in India, none listed in the US. I’m not positive they are actually even connected to this particular company, or if they work for another entity of the same name in India. My guess is that a professor at the local university/medical school, probably who had lived or worked in India, started either a consulting business or small CRO. Or they are trying to pursue leads on the cheap.

    Perhaps most of the startups are of this variety?

  10. berney broz says:

    aLl tHe dRuGs aRE dIsCovEReD bY aCadEMiCs aNd FunDeD bY tHe nSF aND bIg pHarMa cOmEs aNd rAiSeZ tHe PrICe aNd taKez AlL tHe ProFitS

  11. Jeff C says:

    Sigh. I work in this field so where to start. The comments that University TTOs are nuts resonate strongly. Universities do indeed think their IP is extremely valuable and is the source of all blockbusters. We all know the truth. Many TTOs lose money as they patent worthless IP too early. But it’s not all their fault. Professors view company formation as a badge of success irrespective of whether there is anything of value. So academics push administrators to spin out totally pointless companies. Universities then have absolutely bizarre policies around IP and commercialization drive by fear-of-missing-out and obsession with maintaining their not-for-profit tax status (little known fact is that universities need to publish also supports their non-profit status so it should be “publish or pay taxes” And then, sadly, such jobs are not highly valued in universities so the pay is hilariously low. Embarrassingly low. Which is one big reason turnover is so high and that lack of consistency make everything worse. Trust me, the salaries of TTO people (except maybe the head people) is dreadful. So you get what you pay for and a lot of these companies are DOA before they even start. On the other side of fence we just simply have to do our best to find a way to work with the TTOs and get some common sense when we can. All part of the fun

  12. Harrison says:

    Since everybody is piling on… I once worked with a tech transfer office for 9 months to get access to a model system we wanted to use. They were unresponsive, made crazy demands, and were generally not very good to work with. As this was going on, an academic lab at a different university obtained their model system for free and invalidated their work.

  13. Peter Zapf says:

    These companies are all in sickness benefits.
    Seems like focusing on health would be a differentiator.
    Think for the long term.
    Disguise health internally first.
    Preventative & curative, not proprietary & proscriptive.
    Call it health benefits near the end.
    . The feint, acquisition, stack & not sickness benefits.
    Who would notice?

  14. NYC Professor says:

    I am an academic and I have started a few companies, some venture-backed and some just started on an idea where we hope to get funds from angel investors, NIH or elsewhere. This second type of company often goes nowhere – we can’t get enough money or the students/postdocs get recruited to work for Pharma and the company falls apart. However, once, one of my companies started with students and NIH SBIR funding became reasonably successful. So as academics, many more fail since many companies are started before funding. When I work with VC, all but one proceeded towards an exit. We don’t start companies out of my lab to “show off” and the university doesn’t push us to start companies to make them look good. The high failure rate is just the nature of startups from academia where we sometimes don’t have huge resources but we have enthusiastic grad students and postdocs who want to give company building a shot. Let’s not deride the higher failure rates of academic startups.

  15. Anon says:

    Seems to me that by far the biggest reason for failure of academic start-ups, is that they are academic – Professors with no interest in leaving their academic theories and career, with over-engineered solutions to a problem that doesn’t exist or has already been solved, and no clue of how business operates in the real world.

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  17. MTK says:

    The criticism that universities like to “claim, but not create, economic growth” has been my experience. I can’t tell you the number of times I’ve heard some administrator from our local university give a presentation touting all the patent applications filed, patents licensed, and startups started numbers. All of which doesn’t really mean a thing in terms of economic growth. They’re playing to their own empty metrics.

    In terms of arrogance the worst was the Vice-Chancellor who was talking up a new medical research center the University was planning which was also going to include space for private companies “who would pay for the privilege of being there.” I stopped listening at that point.

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