Big Ideas for Small Business: Getting Good Technology out of the Lab and into the Marketplace

This is the latest installment of a new CAP series called “Big Ideas for Small Business.” The weekly series aims to offer a collection of bold proposals that taken together will form a progressive pro-business agenda for the small- and medium-sized companies—and future big companies—our economic competitiveness depends on.

In this space CAP’s economic policy team will offer a weekly pro-growth alternative to the simplistic conservative advocacy for irresponsible tax policy and unaccountable government that are hardly the real priorities of small businesses—and that will do nothing to boost economic growth and ensure widely shared prosperity.

The problem: Great technology sits on the sidelines in university labs

Universities are not only on the front lines of scientific and technological discovery but also at times hotbeds of entrepreneurship. In 2010 alone 651 new startup companies formed around the commercialization of university-licensed technology, and more than 3,600 such small businesses founded in previous years continue to operate.

But many promising patents remain stuck in university labs, inaccessible to the market. The result: Despite the roughly $50 billion of federal dollars spent annually on university research, too few new technologies make it through the pipeline from paper, to patent, to product.

There are many structural and cultural reasons why many universities do not maximize the potential of their small-business technology spinoffs. A key one is that the federal funding on which much university research depends does not encourage universities to prioritize the commercialization of the resulting technology. As a result, universities and the researchers they employ too often do not have strong incentives to take time away from research—and applying to basic research grants—to acquire and maintain the physical, human, and financial capital required to develop technological discoveries into new and useful products.

To be sure, programs such as federal Small Business Investment Research and Small Business Technology Research grants, which we discussed last month in this series, do exist to help small businesses conduct advanced technology research and development. But these programs are geared toward entrepreneurs who already have a business plan. They do little for the thousands of potentially useful patents, those with the potential to spawn new businesses and jobs quickly, that sit idle in university labs or technology transfer offices.

The solution: Help universities develop robust innovation programs where small technology spinoff companies can flourish

The government should ensure that federal research money also supports university-led initiatives to develop innovation and entrepreneurship ecosystems that nurture tech spinoff companies. In a forthcoming paper from the Center for American Progress’s “Doing What Works” and Science Progress projects, Krisztina “Z” Holly, vice provost for innovation at the University of California, outlines a multipoint policy package to achieve this goal. Here we focus on a few of the most important components as they relate to small business success.

Next steps: Authorize changes to existing research funding

In the forthcoming paper, “Universities and Innovation Networks,” Holly proposes changing all federal research grants to ensure they cover the costs of patenting and licensing of the most promising technologies. Today many federal research grants don’t actually cover the diverse costs of extracting the economic value of funded research through commercialization.

In 2010 universities spent $323 million on legal fees associated with technology licensing alone. Certainly not all research leads to a patentable product, nor should it. But setting aside even 1 or 2 percent of existing research funding to cover not just research, but also the first steps toward commercialization, where appropriate, would make a big impact.

Next, the government should create an automatic glide path for technologies from paper, to patent, to product. Bringing university research and small-business grant makers together under a federal common application assistance program, like the one we suggested earlier in this series, would allow application procedures to be coordinated to help university researchers connect with the business expertise needed to develop patents into marketable products.

Finally, we should set aside some federal funding to incentivize universities to acquire and maintain the human, physical, and financial capital needed to support a culture of entrepreneurship. As we alluded to in a previous article in this series, setting aside even a few million dollars for technology commercialization proof-of-concept centers could go a long way. These funds would not be used to invest in specific research projects themselves, but rather to encourage universities to invest in the infrastructure of technology commercialization, such as technology transfer offices, entrepreneur-in-residence programs, and business incubators.

Evidence shows that supporting technology spinoff companies yields a great return on investment. As Holly pointed out in a 2010 Science Progress paper, a $10 million grant spread between the University of San Diego and the Massachusetts Institute of Technology for proof-of-concept centers leveraged $160 million in outside investments. At the University of Southern California a $22 million gift from a private donor for similar activities has leveraged $148 million in private capital and supports 500 jobs.

And it’s not just big name academic institutions or top-50 schools located in populous states that are creating good business opportunities with their technology. The University of Utah in the past six years has spun out 125 companies, an average of one new small business for every $12 million in federal research funding, compared to the national average of one company per $100 million. All in all, small business spawned from research at the University of Utah accounts for more than 15,000 jobs, $755 million in annual personal income, and $76 million in annual tax revenue.

Smart federal investments can help many other research universities identify and capitalize on their competitive strengths. That also helps the small businesses these campuses spin out, as well as the surrounding communities that benefit from new job creation and economic activity.

Ed Paisley is Vice President for Editorial at the Center for American Progress. Sean Pool is Assistant Editor in charge of the Center’s Science Progress online magazine. Paisley and Pool are the project coordinators and lead editors for the forthcoming series of papers on U.S. science and economic competitiveness.