Session III

Small Business, Universities, and
Regional Growth

Moderator:
Keiki-Pua Dancil
Hawaii Science and Technology Institute

Dr. Dancil, introducing the third session, said that after hearing many case studies and principles from the National Academies and the federal government, the current session would examine how these principles are applied in several parts of the mainland and locally in the state of Hawaii. The current session would lead into the following day’s closer focus on Hawaii itself.

40 YEARS OF EXPERIENCE WITH TECHNOLOGY LICENSING

Katharine Ku
Office of Technology Licensing
Stanford University

Ms. Ku said that she was “very ambivalent” about bringing Stanford’s experience to the meeting, being “the smallest unit represented from a very dynamic innovation cluster in Silicon Valley.” She said she would confine herself to the Stanford experience as an example of what a university can do to make technology transfer effective.

She began with the university’s philosophy of technology transfer, which is to do what is best for the technology—to move it into society so that innovations can be useful. In addition, the university sought to foster good industrial relationships. While it naturally had relationships with existing companies, start-ups, alumni, and others, it also seeks good relationships with private corporations, and to do that, it needs to be “reasonable and flexible.” This, she said, is best accomplished when there are “very few rules and very few sacred cows.”



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Session III Small Business, Universities, and Regional Growth Moderator: Keiki-Pua Dancil Hawaii Science and Technology Institute Dr. Dancil, introducing the third session, said that after hearing many case studies and principles from the National Academies and the federal government, the current session would examine how these principles are applied in several parts of the mainland and locally in the state of Hawaii. The current session would lead into the following day’s closer focus on Hawaii itself. 40 YEARS OF EXPERIENCE WITH TECHNOLOGY LICENSING Katharine Ku Office of Technology Licensing Stanford University Ms. Ku said that she was “very ambivalent” about bringing Stanford’s expe- rience to the meeting, being “the smallest unit represented from a very dynamic innovation cluster in Silicon Valley.” She said she would confine herself to the Stanford experience as an example of what a university can do to make technol- ogy transfer effective. She began with the university’s philosophy of technology transfer, which is to do what is best for the technology—to move it into society so that innovations can be useful. In addition, the university sought to foster good industrial relation - ships. While it naturally had relationships with existing companies, start-ups, alumni, and others, it also seeks good relationships with private corporations, and to do that, it needs to be “reasonable and flexible.” This, she said, is best ac - complished when there are “very few rules and very few sacred cows.” 72

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73 SESSION III In addition, the office wants to be action oriented and results oriented. In a university, she acknowledged, these are “often oxymorons,” but Stanford had been unusually successful. The technology transfer office was 40 years old, having begun operations in 1970. Since then it had seen some 8,300 cumulative invention disclosures, executed more than 3,500 licenses, and held about 1,200 active licenses. “We have a lot of active licenses because inventions come and go; patents get issued and then expire.” Ms. Ku mentioned a few notable Stanford inventions “just because you prob- ably don’t recognize most of them.” One of the first was FM sound synthesis, created by a small Yamaha music chip developed by the music department. “We were very proud that one of our biggest inventions, the Yamaha chip, came out of the music department,” she said. “It’s probably in your cell phone; every time your phone plays some interesting song, that’s probably a Yamaha chip.” One of Stanford’s biggest inventions was recombinant DNA, the cloning technology that has enabled people to put genes into bacteria. This invention generated some $255 million in royalties, which was shared with the University of California, and licensed to about 440 companies. “The one that I want to mention just because we’re in Hawaii,” Ms. Ku said, “is phycobiliproteins proteins. I love this term. It’s a fluorescent compound that comes from algae, and it was developed through a collaborative effort between a University of California professor and a Stanford professor. They came up with a compound from algae that can be used in fluorescent-activated cell sorting.” From work in the early 1990s, Stanford researchers also devised a rendi - tion of DSL (digital subscriber line) technology that proved popular. It allowed subscribers a cheaper connection if they were willing to upload slower than they download. In fact, most people do not care how fast they can upload, although they want to download quickly. This technology was eventually acquired by Texas Instruments, which was Stanford’s exclusive licensee for many years. The Success of Google Stanford’s most famous licensee, Ms. Ku said, was Google, a company that was built on a technology appreciated by few people initially. “Two graduate stu - dents worked on a project for the library for about four years. They used Stanford resources to develop a search engine that we tried to market to the four big search engine companies, but nobody was interested. The two guys were frustrated, and decided to start their own company. We gave them an exclusive license, but we didn’t know if they knew how to do business. We took a little bit of equity, and even that 2 percent share brought in about $337 million in equity. We’re happy we were able to give them that start that they needed.” These inventions have generated more than $1.3 billion in cumulative gross royalties over 40 years, with a lot of the money staying with Stanford and the inventors, she said. “And we’ve been able to give $45 million back to my boss, the

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74 BUILDING HAWAII’S INNOVATION ECONOMY Dean of Research, for the Research Incentive Fund. This money can be somewhat akin to a measure of profit.” The “sort of bad news,” Ms. Ku added, is that $870 million of that total came from just three big inventions: recombinant DNA (1974), functional antibodies (1984), and improved hypertext searching (1996). Of some 8,300 inventions seen by the Office of Technology Licensing, only 20 cases had generated $5 million or more, and only 58 had generated $1 million or more. “And I’m always embar- rassed to mention this, but we have about $17.6 million of patent expenses in inventory, waiting for somebody to license. Our university doesn’t count on roy - alties for operating expenses, and it can’t. The reality is that the big cases almost always end up in litigation, so you never know if you’re going to have income tomorrow.” 123456789101112131415161718 Ms. Ku offered a revenue snapshot of one year, 2010, which was their sec- ond best year (after the year of Google). The revenue for 2010 was $65.5 mil - lion, from royalties generated by 553 inventions. The lowest royalty amount was about $5, “so we’re not always talking about a lot of money.” The office spent about $7.1 million in legal expenses for patents; typically it obtains about 80 to 120 new licenses a year, drawn from about 450 inventions a year. One-half to two-thirds are non-exclusive licenses. “We believe in non-exclusive licenses, because we believe that universities should get a fair share when we contribute our technology to a product in the marketplace. About 10 percent of our agree - ments are with start-ups, so it’s not a huge number, about 10 to 12 a year.” Some 10 to 20 percent of the licenses are for biological material that researchers use in their research, such as monoclonal antibodies. She said that with the exception of the Google cash-out, however, equity was not a major factor in the office’s revenue scheme. “And I want to tell you,” she said, “it costs a lot of money to run the office.” It employs 34 people and costs some $5 million a year to operate, not including the $7 to $9 million in patent expenses or the $17 million in unlicensed inventory. Five people work only on agreements with industries that want to sponsor research at the university. 15 Years to Break Even “The most sobering statistic,” Ms. Ku said, “is that it took us 15 years just to break even. The reality is that most of our inventions require a very, very long-term perspective. We have very early-stage inventions. Most of the research inventions are embryonic, so they need lots of years and time and dollars to de - velop. So we can’t ask for maximum royalties or even optimum royalties. Our royalties have to reflect that our technology is very early-stage and very risky. What we’re looking for is broad patents, patents that can’t be invented around very easily. These have to be revolutionary, not just evolutionary improvements. So that means that most of our inventions take 5 or 10 years before they can come to the marketplace.” 1 2 3 4 5 6

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75 SESSION III Technology transfer is complex, she emphasized. “You generally need a tech- nology champion who really understands the technology to sell it to a company. Patents are only a small part of the picture, but most start-up companies want an exclusive license to give the illusion that they can keep out the big players. Com - mercialization of university research is very, very high risk, and success really depends on the receptiveness of industry and entrepreneurs.” Several factors affect licensing and technology transfer. The first is the envi- ronment, Ms. Ku said. Silicon Valley has a unique ecosystem, where people are “dying to be entrepreneurs. All the graduate students want to know what new start-up you’re involved in. It’s not just a few people who are interested in en - trepreneurial activity, it’s almost everybody.” Also required is a critical mass of inventions. “Each university, each ecosystem has to decide if it’s going to plant seeds or nurture seedlings,” she said. “If you’re going to nurture seedlings, you want to help the company grow. You may want to offer incubation, or advice and mentorship. Other universities just plant the seeds and let nature take its course. Some of those seeds will blossom and others will die.” The university culture also has to be supportive. President Greenwood and Chancellor Hinshaw, she said, had shown that they are supportive of an entrepre- neurial system at UH. The inventors, too, have to be entrepreneurial. It takes a long time to get a patent, to review the patent applications involved, and to take part in the prosecution. “You want your inventors to be involved,” she said. “If they’re not involved, it’s not going to work.” Inflated Expectations The first challenge for every university licensing office, Ms. Ku said, is high expectations. “You all have a ton of expectations,” she said, “I can tell from this conference. But you have to have expectations that match your ecosystem. Does your university have an entrepreneurial culture? The university and the commu - nity both have to be risk tolerant. In Silicon Valley, they know that if someone fails, they have learned something and their next venture might be successful. Then, do you have inventors who want to be involved and have the patience to make this happen? Are there companies interested in licensing technologies from the university? And of course, the inventions have to be good. No matter what a university does, you can’t sell an invention that doesn’t work.” The second general challenge is to balance the many interests involved in technology transfer. “The inventors, the faculty and students, all want us to get more for our technology. The administration wants us not to get them into trouble. The physical sciences companies don’t want to pay anything. The life sciences companies recognize patents, and they understand long product development and the value of an exclusive license. The start-up industry wants an exclusive license for the life of the patent, but can’t afford to pay much and doesn’t know what’s

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76 BUILDING HAWAII’S INNOVATION ECONOMY going to happen with the technology. Large companies want to control the patent. So there’s always tension. ” Ms. Ku observed that the age of a technology transfer office is significant, especially in measuring success. Dollars are not a reliable measure for a young office, she said, because revenues from a particular invention seldom arrive in less than 10 or 15 years. In addition, each deal is different, depending on the company’s size, available funding, business experience, and other factors. “We have to be reasonable, mindful of precedence, able to deal with different com- panies equitably. For a university, one of the biggest challenges is to make sure we honor precedent.” Doing What Is Best for the Technology Ms. Ku mentioned the National Academies report on managing university intellectual property.19 She served on the committee and offered two observations derived from her experience. First, technology transfer does fall within the mis - sion of all universities, so the leadership must recognize that. Secondly, “it’s not about the money.” Given how few inventions return a lot of money, she continued, the main objective of a technology transfer office has to be to “get that technol - ogy out to the public.” In conclusion, she offered a broader perspective of the role of her office in the university environment. “We are just a little cog,” Ms. Ku said, “and what’s im - portant for us is that Stanford maintains its role as a premier university. We want to do what’s best for the technology, not chase the dollars. If you’re waiting for those dollars, you’ll probably miss them, because honestly, we don’t know what will be the next big winner. The dollars will come if you do a good job and plant as many seeds as possible. Let the companies find out which ones will bear fruit.” UNIVERSITIES AND ECONOMIC DEVELOPMENT: LESSONS FROM THE “NEW” UNIVERSITY OF AKRON Luis Proenza The University of Akron Dr. Proenza, president of the University of Akron, said he would speak more broadly about the university’s role in economic development. He began with a satellite image of the world at night, showing how economic activity, as indicated by the distribution of light, is clustered in geographical regions that bear little 19 NationalResearch Council, Managing University Intellectual Property in the Public Interest, Ste- phen Merrill and Anne-Marie Mazza, eds., Washington, D.C.: The National Academies Press, 2010.

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77 SESSION III resemblance to mapped geo-political boundaries such as cities and states. In the United States, he said, some 87 percent of economic activity takes place in these larger metropolitan regions. Some 80 percent of the colleges and universities are located there, as are 83 percent of college students. He pointed to a major “blob” of light in northeast Ohio, which crossed many geographic boundaries; this was regional in extent, he said, not local. It contained Cleveland, Akron, Canton, and other economically active places that belonged to larger regions around them. “These regions generally do not compete with each other within the country,” he said. “They compete across the world globally.” For each of these individual places, he said, it is important to understand the specific local context and to learn its capabilities. The capabilities of the University of Hawaii were very different from those at Akron, whose local as - sets included the world’s largest program in polymer science and engineering; a strong program in graduate chemistry; a 140-year history as an institution; and leadership in the rubber industry. “What we’re seeing today is a convergence among clusters,” he said, “because the polymer cluster is now merging with the bio-materials and bio-medical cluster as we begin to develop bio-materials that have functionality and replaceablity in the human body.” Dr. Proenza said that when he arrived at Akron, he found several challenges. Its manufacturing base was in transition from a labor-intensive model to a much more automated model. The region was risk averse, because it had depended for employment on large companies, such as Goodyear and B.F. Goodrich. The universities in the state had no tradition of entrepreneurial activity. Finally, there was little available investment capital. At the same time, the region had nascent strengths, including underutilized research assets, entrepreneurial potential, opportunities brought by globalization, a convergence of public and private interests, and a focus on differentiation and productivity. To make use of these opportunities, said Dr. Proenza, the university developed a guiding framework. The first principle was relevance, including an effort to focus the university’s activities under a strategic vision that utilizes all of its academic disciplines. The second principle was connectivity: the linkages, partnerships, and joint initiatives that bring talents together. Third was the de - cision to be “exceedingly productive” and to use new metrics to measure this. “We’re very interested in measuring the output per unit of input,” he said, “so we created scaled metrics to compare ourselves with other larger universities so that we could understand what each actually achieved per dollar of research input.” The University as a Tool Chest Dr. Proenza looked at the university as a platform or tool chest “that needs to integrate assets within the community through its disciplines and then generate initiatives that benefit the community.” The university had designed seven initiatives, each of them based on partnerships among the university, the

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78 BUILDING HAWAII’S INNOVATION ECONOMY community, and the private sector. By linking itself with the community, he said, the university could create new value for the community. This was ulti - mately in the university’s own interest, he said, because “if the economy and neighborhoods around us are not healthy,” the university itself would eventually suffer the same fate. The plan began with the concept that the campus itself needed to be trans - formed. Over the past decade, the university had made a $500 million investment in a “New Landscape for Learning” and created 20 new buildings, 18 major additions and renovations, 34 acres of new green space, 30,000 new trees and bushes, and walkways, plazas, and terraces. “All of this began to have economic impact,” he said, “and generate goodwill in the community.” At the same time, the university realized that few students were living on the campus, and about 7,000 of them lived in run-down neighborhoods nearby. So a University Park project was initiated, which had grown into the University Park Alliance, revitalizing a 50-block area of about 1,000 acres and 15,000 residents into “a more vibrant and healthy place to live, learn, work, shop, and play.” A $10 million catalytic grant by the Knight Foundation to begin the project had led to about 900 new jobs, 80 new houses, $52 million in civic investment, and $300 million in private invest- ment. “Obviously 1,000 acres is going to take a while,” he said, “but we are well into stage 2, with the university as developer.” The Value of a Research Foundation Dr. Proenza noted that the university had also started a research founda - tion, partly to resolve problems inherent in state laws that tend to restrict entrepreneurial activities of state universities. This issue had been partially resolved in the early 2000s by statutes that permitted faculty to participate in start-up companies, and the foundation had proceeded toward linking industry and the university much more aggressively. As a result, the foundation became a network of entrepreneurial activities that are central to the area’s economic development strategies and encompass more than the traditional licensing and commercialization. For example, with a research base of about $50 million, the foundation was able to create about 26 start-up companies based on university- patented technology and another 15 or 20 companies based on patents held by others in a five-year period. He said that compared well with other universities that had a much larger research base. In addition, the foundation had created partnerships with small and large companies, working with them to develop new technologies jointly. It also devel - oped an innovation campus that serves both to house the research foundation and to provide incubator space. To bridge technology development from concept to actual success, he said, angel investors are needed, so the foundation developed a regional angel network which has also then spawned a student-driven investment network and a women’s angel network. As a sideline, he said, they have joined

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79 SESSION III with a community college that had received a private letter ruling from the IRS to have donations for business development grants become tax deductible. “The trick is,” he said, “that in order for a company to receive a grant, it has to accept an undergrad or grad student as part of that grant.” As a result of this arrangement, which began several years ago, “we are able to improve entrepreneurship across the curriculum, as we call it, with internship opportunities.” The research foundation is also engaged in international ventures, and serves as technology transfer agency for other institutions and organizations. It has also been named the Ohio Research Foundation, rather than the University of Akron Research Foundation, to avoid jealousies. The foundation had received many awards, including recognition as the most productive foundation in Ohio in the rate of return per research dollar in technology commercialization. It had been recognized by Innovation Associates, the University Economic Development Association, the Milken Institute, and the EDA, which had awarded it one of the six i6 Challenge awards in partnership with the Austen BioInnovation Institute in Akron (ABIA). It had created a part - nership with a community college to enhance educational efficiency, to accelerate job formation, and reduce the cost and time required to earn advanced degrees. Dr. Proenza said that one of the most exciting initiatives of this framework is the Austen BioInnovation Institute in Akron, a $200 million, 10-year program. Akron joined with three hospitals and a regional medical school to create this institute, catalyzed by a significant grant and matched by the state and the private sector. “This is dedicated to becoming the world’s number one bio-materials and orthopedic and medical applications research program,” he said. “We take the bio-materials excellence at the university, link it with clinical opportunities, and develop the synergies we need. We hold synergy seminars to gather solution providers, or technology owners, with clinicians that have a problem they need to solve. Bringing these groups together has been a very positive step.” He described a new secondary school model based on a partnership with the National Inventors Hall of Fame, which is located in Akron. The university, the city, and the county together created a STEM-intensive middle school to expose students to some of the technologies showcased in the NIHF and “which have transformed the world. We see this as a way to get the students very excited, and we’re about to start a high school program as well.” “Guerilla Entrepreneurs” Finally, Dr. Proenza mentioned a program of the University of Akron Re- search Foundation that recruits Foundation Fellows, business people who vol - unteer to act as “guerilla entrepreneurial talent” to identify potential partners for the university. “Ten years ago we would never have thought of partnering with the hospitals,” he said, “because we didn’t have anything in common at the time. Now these Fellows have helped us to see ourselves as partners with the city and

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80 BUILDING HAWAII’S INNOVATION ECONOMY community in a broader sense. As such we can coordinate with other regional partners to expand the concept of the university beyond education, research, and technology transfer. This platform, he said, can focus on relevance, connectivity, and productivity, recognize and resolve the problem of egos, address “relationship fatigue,” and let go of short-term control to gain long-term advantage. “This is hard work,” he said. “It’s a contact sport, takes a lot of time, and requires break - ing down a lot of silos.” He noted that the university had literally broken down some grain silos originally owned by the Quaker Oats Company; the silos are now transformed into a residence hall and hotel. ”We need to do that with other organizations,” he said. “We are “silo busters.” Dr. Proenza closed by defining the “new” University of Akron as a “plat- form” or “tool chest” that allowed a great expansion of the role and potential of the university. “The model,” he said, “is that we are no longer alone, but a key partner in the knowledge economy. We are a convener, a developer, an anchor for clusters of innovation. We will not measure ourselves by how many students we exclude, but by the value we add to students and the relationships we build with our communities in solving real problems.” CONVERTING UNIVERSITY RESEARCH INTO START-UP COMPANIES Barry Weinman Allegis Capital LLC Mr. Weinman, who chairs the University of Hawaii Foundation, began by revisiting the purpose of technology commercialization. He agreed with Ms. Ku that moving new technologies into the market place is not done solely to make money, but said that “it should be a little about the money.” He pointed out the large and growing needs of the public universities as state support dwindled for most of them. “When I first came to Hawaii,” he said, “the legislature made up 100 percent of the university’s budget. I think last year that figure was around 40-42 percent, and for the Big Ten universities it averages only 7 percent. So the university is going to have to find money, and its research output should be one place to find it.” He then turned to the need for improving the way technology is commer- cialized in Hawaii. “Normally in the venture capital business we are focused on outcome,” he said. “We don’t care about process very much. On the President’s Council, we talked a lot about strategic planning for the outcomes we hoped for. Personally, I often find discussions of process confusing, but I will say that if we don’t fix the process, the strategic plan probably won’t come to pass. We need everybody’s help to fix it.”

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81 SESSION III A “Radical View”: Support Universities That Commercialize The premise of commercialization, Mr. Weinman said, is that research grants at universities create some leading edge intellectual property (IP), and that IP can benefit society in health, business, quality of life, economic activity, and other ways. “I contend,” he said, “that over time universities that fail to commercialize their IP may lose some of their future grants. If I were running the U.S. govern - ment, I would give money to universities that did commercialize their IP, and put it into the public domain to benefit society. That’s probably a fairly radical view, but I think that’s the way the public universities will win or lose.” He said that there are many “urban legends” at universities, including the UH, about why it is difficult to convert university IP into start-up companies. “Some examples of these legends are: we’ve always done it that way; we’ve never done it that way; the legislature won’t give us permission to create a technology transfer office, or to privatize the technology transfer process; maybe the unions will be against it; it’s not the faculty’s job; we’re not Silicon Valley; what hap - pens if we fail?” “I take the approach that we ought to go and do it,” he said. “It’s better to apologize later than to wait for permission now.” Mr. Weinman said that Hawaii has been a very innovative place, with tra- ditional skills dating from antiquity when the Polynesian navigators learned to explored the Pacific. More recently, many new high-tech companies have affilia- tion with Hawaii, “and we don’t give ourselves credit for that.” The firm Digital Island, he noted, was a local start-up that had a market capitalization of $1.6 billion when it went public. Veriphone, which raised $1.2 billion at start-up, was founded in Hawaii, bought by Hewlett Packard, and then taken public again. “I contend the right thing to do is create wealth, because wealth then gives you the ability to start more companies, invest in yourself, and convince people and institutions in Hawaii, who invest significant amounts of money in other places, to invest here.” Hawaii’s New Companies Mr. Weinman said that a number of new and interesting companies had come out of the UH, including Hoana, which had developed a wireless, noninvasive technology to monitor vital signs. Originally a dual-use project supported by military funding, it was already used in 22 hospitals. Another was Protekai, or Proteins from the Sea, funded by the UH Foundation to market certain proteins from jellyfish. Other young firms included Eyegenix, which makes artificial corneas marketed in Asia where organ donation is rare; TruTags, which makes silica microtags to track medications used in clinical trials; and Adama Materials, which manufactures nano-enhanced epoxy resins and pre-impregnated composite systems. Adama was the winner of the UH business plan competition and had

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82 BUILDING HAWAII’S INNOVATION ECONOMY recently raised about $4.5 million from venture capitalists. Finally, Sentilent, a project that the Foundation was trying to commercialize, had developed a tech - nology to determine sentiment and identify opinion leaders by analyzing blogs, Tweets, and Facebook entries. Its work had been supported by $3.4 million from the Office of Naval Research, the U.S. Air Force, and DARPA grants to univer- sity Professor Sun-Ki Chai. While many firms are attempting to exploit social networking phenomena, he said, Hawaii has an advantage in its unique cultural mix, along with local capabilities in computer science. “We need to leverage our ‘unfair advantages’,” Mr. Weinman said, “like jellyfish, ocean water, wind, geo- thermal heat. If we do that we can create interesting companies.” He said that the UH Foundation now had its own small “seed venture capital” fund, called the Upside Fund. In 2010 Mr. Weinman said that he had been asked to manage this fund, beginning with only $385,000, which made it “the hard- est thing I’ve ever tried to do.” It had just made its first investment, and he said several more were planned. “We’ll put our money into UH researchers who have an entrepreneurship bent,” he said. “We have to convince people to look not only at the market in Hawaii, but also the national and global markets. You have to build the partnerships and position your company with the right management teams to raise money on a global basis. That’s something we still don’t do well enough here.” Privatizing Tech Transfer Mr. Weinman proposed a fundamental change in the process of commer- cialization. “I think we have to take the whole tech transfer process out of the university and privatize it,” he said. “Other universities are doing this.” He said that one of the most successful was the Wisconsin Alumni Research Foundation, which had brought about $1.2 billion into the university; he said that Arizona State University and the University of Arizona were other examples. By creating a 501(c)3 corporation, he said, “you can act the way a private company would act, as opposed to the way a university would act.” He empha- sized that when a product is ready for patenting, the patenting organization must be able to make a decision and move. “We should never be in a position where we can’t support our researchers when they want to file something that has merit. Other people are doing this, so why can’t we be a leader? The benefits are to di - versify Hawaii’s economy and hold on to the best and brightest people.” Today, he said, these people leave the state because they don’t find high-tech jobs. “We need to be able to create these companies for the next generation. At UH we get major funding for ocean sciences, health sciences, astronomy, life sciences, clean energy. These are our ‘unfair advantages.’ We ought to focus on these advantages, identify the important innovations, and use venture-type fund - ing to develop the technologies that come out of them.” In practice, Mr. Weinman said, the university’s commercialization process needed to be more proactive. Instead of waiting for researchers to ask for help

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83 SESSION III filing a patent, he said, the chief commercialization officer should be “way out ahead of that,” meeting with innovators to see where they are going, helping to evaluate technologies, and perhaps bringing faculty or students from the business school to study the market and the competition. “If IP is unique,” he concluded, “we ought to put all our oars behind it and pull as hard as we can. We can help determine whether to apply for a license, spin out a company, join with a larger company, or raise more financing. Then we’ll do whatever is necessary to protect it and nurture it. And let’s not just focus on the licensing and royalty; let’s focus on having successful entrepreneurs who have a warm spot in their heart not only for Hawaii, but for the University of Hawaii. Grateful entrepreneurs are the ones who give back.” IMPROVING INDUSTRY PARTNERSHIPS Mary Walshok University of California at San Diego Dr. Walshok, associate vice chancellor of public programs and dean of extended studies at the University of California at San Diego, spoke about the importance of the community in strengthening university research and research transfer. She said she would illustrate how this can happen through her experi - ence in San Diego, a city and region that in the 1950s faced challenges similar to those of Hawaii—a need to diversify and to transform the regional economy. “But unlike Hawaii,” she said, “it had few of the assets one associates with technology hubs today.” It had, for example, virtually none of the following assets: • Land or facilities dedicated to research and education; • Large, competitive basic research institutions; • Patenting and licensing; • Angel or venture capital; • Technology entrepreneurs or start-up know-how; • Access to global partners and markets. Seventy-five percent of the economy was related to the military. And after World War 2, the military-based economy began to shrink as its defense contract- ing industries lost momentum. In 1962, Time magazine described San Diego as “Bust Town, U.S.A. “So you will understand why I cried when my husband told me he was taking a job in San Diego.” Today, some 50 years later, Dr. Walshok said, San Diego is a city of 1.3 million people that has become a major global science and technology hub. UCSD has more than 29,000 students, more than 1,000 faculty, and ranks sixth

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84 BUILDING HAWAII’S INNOVATION ECONOMY in research funding in the United States. It is also ranked #13 globally by the Shanghai Jiao Tong University ranking (2008). The once-barren Torrey Pines Mesa is home to 74 research centers, which last year received more than $3 bil - lion in basic research funding and file about 7,000 patent requests per year. The rapid growth of research and research-based firms began around a core of outstanding research institutions: Scripps Institution of Oceanography (1903), General Atomics (1955), University of California at San Diego (1960), and the Salk Institute (1960). Today there are more than 50 research institutes, with the newer Sanford-Burnham Medical Research Institute one of the largest. These institutes have research budgets of about $100 million to $400 million, in addition to the $1 billion awarded to UCSD last year. San Diego as a Hub for Technology Companies “We’ve become a hub of diverse technology companies,” Dr. Walshok said, “growing out of a handful of pioneers. When I moved to San Diego and eventu- ally took a job at UCSD, there were two interesting companies in the category of IT and software. One, Linkabit, was started by a faculty member, Irwin Jacobs, in 1968, based on defense contracts. This grew into Qualcomm.” The other was a computer graphics company, ISSCO, started in 1970 by Peter Preuss, then a graduate student at UCSD and later a national pioneer in the field of computer graphics. These isolated entrepreneurial enterprises have grown into nearly 1,000 companies. In the life sciences, the first successful company was Hybritech, founded in 1978 by faculty members Ivor Royston and Howard Birndorf. That company, sold to Eli Lilly, has been joined by over 600 life science companies, anchored by Biogen Idec, Gen-Probe, and Life Technologies. In addition, another cluster of companies has grown out of energy and envi- ronmental innovations. General Dynamics, a major military contractor during World War II and the builder of early nuclear submarines, created in 1955 a new division GA to explore nuclear applications. They recruited major physicists and engineers from across the nation. Today more than 250 companies work in the energy R&D space, all contiguous to General Atomics. Another booming field, action sports, traces its origins to the founding of Gordon and Smith Surfboards in 1959. Today some 600 companies work in the research and development areas of golf, surfboarding, underwater kinetics, hel - mets, skateboards, and related areas. “It’s an industry,” Dr. Walshok said, “and it’s based on materials science, developments in physics, and visualization techniques that can be studied in our supercomputer center.” Sources of Success What brought about 3,000 companies and 70,000 jobs to the San Diego area, successfully replacing many of the jobs lost in the defense downturn of the

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85 SESSION III 1980s, asked Dr. Walshok. Answering this question, she described the interplay of six critical factors: 1. Land use and infrastructure. In San Diego, a few civic leaders managed to convince the city council that the only way to keep military activities in the area was to support R&D. In order to do this, land was needed for R&D compa - nies. The council designated a large parcel of “pueblo land,” which was land the city had received from the state from the redistribution of Spanish land grants at the end of the Mexican American War in the 1850s. “In our case, these land use decisions allowed for a geographic proximity that is to die for. I only need to walk a mile from my office to pass $3 billion worth of research institutions—not counting the smaller, innovative R&D companies.” 2. World-class research. The major institutions—including Salk, UCSD, Sanford Burnham, and Scripps—all used the strategy of hiring senior-level people to accelerate research excellence. “When you hire a senior-level person in sci- ence,” she said, “you hire a person who has connections with the Washington establishment and foundations, and who brings grants, grad students, and post- docs to your region. So you accelerate everything.” The university did this by bundling two assistant professor salaries to hire a full professor, then asking the private sector for help in financing, she said. “It became an extraordinary strategy that paid off.” 3. Private-sector investment. There is a lot of money in Hawaii, Dr. Walshok noted, “but you can’t shake it loose.” In San Diego the money was simply not there. To catalyze the necessary activities, groups of people contributed sums of a few thousand dollars to start small programs. Most of the organizations that have enabled the growth of the San Diego economy, she said, are built on the efforts of private-sector members, sponsors, and underwriters, and very few federal earmarks. 4. An entrepreneurial culture. The culture itself became entrepreneurial, involving “shared agenda setting, shared investment, shared risk, and shared rewards.” This culture, she added, was spurred on by crises in the California economy, when no state money was available. The physical proximity of institu - tions was also an advantage, leading to many formal and informal interactions. 5. Talent development. The universities are essential, Dr. Walshok said, in developing the skills needed by emerging technology companies in the region. This may involve special needs at times, when university flexibility can be a crucial advantage. She cited the example of Irwin Jacobs, founder of Qualcomm, who needed engineers trained in his new wireless technology, CDMA, which was not being taught at other engineering schools. UCSD complied, and the company succeeded. “This talent development commitment by the university and the com- munity colleges was an essential component. It allowed us to keep jobs in San Diego and attract people who could develop skills further.” 6. A commitment to place. Finally, she said, the people of Hawaii and Cali- fornia share a strong commitment to place, which can bring a great advantage.

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86 BUILDING HAWAII’S INNOVATION ECONOMY “Talented people will stay if you give them reasons to stay.” Entrepreneurs will mentor young people and become serial entrepreneurs and invest their money in 2nd and 3rd and 8th-and 10th-generation families. They can also become enor- mously philanthropic. “These characteristics of my place I think resonate with the characteristics of your place,” she said. “But what we did over 40 years, you can probably do in 15 or 20.” Dr. Walshok concluded with a recommendation from her own professional field. “I am a sociologist, not an economist,” she said, “and before wealth can be created, human beings have to learn to work together. If there is to be progress, new forms of association have to be developed. Part of what the Council is recom- mending is that the University of Hawaii can be a catalyst and a hub for some of those new forms of association. Economic growth is connected to technological development, but you also need organizational innovation and cultural change. It’s been true throughout history, and it’s true today.” DISCUSSION Dr. Wessner asked Katharine Ku whether Stanford innovators used the SBIR program much. She said that they did not, partly because of worries about conflict of interest. “We feel that if money goes to a faculty company and then comes back to Stanford, there could be a perception of pipelining to the faculty company.” Dr. Wessner also asked about the critiques by the Kaufmann Foundation of university technology transfer offices. Ms. Ku said that the performance of various university offices was mixed. “Stanford has a lot of inventions and experience,” she said. “Some university technology transfer offices have one or two people, 25 inventions a year, and minimal budgets. It’s hard for them to get the experi- ence and then to be hooked to the larger community.” She referred to the report on patenting by the National Academies, which recommended that the smaller universities might ask other universities to help them manage their technologies or provide guidance.20 “And I feel that’s part of our role at Stanford—to spread the best practices.” Finally Dr. Wessner asked why universities worked so hard on technology transfer if it was so difficult. Ms. Ku said that Stanford saw it as “part of the mis- sion of the university. This is a public service. We don’t want the technologies to lie fallow in the literature. I think we need the inventors to be championing the technology, and we want to help them.” Dr. Proenza added that many universities are doing good jobs at technol - ogy transfer, and suggested that the Kaufmann team “had seen many of the less 20 National Research Council, Managing University Intellectual Property in the Public Interest, op. cit.

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87 SESSION III optimal offices.” He said that the Kaufmann team had been to Akron, and “under- stood what could be done by this highly robust model.” Mr. Weinman added that university leadership could also play a significant role in moving technologies to the market. At his venture capital office in Palo Alto, he said, two deans from Stanford sit on the advisory board and invest in the fund. “When they see something we ought to look at,” he said, “they grab us by the ear and pull us there. There’s a culture at Stanford that goes beyond just trying to license technology. At a lot of universities the deans don’t think it’s a part of their job, but I think it is.” Mr. Goldin agreed with Katharine Ku that “money isn’t the main issue. Get- ting technology transferred is multidisciplinary, and too many universities depend on the technology transfer office. When I was in the government and traveled to the major research universities, I found a significant weakness in the process in the tech transfer shop, especially in state universities, which was the feeling that ‘we can’t fail.’ There are too many restrictions on those individuals. They frustrate the innovators to the point where they don’t want to deal with them.” Mr. Goldin said he agreed with a 501(c)3 strategy that removes tech transfer from the oversight of the state so that it can be dealt with on its commercial merits. The objective of tech transfer, he said, should not be to maximize the money earned back from patents, but to maximize the value of the companies. Dr. Proenza added that the University of Akron, and “virtually all of the successful ones,” were 501(c)3 organizations.

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