Start-Up: the book

As an addition to the post, dated May 4, 2010, I’d like to add a few slides which describe visually the balance between royalties and equity (with some possible antidilution). If you did not have the previous pdf slides, you should check my previous post first. What these new slides show are linear variations of the equity-royalty (possible) balance.

It may not be universally accepted, but in a way more royalty induces less equity and more equity induces less royalty. Also there may be an anti-dilution mechanism:
- many universities state the equity level will stay the same up to a given amount of money invested or up to the 1st round of funding. Given the habit of investors of taking 30-50% of the company after the 1st round, you can compute back how much equity it would have been at incorporation.
- one university, UNC, and I mentioned that in the comment to my post, asks for antidilution until exit at the 0.75% level. Interesting!

What is also interesting is that globally, Stanford, Caltech, Carnegie Mellon and UNC are very similar (small royalties) and MIT may appear as similar for equity but higher for royalties. All this should be handled with care but is probably not too far from a good summary…

So my visuals are not perfect, neither my comments above, but if I am not clear, just contact me! You can download the pdf slides or click on the picture that follows.

There’s been a long standing and passionate debate about what universities “deserve” when they license technologies to start-ups. There is the famous Google vs. Yahoo comparison where Google is an official Stanford spin-off which brought $336M in revenue from the equity the university owned in the start-up whereas Yahoo was considered as a hobby of the founders and no intellectual property was owned by the university. However one Yahoo founder gave some $75M to Stanford.

So what is a typical license between a university and start-up? Well there is no clear answer but the attached pdf file may be of help. I have done some search and found some info, mostly from US universities. I have also tried to find the rationals for or against such deals. The debate remains open and I do not expect a general agreement any time soon. But I hope this is contributing to the topic.

I discovered yesterday the new 2008 Academic Ranking of World Universities done by the Institute of Higher Education, Shanghai Jiao Tong University (IHE-SJTU). Again the USA has the lion share: 8 in the top 10 and 17 in the top 20. Only the UK (Cambridge and Oxford) and Japan (Tokyo) enter the list. You can assess the ranking in more details with the full 500 ranking if you wish.

When I published “Start-Up”, I had a conversation with Christophe Alix, a journalist at Libération who told me that I forgot one thing in my explanations of the US superiority in innovation, i.e. the huge budget of the Pentagon. I certainly do not disagree and address the issue further below with a book I am just reading:

“Creating the Cold War University- The Transformation of Stanford” by Rebecca S. Lowen is an interesting book about how Stanford became wealthy in the 50’s and the 60’s thanks to federal money and industry contracts. Frederick Terman, often credited as being the father of Silicon Valley, called it a “Win-Win-Win” situation. The government funded basic and applied research (the difference between the two was often fuzzy) to develop military applications during the Cold War, the industry developed the products from the results of the research (and did not always have to directly fund the research), and companies like H-P, Varian, GE benefited greatly the effort. Finally Stanford became wealthy as well as excellent in research (which it was not in the 30’s).

Lowen explains that “by 1960, the federal government was spending close to $1B for academic research and university-affiliated research centers, 79 percent of which went to just twenty universities, including Stanford, Berkeley, Caltech, MIT, Harvard and the University of Michigan” (page147). In the Shanghai ranking, Harvard is #1, Stanford is #2, Berkeley is #3, MIT is #5, Caltech is #6 and Michigan #18 only.

Money definitely helps. I had however reacted against Alix’ argument as military money can not explain by itself the entrepreneurial spirit that Boston and Silicon Valley developed. Caltech and its JPL laboratory never reached the same start-up activity. But the quality of universities and their wealth is an extremely strong ingredient for successful technology clusters.