Facilitating the Inventor–Entrepreneur Interaction:
Super-Charging the IP Commercialization Process
“…before technological change results in this process of entrepreneurial exploitation, entrepreneurs must discover opportunities in which to use the new technologies,” Scott Shane.
According to leading economists, entrepreneurs are those individuals who both identify and exploit commercial opportunities. Further, they perform these important functions in a rather serendipitous and idiosyncratic way. Yet, existing initiatives for bringing university-based technologies to market rely exclusively on the faculty inventor and professional technology transfer officers (who are typically lawyers or academics) to identify, assess, and patent their inventions long before entrepreneurs are even aware they exist. This article proposes that more technologies could be commercialized and with greater economic value if a university-neutral foundation was established that allowed entrepreneurs to dialogue with inventors at a very early stage, and used principles of creative problem solving.
Entrepreneurs Need Innovative Technologies
The story of King Gillette and how he conceived the disposable razor is familiar to many. It was 1891 when the then 36-year-old salesman, inspired by a casual comment from his boss, began looking for a consumer product with potential for frequent repeat sales. Then one morning four years later, as he was shaving, it occurred to Gillette that a shaver utilizing a “disposable blade” might not only eliminate the time-consuming process of stropping and reduce the amount of blood spilt as a result of scraping one’s face with a straight razor, but generate substantial repeat business as well. He finished his shave and rushed to a Boston hardware store to buy steel ribbon, a few pieces of brass, some files and a small vise. He later wrote to his wife, who, at the time, was staying with relatives in Ohio, “I have got it; our fortune is made.”
What is much less familiar about this story, however, is what happened next–how the idea for a disposable razor became an actual product. Since he lived in Boston, Gillette approached the Massachusetts Institute of Technology (MIT) for technical assistance. The scientists there informed him that it was simply not possible to manufacture such a blade. They knew of no process for hardening and sharpening steel that could produce the razor he envisioned. Later in life, Gillette quipped that he was glad he was not an “expert” because had he been one, he would have known from the beginning that his razor was impossible.
As with many entrepreneurs before and after, Gillette had conceived a unique disruptive solution to a specific market “pain,” quite apart from the research being performed by renowned scientific experts working in laboratories. And, as with many entrepreneurs before and after, he had been unable to persuade the experts to help. So, for six long and frustrating years, Gillette showed his rough prototype to a string of potential investors, who, by in large, were not interested in a concept that had yet to be proven. Had it not been for the timely and extensive assistance of an engineer named William Emery Nickerson (ironically, a graduate of MIT), Gillette’s safety razor would never have graced a single bathroom sink. Indeed, Nickerson’s inventions related to the manufacture of disposable blades were arguably more important than Gillette’s inception of the idea in the first place.
Innovative Technologies Need Entrepreneurs
Through the twentieth century, however, and especially since 1980 with the passage of the Bayh-Dole Act, the tables have turned and universities are increasingly seeking ways to actually “transfer” their technologies to the commercial space.  According to the Association of University Technology Managers, the annual revenue generated by U.S. universities from licensing their technological discoveries to commercial players has risen from around $160 million in 1991 to $2.4 billion in 2010–a 15-fold increase over a 20-year span. Siegel, Veugelers and Wright explain that this dramatic shift toward “application” is a response by universities to the newfound possibility of leveraging their basic research to generate additional revenue, create job opportunities for university-based researchers, and stimulate regional economic development. Yet as impressive as it sounds, this $2.4 billion in licensing revenue represents only a 4 percent return on the $59.1 billion invested by the U.S. government in university-based sponsored research in 2010–a return on investment that is far below what might be expected given the universities’ increased motivation to garner additional revenues and the over 20,000 (university-based) disclosures announced each year.
Academics have long argued (from a theoretical perspective) that entrepreneurs are essential to the commercialization of technology. Schumpeter’s model of “creative destruction,” for example, posits that while novel technologies allow for the creation of new processes, new products, new markets, and new ways of organizing, it is entrepreneurs who effectuate the change in the marketplace–it is entrepreneurs who identify and then exploit the economic opportunities presented by advancements in science. Recent research funded by the U.S. Small Business Administration supports this contention. In one such study, Camp reports that “…innovation without entrepreneurship generally yields minimal local economic impact.”
So, why are the returns on public investment in technology so low? Why is it, as noted by Shane, that half of all university patents are never licensed and that the top 20 universities account for approximately 70 percent of those that are? The problem must surely involve some dysfunction in the handoff between scientists and entrepreneurs. In support of this proposition, Wright, Birley and Mosey state that “it is important to devote greater attention to the study of entrepreneurship in technology transfer…”
The Struggle to Bring the Two Together
In recent years, many universities have created Technology Transfer Offices (TTOs) charged with encouraging and managing the commercialization of the intellectual property (IP) created by university faculty. In practice, these TTOs have tended to act as middlemen between the technology-producing researchers and the technology-using firms who desire to apply new discoveries to problems they have identified in the marketplace. Thus, Jensen, Thursby and Thursby describe TTOs as “dual agents” who simultaneously represent the interests of the university as well as those of the individual inventors as they seek to maximize utility in their negotiations with potential licensees. However, Macho-Stadler et al. argue that despite the recent surge in laboratory-industry interaction and the existence of such intermediaries, the empirical evidence “clearly shows that significant institutional barriers to the commercialization of basic research remain” and that “smooth interactions between science and industry…have become a central concern of many government policies…”
Researchers in the field have probed the effectiveness of existing efforts at “technology transfer” from many angles. Some have looked at the university itself to see if being more “entrepreneur friendly” produces greater IP commercialization,  or if licensing strategies, policies and incentives are important, or if increased licensing is merely the result of “institutional prestige.”  Others have examined the scientist him/herself, looking for social or individual factors that might explain more entrepreneurial behaviors. Still others have assessed the TTO for characteristics or policies that might hinder or help in the monetization of technologies. 
Shane, however, examined the licensing transaction and the impact of an inefficient transaction process on the behaviors of entrepreneurs and inventors. He began with the proposition that the “best” solution for commercializing university-generated technologies must involve economic actors with a “comparative advantage” in commercializing technologies–those individuals skilled in “identifying customer needs, developing product concepts, designing products and processes, prototyping and manufacturing.” That is, entrepreneurs. He asserted that since university inventors rarely possess these skills, entrepreneurs are therefore better suited to the task. Yet the market created for university inventions by TTOs is largely inefficient due to the possibility for:
1. Adverse selection–opportunistic behavior by either party due to the fact that entrepreneurs cannot easily discern the true efficacy of a university’s inventions, and universities cannot easily assess the true market value of the business opportunity,
2. Moral hazard–shirking by universities on their commitment to transfer all of the agreed upon knowledge (especially tacit knowledge) once they have received payment, or by entrepreneurs on their commitment to pay all of the agreed upon funds once they have received the “secret sauce,” and
3. Hold-up–the tendency for universities and licensees alike to renegotiate the terms of the agreement after the other side has made relationship-specific investments.
Shane demonstrated how well-structured patents reduce the opportunism, shirking, and hold-up described above. He concluded that patents decrease the uncertainty of licensing a technology by making the efficacy and boundaries of the technology more explicit to both parties. In addition, he explained that effective patents provide both parties with legal remedies from misappropriation or misrepresentation by the other side.
Yet the patents created by inventors and TTOs prior to interaction with entrepreneurs may not be adequate or appropriate for specific commercial applications. That is, they may not extend protection in important fields or conditions of use, or may become unenforceable by attempting to cover too broad an area. In fact, such an approach fails to capitalize on Shane’s original premise that entrepreneurs are the ones who are best able to identify market opportunities. Since patents are intended to protect inventions in the marketplace, it stands to reason that market opportunities should therefore be identified in cooperation with entrepreneurs either prior to patenting, or within a system that permits co-ownership of any extensions or new developments.
Facilitating the Inventor–Entrepreneur Interaction
Researchers recently developed and then tested a unique approach to IP commercialization that is designed to overcome the inefficiencies identified by Shane and to increase the effectiveness of TTOs in monetizing their IP. It is based on the following precepts:
1. A university-neutral research foundation–Technology Transfer Offices are most often embedded in a university (or national or commercial laboratory) with a fiduciary responsibility to promote only its indigenous technologies. As a result, they rarely collaborate with one another or consider the “bundling” of multiple technologies in an effort to create a more market ready (and valuable) “final product.” This feature of the program has the added benefit of making IP commercialization available for universities that do not have science or engineering labs.
2. Early interaction between entrepreneurs and inventors–Encouraging entrepreneurs to interact directly with inventors in face-to-face meetings at an early stage in the development of the technology allows scientists to direct their efforts toward more defined commercial targets, and entrepreneurs to know the quality and boundaries of given technologies. It also confirms addressable markets and assists the TTO in shaping patents for more specific (and more protectable) fields of use. As noted by Markman et al., “research on knowledge spillover and organizational learning suggests that continuous interactions among creators, appropriators, and consumers of technology accelerate the richness and reach of knowledge and discoveries.”
3. The utilization of creative problem solving techniques–In his seminal article, “Prior Knowledge and the Discovery of Entrepreneurial Opportunities,” Shane shed important light on the underlying mechanisms for the successful commercialization of technology. His in-depth analysis of the eight licenses awarded around MIT’s 3DPTM technology suggests that the process of opportunity identification showed that:
- The commercial opportunities in a given technology do not lie on the surface. Entrepreneurial opportunities contained in new technologies are non-obvious and therefore only “discoverable” when viewed by individuals peering through the unique lens of their own specialized knowledge. In support of this proposition, Shane revealed that none of the eight entrepreneurs in his study discovered the same opportunity, and that none of them uncovered more than one.
- Individuals do not search for opportunities–they discover them. The discovery of commercial opportunities in basic research is serendipitous. Shane observed that none of the entrepreneurs in his study contacted MIT’s Technology Transfer Office to inquire about the 3DPTM technology. Rather, they heard about this technology “from someone directly involved in its development, and recognized the opportunity immediately upon hearing about it…almost by accident, as if they were surprised by the discovery.”
- Individuals exploit opportunities in markets and with methods reflecting their prior knowledge. Each of the eight licensees in Shane’s study sought to use the 3DPTM technology in a different market, with a different approach, and to solve a different customer problem. According to Shane, their approach for exploiting an opportunity was “idiosyncratic, resulting from work experience, personal events, and education.”
The “basics” of entrepreneurship have remained the same since the term was first coined at the height of the Industrial Revolution in the 1700s. It involves the identification of a market problem and the creation of an innovative solution that produces a change in the marketplace. It has been repeated countless times by regular people (like King Gillette) who, in the midst of performing a daily activity (shaving), see a problem (nicks and cuts), imagine a unique solution (disposable blades) and commit to the implementation of their concept (build prototypes and search for investors). The only difference for today’s entrepreneur is that they now have willing partners in their quest to identify and exploit disruptive innovations–Technology Transfer Offices. All that remains is to find a way to maximize the efficiency and effectiveness of the handoff between scientist and entrepreneur.
Recent studies indicate that a university-neutral research foundation, early interaction between entrepreneurs and inventors, and the utilization of creative problem solving techniques dramatically increases the number and innovativeness of the commercial opportunities identified in a given set of technologies. From the TTO’s perspective, this increases the expected value of their IP because it may then be matched with complementary technologies from other institutions, or connected with previously unimagined applications. Both possibilities may enlarge the size of the addressable market and point the TTO toward more likely licensees. From the entrepreneur’s perspective, this process reduces much of the mystery surrounding the invention thus making it easier to quantify its economic value and limiting the license to more specific (and thus more affordable) “fields of use.” All of this reduces transaction costs and uncertainty for both parties and increases the likelihood of striking a deal. Finally, the addition of “serendipity” to the process of IP commercialization increases the likelihood that truly innovative solutions will rise to the surface.
About the Author(s)
Larry William Cox, PhD, is an associate professor of entrepreneurship at Pepperdine University’s Graziadio School of Business and Management. Dr. Cox has directed Entrepreneurship Centers at Ball State University and the University of Wisconsin-Madison. Prior to this, he was the Director of Research at the Ewing Marion Kauffman Foundation in Kansas City, MO. Dr. Cox attended the University of Nebraska on a basketball scholarship from 1972 to 1976. He experienced entrepreneurship firsthand when he started his own company in 1985 selling industrial products to large manufacturers in the Rocky Mountain area. He returned to the University of Nebraska in 1990 to receive a master’s degree in Management Information Systems and a doctorate in Strategic Management. While earning his advanced degrees, Dr. Cox served as the director of the Nebraska Business Development Center, and consulted with hundreds of would-be entrepreneurs. His personal research interests include the impact of entrepreneurship education, and the creative processes of entrepreneurs. An award-winning educator, Dr. Cox especially enjoys helping young entrepreneurs and is an inspiring speaker and seminar leader.