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Special Report
University Entrepreneurship

 March 2000



University Entrepreneurship: Joining the New Economy

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Research universities today find they resemble the proverbial town suddenly found to be sitting on a valuable oil reserve. However, instead of harboring petroleum or minerals, they find they hold the new economy's greatest resource: technological innovation.

After decades of quietly engaging in basic research - far removed from the noise of commercial life - university researchers are developing technology that has strong and immediate commercial potential. Now there is money to be made from the research lab, and universities are struggling with whether to capitalize on their efforts or allow their advances to slip into the public domain without compensation.

This is particularly true in electrical and computer engineering, where advances in wireless communications, computers, Internet technology, and electronics are fueling much of the nation's current economic boom.

"Virginia Tech's electrical and computer engineering research is creating intellectual property with enormous commercial value," said department Head Leonard Ferrari. "We arrived at this point from several directions," he said. "First, the department has tripled its research expenditures in the past four years. Second, federal research grants have become less basic and more applied with outputs that belong to the university and that have much more immediate commercial value. Third, Virginia Tech has matured as a research university and over the years has developed leading research programs in wireless, fiber and electro-optics, power electronics, and microelectronics design. All of these fields are extremely hot in the commercial world. And finally, the venture capital community has become enormously wealthy and has discovered that Virginia Tech is a gold mine of new ideas and patentable intellectual property."

A consensus is developing that Tech should harness the commercial potential of its research for its own support of education and outreach programs and to aid further development of Virginia's economy. The question, however, is how to participate in the economy and what role the administration, faculty, and students should play.

The Opportunity is Now

Business owners, venture capitalists, entrepreneurs, alumni, and students familiar with Tech's research are among the loudest and most urgent voices calling for economic development of the university's technology.

"With its research capabilities, Virginia Tech has enormous [marketplace] potential," said James Fabunmi, who opened a branch of AEDAR Corporation in Blacksburg to be in close proximity to the ECpE department's configurable and custom computing research. "The university has great technological resources and great students - it should be thinking about commercializing its technology in industry," he added.

"Universities that have been successful in developing their commercial potential have recognized the importance of the marketplace. The whole world is changing and the universities must change in order to stay relevant," he said.

"In today's world, technology and content are king," said Stephen Spry, managing partner of NewGotham Venture Capital, Inc., a firm that specializes in Internet applications. Spry first encountered Virginia Tech officials at a trade show in Baltimore, and has become active in supporting the development of the university's technology. "Among its faculty and students, Virginia Tech has some of the brightest minds in the East," he said. "The possibilities in Tech's high bandwidth wireless and internet technology gives the university the opportunity of creating ventures that can affect international standards," he added.

"The university should benefit more by capitalizing on its research results," said Kent Murphy (Ph.D. '92), alumnus, Tech professor, and president of Luna Innovations, one of Virginia's fastest growing high tech companies. "Publishing the results and leaving the technology on the shelf or for others to capitalize and reap the benefits does not make sense," he said. "If the university can capitalize on its own ideas, it can get the funding it needs and improve facilities and programs across all the curricula."

Murphy also believes that Tech could help develop Virginia's economy by capitalizing on its research. Ferrari agrees with Murphy. "We have many outstanding students and faculty," he said. "Our primary mission is education, but what is the point of Virginia educating all these engineers who go to work in California, North Carolina, or Texas? We should take the economic development opportunities and help the state recoup on its educational investment," he said.

Alumnus Alan Truman ('80), who built the successful California company Bay Networks, which was sold to Nortel, believes Tech should build the regional economic base and "stop those high-tech carpetbaggers...This region has always been exploited," he explained. "During the industrial age, this region supplied the timber and coal that fueled the rest of the economy without much benefit coming back to the region. Now, companies from all over the country come here for our students and research results and do not give us much in return.

"We have the technology. We have the brainpower. We have a big fiber pipe that comes through here, offering us bandwidth that most areas do not have. Finally, thanks to the Internet, geographic isolation is no longer an issue. Now you are just a couple of clicks away from anywhere."

The window of opportunity, however, is finite, he said. "We're on the cusp of greatness here, and need to take advantage of it. If we miss this one, it would be very embarrassing."

Spry agrees that the current opportunity is time dependent. "NewGotham received more than 2,500 business plans last year and we are running at an even higher rate this year," he said. "If Virginia Tech doesn't take advantage of this technology, others will. Right now, the caliber of your students gives you the edge, but it's a window, and windows can close."

For many administrators and faculty members, the window comes at a good time. John Phillips, Tech's economic development officer, speaks for many when he explained, "Universities are suffering from a decline of financial support from the states, coupled with a decrease in federally sponsored research. We should take advantage of this opportunity to build our financial base and ensure the continued quality of our programs."

Models of Commercialization

There are several models for commercializing university research results. The appropriate model for any particular technology depends upon the market situation. A university should engage in each model, depending upon the circumstances and expected benefits, Ferrari said. "The costs and benefits of each model vary greatly," he said. "For example, while revenues from university-owned patents are measured in thousands, successful participation in the high technology business sector is usually measured in the tens and hundreds of million dollars."

Traditionally, when researchers develop technology that has commercial potential, they file an invention disclosure and start the patent process. The university owns the intellectual property rights and licenses it to companies interested in using it in commercial ventures. Virginia Tech has been fairly active with this model and in 1997 ranked seventh in the country in patents for universities without a medical school. The university's portfolio exceeds 100 patents, and licensing income tops $1 million per year.

The patent/licensing process is effective in many cases, but when the market cannot use the technology without the inventor's expertise, the technology lies fallow. Such was the case with workstation software developed by Tech researchers for the Electric Power Research Institute (EPRI) for the design and analysis of large electric distribution systems. EPRI distributed the software to its member utilities, but needed the Tech team for technical support. The Tech team formed a company to handle the support activities (see page 26). "If we hadn't been involved and able to support it, the technology would have fallen by the wayside," explained Robert Broadwater, a professor who is serving as president of the firm.

Another example is provided by new sensor technology for use in harsh environments, which was developed by the department's Photonics Laboratory. The technology was ideal to help the U.S. Air Force with instrumentation for gas turbine jet engines, but would be difficult to commercialize without an extensive and specialized background in lightwave engineering. The research team that developed the technology then spun off a firm to develop applications to meet the Air Force needs.

Many faculty members say that delays involved in patenting and licensing can cost lucrative opportunities (see sidebar 1). The technology and markets are moving so fast, "that there is limited value to patenting a single invention unless it is very basic," said Michael Martin, executive vice president, Virginia Tech Intellectual Properties (VTIP), which manages the university's intellectual properties.

An often-copied model is the corporate incubator concept popularized by Stanford and Berkeley, where the university provides low-rent space near campus, business experts, and access to technology. The hopes of these incubators are that non-university affiliated firms will start up in the incubator. These firms would kick-start a local, high-tech business community that is based on university technology and eventually provide the universities with large research contracts, educational support and major gifts.

Virginia Tech's Corporate Research Center is a modification of the incubator concept, with more than 100 firms engaged in leading-edge research. However, many of the firms are student- or faculty-owned and operated enterprises.

It is this category - the many variations of student- and faculty-owned and operated spin-offs - that receives the most interest today. Universities across the country are witnessing an increase in faculty and student entrepreneurs, and reevaluating their policies and methods of transferring technology.

"It's the economy," said Rick Claus, a professor and director of the Fiber & Electro-Optics Research Center (FEORC), which has spawned 17 spin-offs. "It's the dot-com-make-a-zillion-dollars craze," he added.

"The students are very entrepreneurial right now, particularly the graduate students," agreed Jeff Reed, a professor and expert in digital signal processing. "Many of the students are approaching me and asking when we are going to start a company out of their research," he added. "They are ready. The students want it."

Students in the Marketplace

"More people are coming into college today with an entrepreneurial mindset because of the stock market. They now realize they also can start a company," said Roger Skidmore (BSCpE '95, MSEE, '97), a Ph.D. student who is vice president and cofounder of Wireless Valley Communications. "In my ideal world, a university would encourage graduate students to pursue starting their own business based on their research. Knowing that a university encourages entrepreneurship in today's world could be a deciding factor."

"Starting up a company has been much more positive for me than any other academic or professional pursuit I've ever been involved in," he added. "For me, pursuing both at once feeds on each other. The more I learn in the classroom, the more I'm interested in the company; the more I learn in the company, the more I learn in the classroom."

One of the drawbacks that Skidmore mentioned was the possibility of becoming disconnected from the university. "I have to make a conscious effort to keep up with my friends and with the grad students in the research lab," he said.

Several faculty members agree with Skidmore that the opportunity to earn equity and a salary while pursuing a graduate degree might attract graduate students to Virginia Tech. "We are having trouble recruiting domestic graduate students because the salaries and opportunities in industry are so high right now," said Kwa Sur Tam. "We are also losing students to the dot coms."

"There is so much of a pull for students to go out and be a part of the dynamic economic marketplace right now," agreed Russell May, president of Prime Photonics (see Prime) and a research assistant professor on the faculty. "It would be wonderful to be able to provide them with that same opportunity while they pursue advanced degrees," he added.

The lack of domestic Ph.D. students in ECE graduate programs is considered a national crisis by the more than 200 department heads in the National Electrical Engineering Department Heads Association (NEEDHA), Ferrari said. "This has been a primary topic for discussion at the last two national NEEDHA meetings. It has steered me to look for graduate education models that provide higher stipends and entrepreneurship opportunities for graduate students."

The Role of Faculty Entrepreneur

Although the students are particularly interested in entrepreneurial ventures, faculty-operated companies ignite the most controversy.

University policy allows faculty members to consult for outside enterprises one day per week. Participation in spin-offs generally falls under this rule.

Faculty members involved in managing the spin-offs cite a number of benefits to themselves, students, and the university. "I've been exposed to many interesting problems I wouldn't have encountered otherwise," said Broadwater, whose firm is supporting the power industry software. Most important, he said, was the opportunities made available to his graduate students. "We have been able to provide the opportunities of a large academic research group that would otherwise not have been available with me," he said.

Murphy, who was president of Luna Innovations before becoming an assistant professor, said that working at both was synergistic. "The whole experience of being in the company helped build contacts in the industry, which helped tremendously in my research and funding," he said.
Kwa Sur Tam, who is cofounding an Internet firm (see PowerA) said that his being involved in the marketplace will open his research to more practical opportunities. He is also hoping that an increasing number of high-tech firms in the area will help to attract top students to Virginia Tech.

Cautionary Notes

With so much enthusiasm from faculty, students and administrators, why doesn't Virginia Tech immediately jump at the commercial opportunities? The answer lies in the role of a public university. Movement into the private sector appears to many as a complete departure from the traditional goals and operation of a public university. Moreover, the faculty also is cautious about making changes that could detract from Tech's educational mission.

"I think being a university faculty member is a full-time job," said Charles Bostian, director of the Center for Wireless Telecommunications, which has been very active in helping Virginia companies. "Being president of a start-up can also be a full-time job, which causes a conflict of commitment...I also believe we should be very careful about starting companies that compete with our sponsors," he added.

"I'm concerned that students not get victimized," he added. "Their intellectual property rights should not be overlooked. Graduate students who work for companies owned by faculty members should have the same IP rights the university grants to all students."

Gary Brown, director of the department's ElectroMagnetic Interactions Laboratory is concerned that actively participating in start-ups could diminish faculty-to-faculty contact, "which is a major source of idea generation and cooperative development."

He is also concerned about the amount of time such outside activities can consume. "When education is done properly," he said, "it requires a great deal of faculty time. This is especially true now with many incoming students so poorly prepared and motivated. As a faculty member today, you are not simply a teacher; you must also be a motivator, a substitute parent, a role model, and a guidance counselor! When you are trying to start and run a company, you simply cannot do all of this," he added.

Other faculty members cited concerns about potential conflict of interest. "If professors are doing research at the university and have start-ups, they often hire their own graduate students," said Fred Lee, director of the Center for Power Electronics Systems. "If resources flow back and forth in an ambiguous way and the students get confused whether a particular task they are working on is for the university or the company, it can corrupt a whole research program," he said.

From the business aspect, there are also positive and negative aspects of professorial involvement in start-ups. Spry, the venture capitalist, said that the technologist is the kernel of the start-up. "The technologist generally has to be able to define what it is that makes the breakthrough valuable," he said.

However, one of the difficulties with involving professors is that "the learning curve of the producer of the technology is high and lengthy. They do not know the details of business interactions. They do not know what it takes to develop corporate resolutions, how to negotiate with stockholders, or how to value corporate assets. There are so many businesspeople out there with completed business plans, boards, and connections, that for venture capitalists, there is a trade-off between developing businesses from universities and looking elsewhere," he said.

John Phillips, Tech's economic development officer, believes that the difficulty of running a successful business will keep the numbers of entrepreneurial professors to a minimum. "It's very difficult to go into business," he said. "To be satisfactorily successful, you need multiple product lines, and you need to compete on uniqueness, price, and sophistication." Ph.D.s in engineering or science do not often have the background for such success, he added.

Ferrari agrees that only a small percentage of VT's faculty will be involved in high-tech spin-offs. "Many faculty have hired business partners to run their organizations and still devote most of their time to university activities. In fact, the venture capital community will most likely insist on this scenario before they make major investments."

Managing Entrepreneurs

Virginia Tech administrators have decided that entrepreneurship is a fact of today's economy. Several committees are working to develop a comprehensive university policy so that faculty and student conflicts of interest, and conflicts of commitment such as those discussed above are avoided.

"The debates and doubts raised by our faculty are essential to the process of finding policy and mechanisms for entrepreneurship that protect all of us as we consider these initiatives," said Ferrari, who serves on the College of Engineering's Conflicts Committee.

Universities traditionally have allowed faculty members to engage in paid external work, said Malcolm McPherson, associate dean of research and graduate studies for the College of Engineering. "Outside activity broadens the experience of faculty members, which improves their performance as teachers and researchers," he said. Spin-off companies are a modern version of this outside activity, he explained.

"A great deal of intellectual property is developed on campus and the university has to be part of it," said Bill Stephenson, dean of the College of Engineering. "Unless we encourage entrepreneurship, we cannot attract the faculty we need in certain areas, and we run the risk of losing some extremely creative faculty members who are good teachers and good researchers," he said.

McPherson agreed. "The real problem is that as we reach beyond these traditional roles, suspicions arise inside and outside concerning the activities of entrepreneurial faculty," he explained. "There is a traditional perception by the outside world that we faculty should teach, produce future generations of leaders, and engage in research for the good of society and technology. The perception is that we should do this without regard for personal or institutional gain," he said.

"We have a number of faculty, particularly in the engineering college, looking beyond those traditional roles, asking, 'just because I'm on the faculty, why should I not also be involved in the development and commercialization we're producing at Virginia Tech?' Instead of tolerating that question with a grimace on our institutional face, we're starting to say, 'we have great faculty, with great ideas. Let us bring these two things into parallel: the forward progression of faculty aspirations in concert with the objectives of the institution.'

"We would like to encourage entrepreneurship while maintaining our primary roles of teaching and scholarship," he said.

McPherson described three committees at Virginia Tech that are reviewing the university's policies and procedures for entrepreneurial activities. "By the end of the academic year, we will have a formal policy and set of procedures that will lay out the mechanism for faculty and institutional involvement in commercial activities," he said. "We are trying to encourage the entrepreneur and create a climate in which the entire faculty can grow. We not only must do the right thing for the state, but we must be seen to be doing it in a correct manner."

Many faculty members, entrepreneurs, and students welcome the formal policies and procedures. "There has been so much conflicting directions and misinformation in the past," said one entrepreneur. "A definitive policy will be a boon."

"The issues are complex with conflicts of interest and commitment. Faculty entrepreneurs are walking a fine line, and we will appreciate the direction and policies," said Tam.

The entrepreneurs have led the university to clarify its position on tapping its technology reservoir. Perhaps Russell May, president of Prime Photonics, spoke for all the entrepreneurs when he said, "We became engineers to apply science and technology to develop systems that benefit mankind. If that engineering is also happening in the commercial realm, then that is where we also belong."

Article Continues with
Sidebar 1: Tapping the Reservoir
Sidebar 2: Maximizing Opportunities


The Bradley Department
of Electrical and Computer Engineering
Virginia Tech

Last Updated, April 4, 2000
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