Incubation's Unintended Consequences

Business incubators are booming among universities lately, with many top research institutions establishing incubators and bragging about their ability to help move innovation out of the ivory tower and into the marketplace.

But new research published in the Strategic Entrepreneurship Journal shows that university-affiliated incubators aren’t all they’re cracked up to be when it comes to at least one key metric of innovation -- patents. Incubators’ establishment is actually associated with a decrease in average patent quality and licensing revenue across the country’s top research institutions.

That doesn’t mean incubators over all saddle universities with a negative net impact, say the research’s authors, Baylor University Entrepreneurship Professor Peter G. Klein and University of Bath Innovation and Entrepreneurship Associate Professor Christos Kolympiris. Instead, they say, their findings show that universities may be changing their mind-sets and incurring hidden costs when they start business incubators.

The findings drew skepticism from leaders at university incubators and technology transfer offices, who argued that patents aren’t the only measure of innovation success at universities and incubators. Critics also pointed out that the findings do not necessarily hold true at all universities.

Klein and Kolympiris set out to examine the effect incubators have on U.S. research universities’ innovation quality -- universities emphasizing incubators may be tilting their philosophy away from long-run, high-level teaching and research, Klein said. Universities want their faculty members and students to perform research and get patents, he said. At the same time, universities are increasingly trying to become technology and entrepreneurship hubs, helping to turn those patents into viable businesses. Meanwhile, many are also struggling with funding and trying to supplement their budgets with revenue from patent licensing.

It’s hard to examine innovation quality, however, so Klein and Kolympiris decided to use patents as a measure of innovation quality. They first analyzed more than 55,000 patents granted from 1969 to 2012 at U.S. universities largely in the Association of American Universities, examining forward citations -- the number of times a patent is cited by subsequent patents. They also analyzed licensing income.

If incubators complement high-quality research on campuses, one would expect patent quality and licensing revenue to improve once incubators are established, Klein said. But the authors found the opposite to be true.

They found a drop in innovation quality follows the creation of university-affiliated incubators. Then they found a reduction in licensing income after incubators were established.

Those results suggest university incubators compete for resources with technology transfer offices, the authors wrote. It also suggests they compete for resources with other campus programs and activities.

“To be honest, we weren’t expecting to find the results we found,” Klein said. “We went into it thinking we would document more positive effects.”

The takeaway from the research is not necessarily that incubators are bad or that universities should not establish incubators, Klein said. It’s that a university may incur hidden costs when it changes its mind-set by establishing an incubator.

“We think commercialization is great,” Klein said. “I’m all about entrepreneurship and innovation, but I think we need to take a balanced perspective and realize that universities are complex coalitions of groups, and they have multiple objectives. It’s not always possible to be all things to all persons.”

Klein and Kolympiris had no way of observing the actual mechanisms involved in the changes they observed, Klein said. Klein’s sense from talking to those working in technology transfer departments is that the symptoms observed may be a case of split priorities.

“It’s not the incubator, per se, that is the driver,” he said. “That’s just a symptom of the university deciding, ‘We’re all about different things.’”

Universities, after all, do not have unlimited budgets. They may be able to raise funds for some new operations, but in many cases at least some money for incubators has to be diverted from somewhere else in an institution.

So university budgets are reallocated. Resources that might have gone toward research might be funneled to application.

The authors said that their report is a look at top research universities on the whole -- the situation could be very different on individual campuses.

“We’re saying that on average, this is the effect that we’ll find,” Kolympiris said. “It is possible that some universities will actually benefit from having an incubator. Quite a few would lose. The effect is the average effect.”

Questioning the Findings

University leaders involved in technology transfer offices and incubators disagreed with some of the study’s key premises. Brett Cornwell is executive director of Texas A&M Technology Commercialization, the technology transfer organization for the Texas A&M University System. It manages more than 900 patents.

Universities are all structured differently, so depending on a university’s organizational structure, there might be very little connection between funding, incubation activity and patenting decisions, Cornwell said. But he added that patents aren’t always a good proxy for innovations -- particularly where incubators are concerned.

In Cornwell’s experience, young and unsophisticated technology commercialization programs emphasize patenting. Institutions with more sophisticated activities, including incubators, are usually more selective in what they patent.

“When you talk about having incubators and accelerators, almost by definition that means the university is getting closer to the market, thinking about market pull,” Cornwell said. “That implies sophistication and sophisticated decision making about what you invest in and what you don’t invest in.”

Further, Cornwell questioned whether forward citations are always a marker of patent quality. The true quality of a patent is the value a company can derive from it, he said.

That value doesn’t necessarily show up in licensing income, either. Universities divide royalty monies between different parties like tech transfer offices and inventors. And incubation might lead to other benefits for a university, Cornwell said.

“At the end of the day, the university receives 35 percent of that top-line income,” Cornwell said. “What was interesting is the same companies that were licensing the same tech for us and were paying the royalties had done about five times more sponsored research.”

Economic development is an important part of many university incubators, according to Keith McGreggor, director of Georgia Tech’s VentureLab start-up incubator.

“The economic development angle, which is at least a part of the university spinning things out, is predicated on jobs created and tax bases for revenue generated by the companies that try to spin out and stay local in the state,” McGreggor said. “And that’s not the same thing as measuring the impact of patents that are created.”

McGreggor also wondered about equating income from patents to patent quality.

“If the university has a very progressive approach to pricing the intellectual property, say for the benefit of their own spinouts, then the measure of value of that wouldn’t necessarily be reflective of that spinout’s subsequent action,” he said

McGreggor said he feels no tension between research and incubation at Georgia Tech. He hasn’t seen a competition for resources.

“I don’t think this is a zero-sum game with respect to resources allocated,” McGreggor said. “I wonder how it will be when the entrepreneurship faculty encounter the technology licensing offices and the incubators, how that will change our landscape in coming years.”

Texas A&M and Georgia Tech were both included in the innovation study. But they’re not the only ones that pointed out incubators might have benefits beyond patents and royalties.

They can help recruit faculty and students, said Stacy Strauss, director of the Innovation Center at Ohio University (which is not an AAU member and was therefore not part of the study). “Students, if they know they have an opportunity for experiential learning outside the classroom, perhaps by being embedded within the staff of a biotech company -- that’s a way the university can attract and retain a higher-quality student,” Strauss said.

Klein and Kolympiris acknowledged those arguments. They are not saying incubators destroy value over all, Kolympiris said. Incubators can add many other forms of value, including prestige and connections to local communities.

The researchers freely admit that they are not measuring those other outcomes, Klein said.

“Maybe universities should have incubators, even if they have some possibly harmful effects on basic research,” Klein said. “If this research helps to begin a conversation or deepen ongoing conversations about these issues -- what is a university for, what should universities do -- we think that’s terrific.”