Investment in startups generates money for U.

At the August completion of the largest technology initial public offering in history, Stanford University came away $15.7 million richer from its sale of stock in search engine giant Google Inc.

The question many were left asking is how a university can make so much from a private company.

Eight years ago, the search engine was developed at Stanford using university funds, thus giving Stanford ownership over the technology.

Under a licensing deal with Google, Stanford is paid an annual licensing fee for usage rights, as well as a large share of stock. During the IPO, the university was able to sell some of its stock in the company but retained significant holdings -- now valued at over $140 million.

Though Google is probably the most high-profile example of universities profiting off of campus-developed inventions, the trend has become commonplace since the passage of the Bayh-Dole Act in 1980.

In 2002, Columbia University earned $155.7 million in licensing fees off its portfolio of patents, topping the list of universities with licensing income. Stanford came fifth with $50.2 million, and Penn came in at No. 29 with $6.4 million.

Under the provisions of the Bayh-Dole Act, grantees may seek patent rights for the results of government-sponsored research. Over 300 universities nationwide are currently involved in applications for patents, making use of the fact that much of the scientific and technological research at these institutions receives federal funding.

Applying for patents is not free and requires a substantial investment on a university's part. Penn was the last of the major research universities to open up a center for technology transfer to manage the patent process.

Since 1996, Penn has spent more than $25 million in University funds on hundreds of successful U.S. and foreign patent applications. All together, licensing of these patents has returned more than $89 million to investigators and their departments.

However, it is not owning the patents themselves that brings in what institutions seek.

"We can learn and transmit knowledge on campus -- but to have any practical application in the public, for the benefit of mankind, we have to work with the public sector," said Louis Berneman, managing director of Penn's CTT.

To do so, institutions depend on established or startup companies that are willing to license and further develop intellectual discoveries for public consumption.

Most universities tend to look toward established companies when seeking appropriate licensees, as they can quickly commercialize products that fit into their existing manufacturing network.

Startups, on the other hand, are more useful for developing the more basic platform technologies created by the universities. These so-called "emerging technologies" are usually of less interest to established companies. Also, investing in startups is risky for universities, as the technology and the company itself may fail.

"Penn used to be risk-averse and not attentive to commercialization," Berneman said.

"After we saw many of our peer institutions delve into it, we overcame our historical perceptions and are now always looking to new startup ventures to expose new technologies."

Universities involved with startups will usually settle for an equity position in a startup under the terms of the licensing agreement. This would generate the possibility of more money in the long run, somewhat like the position Stanford is in today.

Penn has a solid history of incubating startups over the last few years -- and retaining "sizable" equity positions, according to Berneman. The current fair market value of Penn's startup holdings is $14.6 million, up 55 percent from last year.

This year alone, Penn has supported 14 new startup companies, mostly in the Philadelphia area. These include BIOSoftware Systems, Inc., which will create software for the modeling and simulation of biological pathways, as well as LipoPhobics -- which will create drugs that treat obesity -- and MicroMRI, which will diagnose and treat osteoporosis.

In fact, Penn only trails behind the Massachusetts Institute of Technology and Stanford for the title of most startup companies created by a single-campus university.

Nevertheless, unlike MIT and Stanford -- which have incubated companies like 3Com Corporation, Hewlett-Packard Development Company, Yahoo!, Excite, eBay and Google -- Penn has not yet sponsored any product commercialization earning more than $20 million in royalties.

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