Three things hampering effective commercialisation of intellectual property at South Africa’s universities were mentioned as animosity between universities, misconceptions around royalties and the lack of willingness to share IP.
This was the controversial view of Mr Daniel Strauss (left), Private Equity and Venture Capital Entrepreneur, best-selling author and – most importantly – manager of the University Technology Fund (UTF). He was addressing a public universities’ executive leadership audience at the two-day Executive Leadership Workshop (ELW), hosted by Universities South Africa’s Entrepreneurship Development in Higher Education (EDHE) programme in Cape Town, last week. The ELW 2022 theme was Commercialisation of Research.
Held annually and now in its 4th iteration, the purpose of the ELW is to increase the number of institutions positioned as entrepreneurial universities and provide an opportunity for deputy vice-chancellors, executive directors and directors in entrepreneurship development, to engage on entrepreneurship at universities, specifically as it relates to university strategy and policy. This annual empowerment exercise is sponsored by the British Council as part of its support to growing entrepreneurial universities in the South African ecosystem.
Speaking on What venture capitalists look for when considering investment into research commercialisation, Strauss raised challenges facing universities and was met with some pushback from individuals in the audience.
In a discussion session following his presentation, the workshop host and facilitator, Mr Nolo Mokoena, himself a non-executive director of Greendesign Africa, asked Strauss what the UTF mandate was. “To commercialise IP from all 26 SA universities,” Strauss replied.
He explained the various funding stages:
- Pre-seed, up to R500 000, for the early getting research to product development stage.
- Seed, up to R1,5million, where you have a minimum viable product (MVP).
- Core funding is accessed when you can take the MVP to market.
Mokoena asked if all viable ideas with commercial value are invested in, to which Strauss replied they distinguished between IP ready for a multi-national to take and commercialise, and IP that becomes a start up. “We are fixing the problem of commercialising IP that is ready for startups,” Strauss said.
One of the areas of contention was around the distribution of profits from the commercialisation of an IP.
In his presentation, Strauss said the university, for supporting the company, was issued shares at a nominal R1. It took 20% – 25% of the company and had the right to co-invest with the UTF. However, royalties – between 3%-5% of revenue – did not factor in that most companies have a net profit of 8%-12%.
“You are taking 40% to 60% of profit. By putting royalties as a burden on these companies, they won’t get funded, or you reduce their valuations by 80%.”
He said that most Venture Capitalists (VC) let companies keep the royalties, but opt for compensation through the valuation. As an example, he said a R100million valuation could reduce to R20million. “As a result, we might not find co-investors. In Dragon’s Den or Shark Tank, investors are hard on entrepreneurs. We at UTF are a dolphin pool, swimming with the entrepreneur. If something goes wrong, we come in and fix it with them. That is why we try to be a bridge between universities and VCs.”
Show me the money
Professor Nosisi Nellie Feza (right), Deputy Vice Chancellor: Research and Post Graduate Studies, at University of Venda said the presentations had triggered her. Confessing to having been abused and a victim regarding innovation and reward, she said: “We professors find solutions, but nobody cares about us. We are accused of using the taxpayers’ money; that our ideas must go to open access. People are making money out of us. When are we going to be humanised? How are we, the professors, to position ourselves — to see if we want to participate or not?”
Strauss responded by saying he had three roles he could not mix: business, charity and lifestyle/family life. “People fight in business if they don’t know when they are acting as shareholders, directors, managers or employees.”
All university deals, he said, were negotiated beforehand, with some shareholding going to the university, to every researcher or professor and the people running the company as well. “We are very clear about that before hand. When a company (as recently happened) grows from R55million to R155million in value, the professor holding 10% is now worth R15million. Professors have significant value created for them,” he said.
Professor Bavesh Kana (left), Head of the Centre of Excellence for Biomedical TB Research at the University of the Witwatersrand, said the picture being painted was highly simplistic. “As research professors, it is not as simple as getting shares. We are presented with choices. If you take shares you have to give up your academic position because you are now conflicted.
“So, as a professor who spent 18 years at university, you give up your academic position for 10% of a share in something that has just been created. It’s a choice but it’s not a choice. There is conflict and then there’s the perception of conflict. We academics have our reputations that we live and die by.”
Strauss said he understood that IP needs to stay in South Africa. He therefore advised universities opting to keep the IP here to “put it in another company and have an exclusive licence agreement. If we do not have the freedom as universities and VCs to create international structures for these companies, we are cutting off 99% of additional funding we could raise in the future.”
Animosity between universities
He said his experience has been that inter-university relationships were amicable until institutions were asked to work with each other. “You see people clam up. We have to fix this,” he said.
The lack of willingness
He also relayed a story of how the head of a university TTO had refused to grant them access to “an amazing technology we want to throw money at” despite UTF having an industry partner willing to commercialise and roll it out around the world. There has to be willingness,” he said.
He called for a change in mindset around sharing: “In IP and technology businesses there is more than enough for everyone and if we share all our best business secrets to build this ecosystem together, we start to grow.”
University Technology Fund (UTF)
The fund stands at R258,75million with the total investment to date being R65,6million (including pre-seed and seed funding). “In the first 24 months of managing the fund we have already done 30 deals — made 30 investments. The SA SME Fund, our biggest investor, made a seed facility available – initially only available to Stellenbosch and UCT, because they are the only institutions who committed to invest R20million each, into the fund.
“Since then, the North-West University has been added and they have received pre-seed funding,” he said. The SA SME recently allocated additional money for seed funding for all the other universities. Strauss said they were committed to co-investment saying the R258million fund was too small for all 26 universities. “In the past 20 months, the UTF, with private investments, raised an additional R1,5billion in co-investment. In February, we helped one company raise R35million while we contributed R10million. There is exponential potential for more capital to flow in.”
During the QnA, EDHE Director, Dr Norah Clarke (above), said there was a misconception that the only way to access funds at universities was through the Tech Transfer Office. “As hugely valuable as our TTOs are, those who work with student entrepreneuers know there are student startups that are not driven by the university and not necessarily the result of official research channels. These things go unnoticed – even to us. What do we do to solve that problem?How do we find a new channel for VC to find the wealth of gold that is there that TTOs might be unaware of?”
Strauss dismissed this, saying students could approach any investor to fund their business. He firmly said the UTF did not consider side hustles. Clarke interjected saying the businesses she referred to were not necessarily side hustles. Strauss said they had invested in various companies of students who had completed their studies — insisting that students cannot be parallel entrepreneurs, that is, study and run a business. He added that his focus was commercialising IP that universities had invested billions on.
Clarke insisted that studentpreneurs had little access to funding, which Strauss countered by saying the number of VC funds had increased exponentially in recent years. There are 15 new SA SME funds in circulation.
Why university technology is exciting
Billions have gone into research and development at universities, he went on to say. With small additions, these are ripe for commercialisation. Said Strauss: “For the last two years the fund has been helping researchers learn how to create shareholder and commercial value. Most of these companies have been instrumental in making the world a better place.”
Strauss said their biggest investment made so far was to the University of the Western Cape company called Hyrax Biosciences. Hyrax contributed to identifying the Omicron variant: “A virus variant can only become a variant of concern if it has been sequenced on a large scale. The only real platform in the world that can sequence on that kind of scale is the Exatype platform from Hyrax. This company ticks all the boxes!” he said.
Questions VCs ask before investing
Strauss listed fundamental questions VCs ask when considering an investment:
- Are you solving a real problem in the real world? He said: “Most entrepreneurs identify a problem then find an innovative way to solve it. Researchers normally find a solution and then they look for a problem to solve. This needs a shift in thinking. Being able to adapt to the changing needs of the market is critical.
- Are people willing to pay you to solve your problem?
- Can you solve it – preferably 10x faster, better and more cost-effectively? Hyrax was a great example, he said.
- Milestones. He advised researchers to provide investors with the necessary information:
- What do you want to do with the money?
- What is your next milestone?
- How long it will take?
- How much money will it take?
“Getting those four things out of researchers has been one of the biggest challenges because they can’t tell you. Apologising for potentially offending the audience, he advised for a shift away from what he called “entrenched grant thinking”.
Collaborate in investing in new technologies
Strauss said: “Our main purpose as managers of the UTF is to prove that university technology is an asset class worth investing in. The money is in the private sector; we need a few success stories to prove that you can make a return on your investment. We must align VC thinking with university thinking. I see a commercialisation community that collaborates to make the world a better place, while creating shareholder value for their investors.”
Charmain Naidoo is a contract writer for Universities South Africa.