Israeli academia and high-tech sector can strengthen collaboration

Sahar Peleg credit: Eyal Toueg
Sahar Peleg credit: Eyal Toueg

A revision is needed in the economic model of license agreements, to maintain incentives for early-stage companies to succeed but not weigh them down with financing of development activities.

Profits from academic research are achieved through collaboration with the high-tech industry, but the payment terms demanded by universities substantially burden early-stage tech companies. A revision is needed in the economic model of license agreements, to maintain incentives for early-stage companies to succeed but not weigh them down with financing of development activities.

The high-tech sector is one of Israel's most inspiring achievements. However, the tremendous challenges it now faces require initiatives and revisions that will strengthen the sector and allow it to flourish. In addition to governmental initiatives such as the Israeli Innovation Authority offerings, it should also be examined how the nation’s technology industry can be strengthened by collaboration with various local sectors and entities.

Prospering collaboration is achieved by utilizing the research products of Israeli academia. The research products are groundbreaking, but the road to commercialize and produce profits from them is achieved through tech companies, which carry out supplemental development activities required to offer products based on them. As part of the efforts to help the high-tech sector, and thus also allow universities to enjoy profits from their existing research activities, we must examine how to increase the use of research products as the underlying technology of early-stage tech companies.

When universities grant startup companies with a license to research products, they do so in exchange for shares in those companies (which initially have a very low value), and an obligation to pay royalties from future sales of the products that will be developed based on such research products. Similar to venture capital funds that provide startup companies with funding, universities also act, by the grant of licenses, as investors. Startup companies are short in funds, and both venture capital funds and universities will only enjoy significant profits from their activities only if the startups are successful and achieve fruition, which is only rarely the case.

After intensive work with both Israeli and foreign universities, a fundamental difference, despite the similarity in the economic model, can be identified between the conduct of venture capital funds and those of universities.

Venture capital funds invest in a small number of companies because such investments carry large risks. The relatively small scope of activity allows the funds to carefully inspect the founding entrepreneurs of startup companies and their business plans, to conduct thorough due diligence reviews and only select those who seem to have particularly high chances of success. After the investment is made, most funds, which are usually led by successful entrepreneurs themselves, continue to support the startups and assist them in any way they can.

In contrast to the relatively limited scope of funds’ activities, universities aim to exhaust the commercial potential inherent in all research products and grant licenses to as many of them as possible. The substantial amount of license agreements, as well as the even greater amount of research products, does not allow universities to carefully examine the companies and their founders, in the way that venture capital funds do. Therefore, they are aware that the success rate of startup companies that will receive a license from them may be much lower than that of the companies in which the funds invest.

Under these circumstances, the universities seek to ensure a return even from the companies that will not succeed, i.e. from those that will not complete their development plans and will not enjoy high revenues from sale of products (which in turn would generate royalties for the universities).

The universities guarantee such return by demanding various advance payments, even before the companies have any sales. In this situation, the advance payments are made from the investors' funds, which are intended to finance the companies' development activities. Although these are not significant amounts, from the universities’ point of view (especially compared to income received from royalties or the sale of shares if such companies were sold), the payment of the advances is very burdensome for these early-stage companies, specifically when they struggle to finance their development activities. In fact, unlike the funds that try as much as they can to help the companies they invest in, the universities substantially burden the companies to whom they granted licenses to.

Universities are not expected to finance failing companies. They should always strive to increase their income and budget. However, a revision is required in the economic model of license agreements, in a way that will create incentives for early-stage companies to succeed but will not weigh them down in financing development activities. After all, universities' revenue from license agreements would increase significantly if more companies that license from them complete development stages and enjoy significant revenue or see an exit. The significance of a companies' failure is a refined loss for all parties involved, both universities and startup companies, as well as the high-tech sector and Israeli society as a whole.

The author is a partner in Amit, Pollak, Matalon & Co., law firm, and co-heads the firm’s Intellectual Property practice.

Published by Globes, Israel business news - - on February 7, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.

Sahar Peleg credit: Eyal Toueg
Sahar Peleg credit: Eyal Toueg
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