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Commercializing public research in Russia:Scaling up Spinoff Companies

The World Bank GDLN Video Conference – June 16 2011

The World BankEurope and Central Asia RegionFinance and Private Sector Development

Prepared by Paulo Correa and Juan Julio Gutierrez

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Background and context• Russia’s publicly-funded research has recently given

rise to a number of companies (university companies).

• Such spin-offs show how Russian innovation policy, if scaled up, could raise the productivity of small- and medium-size companies and contribute to a more diversified economy.

• Achieving this result, however, may require several adjustments to Russia’s current innovation policy.

• Broader study on export diversification

Low productivity of R&D limits Russia the Supply of “Ideas”

-0.4 -0.2 0.0 0.2 0.4 0.6 0.86.56.76.97.17.37.57.77.98.18.38.5

AustriaBelgium

Canada

China

Croatia

Czech Rep.

DenmarkFinland

FranceGermany

Hungary

IcelandIreland

Israel

Italy

JapanKorea

Luxembourg

Netherlands

Norway

Poland

PortugalRomania

Russia

Slovakia SloveniaSpain

SwedenSwitzerland

Turkey

UK

U.S.

Log GERD/GDP

Log

GERD

/Pat

ents

gra

nted

in th

e U

.S.

4

19961998

20002002

20042006

2008

4

5

6

7

8

9

10OECD EU-27 EU-15 Russia

Res

earc

hers

/1,0

00 e

mpl

oym

ent

Total researchers per thousand total employment

Source: OECD STI 2010/1

0.029

0.030

0.031

0.032

0.033

0.034

0.035

0.036

Science and engineering journal articles per researcher

Source: NSF-Science and Engineering Indicators. UNESCO

Declining Scientific Output and Employment in Research Activity

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Age of researchers by educational attainment

Researchers

Age Category

Year

2002 2004 2006

70 and older 3.8 4.6 5.9

50-69 y.o. 44.9 45.2 45

30-49 yo. 37.7 34.9 32.1

under 29 y.o. 13.5 15.4 17

PhDs

70 and older 20.3 22.2 24.7

50-69 y.o. 64.2 63.7 62.3

30-49 yo. 15.5 13.9 13.1

under 29 y.o. 0.2 0.1 0.1

Candidates of science

70 and older 5.9 7.4 9.7

50-69 y.o. 54.9 54 52.8

30-49 yo. 35.6 34.4 33.1

under 29 y.o. 3.5 4.1 4.5

Source: Indicators of Science (2009) - Ministry of Education and Science, ROSTTAT and the Higher School of Economics

• Reduction of middle-career researchers is a problem because those are more likely to publish

• Less than one fourth of PhD STEM graduates had returned to Russia after 5 years of graduation

• Another effect. More than 70% of researchers in Russia hold no advanced scientific degrees (PhDs, or Candidates of Science)

• One of the causes. Researchers working either in public research institutions, the private sector or higher education institutions could not expect to earn more than US$ 600 monthly

Aging Profile of Researchers and Severe Brain reduces the supply of ideas

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Lack of financing specially for early stages of the “valley of death” leaves RVC’s funds without a deal flow to invest in

The U.S. Case (State of Maryland)

. The government established, through the OJSC Russian Venture Company (RVC) , 7 venture foundations with total capitalization of US$740m in 2007 and 2008.

• However, most Russian VC (80%, including private) continues to be attracted to mature companies operating in mature markets rather than early stage financing of Russian firms (20%). There is a lack of investment projects that fit a VC investment criteria.

• Early stage funding is provided by FASIE, up to 3 million rubles (approximately US$100K). However, companies assess the funding gap in the range of 10 to 150 million rubles (US$330K to US$ 5 m). Funding needed to create a prototype and business validation.

• Current early stage financing, through RVC’s Seed fund and business angels does not seem to cover the financial gap .

The Case of Russia

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Though IPR legal framework has improved there is still uncertainty, discouraging both patenting and licensing

The process of commercialization IP of Gov. Funded R&D in Russia• Part IV of the Civil Code (2008) provides a foundation to treat the

IP generated with public funding (63% of total R&D expenditures).

• IP belongs to the Russian Federation (RF) in defense related research but potentially any discovery registered in any stage of the innovation process funded by the government.

• Federal Law 217 (2009) deals exclusively with the use of IP generated with public funds to form start-up companies by universities and Russian Academy of Sciences research institutes.

• However the start-ups do not own the patent that supports the company. The IP is not granted to the companies on an exclusivity basis.

• There is non-existent skilled independent valuation of high value IP (above 500k rubles or US$ 17k), since the IP could be considered an intangible asset.

• Also, the absence of a patent court implies that:– Lack of jurisprudence makes it difficult to arbitrage

disputes – It is unresolved how to assign IP to discoveries made

before the Civil Code (2008).

Publication of Results

Results from Contract Research and Collaborative research transferred to company

Research Results

InventionDisclosure

Commercialization License options

Spinoff company formation

Direct license to existing company

More research is needed by researcher

More research is needed jointly with prospective investor/client

From lab to business

New companies and new /better products

Research Activity

WB-MoES 2011 Survey of Technology Transfer Offices (TTOs) - Key Results

• 81% of the 65 surveyed TTOs initiated operation before 2008 (i.e. before the main new IP laws were enacted)

• Only 40% of TTOs had technology transfer as their main activity. Other main activities are coordination of R&D (13%), consulting (11%) and training (11%).

• On average, TTOs had 5.6 Full Time Employees (FTE) in 2010. The staff professional background is roughly a third of Businessmen, Faculty University and University Administrators.

• There is active participation of inventors in the licensing process, as reported by 75% of the TTOs.

• More than half of TTOs pay their personnel using both the university/research institution pay-scale and incentives/bonus/success fees related to performance.

• TTOs and/or their parent institution tend to provide accompanying innovation services. Half of TTOs report offering both incubation and prototyping services.

• TTOs’ budget comes mainly from the parent institution, on average 40%. Other important budget sources are consulting fees (18%) and fees received as broker for university/research institution contract research (10%).

• Patent applications are made mostly in Russia. On average, each TTO applied for 34 local patents. The total ,1715, represent around 5% of total patent applications made in Russia. Patent filing in the EPO and USPTO is almost non existent, less than 1 patent is filed annually. ,

• Out of the 612 IP based start ups reported by the MoES, 200 were founded using licenses of the TTOs’ parent

institution technology.

Policy Implications Broaden up the commercialization efforts to include areas with

potential for new ideas:– Academy of Science (bulk of the funds)– Defense sector (market friendly IP management)– Agricultural research (renewed emphasis)

Strengthen results-based management of public research organizations:– allocation of public funding based on scientific output, included

commercialization efforts;– career development based on performance and support for young

scientists

Improve incentives for public research organizations (PROs)and research to engage in commercialization– Review IP regime for federally funded R&D: transfer full ownership (not

only use) to PRO including transferability (with minimum royalty payment to research team)

– Include entrepreneurial achievements related to commercialization as part of the criteria for career development (extending sabbatical years)

– Finance and manage the TTOs through results based agreements– Provide with funds for early stage development of technologies (e.g.

Croatia “Proof of Concept Project”)Enhancing the supply of financing and services to innovative startups

(preparing the pipeline for VC investments)– Matching grants at early stage– Differentiated tax breaks for SMEs– Integrating business development services and financing in a single agency

Policy Implications

Illustration from Croatia1. An integrated approach for SMEs…

2. … with corresponding agency…

3. … and some results.

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