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New Ohio Law Allows State Universities to Obtain Ownership in Spinout Companies

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By Ben Butkus

Ohio's public universities and research institutions now have more incentive to create startup companies to commercialize their discoveries thanks to a law passed this summer as part of the state's budget bill.

The law will, for the first time, allow the 14 universities and more than 20 community colleges in the University System of Ohio to take equity stakes in newly formed companies in lieu of a cash payment for technology licenses.

The change, already in effect, is expected to help the state translate the approximately $1.5 billion in research generated annually at the institutions into goods and services and create jobs by "substantially increasing" the number of university startups in the state, Mark Coticchia, vice president for research at Case Western Reserve University and one of the bill's co-authors, told BTW this week.

"Many of the licensable technologies that are available at our state's public institutions could be the basis of new companies," Coticchia said.

"Typically those new companies are short on capital, and therefore it is desirable for the institutions to be able to accept equity in exchange for technology licenses," Coticchia added. "By adding that ability, we thought this would level the playing field not only with the state's private institutions, but also with public institutions in other states."

Coticchia said that Ohio was behind other states such as North Carolina, California, Illinois, Kentucky, Missouri, and Oregon, all of which allow its universities to own stock in companies. It is unclear what other states have similar provisions in place.

Coticchia added that the new law provides "another tool in the tech-transfer professional's toolkit to launch a new business. My experience is that every situation is a little different, so you need all the tools you can to find the best way to start a company."

The law, which began as House Bill 140, amended existing statutes that prohibited Ohio's public universities from holding stock or other forms of ownership in private entities.

HB 140, the full text of which as introduced can be seen here, was sponsored by Ohio state Representatives Jay Goyal (D – Mansfield) and Mark Schneider (D – Mentor). The bill was submitted as part of the state's budget, which Gov, Ted Strickland signed in mid-July.

As written, the bill "permit[s] institutions of higher education to facilitate and assist with entrepreneurial projects for economic development and to authorize the institutions to enter into agreements to induce development of, acquire ownership in, and make or guarantee loans and incur debt to fund the entrepreneurial projects."

The 14 schools comprising the University System of Ohio are: the University of Akron; Bowling Green State University; Central State University; University of Cincinnati; Cleveland State University; Kent State University; Miami University; Northeastern Ohio Universities; Colleges of Medicine and Pharmacy; Ohio State University; Ohio University; Shawnee State University; the University of Toledo; Wright State University; and Youngstown State University.

Goyal and Coticchia helped develop the language of the bill while Coticchia was working as an advisor on technology commercialization for the Ohio Board of Regents.

"I was responsible for putting together a division of economic advancement, where I focused on several areas," Cottichia said. "As part of that, we had been looking for barriers to the practice of tech transfer at our public institutions."

Coticchia's employer, Case Western Reserve University, is Ohio's largest private university and thus has always been allowed to take equity stakes in startups. He also said that some public universities had created workarounds such as establishing private research foundations or other non-profit foundations to act as "go-betweens" for universities and private companies.

Those arrangements, however, "can be cumbersome," Coticchia said. "It's a lot easier to consummate deals when you can do so quickly and flexibly. This now allows Ohio public institutions to behave more in a private manner."

The research foundation arrangement hasn't been too cumbersome for the University of Akron, a state university that established a private research foundation in the mid-1990s to handle tech-transfer matters for the university.

The University of Akron Research Foundation won the University Economic Development Association’s National 2007 Award of Excellence in Technology Commercialization, ranks first in the state in rate of return per research dollar, and has helped start up some two-dozen companies since it was founded, which is competitive with many larger US universities.

UA was also one of 10 schools featured in a 2007 National Science Foundation-funded report by consulting firm Innovation Associates on how smaller universities and non-profit research institutions can achieve tech-transfer success by focusing on niche research areas (see BTW, 11/19/2007)

UARF has even been assisting other University System of Ohio schools with their commercialization efforts, having inked deals to provide tech-transfer support to both Youngstown State and Cleveland State Universities (see BTW, 1/16/2008).

But UA is primarily an engineering school that excels especially in the fields of chemical engineering and polymers, and doesn’t commercialize a ton of life sciences technologies, which may require a deeper early investment to form companies around.

Anne Chasser, associate vice president for technology transfer and commercialization at the University of Cincinnati, told BTW that the new law is "critically important to public universities" in the state because they are "in essence competing with private universities in terms of creating jobs and opportunities for our faculty to be involved in startup companies."

Chasser said that UC currently has six potential startup companies in the works, and that once the school learns to manage the process, "this should really energize" entrepreneurialism on campus.

"There is really a lot of excitement around here, because it gives us a little bit more creativity in the deal making," Chasser said. "At the end of the day it really helps our faculty too, because with startups there are not a lot of resources when a company is formed."

This is especially true in the life sciences, where large pharmaceutical companies are more frequently eschewing early-stage university technologies. "Big pharma is not looking at our early-stage technologies," Chasser said. "With a startup company you have the opportunity to further develop that so it's much more attractive to big pharma."

Coticchia said that the new law will help entice universities form companies regardless of the industry segment, and that all institutions in the state — public and private — are behind the new statute.

"I think it's been very well-received," Coticchia said. "I think everybody recognizes this acts as an incentive for institutions to encourage more startup companies. It also enables more relationships to be formed between the business community and Ohio universities."

Coticchia added that the Board of Regents will be closely tracking Ohio startups over the next several years to see if the bill is working. "We expect a substantial increase in the number of startups that will result from the ability to take equity in lieu of cash or other fees in exchange for a technology license."

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