Conflict of Interest in Academic Spinouts
Facilitating incubation of early stage, deep tech startups in their parent academic labs is an existential necessity, but comes with conflict of interest
Last week’s post about Mitacs touched on a topic that deserves its own discussion: managing conflict of interest (COI) at the intersection of academia and industry. In this post, I explore the issue of COI arising in the situation where a Canadian academic researcher has a founding stake in a spinout which needs access to the parent lab in order to get off the ground - a situation that needs to be possible if we are to address the IP leaks endemic to Canadian academic tech transfer.
Technologies are far more likely be able to cross the valley of death if the inventors are involved, and if the lab that does the research leading to a technology portfolio is able to support its commercial early development during its journey across the valley of death. This is well-evidenced by the Lab2Market approach, which has developed clever methods of navigating existing funding programs to push technologies as far as possible in the parent lab before spinning out a company to bring it to market.
Given the complete lack of affordable commercial wet lab space in Canada and a likely need for access to unique and expensive equipment not available elsewhere, being able to continue to access the parent lab is an existential requirement for many spinouts. While programs like Lab2Market are extending a bridge across the funding gap by enabling technologies to develop further while remaining fully academic, it is often the case that a startup will still need access to very specific R&D resources well into the first few years of their operations, resources which are often unique to their parent labs. If we want to see domestic commercialization of the IP developed by our academic community, it is critical that we find productive and standardized ways to give deep tech startups access to their originating labs. This requires careful navigation of the associated COI.
To put this challenge in perspective, the only available wet lab space I found outside the University of Ottawa lab where my company was born was in Edmonton, cost $4500/month for a bench, and I would still have had to find money to equip it with anything beyond the basics. In our case, the requirement infrastructure would have cost another $50,000, which we did not have. Our options were to find ways to manage conflict of interest to get access to the uOttawa lab from which we spun out, or not spin out in the first place. We were lucky to have the support of the university in making this happen, but not all technologies have such support.
In the absence of widespread, major investments in infrastructure such as are being made by Seeker Labs in Toronto and infrastructure funding to equip it with technology-specific tools compatible with early-stage private enterprise, access to originating labs and the unique resources therein will remain an existential requirement for deep tech spinouts in Canada.
In Canada, the rules around conflict of interest management actively disincentivize academic researchers from spinning out companies to carry their research out of the lab. The disincentive takes two forms: the first is a huge amount of administrative complexity involved in separating spinout activity from academic work when anyone involved in the company has a foot on both sides of the divide and/or the startup needs access to the parent lab for its early operations. The second is that in Canada, academic researchers are allowed to turn any external pay into tax-free a research grant, avoiding taxation on the income by turning personal gain into further academic research—academic research that in turn does not get commercialized. The net result is a pointless loop of IP generation without follow up that is largely responsible for our productivity paradox.
Not all countries have this issue. Israel, for example, actively encourages their academic researchers to spin out companies to develop their technology commercially by mandating that they profit from the result of doing so. While Canada rewards academics for turning personal income into research money to generate more IP that subsequently then goes undeveloped, Israel actively forbids this and requires that academics profit from the result personally. The result, unsurprisingly, is that Israel has a far higher rate of commercial spinout from academic labs than does Canada.
When considered through this lens, our productivity paradox is not so paradoxical: it is a direct result of the incentives that surround the commercialization process. Canadian academics simply can’t be bothered to commercialize their research, because we provide them no tools to do it, while incumbent policy frameworks are active hindrances. This does not need to be the case, however.
Conflict of Interest and Public Funding
The usual reasoning for the perception of COI in academic spinouts is that public funding should not be used for personal profit. The core of the idea is that an academic who has a vested interest in specific research outcomes should not be the signing authority on spending funds intended for related academic research.
In a scenario where there the Principal Investigator of a lab has no ownership stake in the spinout, there is no COI in public funding supporting spinouts in accessing academic lab space. In that case the simplest model is just to rent the lab space or partner with the lab via one of the many funding programs that supports industry-academic partnership. In practice this is tricky: universities are not incentivized to open their doors to industry directly, and startups who cannot pay high rent will have a hard time finding space.
COI enters the picture when the prof has an ownership stake in the company that is being incubated in their lab, possibly the one lab on the planet that has exactly the set of equipment needed for early operations. Mot PIs usually have multiple grants on the go at any given time, and there is a scenario in which a bad actor could use a public grant intended for purely academic work unrelated to the startup to advance the interests of the startup.
While it is perfectly true that allowing a situation wherein an academic could directly or indirectly pocket taxpayer money intended for research should be carefully managed and avoided, extending this logic to forbid personally profiting from the results of that research through commercialization is short-sighted, and fails to hold up when considered on a longer time horizon. Domestic economic activity resulting from taxpayer-funded research and intellectual property is far more likely to end up with a positive return on investment for taxpayers than a technology pathway that ends with scientific publication, or a patent that collects dust on the shelf of a tech transfer office or, worse still, as part of the IP moat for a multinational.
If the concern is just that taxpayer money be used to the benefit of taxpayers, there is no COI in using it to generate IP that is later commercialized domestically by the same research team, so long as the academic funding is spent in a way that aligns with the academic purposes for which it was awarded.
On the other hand, funding research that does not get commercialized represents a complete failure to ensure taxpayer benefit of the billions that Canada spends on academic research every year. The policies that get in the way of spinout activity turn Canada effectively into an “IP republic” for countries with the stomach to take a risk on early technology development.
Probably the most egregious example of this of which I am aware is the transfer of billions of dollars worth of battery technology developed in Dalhousie University directly to Tesla in exchange for a few million dollars of academic funding that represents a near-complete loss of taxpayer investment in that research. As of a few years ago, that was the only academic collaboration Tesla had ever had at the time I learned about it. The electric vehicle market would look very different today had those researchers been incentivized and empowered to commercialize their technology themselves, as would the long-term benefit to taxpayers who funded part of its development.
I will caveat this by saying there is plenty of research being funded that is still far too early to consider commercialization that is still well worth funding. However, anything worth patenting is worth trying to commercialize (else, why bother patenting?).
In addition to financial concerns, academics have a duty to publish the results of their publicly-funded research and to act in the best interests of their students and trainees, a duty which may not be prioritized over for-profit commercialization activity when they are involved in both. Startup companies are not always able to or interested in publishing, preferring to patent or keep as trade secrets the results of their technology development. In the absence of oversight, an academic with a hand in both academic research and a related startup may not be focused on the best interests of the students in the lab who are not involved in the startup. Just as in the case of purely academic grants not being used to advance the goals of the startup, it is critical that students in the lab that are not involved in the startup are not spending their time advancing anything other than their own academic work.
The historic approach to managing these issues is a flat refusal by institutions or grant agencies to engage in, support, or fund any work that involves COI or the perception of COI. While this obviously avoids the issue, it misses significant opportunity to commercialize technology.
More recently some universities are opening up to the idea of incubating startups, but the approach to COI management is fraught, complex, and bespoke each time. A handful of grant programs exist that get around this issue. NSERC I2I, for example, is specifically funding for product development with academic research that avoids the issue by requiring it be awarded before a company is incorporated.
The problem is not that taxpayer money should not directly or indirectly fund private, for-profit enterprise (it does, all the time, and always has - see NSERC Alliance, NRC IRAP, SR&ED, etc.). The problem is that, while some Canadian research institutions have developed ad-hoc ways to manage it, Canadian granting agencies generally do not have a well-established and standardized way to manage the COI, instead passing the buck to individual institutions that have developed a variety of ad-hoc methods of varying effectiveness.
Standardizing COI Management In Academia
The framework for COI management need not be particularly complex. Currently, any application for federal research funding requires disclosure of any potential conflict of interest, which is sometimes but not always disqualifying. In cases where it is not disqualifying, there is additional oversight and paperwork required wherein the university details a COI management plan.
The situation in Canadian research universities is not so unique that every grant application requires a bespoke approach negotiated on the fly with all those involved. At their core, COI management involves ensuring that signing authority on money spent does not rest with someone with a vested interest in anything other than the target grant outcomes, and ensuring that academic integrity and training standards are not compromised.
This can be achieved by appointing another person to be the signing authority on grant spending. This person should be another faculty member given the need for academic expertise to be able to perform the role effectively. It also involves giving students in the lab in question who are not involved in the spinout a neutral third party who can advocate for them academically and intervene if there is ever a conflict between their academic work and the activity of the spinout. These should be the same person, given the oversight and access requirements. Students in academic labs that are incubating spinouts should be educated on the topic and be made aware of the role.
However, instead of negotiating this issue anew every time a grant is submitted, granting agencies should formalize the requirements and duties for this position and include a requirement for someone to be named to the role on all grant applications involving labs with spinouts. Instead of requiring a bespoke COI management plan from the academic institutions, grant agencies should define the COI management plan at the federal level and include it as a requirement across all grants awarded to labs that incubate university spinouts. Universities will respond to the requirement by creating these roles within each Faculty to address these issues, and yet another small barrier to Canadian spinout activity will be removed.
The alternative is a massive investment in physical infrastructure to provide spinouts wet lab space to develop outside of academia, subsidized rent in the early stages, and funding for capital investments in specialized equipment, and as much as I would like to see all of those things, they will not happen overnight.
Alignment of Interest
While COI issues exists at a few specific inflections points in the process, managing them need not be complex and has core elements in common across all instances. The framework for doing so should be standardized to reduce friction in spinning out companies to carry technology through the valley of death, allowing greater flexibility in academic grant funding in bridging the gap from academia to industry without compromising on associated ethical issues.
Commercialization of innovative technologies coming out of Canadian research institutions is in the interest of everyone in the long run. I have written previously about a need to align the various moving parts of the innovation pipeline, so that the outputs of one can become the inputs to the next without leaking IP in the gaps between. COI represents one such misalignment between the output of Canadian academia and the input of Canadian deep tech commercialization that can and should be addressed in a relatively simple and standardized way.
The additional effort and cost of doing so is miniscule when compared to the value of the lost intellectual property that leaves the country due to our current inability to consistently address these challenges.
If your institution has developed a clean way to manage COI at the interface of academia and industry, or if you have taken part in a spinout that navigated these issues, successfully or not, I want to hear from you. Please reach out to be directly here.
Note: This post was edited on 2024-06-28 to clarify some issues that were expressed poorly in the first version.