Canada’s taxpayer funded research and innovation system promotes the development of new intellectual property (IP) to support the country’s economic competitiveness in a knowledge-based economy. But one of the by-products of our innovation system is useful IP created by companies and university researchers who lack the ability or desire to extract the economic value from the invention. The IP is “stranded” – its commercial potential unrealized. Why does this happen? Can we promote better outcomes?
When Canadian companies engage in R&D to develop new technologies to enhance their businesses, some of this work is done in collaboration with university researchers, with financial support from federal and provincial government programs. As the inventions accumulate, some are actively used to improve products or processes. However, many others sit on the shelf, forming an asset on the balance sheet and not generating any return on the investment. Often significant effort is required to advance the technology to market and decision-makers can be reluctant to invest time and resources in activity which is not connected to current lines of business and profits. And so these valuable assets remain locked away.
IP created in universities faces similar challenges. When the inventor doesn’t have the interest or capacity to take a leadership role in a spin-off company, the options for commercializing the IP are limited. A university’s technology transfer office may offer to take on licensing or company creation, but they usually give preference to inventors who want to lead the enterprise. As a result, commercialization of the inventions is stalled. What other options are available to help unlock the value of these stranded IP assets?
Business incubators and accelerators play a big role in the innovation system. However, both are designed to support a management team with a business idea, not specific inventions. And while venture capital firms are attracted to IP, they will usually only consider investment opportunities proposed by a strong management team with a clear vision and coherent business plan.
Can something called the “venture studio model” provide a pathway for stranded IP, including inventions developed with or by university researchers? Venture studios are relatively recent entrants into the Canadian commercialization scene, emerging over the last 10 years. They are often led by experienced entrepreneurs with strong track records in building businesses. Studios typically cultivate a small roster of promising concepts, moving them through a systematic testing process with established stage gates. Proven concepts are then spun out into a corporation led by a newly recruited CEO, and primed with seed funding in preparation for entering the market.
Canadian venture studios have been responsible for some notable successes. Neo Financial, the recent entrant in Canada’s financial services marketplace, emerged out of Harvest Builders, a Calgary-based studio. Similarly, Dialogue Health Technologies, an employee health and wellness platform which recently completed an IPO, emerged out of Diagram Ventures in Montreal. And there are also many examples in the U.S. like Moderna, Inc., which is a notable product of the venture studio model.
However, most venture studios were created with a mission to generate and develop their own business concepts. While some are open to receiving proposals from individuals or corporate partners with an idea or IP with commercial potential, their preference still remains creating a relationship with founder-entrepreneurs.
In 2021, Calgary-based Carrot Ventures launched with a variation on the venture studio model, directly targeting stranded IP. Carrot is a venture capital partnership between Farm Credit Canada and AVAC Ltd., an Alberta-based venture capital investor.
Two features make the Carrot Ventures model distinctive. First, Carrot is only interested in acquiring existing IP. Carrot doesn’t cultivate its own technology or business concepts. Second, Carrot is focused solely on the agricultural value chain. Many venture studios specialize in types of technology, for example biotech, fintech or other digital tools, but are less likely to be focused on solutions for a specific industry.
For the inventor or holder of the IP, the process begins with granting Carrot a one-year option to acquire the IP. During that time, Carrot conducts due diligence and technology validation at its own expense and launches the campaign to recruit the CEO. No IP is transferred unless Carrot can find an experienced executive to be the founder and lead the commercialization effort.
The Carrot process can move quickly. Its first company, Susterre Technologies Inc., was incorporated within the option period. The Founder-CEO then developed the company’s business and financing plan, and successfully closed on $2.5 million in seed financing approximately a year after incorporation, with Carrot Ventures as the lead investor.
The technology rolled into Susterre was initially developed in a corporate environment as a sideline project and early commercialization efforts stalled because it was too far outside the company’s core business. The Carrot offering gave the company an opportunity to recover some value for its investment in its R&D.
The Carrot model may also have potential for unlocking the value of stranded IP in the university environment. According to Scott Inwood, director of the commercialization office at the University of Waterloo (WatCo), the Carrot option stands out because it gives the university inventor a clear map of the process. He reports that the IP validation work conducted during the option period included some funding back to the university for further research. He also noted that the initial IP validation results were shared with the university, and would have been valuable data for WatCo regardless of whether or not Carrot chose to exercise the option to acquire the IP.
Developing and retaining rights to new IP is essential for increasing Canada’s economic competitiveness. But economic benefits are not realized unless the IP is commercialized. Venture Studios may offer options for companies and researchers who hold IP but who may not have the ability or desire to lead a commercialization effort. Currently, many players in this field in Canada are still maturing and favour development of their own concepts. We need more options like Carrot, with a clearly defined strategy for leveraging stranded IP and deep experience in a specific industry.
Neil Campbell is an independent lawyer and counsel for research services at the University of Calgary.