This is the second in a four-part series about institutional patterns that leave most faculty inventions stranded. Part one is here. This post examines why it keeps happening, and what it costs.
Imagine a grad student who discovers a better way to detect sepsis from a drop of blood. She discloses it to her university’s tech transfer office, who reviews her filing and calls her up: “Great work. Really promising. Let’s turn this into a company. Who’s going to be CEO?”
The grad student, thinking of loans and promises to parents, and the post-docs she’s been interviewing for, protests: “I’m less than a year away from finishing my PhD. I already have plans to work in a lab. Can’t we just license it to a diagnostic company?”
TTO again: “We tried. They want to see more data and another validation study. You need to de-risk this first. We’re going to need to get a company together and raise a seed round to fund that. We can help. Meet us next week and we can get the process rolling.”
Some version of this conversation happens at research universities across the country day after day. It’s also the moment when a lot of promising inventions stall.
No matter how good the invention, the only way it’s allowed to grow up is to become something it may or may not be: the founding technology of a scalable, venture-backable company.
This post, this series even, isn’t an argument against startups. Some of these inventions absolutely warrant them, and the ones that do deserve a system that serves them well. It is an argument about what happens to the ones that don’t, and about why the system can’t tell the difference.
You build a company when organizing things internally is cheaper than coordinating through markets. Hire the expert rather than contracting with one, own the equipment rather than renting it. That’s economist Ronald Coase’s famous answer to why companies exist at all. And for a long time it was a pretty good description of why university spinouts made sense too.
For many early-stage university innovations, that logic has largely stopped applying. Specialized capabilities have never been more accessible in the market. What once required building a company (research, manufacturing, regulatory and reimbursement expertise, software engineering) can now be suitably contracted out as needed. And in many cases, the costs to develop healthtech (and other) products have fallen dramatically.[1] The economic case for company formation is weaker than it’s ever been.
So, while nobody makes a conscious decision to push every invention toward a startup, the machinery surrounding inventions on university campuses is built squarely around company creation. Tech transfer offices, accelerators, incubators, pitch competitions, venture funds. Each has its own processes, metrics, and incentives, and every one of them points toward a startup as the natural outcome.[2]
On the ground, even university programs purpose-built to foster entrepreneurship awkwardly manifest the same patterns. At UW, the “primary organization tasked with driving entrepreneurship on campus” is called Discovery to Product, or D2P for short. (Sounds like exactly what this series is arguing we need.) But D2P’s own description of its goals is to mature projects “so that they become competitive for the funding needed to form a company.” Since 2014, it has helped launch or grow more than 140 startups. What it hasn’t built is a route for inventions that shouldn’t be startups. Recent university efforts to strengthen campus entrepreneurship have made the move explicit, excluding licensing and industrial partnerships from their mandate, effectively drawing a circle around company formation and calling it entrepreneurship. The underlying assumption, that every invention should become a company, goes unexamined.[3]
This is the best example I’ve found that Professor Coase’s logic has inverted. The startup infrastructure has today become so dominant that the cost of doing anything other than forming a company is higher than the cost of doing it the familiar way. You could say that what was supposed to solve a market coordination problem has itself become one.
If company formation is the default, licensing should at least be the obvious fallback. In practice, it rarely is. (At least for things that aren’t drugs.) And how that usually fails, which you can hear in the tech transfer dialogue, is exactly what pushes offices toward company creation in the first place.
So, why doesn’t licensing work? First, established companies aren’t interested in early-stage university research. WARF’s public affairs director Kevin Walters explains the incumbent’s perspective plainly: large medtech and device companies “don’t often want to take risks on basic research patents, what we call ‘deep tech.’ To take the massive risks, you’ve got to create a new company.”[3] Most strategics are hunting incremental improvements to products they already sell. An early-stage university invention asks them to absorb a kind of risk they’re not built for.
Second, most of what arrives at a tech transfer office isn’t ready to license anyway. Greg Keenan, who runs WARF’s Accelerator and Ventures programs, describes most disclosures as “early-stage technologies, sometimes just lab bench experiments, that aren’t products in any meaningful commercial sense.”[3] A licensing deal requires a licensee who can see a plausible route from here to something they can sell. That’s a hard case to make for something that hasn’t left the lab.
Since licensing rarely works for non-pharma innovations, doing nothing (ie, not starting a company) means the invention sits in a catalog nobody browses. That’s part of why the institutional default is so hard to dislodge.
Underneath all of this is a simpler problem: where does the money come from? An inventor has a compelling idea, and to develop it, she needs funding. But the only financing available at meaningful scale is venture capital, and it requires a compelling story about market size, because venture returns depend on a small number of large outcomes. So the innovation needs not just a company, but a company with an addressable market big enough to support that return profile. Otherwise, the capital simply isn’t there, regardless of the clinical or commercial merits of the invention.
The human cost is most visible in pediatric medicine. “A lot of companies avoid making things for kids,” one ICU physician told me, “just because it isn’t worth their time.” After all, that’s a market with smaller patient populations, lower reimbursement, and higher regulatory complexity. As a result, clinicians routinely adapt adult devices for pediatric use, off-label and at some risk, because the right-sized product simply doesn’t exist.[5]
It isn’t only the smallest-market innovations that fall through, leaving real gaps in patient care. There’s a whole category of outcomes in the tens to hundreds of millions that are achievable, valuable, and still, eventually, orphaned. They’re objectively not failures; they’re the right size for what they are, even if venture needs them to be bigger and private equity wants them to be already profitable. The acquisition market that used to bridge that gap has mostly closed its doors. Large medtechs rarely acquire pre-commercial companies anymore, which means there’s no buyer waiting at the end of the runway for a mid-sized outcome either. A substantial portion of healthtech innovation quietly disappears between those positions.
The same logic distorts the route for innovations who have a clear path to profitability. Immuto Scientific, a WARF spinout from UW-Madison, developed a faster, cheaper method for determining protein structure. It had obvious value to pharmaceutical companies and a natural, straightforward path to profitability in a few years through recurring revenue from their per-protein analysis fees. “We knew right away that there was a service business here,” CEO Faraz Choudhury has said. “And we could make some money on services.” But the logic of the capital structure pointed them elsewhere; to justify venture investment, the company needed a different “North Star.” As Choudhury put it: “How do we make this into a high-growth business? We’ve got to make drugs of our own with this platform.” So the business pivoted toward making drugs and walked away from a profitable model to chase a venture-scale bet.[3]
Universities apply their own pressure. They behave as if they were licensing a de-risked drug through a well-understood regulatory pathway, when what they’re actually doing is asking someone to build a company from scratch to take an unproven product into an uncertain market. Calibrating their equity demands to the invention rather than to the full cost of building a company around it gets the pricing wrong.
Demands for substantial equity extract a disproportionate share of a venture that hasn’t been built yet. Past a certain point, the terms make the deal not worth doing for exactly the people you’d want to attract. There have been serious international efforts to reform and standardize academic licensing terms, but the conversation has stayed focused on making spinout deals faster and the equity curve fairer, rather than helping to define when a spinout is the right vehicle in the first place.[6] European universities on the wrong side of that curve restrict supply through onerous terms, then try to compensate by subsidizing demand through accelerators and innovation hubs, which is a somewhat expensive way to avoid asking whether the terms were right in the first place.
And then there are the companies that form anyway, on the strength of early enthusiasm, friends-and-family capital, maybe an angel round, with big promises about markets that don’t quite pencil out. Eventually the company hits the institutional funding market and stalls. The market isn’t large enough, the team doesn’t have the right track record, the capital needs are too high for what’s on offer. Many of these companies don’t fail cleanly. They drift, cycling through accelerators and pitch competitions, collecting small grants, accumulating just enough forward motion to stay alive. The inventor stays attached long after the point of rational exit, spending time on fundraising instead of research, patient care, or finding a buyer with the resources to take it forward. There is no defined endpoint, no moment at which the system declares the bet lost and lets everyone go home.
Think about what that grad student actually needed. The tech transfer office pushed her toward a startup because that was the available mechanism. What would have really helped her is someone with commercial instincts and domain knowledge who could take the invention, do the development work, find a licensing partner or an industry buyer, and shepherd the product to market without building a standalone company around it. It’s easy to imagine that person and yet that’s the one role with no institutional home in the current system. Tom Chapman, co-founder of a medical device commercialization company, describes the situation directly: “The gap isn’t ideas. It’s pathways for business-oriented operators to step in early, explore viability, and lead.”[7] It’s not just that capable operators are scarce or that incentives are misaligned but that we have no defined positions for them to fill.
This is a problem of selection, too. When Norway transferred IP ownership from faculty to universities, startup formation among science and engineering academics fell dramatically.[8] The reform didn’t change who was still trying, but faculty with the most valuable research had the most options and they exercised them.
The inventors I’ve spoken with in preparing this series confirm the picture from the other side. One physician-researcher described what most of his colleagues would actually want as “something like a side hustle” — passive income from an invention without having to become a founder. The financial appeal, he said, is real: most faculty “are taking a pretty substantial pay cut” to stay in academic medicine, and the idea that an invention could generate some additional return is genuinely attractive. What makes a startup unrealistic isn't interest; it’s “bandwidth.” The skill acquisition required, he said, “is rather steep. Networking, fundraising, pitching” are things that, to pursue seriously, would require “a leave of absence or a big percent reduction” from a traditional faculty role. That's not a realistic ask for someone trying to keep a lab running and a chair happy.
Another was more direct. “I am not interested personally in starting a company,” he said. “I don’t have time to be honest with you.” He actively wants his inventions at the bedside — “that’s the reason,” he said, “why I am looking into a solution like this.” But the route through company formation doesn’t fit his career or his life, and there is no other path on offer in which he can move the invention forward without a high-stakes career detour. Forcing him to retrain as a startup CEO is a rookie misallocation.
Every spinout builds from scratch the operational capability to function as an independent company. Sure, the specific questions differ: regulatory strategy for a diagnostic differs from regulatory strategy for a surgical device. But each founder-CEO figures out how to manage a cap table, negotiate a manufacturing contract, engage a regulatory consultant, build a board, while also trying to develop a product. The institutional knowledge accumulated by one spinout doesn’t flow to the next one down the hall. The overhead serves one program and disappears.
Economists have a name for what’s missing here: economies of scope. Economies of scale says you get more efficient as you do more of the same thing. Economies of scope says it’s cheaper to produce two different things through the same platform than to produce each one independently. The savings come not from volume but from variety. Shared infrastructure serving different programs simultaneously costs less than building separate infrastructure for each. This is, I should say, a pretty basic idea.
Procter & Gamble doesn’t build a separate company for every product in its portfolio. Tide, Crest, Gillette, and Pampers share legal, regulatory, manufacturing, and distribution infrastructure; the marginal cost of adding a new product to that platform is a fraction of what it would cost to stand it up independently. But the current startup-per-invention model does exactly the opposite. Every new spinout rebuilds operational capability from scratch, and when the program ends, what was learned evaporates with it.
But universities and accelerators are rewarded for creating new companies, not for efficiently developing realized inventions. Startup numbers feature in rankings, press releases, grant applications, and annual reports. And the incentive to keep doing what’s countable is more powerful than the incentive to explore alternative ways to get gadgets to market.
Universities also know how to get paid from the current model. Decades of deal-making have produced templates for how equity stakes and royalty streams flow back to the institution from a spinout or a license. The legal infrastructure exists, the precedents are clear, the finance office knows where to put the income. A product-not-company model has none of that. No established deal structure, no standard royalty framework, no clear accounting treatment for returns from a product commercialized through another mechanism. For a tech transfer office trying to justify its budget, the known deal is always easier than inventing a new one.
The venture studio, a professional company-creation platform that uses shared legal, regulatory, and operational infrastructure to systematically create startups, is the most direct response to the newco-for-every-invention overhead problem. A growing number of universities have attached these directly to their tech transfer efforts. That means having operators on staff so the inventor doesn’t have to become a CEO, and focusing on active development instead of passive licensing. Venture studio advocates report better financial returns and faster paths to subsequent funding rounds than traditional approaches.[9]
It solves the overhead problem completely, for companies. But each of those still needs to build a team, raise venture capital, and clear the market size hurdle. It’s a more efficient expression of the institutional default, not an alternative to it. The innovations that were never right for the company form don't get rescued by a more efficient company-creation machine. They get processed more quickly to the same outcome.
Anastasia Gamick, of Convergent Research, gets closer to the right diagnosis. There’s a class of companies that should get built but don’t, she argues, sitting in a valley between capital categories. The problems they address are “well-characterized, urgent, and solvable” — she specifically names diagnostics, antibiotics, and others with roots in healthtech — but the companies they require are “Too slow for venture. Too early for PE or growth equity. Too capital-intensive for bootstrapping. Too profitable for charity.” Her answer is more patient capital and better-structured funds. That will help. But it’s still a company-creation answer when the problem runs upstream of capital structure. This series is asking whether companies are the right unit in the first place.[10]
The system is very good at producing companies. What it cannot do is develop a product without building the typical startup around it. Post 3 is about different organizational logics that already exist in corners of the life sciences and elsewhere, which turn out to be much better at getting inventions to patients.
Endnotes
Getting a medical device through clinical validation and early commercialization remains expensive and is getting more so. Development costs are rising, particularly at the clinical validation stage. Pivotal trials for novel devices now routinely run into the tens of millions of dollars, IDE study requirements have grown more demanding, and post-market surveillance obligations have expanded significantly under updated regulatory frameworks on both sides of the Atlantic. Meanwhile, the commercialization gauntlet has lengthened. A 2023 study found that among 64 novel devices and diagnostics that required establishment of new Medicare coverage after FDA authorization, the median time to achieve at least nominal coverage was 5.7 years. That figure applies only to the 44 percent that achieved coverage at all. The majority were still waiting at the time of analysis, meaning the true average is likely considerably longer. (See Sexton ZA et al., "Time From Authorization by the US Food and Drug Administration to Medicare Coverage for Novel Technologies," JAMA Health Forum 4, no. 8 (2023): e232260. doi:10.1001/jamahealthforum.2023.2260). FDA clearance, long a viable exit milestone for acquirers, no longer reliably triggers reimbursement, leaving companies to navigate the full coding, coverage, and payment process on their own. This is one of the structural reasons the drug development analogy, while instructive, doesn’t port directly to healthtech. Post 3 is specific about where it holds and where it breaks down.
SBIR and STTR programs, the federal grants marketed as non-dilutive alternatives to venture capital, sound, on the surface, like an off-ramp from the company form, or at least a small-business alternative to the venture model. In practice they require a legal entity to receive the grant, reward the same milestones venture does, and run through the same tech transfer machinery. They reinforce company formation rather than offering a way around.
“Empowering the Wisconsin Idea: The Future of Entrepreneurship at the University of Wisconsin–Madison.” Report of the ad hoc working group commissioned by Chancellor Jennifer Mnookin, September 2024. The report is notable for what it excludes as much as what it recommends: the working group explicitly scoped its charge to entrepreneurship resulting in company formation, excluding industrial partnerships and licensing to established companies. That framing is the institutional default made visible.
John Allen, “WARF Seeks the UW’s Next Big Thing,” On Wisconsin, Fall 2025. The Walters and Choudhury quotes are drawn from this article. The Keenan quote is also sourced here.
Pathak et al., “High-risk Therapeutic Devices Approved by the US Food and Drug Administration for Use in Children and Adolescents From 2016 to 2021,” JAMA Pediatrics 177, no. 1 (2022). Of 124 high-risk therapeutic devices approved by the FDA during the study period, 80 percent were approved for adults only. Estimates of off-label device use in pediatric patients range from 60 to 75 percent. See also Sutherell et al., “Pediatric interventional cardiology in the United States is dependent on the off-label use of medical devices,” Congenital Heart Disease 5, no. 1 (2010): 2–7, cited in Haller et al., “Experience With Pediatric Medical Device Development,” Frontiers in Pediatrics (2020).
The USIT Guide was developed by TenU, an international collaboration of leading technology transfer offices including MIT, Stanford, Oxford, Cambridge, Imperial College, and others. Its focus on deal structure, equity terms, royalties, and licensing mechanics reflects the consensus view that the problem with university spinouts is how deals are constructed, not whether spinouts are the right vehicle. That’s meaningful reform, but not the reform this series is describing.
Tom Chapman’s LinkedIn post
Hvide, Hans K., and Benjamin F. Jones. “University Innovation and the Professor’s Privilege.” American Economic Review 108, no. 7 (2018): 1860–1898. The pattern is worth sitting with: the reform designed to increase commercialization activity reduced it most sharply among exactly the faculty most likely to produce commercially valuable work.
Matthew Burris, “The University Venture Studio: Unlocking the Innovation Potential of Higher Education,” Venture Studio Perspective (Substack), August 5, 2025, citing Global Startup Studio Network / Morrow & Co, “Disrupting the Venture Landscape.” The data comes from industry sources with an interest in the conclusion and has not been independently validated. The directional claim, that studios outperform traditional approaches, is widely accepted among practitioners even if the specific figures are contested.
Gamick’s piece is worth reading alongside this series. Post 4 returns to this distinction when examining what an alternative infrastructure might actually look like and how it might be capitalized.
Hi David, Love this series, I'm looking forward to the solution you propose because I see so many of these great university ideas that don't fit the funding model but could be great creators of local jobs, local businesses that could drive economic growth for a region but they die because they get stuck without the capabilities or funding to grow to VC requirements. I even tried to champion one company through ... lots of great lessons.