An Uphill Climb For Inventors

As the Federal Reserve raises interest rates, the number of startups born of academic inventions is likely to shrink. That's the conclusion of a June working paper by Richard Jensen of the University of Notre Dame and Celestine Chukumba of Pennsylvania State University, who looked at inventions and startups from 1993 to 2002.

Typically, universities try to license professors' inventions to existing companies through their technology-transfer offices. But Jensen and Chukumba, using data from the Association of University Technology Managers, estimate that only about 30% of academic inventions are licensed in this fashion.

Inventions that are not licensed remain the property of the university, but it's up to the professors to commercialize them. From 1993 to 2002, professors created 3,047 start-ups from a pool of 75,000 university inventions.

But when interest rates increase, Jensen and Chukumba found, funding falls for these startups. For every percentage point the federal funds rate rises, the number of startups falls by more than 14%.

That's because higher interest rates lift the return that venture capitalists need to make an investment worthwhile. The researchers suspect this has a disproportionately negative effect for academics. Jensen says professors like to announce their inventions as soon as they can to get credit, but the invention isn't always ready for market. There's often little understanding of how the invention can be used in the real world, which raises the risk and dampens its appeal to investors.

By James Mehring

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