Commercializing public research in Russia: Scaling up Spinoff Companies

1. The World Bank Europe and Central Asia Region Finance and Private Sector Development Commercializing public research in Russia:Scaling up Spinoff Companies The World Bank GDLN Video Conference – June 16 2011 Prepared by Paulo Correa and Juan Julio Gutierrez

2. Background and context • Russia’s publicly-funded research has recently given rise to a number of companies (university companies). • Such spin-offs show how Russian innovation policy, if scaled up, could raise the productivity of small- and medium-size companies and contribute to a more diversified economy. • Achieving this result, however, may require several adjustments to Russia’s current innovation policy. • Broader study on export diversification

3. Low productivity of R&D limits Russia the Supply of “Ideas”

4. Declining Scientific Output and Employment in Research Activity Science and engineering journal articles per researcher Total researchers per thousand total employment Source: NSF-Science and Engineering Indicators. UNESCO Source: OECD STI 2010/1

5. Aging Profile of Researchers and Severe Brain reduces the supply of ideas • Reduction of middle-career researchers is a problem because those are more likely to publish • Less than one fourth of PhD STEM graduates had returned to Russia after 5 years of graduation • Another effect. More than 70% of researchers in Russia hold no advanced scientific degrees (PhDs, or Candidates of Science) • One of the causes. Researchers working either in public research institutions, the private sector or higher education institutions could not expect to earn more than US$ 600 monthly

6. Lack of financing specially for early stages of the “valley of death” leaves RVC’s funds without a deal flow to investin The U.S. Case (State of Maryland) The Case of Russia The government established, through the OJSC Russian Venture Company (RVC) , 7 venture foundations with total capitalization of US$740m in 2007 and 2008. However, most Russian VC (80%, including private) continues to be attracted to mature companies operating in mature markets rather than early stage financing of Russian firms (20%). There is a lack of investment projects that fit a VC investment criteria. Early stage funding is provided by FASIE, up to 3 million rubles (approximately US$100K). However, companies assess the funding gap in the range of 10 to 150 million rubles (US$330K to US$ 5 m). Funding needed to create a prototype and business validation. Current early stage financing, through RVC’s Seed fund and business angels does not seem to cover the financial gap . .

7. Though IPR legal framework has improved there is still uncertainty, discouraging both patenting and licensing The process of commercialization IP of Gov. Funded R&D in Russia Part IV of the Civil Code (2008) provides a foundation to treat the IP generated with public funding (63% of total R&D expenditures). IP belongs to the Russian Federation (RF) in defense related research but potentially any discovery registered in any stage of the innovation process funded by the government. Federal Law 217 (2009) deals exclusively with the use of IP generated with public funds to form start-up companies by universities and Russian Academy of Sciences research institutes. However the start-ups do not own the patent that supports the company. The IP is not granted to the companies on an exclusivity basis. There is non-existent skilled independent valuation of high value IP (above 500k rubles or US$ 17k), since the IP could be considered an intangible asset. Also, the absence of a patent court implies that: Lack of jurisprudence makes it difficult to arbitrage disputes It is unresolved how to assign IP to discoveries made before the Civil Code (2008).

8. WB-MoES 2011 Survey of Technology Transfer Offices (TTOs) - Key Results • 81% of the 65 surveyed TTOs initiated operation before 2008 (i.e. before the main new IP laws were enacted) • Only 40% of TTOs had technology transfer as their main activity. Other main activities are coordination of R&D (13%), consulting (11%) and training (11%). • On average, TTOs had 5.6 Full Time Employees (FTE) in 2010. The staff professional background is roughly a third of Businessmen, Faculty University and University Administrators. • There is active participation of inventors in the licensing process, as reported by 75% of the TTOs. • More than half of TTOs pay their personnel using both the university/research institution pay-scale and incentives/bonus/success fees related to performance. • TTOs and/or their parent institution tend to provide accompanying innovation services. Half of TTOs report offering both incubation and prototyping services. • TTOs’ budget comes mainly from the parent institution, on average 40%. Other important budget sources are consulting fees (18%) and fees received as broker for university/research institution contract research (10%). • Patent applications are made mostly in Russia. On average, each TTO applied for 34 local patents. The total ,1715, represent around 5% of total patent applications made in Russia. Patent filing in the EPO and USPTO is almost non existent, less than 1 patent is filed annually. , • Out of the 612 IP based start ups reported by the MoES, 200 were founded using licenses of the TTOs’ parent institution technology.

9. Policy Implications Broaden up the commercialization efforts to include areas with potential for new ideas: • Academy of Science (bulk of the funds) • Defense sector (market friendly IP management) • Agricultural research (renewed emphasis) Strengthen results-based management of public research organizations: • allocation of public funding based on scientific output, included commercialization efforts; • career development based on performance and support for young scientists

10. Policy Implications Improve incentives for public research organizations (PROs)and research to engage in commercialization • Review IP regime for federally funded R&D: transfer full ownership (not only use) to PRO including transferability (with minimum royalty payment to research team) • Include entrepreneurial achievements related to commercialization as part of the criteria for career development (extending sabbatical years) • Finance and manage the TTOs through results based agreements • Provide with funds for early stage development of technologies (e.g. Croatia “Proof of Concept Project”) Enhancing the supply of financing and services to innovative startups (preparing the pipeline for VC investments) • Matching grants at early stage • Differentiated tax breaks for SMEs • Integrating business development services and financing in a single agency

11. Illustration from Croatia Hypersphere – an autonomous, geoestationary airship financed by RAZUM R Jet-062 -- Robot for cleaning of concrete surfaces, financed by SPREAD 1. An integrated approach for SMEs… 2. … with corresponding agency… 3. … and some results. UKFscientist among 30 worldyoung scientists – Genome Technology(Dec. 2008) Pneumatic Grinder (comparison with competition) , financed by RAZUM