University Spinoffs: Bridging the Cultural Divide

This is part of my Series on University Entrepreneurship.

 A big factor in having success spinning-out university startups is the ability to bridge the cultural gap between academia and the investment community.  I think about this divide a great deal, both as a long-time investor in this space and perhaps even moreso now that I am the director of a prominent university venture lab which spins out 10-12 new companies a year.

I was therefore delighted to recently come across this short post written by Amit Monga, Professor of Finance at the University of Alberta. He shares some excellent insights into the practice of investing in university startups courtesy of his prior experience as a venture capitalist.  Dr. Monga’s central premise is that investors want to see much more than technology when they speak with a university tech transfer office.  They are, after all, in the business of launching new companies, which require quite a bit more to succeed than the initial invention or discovery.

What really caught my eye, however, is his very first point which addresses the cultural divide to which I refer above. He points out that whereas it’s very much the custom in academia to focus on a professor’s achievements in research, (including his or her credentials, awards, honors, the number of grad students in their lab, etc.), the reality is that investors first want to hear a value proposition articulated for a potential business. Monga asserts that investors must actually have the answer to this question within the first five minutes of a pitch.

Having politely sat through quite a number of such lengthy introductions that never quite arrive at describing the “pain in the market”, I must wholeheartedly agree with Dr. Monga. In fact, I would say that this value proposition should be expressed within the first two minutes of a pitch.  If the investor is interested, there will be plenty of time to learn more about the professor’s academic achievements. 

I’ll go a step further on the subject of the cultural divide and say that I’ve seen instances where an investor’s motives are viewed extremely dimly by the academic. This too can be a problem.  Again, in this instance, it’s incumbent on the tech transfer folks to invite only the most reputable people into the university and to help work through any ingrained biases that might exist on either side.  For an eventual start-up to be successful, both parties will have to get along extremely well and will come to rely on each other. Start-ups are the very opposite of “arms-length” transactions.

So whether you’re an angel investor, a VC, an entrepreneur, a grad student, a post-doc or a university professor, it’s always valuable to approach university spin-offs with a great deal of cultural sensitivity and understanding.  I assure you, this sort of awareness alone can make all the difference.

For Part Ten in this Series, click here

Deal Terms for University Spin-Offs

This is part of my Series on University Entrepreneurship.

 Everyone asks about deal terms at some point, so we may as well address it sooner than later. Let’s say you’ve now visited a few tech transfer offices and you are ready to talk to their New Ventures person about spinning out some IP into a start-up.  What kind of deal terms should you be looking for?

The reality is that every deal is different and so it’s difficult to generate a one-size-fits-all response. Also be mindful that university tech transfer offices across the country vary greatly in their approach to start-ups.

Here are some very general guidelines to a fair deal that you may find helpful, however:

• In most cases you should obtain an exclusive license to the technology in the fields in which you intend to operate

• In most cases you should seek to back-end the economics of the deal and stay away from high up-front license fees

• You should be prepared to partner with the university and let it have an equity stake in the company. (We will have a separate series of posts on equity considerations as there are many nuances here).

• You should mutually agree to some diligence milestones that lay-out time-lines for things like first product sale and in some cases capital-raised or revenue targets. These should have built-in flexibility and not be harsh

• Royalties depend a great deal on the industry in which you’ll be operating but should never be a yoke around your neck- allowing you to operate with a comfortable margin

If you’re not getting a deal done that reflects a win-win you should quickly move on, but such negative outcomes are less and less frequent. More and more offices understand the challenges of launching a start-up and, when a talented entrepreneur is at the table, increasingly have the right approach.

For Part Nine in this Series, click here

How America’s New CTO Can Help Launch Game-Changing University Spin-Offs

This is part of my Series on Entrepreneurial Culture.

I was introduced to America’s new CTO, Aneesh Chopra, a few years ago after a rousing speech he gave in Washington DC. Back then he was Virginia’s Secretary of Technology and I clearly remember being impressed by what a great a speaker he was and just how different he was from the typical government policy wonk we’ve all heard talking in broad strokes about the importance of technology, job-creation and the like. As he was finishing his speech people actually got up off their seats and started applauding. He had the whole place buzzing.

This was obviously a guy with great intellect who was talking specifics and who brought a tremendous understanding of the tech landscape to the table. Tim O’Reilly actually wrote the definitive post (http://radar.oreilly.com/2009/04/aneesh-chopra-great-federal-cto.html ) about Chopra back in April and it is well worth reading as it outlines his qualifications, his vision and the many initiatives he brought to fruition in Virginia. This is someone who actually gets things done!

I’m bringing Chopra up because he was recently interviewed by the New York Times http://bit.ly/PIPwJ  and specifically mentioned what he’d like to see change within University Technology Transfer:

“Mr. Chopra noted that among universities, there is a wide range in how effective they are in commercializing the work of their laboratories. He wants to take the practices used by the most commercial of universities and spread them to other research facilities.”  He also stated that “…. rather than purely thinking about basic research…. the government should focus on investing in technologies that can be developed. A first step is to find ways to actually measure how much research is being commercialized.”

These statements were quite stunning to me actually. First of all, a prominent government official was unequivocally stating that some universities are doing a better job commercializing IP than others.  Second, in terms of that age-old policy debate  that pits the funding of pure basic research against the funding of commercializable technologies, Chopra feels that government must also fully embrace the latter. This is refreshingly plain talk from a senior political appointee.  

So how do we make this happen? I believe that the best way for the government to help commercialize the country’s most promising university technologies would be through the creation of a special fast-track program.  This program would selectively provide proof-of-concept funding for breakthrough university technologies suited for a spin-off. Bridging this “gap phase” or “valley of death” as it is called in the industry, is the most formidable challenge we are faced with in the world of university spin-offs.  This money would thus be used to fund the vital proof-of-principle work that really needs to get done before talented investors/entrepreneurs can be incentivized to spin-off companies from the academy. I am specifically talking about funds for beta versions of software, prototypes for medical devices and animal studies for drug discovery projects.

Obviously these emerging spin-offs would have to address the innovation mission of the Administration http://www.whitehouse.gov/issues/technology/ : Modernized infrastructure: broadband, health care information tech, electrical grid & cyber-security.

The other crucial feature of this Program would be to assemble a world-class Selection Board comprised of successful entrepreneurs and/or investors with domain expertise in the relevant disciplines. This Board would not only select the country’s best spin-off opportunities but could also help recruit the right management for them.

Hopefully I'll be able to get this message to Aneesh because I truly believe it could lead to the emergence of game-changing university spin-off companies that could have a role in helping us transform this economy.

Should There be Profit in Knowledge? A Century of American Debate

 

This is part of my Series on University Entrepreneurship.

I recently hosted a talk by Geoff Smith of Ascent Biomedical Ventures entitled: Should There be Profit in Knowledge? Geoff is a fellow Williams College alum and recovering attorney who, like me, got ensconced in the world of launching companies and venture investing in the mid-nineties.  He’s a Managing Partner at Ascent which is one of the few truly seed-stage venture funds in New York operating in the biomedical tech space. He also happens to be a Scholar at Rockefeller University where he founded and teaches the University’s Science & Economics Program. (See here for his bio: http://bit.ly/gbnAC)

One thing I learned about Geoff during his talk is that he’s really a very deep thinker about public policy as it relates to university tech transfer. His lecture covered the evolution of the intense American debate in this field over the last century, from the time of the World Wars up through the passage of the Bayh-Dole Act of 1980, taking us right to the present day. His analysis wove in the scientific norms of Sociologist Robert K. Merton,  the effect of the Ransdell Act of 1930, and the pioneering work of Vannevar Bush (one of the gentlemen pictured above), who drove so much of the ground-breaking government policy in this field. Lastly, I'll say that Geoff’s conclusions were not what one might have expected from a venture capitalist. He has a real reverence for the singular importance of basic research to our society.

I left the talk and ensuing discussion with both a deepened historical perspective and greater appreciation for the transformative effect on our society that a century of American policy evolution in university tech transfer has wrought.  I also emerged perhaps with a keener understanding of its boundaries.  Fascinating stuff and many thanks to Geoff.

For Part Eight in this Series, click here

Raising Capital (1): What’s it Really All About?

This is part of my Series on Venture Capital.

‘Raising Capital’ for one’s start-up is perhaps one of the most talked-about and important aspects of early-stage entrepreneurship there is.  And despite the amount of attention and discussion the topic receives, I also think it is perhaps the most misunderstood of all.

At some point, all start-ups, (whether they be university spin-offs, services/consulting companies and/or technology companies), that aspire to some conventional measure of growth and success will require operating capital of some kind.   As someone who over the past sixteen years has raised millions of dollars in capital both for my own start-ups and for several dozen university spin-offs, I’ve definitely developed a feel for what I believe works and for what doesn’t work.

In this series we explore the challenges, myths and rules of thumb that apply to this process and of course welcome your input.