The Parable of the Venture Capitalist, the Entrepreneur and the Professor

 
This is part of my Series on University Entrepreneurship.

Entrepreneurs and venture capitalists know all too well that launching a successful startup is perhaps one of the most challenging and difficult of all human endeavors. (Please note my stress on the word "successful"). We've also learned that only a small sub-section of the human population are actually suited for this line of work. (They all must share some rare strain of DNA yet to be identified!)

I also like to say that there is actually an even more difficult endeavor. And though I say it in a tongue-and-cheek way- it's actually true. In my opinion, launching a successful university spinoff is much harder. 

The higher degree of difficulty has everything to do with the fact that the entrepreneur/vc/angel has the added hurdle of navigating the oftentimes arcane atmosphere of a given university before he or she can "spin-out" the technology. And depending on the particular university, this process can take anywhere from a couple of months to over a year!

You see, unlike a "normal startup", launching a university spinoff involves such steps as identifying and validating the university intellectual property, cultivating a strong relationship with the professor and the students in his lab, building a relationship with the appropriate people in the university's technology transfer office, and ultimately negotiating a license agreement and stock purchase agreement with them. This will entail agreeing to diligence milestones, sub-licensing fees, minimum annual royalties, reimbursing patent costs incurred by the university, paying royalties back to the university once you have a product and often making the university a minority equity partner in your venture.

It takes a special kind of person to pull all of these moving parts together and it is more than many seasoned entrepreneurs and/or investors can stomach. "It takes forever to get anything done there.... Why should I pay royalties to the university? ... The IP is just sitting there in the lab and I'm the one that's going to create all the value!", are all common refrains I have heard many times.

Mind you- these reactions are totally legitimate and natural without a doubt. For many, it may certainly not be worth the effort. Yet these criticisms always overlook a couple of key points about the nature of university technology that should be mentioned. First, some of the best and most commercializable work going on within the academy is world class and has often been under development for years- in some cases for almost a decade. Second, it is often the case that hundreds of thousands, even millions of research dollars have already gone into the underlying work by the time the entrepreneur/investor shows up for the first time. In many such cases, there is enormous value waiting to be unlocked. This would no doubt have something to do with the stunning historical IPO rate that university spinoffs enjoy.

Probably the most important and overlooked point of all, however, is the fact that the professor has often devoted his or her entire professional life to this work! In many cases these professors are world experts in this particular domain/technology.  This can simply be a priceless asset! Involving the professor as your chief scientific advisor and equity partner can thus bring with it an enormous positive effect.

I've actually posted about bridging this cultural divide between VC, Entrepreneur and Professor before, and have advocated for cultural sensitivity on both sides. Upon reflection I've come to realize that this is really not enough. After four years and with some fifty plus university spinoffs under my belt, I now understand that something much deeper needs to occur, and in this sense, a university spinoff is no different from any other startup. It will always be a story of human relationships and how successful and enduring these relationships will be. So now we arrive at a university spinoff distilled to its very core:

It is the parable of the VC, the Entrepreneur and the Professor...

It is their story to write and it will be a human story about their relationships, their level of trust, their communication and their collegiality and fellowship. 

If it is a story rife with avarice and smallness and conflict- all is lost and we have a failure on our hands. Time, money and resources will have been wasted. Years of people's lives. It is a tragedy.

On the other hand, if it becomes a story of respect, of trust, of friendship and cooperation, we have the necessary foundation upon which a successful university venture can flourish. I have not seen it work any other way.

For Part 25 in in this Series, click here

New York City’s Academic Institutions: A Stunning Engine of Innovation

Many of us who have the distinct pleasure to live and work in New York’s entrepreneurial ecosystem and/or Silicon Alley have no inkling of the staggering role its local academic institutions play in the realm of innovation, licensing, and start-up formation. I can tell you that until approximately six years ago I had no idea of the sheer scale of it all.  It  is certainly true that the majority of this output is in the realm of health sciences/biotech, but much is being done to stimulate entrepreneurship from engineering, computer science departments, the undergraduate ranks and the business schools.  (More on this in subsequent posts).

Just look at these hard numbers:

Annual Research Funds:                                       $1872 million

Annual  Inventions:                                                 643

Annual New Licenses and Options:                      193

Total Active Revenue Generating Agreements: 566

Annual Gross Licensing Revenue:                       $509 million

Annual Number of Start-up Companies:             20

Number of Start-up Companies to Date:             188

Source: New York Academic Consortium (NYAC)

For Part Twenty in in this Series, click here

A Sampling of Commercial Products Using Columbia University Technology

This is part of my Series on University Entrepreneurship.

 Above I’ve posted a graphic showing some of the many products that have been developed in whole or in part from the intellectual property emerging from Columbia University’s many labs. Almost all of these represent IP licensed directly to industry by my colleagues at Tech Ventures, Columbia’s Technology Transfer Office. One can see everything here from life-improving and sustaining drugs to BluRay technology to the technology behind the Iphone’s screens.  With an average of 50 industry licenses, 100 sponsored research agreements, and 12+ spinoffs per year coming from Columbia alone, one can see that university tech transfer across the country has had an enormous benefit to society. The original vision behind the Bayh-Dole Act is definitely working.

For Part Eighteen in this Series, click here

Some Examples of Private Sales and IPO's from Columbia University's Startup Portfolio

This is part of my Series on University Entrepreneurship.

 In the coming weeks I’ll be discussing the popular Entrepreneur Office Hours Program we launched at Columbia University’s Venture Lab some months ago. The program is open to anyone in the Columbia community and is scheduled on a rolling basis by appointment.

In the meantime, for all you fledgling entrepreneurs out there in universities around the country and overseas, I thought I’d begin to post some inspirational information on some of the successful exits Columbia’s portfolio companies have enjoyed over the years. Here are a few examples below. 

Aton Pharma (Acquired by Merck for $150 million; NYSE: MRK)

http://www.merck.com/

The company is developing cancer drug targets based on research from R. Breslow of Chemistry and Sloan Kettering technology. Lead candidate is in Phase I/II clinical trials. The company was acquired by Merck for $150 million on February 2004.

CallStreet (Acquired by FactSet for $7 million)

http://www.callstreet.com/

CallStreet is the leading provider of corrected and formatted transcripts of management conference calls to the investment community. Hundreds of leading firms rely on CallStreet for the most accurate, highest quality content available. The company was acquired by FactSet in May 2004.

Corixa (Acquired by GSK for $300 million)

http://www.gsk.com/

Corixa is a biotechnology company involved in the identification of novel genes. The company develops immunotherapeutics that treat and prevent autoimmune diseases, cancer, and infectious diseases by understanding and directing the immune system. Corixa was acquired by GSK for $300 million on May 2005.

CoTherix/Exhale Therapeutics (Acquired by Actelion Pharmaceuticals; NASDAQ: CTRX)

http://www.cotherix.com

CoTherix is a biopharmaceutical company focused on licensing, developing, and commercializing therapeutic products for the potential treatment of cardiovascular diseases. CoTherix went public at the NASDAQ for $30 million in October 2005 and was purchased for $420 million by Actelion in November, 2006.

Electro-Optical Sciences (NASDAQ: MELA)

http://www.eo-sciences.com

EOS is a medical device company focused on the design and development of a noninvasive, point-of-care instrument to assist in the early diagnosis of melanoma. EOS went public at the NASDAQ for $20 million in October 2005.

Memory Pharmaceuticals (NASDAQ: MEMY)

http://www.memorypharma.com/

Memory Pharmaceuticals, a biopharmaceutical company, is focused on developing innovative drugs for the treatment of debilitating central nervous system disorders, many of which exhibit significant impairment of memory and other cognitive function. The company went public at the NASDAQ for $35 million on April 2004 and was acquired by Roche in 2008.

Mycrocept (Acquired by Healthpoint)

http://www.healthpoint.com/divisions/surgical/

Mycrocept develops, markets, and distributes a variety of innovative pharmaceutical infection control systems, its flagship product being an antibacterial surgical hand scrub to the hospital market. The company was acquired by Healthpoint for an undisclosed amount in October 2005.

Nephros (AMEX: NEP)

http://www.nephros.com/

Nephros was founded in 1997 by Columbia University health professionals, scientists, and engineers to improve the quality of life for the end stage renal disease patient, while addressing the critical needs of the care provider. The company went public at the AMEX for $12.6 million in September 2005.

ParAllele Biosciences (Acquired by Affimetrix; NASDAQ: AFFX; Department-Genomics and Development, Eric Schon)

https://www.affymetrix.com/corporate/parallele.affx

ParAllele Bioscience is now part of Affymetrix. Not only does ParAllele bring innovative assay technologies to the Affymetrix technology portfolio, but working with their talented team of scientists, Affymetrix can continue to build on the underlying molecular inversion probe technology while expanding the applications capability of the GeneChip® platform. The company was acquired by Affymetrix for $120 million in October 2005.

Pharmacopeia Drug Discovery (LGND: NASD)

www.pharmacopeia.com

Pharmacopeia is a biopharmaceutical company developing small-molecule therapeutics to meet the needs of large patient populations suffering from significant unmet medical needs. Pharmacopeia's programs leverage the company's immunobiology expertise and are focused on diseases such as rheumatoid arthritis, multiple sclerosis, and psoriasis. The company was purchased by Ligand Pharmaceuticals in 2008.

Progenics Pharmaceuticals (NASDAQ: PGNX)

http://www.progenics.com/

Progenics is a biopharmaceutical company focusing on the development and commercialization of innovative therapeutic products to treat the unmet medical needs of patients with debilitating conditions and life-threatening diseases. Their principal programs are directed toward symptom management and supportive care, human immunodeficiency virus, or HIV, infection, and cancer. The company has four product candidates in clinical development and several others in preclinical development.

Renovis (NASDAQ: RNVS)

Renovis was a science-driven, biopharmaceutical company that sought to discover, develop, and commercialize therapeutics for major medical needs in the areas of neurological and inflammatory diseases. The company went public at the NASDAQ for $66 million in February 2004.

Sentigen (Acquired by Invitrogen; NASDAQ: IVGN)

http://www.sentigen.com/

Sentigen Biosciences, a wholly owned operating subsidiary of Sentigen Holding, has developed a proprietary drug discovery platform that has the potential to change the paradigm of modern-day pharmaceutical discovery and development. The company was acquired by Invitrogen for $26 million in September 2006.

SGX Pharmaceuticals (NASDAQ: SGXP)

http://www.sgxpharma.com/

SGX Pharmaceuticals is focused on the discovery, development, and commercialization of innovative cancer therapeutics. Its mission is to provide patients with life-changing therapies through the dedication, innovation, and excellence of its employees. The company went public at the NASDAQ for $24 million in February 2006 and was subsequently bought by Ely Lilly & Co. in 2008.

Skinetics (Acquired by Sirna Therapeutics Inc., which was subsequently acquired by Merck; NYSE: MRK)

http://www.sirna.com/

Based on technology from Dr. Angela Christiano's lab in Dermatology, Skinetics focuses on hair loss and growth. The company was acquired by Sirna for $2 million in December 2004, and was subsequently acquired by Merck.

System Management ARTS (Acquired by EMC)

http://www.emc.com/products/software/smarts/smarts_family/index.jsp

System Management ARTS is a leading developer of software to automate management of complex networked systems and identify network problems in real time. The company was acquired by EMC for $260 million in December 2004.

For Part Seventeen in in this Series, click here

Breaking the Century Mark: Celebrating 100 University Spinoffs at Columbia University

This is part of my Series on University Entrepreneurship.

 Upon spinning-off 13 companies from Columbia University in FY 2009, we at the Venture Lab realized that we’d now eclipsed the century mark with over 100 spinoff companies historically. We were also heartened by the fact that over 30 of these had been venture-backed at some point in their life-cycle, over 20 had either been sold or gone public and among them they had created in excess of 1500 jobs and raised over $1 Billion in venture capital.

It’s a testament to all the great work being carried out by the faculty and grad students in the 7,000 plus labs at the University, by the business school’s entrepreneurship center and by the talented entrepreneurs and investors who stepped up to take fledgling ideas and transform them into commercial ventures.

It’s also just a snapshot of the emerging behemoth of university entrepreneurship being loosed upon campuses around the country. 

(Above find just a few of Columbia University’s portfolio companies)

For Part Sixteen in in this Series, click here

Profiles in Entrepreneurial Courage: The Story of Bill Powell

This is part of my Series on Entrepreneurial Culture.

I was really inspired by an article I read in this weekend’s NY Times penned by Larry Dorman.  It’s about a gentleman by the name of Bill Powell, a veteran of WWII, a great-grandson of Alabama slaves, and a man who endured enormous indignities and discrimination but nonetheless persevered in achieving his entrepreneurial dream. His particular ambition was to design, build and run his own golf course.

Upon his return from the war no bank deigned to give him a loan and he was essentially denied the rights accorded to him in the G.I. Bill.  Unbowed, he managed to scrape together some seed money for his venture, borrowing from his own brother and from two black physicians. He then proceeded to handle the rest on his own and slowly and steadily built a golf course from scratch. He finished with the front nine in 1948. After earning the means to buy some more land, he completed the back nine thirty years later- in 1978.

Today his Clearview Golf Club of East Canton, Ohio is on the National Register of Historic Places and Mr. Powell, who is now 92 years old, will shortly be receiving the PGA’s Distinguished Service Award.

I write quite a lot about entrepreneurship and entrepreneurial culture and you can find my various posts on this subject here. These two passages below, however, said it all to me and embody somehow what being an entrepreneur is all about:

“He did much of the heavy work himself, clearing brush, pulling out fence posts and hauling away stones in a wheelbarrow. He seeded the fairways by hand, sometimes helped by Marcella, who died in June 1996 after 56 years of marriage.”

“He and my mother planted most of the trees you see there bordering the first hole,” she [his daughter] said. “When you think about what he was able to accomplish here, with everything that was arrayed against him, it really is quite amazing.”

For Part 6 of this Series, click here.

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• After Battling Racism, Veteran Found Peace on His Golf Course (nytimes.com)

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

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

University Spin-Offs (6): Amazing Historical IPO Rate

This is part of my Series on University Entrepreneurship.

 Soon after getting involved with university spin-offs I came across Scott Shane’s book, Academic Entrepreneurship: University Spinoffs and Wealth Creation.  Scott is a Professor of Entrepreneurship at Case Western  Reserve in Cleveland, OH.  You can find his impressive credentials and scholarship here. He is also one of the few scholars that has closely studied the world of university spin-offs.

One of the outputs of his research was a staggering statistic that has been quoted widely. He found that university spin-offs were 108 times as likely to go public as a company with no ties to a university.

The National Council for Entrepreneurial Tech Transfer has put forth a similarly impressive statistic, indicating that 8% of university spin-offs have actually gone public.

I believe that this disparity has a great deal to do with the fact that the crème-de-la-crème of university start-ups are no doubt the end result of years of research, know-how, incubation, testing, federal funding, development and patenting within the university prior to being spun-out. When such a package is licensed to a talented entrepreneurial team, we have a formidable recipe for success.

For Part Seven in this Series, click here

Raising Capital (2): Five Myths About Raising Capital

This is part of my Series on Venture Capital.

Let’s start by dispelling some myths about raising capital.

Myth #1: That because you've started a company, someone ought to fund it.

Fact: Actually, no one owes you anything. VC’s are in business to make money, not to take a bunch of fliers.

I am consistently amazed at how often I hear people complaining about how “vc’s don’t want to take any risks”.  Of course they don’t ! They want to de-risk deals as much as possible. Venture capitalists are already in the highest risk class of the alternative investments category.  Definitely keep this in mind when you are pitching your company to investors. Remember, fewer than 1% of start-ups actually receive venture funding.

Myth #2: That a first-time entrepreneur can raise Venture Capital money.

Fact:  Of the less than 1% of start-ups that actually receive venture backing each year, you can be assured that with few exceptions the leadership/track records of those companies are well-spoken for in the venture community.

If you are a first-time entrepreneur, 99.9% of the time you will be looking at funding your company with your own money, friends and family money, or, with angel money.

Myth #3: That investors will actually read your business plan

Fact: Investors do not read business plans. If they did, they wouldn’t be able to get any work done.

The way deals get done are through referrals to investors from trusted colleagues. A one-page executive summary is an acceptable way to initially share one’s company profile with an investor.  So never bother sending your 50+ page business plan  to someone unless they’ve asked for it. If you don’t believe me, see these links below from actual studies that have been carried out.

http://bit.ly/O4kO4   http://bit.ly/Cj92J

Myth #4: That a first-timer can raise money without serious proof-of-concept.

Fact: Unless you are Marc Andreesen or an uber-successful, cashed-out entrepreneur who has made his investors a lot of money, you will need to demonstrate a certain amount of traction before professional investors will even consider investing in you.

What I mean by this is as follows:

·        If you are a biotech entrepreneur, you will need to show at least strong results in animal studies.

·        If you are a medical device entrepreneur, you will need to show a working prototype, validation and support from multiple clinicians who would use such a product, as well as a clear path through FDA approval.

·        If you are a tech entrepreneur, you will need to show heavy traffic and consistent month on month growth to your site.

Myth #5: That because you have spoken to a venture capitalist about your company you are “in talks with investors”.

Fact: What this simply means is that you met someone that may or may not be interested in your start-up.

Spare yourself a lot of heart-ache and lower your expectations. If you’ve had a conversation or pitched someone who happens to be an investor, don’t get your hopes up until they are actually ‘in diligence’ and you have a term sheet.