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

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

University Spin-Offs (4): Professor as CEO?

This is part of my Series on University Entrepreneurship.

 A question that comes up often at various conferences is whether the inventor/professor should leave the university to launch the start-up as the CEO. Whereas in extraordinary situations this may be appropriate, for the most part, it is not a good idea for a number of reasons.

Ideally, a university spin-off, (like any other start-up), should be run by an experienced and talented entrepreneur with a deep network of contacts. It’s just a fact that most professors are not in this category. Most investors can regale you with a few unfortunate tales of woe in which they violated this maxim and backed a CEO professor who left the university to spin-off a company. There are less such cautionary tales of late because most experienced investors just won’t do this again. The investment community has learned from its mistakes over the last 10-15 years.

The other reason it’s not such a good idea is that the inventor/professor can be incredibly valuable to the spin-off without leaving the academy. He or she can keep working in the lab, keep teaching students and at the same time serve as a Chief Scientific Advisor and shareholder in the company. Most schools allow a professor to hold equity in a spin-off so long as the spin-off does not fund research in the professor’s academic lab.

The last major reason the professor should stay put is that often, one can achieve a  very effective ‘technology transfer’ simply by hiring a graduating PhD student from the professor’s lab. This is often a terrific way for the start-up to benefit on an ongoing basis from the human/technical expertise/know-how that is so critical to the future development of the ultimate product.  

For Part Five in this Series, click here