News and Events > Creating a Start-up Climate: Ideas for Next-Generation Technology Transfer

Creating a Start-up Climate: Ideas for Next-Generation Technology Transfer

David L. Drake, M.B.A.

Background
The author's institution is the University of Colorado (CU), a three-campus system including a medical school. In 2002, CU reorganized the technology transfer office (TTO) around the goal of becoming a top performer among public universities by 2010.(1) Experienced technology transfer personnel were recruited and new administrative policies created to energize and reward faculty participation. Due to state restrictions on managing private equity at a public university, a new nonprofit corporation, University License Equity Holdings Inc. (ULEHI), was created and tasked with managing private equity received from start-up licenses and fueling the creation of new businesses from the research enterprise.

Introduction
Prior to reorganizing, CU's TTO was ambivalent about start-up licensing. Management faced the classic questions: Have we picked the right technology on which to spend our limited resources? Will we ever have the resource edge required to spin out early-stage technologies into successful ventures? With a few notable exceptions, CU's start-ups were struggling and the TTO was not equipped to assist them. The TTO operation underperformed Association of University Technology Managers (AUTM) peers across all standard measures. In 2001, CU's technology transfer performance ranked among the bottom one-third of AUTM's membership. Despite being ninth among research universities in federal funding, CU was last among its peers in invention disclosure and patenting activity. (2,3)

Beginning in FY01-02, however, under new leadership from senior administration, CU committed not only to technology transfer, but also to reinvigorating a latent entrepreneurial culture. Technology transfer has become an important plank in the administration's larger vision of removing barriers to innovation ("university without walls") and unleashing the creative potential of faculty to solve problems through cross-disciplinary collaboration, both within and outside the university.(4)

The result is that the CU TTO is moving at an accelerated pace toward achieving its ambitious goals. Performance has improved markedly with nearly three times the number of license and option agreements being executed in 2004 as compared to 2001. Perhaps even more significant is the organization's emphasis on start-up companies. (See Table 1.)

Table 1

CU's TTO Performance 2001-2005

Why Start-ups?
Long-term trends in the economy and maturation of the technology transfer enterprise are encouraging a start-up environment at universities. With nearly 25 years of operating experience post Bayh-Dole, universities are exploring new mechanisms for promoting the commercialization of academic research. Universities are becoming more pragmatic in aligning various institutional interests with the need to generate a fair economic return on investment.

Analyzing federal and industry research-and-development (R&D) data, it is clear that in the new knowledge economy, research universities are assuming a larger economic role. Traditionally, this is a role that universities have not been well-prepared to play. As is discussed below, they need to develop strategies and tactics that conform to this new paradigm.

Industry is funding less of the high-risk research that creates new technology platforms and future growth. A widening gap exists between government-sponsored basic research and corporate R&D investment, orphaning, in many cases, the conceptual, pre-proof-of-concept and laboratoryprototype projects that are the key drivers of innovation. Start-ups are often the only vehicle for funding nascent technology to the point where it garners additional outside investment or is attractive to a licensing partner.

In fact, despite its smaller funding share, basic research, by producing radical innovation, generates a disproportionately greater economic impact than incremental (applied research) innovation.(5) The challenge is moving discovery from the lab to the marketplace. If universities are going to supply the raw R in R&D by supplanting corporations in the area of fundamental research, it is simply prudent for institutions to adopt new market driven models that access the skills and experience of those people and organizations that are most qualified to supply the D in R&D. The clearest picture of this emerging trend is in life sciences.

The life-science industry is a large and growing segment of the worldwide economy where university start-ups have become a powerful subset of all life-science start-up companies. In core segments like biotechnology, such companies dominate the growth of the industry.(6) Pharmaceutical giants continue to access new technology by buying small innovative companies, with biotech companies acting almost as intermediaries between the universities and big pharma, the "distributors and marketers of the fruits of academia's invention."(7)

Next-Generation Technology Transfer Office
In this paper, CU presents a blueprint designed to overlay the traditional Bayh-Dole mandate, applying the new economy's imperative to exploit knowledge and networks to do more, faster. It works by leveraging resources that have heretofore not been tapped to full potential. Entrepreneurs and innovative small businesses are the winners in today's economy, making them both good models and good partners for TTOs. Charged with commercializing universities' rich yield of innovations-the new economy's raw material-TTOs can strategically adjust by incorporating into the technology manager's guide a few pages from the entrepreneur's notebook. By looking at invention disclosures through entrepreneurial eyes and gauging innovation by market, not research standards, next generation TTOs can add significant value that is quantifiable and capable of generating superior returns to the institution.

Interviews with TTO licensing managers suggest that the maturing TTO enterprise increasingly employs start-up licensing for both practical and economic reasons. Michael Bray and James Lee examined the economics and attitudes of universities taking a proactive role in start-ups, specifically addressing the question of taking equity in new companies.(8) They found a start-up is often the best opportunity to market a new technology, providing TTOs with greater freedom to do more deals, giving the university something of value (equity) if the technology originally licensed to the start-up is eclipsed by a better idea as the technology evolves, and returning more income to the TTO. Skillful entrepreneurial start-up practices also serve to align TTO and inventor interests, contributing to a speedier and less adversarial licensing process and, ultimately, producing higher average returns than income derived from a traditional license.(9)

As this paper will show, the accelerated model does not represent an either/or deployment of limited resources. Instead, it offers a value-added decision model. An accelerated, streamlined operation is designed to promote the ideal situation in which the TTO employs traditional licensing while maximizing start-up numbers. If half of all start-ups survive, as either moderate revenue producers or the occasional big winner, statistics still demonstrate a convincing case for generating solid returns.(7) This blueprint outlines the activities essential to fostering a positive start-up environment and conveying an inventive concept into the capable hands of those best positioned to develop and market new products.

In CU's experience, encouraging university start-ups makes good commercial and economic sense. Of the 38 companies started at CU since 1995, 34 remain operational. Four achieved initial public offering (IPO) status or were acquired by large corporations in a single year (FY04). One half of the companies in which CU has an equity interest were founded after CU's operations accelerated in 2002, and, thus far, all are still in operation today.

An Entrepreneurial Framework for Assessing Technology
CU has created a continuum of programs to move a technology to the decision point where it is either supported as a start-up, licensed to an existing company, or is routed to an alternative path. The present discussion will focus on the prelaunch stage of new business creation, occurring in four phases:

Phase 1: Accessing and showcasing the raw material

Phase 2: Developing a prototype business concept

Phase 3: Drafting a commercial development plan

Phase 4: Sourcing seed capital

Phase 1: Accessing and Showcasing the Raw Material
The challenge for any TTO is to create a culture where people along the entire value chain, from investigator to end-user, are steeped in commercial drivers and market solutions. Getting investigators to think about research in commercial terms requires new approaches to faculty education, collaboration, and incentives. To accelerate this culture shift, TTO professionals meet with research groups and host opportunities for the academic and business communities to mingle. Additional intensive TTO outreach encourages cross-disciplinary and cross-campus research, mirroring convergence trends in the economy.

In addition to start-up-specific seminars and presentations conducted throughout the year by TTO and ULEHI staff, CU is teaming with the National Collegiate Inventors and Innovators Alliance (NCIIA), a private nonprofit foundation, to host a series of one-day workshops called "Invention to Venture." These programs teach community entrepreneurs and faculty investigators about the university start-up process. Topics cover a spectrum from assessing basic research for commercial potential to working with the TTO to start a company.

To encourage collaboration and leverage resources, CU's TTO has built two new programs. The Colorado Technology Commercialization Partnership (CTCP) was launched in 2003, funded by the Colorado Institute of Technology (a quasi state institution supported by leading technology firms) and the Deming Center for Entrepreneurship at the CU Leeds School of Business. The CTCP pools the resources of TTO, numerous volunteers, and advocates from the Colorado business community. Teams of students, businesspeople, and TTO professionals meet with faculty inventors to explore labs and departments for new ideas, proactively generate invention disclosures, and pursue the most promising cases for commercial licensing and start-ups. The CTCP is a nine-week summer internship program. Students wishing to continue working with the TTO are hired parttime as market researchers throughout the academic calendar.

In biotech, TTO recruits students enrolled in an innovative M.D./M.B.A. curriculum who bring scientific and market-related skills to bear on early-stage therapeutic and diagnostic concepts. Another student opportunity and leveraging venture is a full-semester business-plan-preparation course co-taught by the director of ULEHI. Both programs merge the university's education and career-preparation missions with industry's interest in identifying valuable early-stage technologies and recruiting highly qualified new graduates. For the TTO, the benefit is a critical leveraging of human capital, estimated at 10 to 1.

Combined with a proof-of-concept program that is described later in this paper, TTO outreach to faculty and entrepreneurs generates a large number of concept companies for showcasing. Like most states, Colorado is home to an organized venture capital association, angel networks, industry trade groups, and so on, all of whom are excellent partners for getting the start-up message to market. For example, TTO concept companies are showcased annually in a regional meeting of leading life-science firms sponsored by Colorado's economic development agency.

Phase 2: Developing a Prototype Business Concept
CU executes start-up licenses that pass rigorous scrutiny by external advisers and consultants, a standard essential to maintaining credibility with venture capitalists and experienced entrepreneurs. The prescribed model requires a large volume of candidate technologies to identify a number of technologies with potential for licensing and start-up formation. The value added to the TTO by these leveraging programs cannot be overstated, nor can the imperative to produce quality results.
The teams of business students, industry-specific advisers, serial entrepreneurs, potential CEOs, business professors, service providers, and others perform work similar to that of early hires in a new company. Technological risk is assessed through regular meetings among the primary investigator, students in the lab, and TTO teams. Market and competitive analyses are performed. Potential customers are interviewed, and market studies and focus groups determine likelihood and timing of market entry. Financial pro formas are established, and early use of revenue estimates are created and presented to venture capitalists. Even at the formative stages of planning, potential entrepreneurs from the community, under nondisclosure agreements, familiarize themselves with work-in-progress business plans and add strategic direction. And, TTO helps coalesce cross-functional volunteers into interim business advisory boards to the concept company.

Example
A CU company developing new technology for water purification exemplifies this process. TTO staff introduced the inventor and the idea to a student team that researched the opportunity in the entrepreneurship track at CU's Leeds School of Business and produced a business plan. The team and plan won the school's prestigious business-plan competition and, subsequently, was invited to present at national competitions and venture capital associations. Valuable market feedback has been incorporated into multiple revisions of the plan. TTO staff helped to recruit management and other business advisers, and the company received a $100,000 proof-of-concept investment from ULEHI to further technological development. One of the original team members is now vice president for business development for the company, and the principal investigator, while maintaining his faculty appointment, is the chief scientific officer.

To ensure product consistency and quality, the TTO is producing a handbook for interns and volunteers that is both a how-to manual and a template that covers the essential elements needed to introduce a concept to potential investors.

Phase 3: Drafting a Commercial Development Plan
The commercial development phase picks up the preliminary development plan and moves it into an arena where key decisions will impact the invention's technical and market-oriented development, advancing it to the startup licensing decision point.

The faculty-inventor's role is defined here. To create and sustain an entrepreneurial culture within a university, faculty must be allowed to participate fully in a new company's development, especially at the formative stages, which may last up to three years after the start-up is formed. This is where a commitment to education and policy improvements that foster an entrepreneurial culture shows positive results; such efforts lay the groundwork for managing the myriad challenges inherent in the faculty-entrepreneur's dual roles.

CU's accelerated outreach activities include workshops, presentations, newsletters, and bulletins focused on business development and tailored to individual department and research groups. By following accepted professional and federal guidelines with respect to conflicts of interest and commitment, the CU model recognizes and manages classic contradictions and divergent interests in its mission to bridge academic and business cultures. Educational outreach consistently disseminates standards and best practices that aim to reconcile for-profit and academic values.

In conjunction with defining the inventor's role, key requirements in this phase are to engage entrepreneurial management and to validate the invention as start-up material. If the invention and associated business concept emerge viable from Phase 2, the TTO professional must judge if, indeed, the technology can be packaged to survive real-life tests. Will it engage the interest of professional business management? Is it a good fit with existing market trends? Is the value proposition consistent with sound economic principles?

One such test is embodied in an option or standstill agreement, which provides the concept company with the right to negotiate a license to technology for a certain period of time and after certain benchmarks of progress have been established. No financial upfront fee is required because there is usually no money in the deal, and, if funds are available, it is in the best interest of the TTO and the concept company to spend the money on developing the technology. Six of CU's nine startups formed in 2004 started with options or standstill agreements before exclusively licensing the intellectual property.

The TTO often assists the start-up to recruit a business advisory board. The leveraging principle applies: Nearly every university community is home to serial or retired entrepreneurs willing to provide pro bono strategic advice to start-ups. The key is to recruit and organize these individuals effectively during the early development of the business concept. Ideally, once people, business plan, intellectual property, and a sound strategy for raising capital are in place, the TTO is positioned to enter into license negotiations. The start-up process is inherently muddy. To be successful, TTOs must have a high tolerance for ambiguity combined with a cultural willingness to trust but verify. Every CU TTO license contains fair but stringent milestones and performance clauses. If a start-up misses the mark, all parties are required to meet and discuss next steps. If it then becomes clear the startup cannot commercialize the technology, even with revised benchmarks, the TTO retains the right to pull back the technology and/or nonexclusively license to the start-up and explore alternative licensing arrangements.

Phase 4: Sourcing Capital
Once a commercial development plan is in place, management has been recruited, founders' roles have been established and communicated, and the market opportunity is well-understood, the remaining step is to source the financing needed to prove the concept and launch the business.

Access to capital is another real-life test of the business concept, as well as an opportunity for the TTO to reinforce the entrepreneurial culture and support its chosen licensing vehicle. University start-ups exist in a developmental no-man's land at the gap between basic and applied research where few dollars are available for the high-risk prototype studies needed to prove concept. Steven C. Price and Philip Z. Sobocinski's study on gap funding provides an excellent overview of the need and identifies specific funds within universities established to fill the gap.(10)

Money for start-ups is the green enzyme of progress. Without seed and early-stage funding, businesses cannot launch, let alone survive. Raising seed money is hard, but certain activities can be done that involve 99 percent sweat equity on the part of the TTO. The TTO is well-positioned to aid fund raising by organizing venture forums, introducing angels and venture capitalists to deals in their formative stages, publicizing and disseminating nonconfidential executive summaries, soliciting venture investors as early advisers, attending venture association events and conferences, and publicizing success stories in the media. Importantly, TTO staff must understand the venture process and deal appropriately with the financial community.

TTO staff members are responsible for knowing which firms invest in what technologies and at what stages. They must develop relationships with firms interested in university investing and help to educate those firms on the nuances of technology licensing. They should develop close relationships with specific individuals and develop an understanding of the types of investments that most interest them. Further, TTO staff should understand venture portfolios and what does/does not fit within the firm's framework and fund cycle. Finally, financial investors in university technologies should be recognized publicly for investing in university start-ups.

In addition to the standard private routes (venture capital) and public funding (Small Business Innovation Research/Small Business Technology Transfer [SBIR/STTR programs]), TTOs need to innovate and create their own sources of seed capital. Recently, CU TTO launched a proof-of-concept (POC) program that provides small amounts of seed funding to qualified start-ups.

Unlike more traditional sources such as alumni awards, state grants, or direct university allocations, CU's POC program derives from a recent successful patent litigation. The university holds the principal amount of the award and directs the earned interest into a TTO quasi endowment managed by the CU treasurer. Start-up companies compete for proof-of-concept investments that TTO awards from this quasi endowment fund. The university's start-up organization, ULEHI, runs the program and utilizes volunteers from the venture community to review applications and help choose investments. Investments are made in the form of convertible loans; ULEHI does not negotiate valuation. Loans are subject to mandatory conversion, at ULEHI's discretion, if and when a professional third-party round of financing occurs.

The CU Experience
Start-ups face numerous tests during CU's phased decision process. Those that successfully pass through each gate are virtually certain to draw investment. First, the start-up must have professional entrepreneurial management. Second, the business concept and commercial development phases must prove that the technology meets the requisite standards for a startup company. Third, the proposition must be a good fit with market trends, consistent with sound economic principles. Finally, the business must be capable of raising capital. Not adhering to this process increases the risk the start-up will fail or under-perform.

Where hasn't this process worked? Despite the efforts promoted in this paper, there are no guarantees in the start-up business. The potential for outright failure, backsliding, inability to time the market correctly, paucity of start-up capital, ill-conceived market entry, unknown competitive alternatives, and so on are as true in university start-ups as they are within the general marketplace. These factors serve to elucidate further the importance of a structural method to increase the number, and quality, of start-up possibilities and bring market expertise to bear on raw technology early in the process. From this relative point of strength, informed TTOs can help to guide technologies into the right vehicle to fulfill their commercial potential.

Conclusion
Not all universities are lucky enough to be located in areas known for their entrepreneurship. Statistics such as science and technology indicators are a useful measurement for entrepreneurial churn and likelihood of new venture success in a particular region.(11) Importantly, location is not a prerequisite for a university TTO to pursue the activities mentioned in this report, although, depending on a university's size, financial strength, and proximity to centers of commercial and entrepreneurial activity, technology transfer operations will have varying degrees of access to the kinds of resources that CU leverages. Regardless of these factors, every proactive technology transfer operation can ally itself with a business school, incubator, or entrepreneurial program; and it can propose support from local, state, or regional economic development programs. Through such creative collaborations and alliances, the TTO's contribution and influence will increase as its performance improves, helping to drive aggregate growth. Most universities with an interest in fostering a climate of entrepreneurship among faculty and their local business community can employ each of the phases presented in this blueprint. Through effective implementation of entrepreneurial policies and practices, universities can truly fulfill their potential as the next great source of innovation in this century.

Acknowledgement: The author expresses his appreciation to Jack Burns, University of Colorado vice president for academic affairs and research, for his systemwide support of pro-business policies and David Allen, associate vice president for technology transfer, and their staff for creating and implementing many of the programs outlined in this article. The author would like to give special thanks to Kathe Zaslow, director of operations at the University of Colorado TTO, for generously donating her time and expertise to compiling many of the references and statistics used in this report and editing the manuscript. The author also owes thanks to the board of directors of University License Equity Holdings Inc. for volunteering time, energy, and expertise to promote start-ups at CU.

Notes
1. University of Colorado Report, 2002 Strategic Plan: Building a World- Class Technology Transfer Operation, http://www.cu.edu/techtransfer/ publications/plan2002/.

2. National Science Foundation, Division of Science Resources Statistics, Academic Research and Development Expenditures: Fiscal Year 2001, NSF 03-316, Project Officer, M. Marge Machen (Arlington, VA, 2003).

3. Association of University Technology Managers, AUTM Licensing Survey, FY2001: Survey Summary (Northbrook, IL: Association of University Technology Managers, 2002).

4. University of Colorado, University of Colorado Vision 2010 (Boulder: University of Colorado, 2001), http://www.cusys.edu/vision2010/.

5. Gregory Tassey, R&D and Long-Term Competitiveness: Manufacturing's Central Role in a Knowledge-Based Economy, NIST Planning Report 02-2 (Gaithersburg, MD: National Institute of Standards and Technology, 2002).

6. Scott Shane, Academic Entrepreneurship: University Spinoffs and Wealth Creation (Cheltenham, England: Aldershot Edward Elgar Publishing, 2004).

7. The Economist, "Don't Laugh at Gilded Butterflies," April 22, 2004, http://www.economist.com/printedition/PrinterFriendly.cfm?Story_ID=2610485. The article quotes Toby Stuart, a professor at Columbia Business School, New York.

8. Michael Bray and James Lee, "University Revenues from Technology Transfer: Licensing Fees vs. Equity Positions," Journal of Business Venturing 15 (2000): 385-392.

9. Maryann Feldman, Irwin Feller, Janet Bercovitz, and Richard Burton, "Equity and the Technology Transfer Strategies of American Research Universities," Management Science 48 (2002): 105-121.

10. Steven C. Price and Philip Z. Sobocinski, "Gap Funding in the United States and Canada," Industry and Higher Education 16 (2002): 387-392(6).

11. U. S. Department of Commerce Technology Administration, Office of Technology Policy, Dynamics of Technology-based Economic Development, State Science and Technology Indicators, Fourth Edition, http://www.technology.gov/p_Reports.htm.

David L. Drake, M.B.A., is executive director of University License Equity Holdings Inc. in Boulder, Colorado. This article was originally written for the Journal of the Association of University Technology ManagersT and appears in the Fall 2004 issue, Volume XVI Number 2, pages 33-45. Copies of the complete AUTM Journal® are available for purchase. Visit www.autm.net or contact AUTM headquarters at autm@autm.net or 847/559-0846 for details.

©2005, David L. Drake, M.B.A.

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