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Category Archives: Spin-Off vs Start-Up

When Co-Founder Asymmetry Works

2 Comments Posted by on October 30, 2012

A university student professor team

I recently listed co-founder asymmetry as one of the key failure conditions for startups. While definitely a major cause of startup collapse, there is one scenario where co-founder asymmetry can work well enough: university spin-outs where you have student-professor partnership.  Students don’t have the expertise and seniority of their professors, but typically have far more hours to put into a venture.  For this kind of relationship to work it is important that the expertise provided by the faculty member truly offsets the higher workload of the student. Just being a professor of high status isn’t enough (even if many professors would like to think so). Execution is king, so the high workload student has an intrinsic advantage in the value creation “competition”.

Professors likely have higher technical skill and prestige than their students but just having those isn’t enough. They need to find a way to inject these values into the start-up. Technology-wise, the professor has to be an innovation engine for the startup to offset the often relatively modest workload impact. Similarly, the prestige of the professor needs to translate into tangible opening of doors and recruitment of advisors. Both of these contributions also need to be maintained over time. Once a startup leaves campus it takes a certain kind of professor to remain deeply involved in an innovation function. Even rarer are professors that are able to continue to have a profound impact on the business side of the startup, through strategic guidance and door-opening.  If this sounds demanding, consider the fact that the student co-founder is probably working 80-100 hours per week for her co-founding stake.

I had the privilege of founding a company with a professor who truly made all these contributions and more. Himself a serial entrepreneur and inventor of over 100 patents, he brought deep expertise to the game and had a profound impact on the company. At the same time, I have seen many student-professor founding teams that don’t balance at all. Often, those are primarily on the institutionally determined hierarchical relationship.  Even if that relationship works during the first few months of the startup, as the startup gears up the professor will ultimately become an over-compensated co-founder which is almost guaranteed to lead to trouble down the road.  University startups in particular need to be prepared in advance to for these shifts in co-founder dynamics. A good choice is to reverse-vest founding shares at specific levels of impact (e.g. full involvement, advisory services, no contribution). Alternatively, the startup can issue fixed founder shares to all but then create a large additional incentive grant to operational co-founders.

Entrepreneurship, Spin-Off vs Start-Up , , , ,

Five Steps for University Inventors

5 Comments Posted by on November 3, 2011

For researchers working in technical fields, inventions are to be expected.  Unfortunately, many university inventors receive little, if any, training on what to do once they have an invention on their hands. Our team has put together a handy FAQ to help orient inventors to the world of university-industry technology transfer.  We’ve also put together a quick overview of what we see as the key steps for inventors to transform their ideas into commercial solutions. 

Step One: Understand the problem that you are solving

Few inventions are truly novel visions of the world. Usually, they are combinations of known ideas that, together, solve a new problem. Understanding the problem is often 90% of the invention battle. Understanding the problem also helps you to articulate market applications for your invention, and gives you a mechanism to compare your solution to alternatives. The latter is particularly important in the commercial context, where it really doesn’t matter *how* a problem is solved. I frequently read new project proposals that proudly promise to speed up a particular technique by 10x – only to overlook the fact that a different type of technique already solved the problem years ago. It doesn’t matter that you have the world’s fastest horse when people drive cars. If you are looking to have your idea commercialized, save yourself some time and make sure that what you are doing really is novel, and makes sense in the technology landscape.

Questions to ask: Has anyone been down this road before?  What challenges have they faced? How does your technology fit in with existing technologies and technology needs? Above all, what information or proofs do you need to be sure that this technology can actually work?

Step Two: Build a relationship with your Technology Transfer Office (TTO)

Like companies, most universities have some claim to intellectual property (IP) created by either faculty or students using their resources.  The mandate of a university TTO is to manage this IP and facilitate the technology transfer process for its inventors.  If you are unsure how to connect with your university’s TTO, the best place to start looking is the office responsible for research services (grants, contracts, etc.). 

I encourage early engagement with your TTO to make sure that you understand your university’s IP policies, and can take full advantage of their services.  An important thing to ask about in the early stages is what your TTOs disclosure policies and processes are.  Typically, disclosure to your TTO should happen prior to public disclosure (publication), as public disclosure will affect your ability to patent an invention. 

Questions to ask: What is my university’s IP Policy? Who, when, and how should I submit a research disclosure? What services does the TTO office offer?

Step Three: Have an IP strategy

The more fully developed your idea is, the easier it will be to sell (Which would you rather invest in, an idea that can theoretically work, or an idea with a working prototype behind it?).  As a university inventor you are typically looking to develop at least some patent protection before progressing to the commercialization stage for your technology. You don’t have to become a patent lawyer, but try to keep issues of IP ownership in the back of your mind, keep in touch with your TTO, and protect your ability to commercialize you resulting invention(s).  As a general rule any disclosure, even a quick story at a café, can severely limit your patenting options, so think through your engagements in advance (Read more about intellectual property and secrecy).

This isn’t a reason not to collaborate with other researchers. In fact, in my experience collaborations add tremendous value to most research initiatives and I would strongly encourage you to seek out partners. You just need to be clear about who will have a stake in the resulting IP and create some basic structure for your relationship to cover the IP aspects.   Similarly, there is no reason not to engage with potential investors and customers early.  They will give you valuable feedback, even if it hurts.  Discussing the problem you are solving without disclosing the specifics of your invention does not require a non-disclosure agreement.  Most investors never reach the depth where they need access to detailed information about your patentable invention (read more about confidentiality and investors, and customer engagement).

Questions to ask: Who are the key collaborators for the project? What legal relationships do they have with your university? Does everybody understand the difference between collaboration on publications (everybody is a co-author) and patents (only those who have made inventive contributions are inventors)?

Step Four: Protect your invention

Your research will become an invention when a definite idea has been conceived and translated into a practical application (a prototype is not required, but helpful).  Once you’ve arrived at the point of having an invention, your best bet is to contact your TTO (if you aren’t already in touch with them). 

University technology transfer typically involves the sale or licensing of patent rights.  A patent protects your ability to control who can and cannot use or profit from your invention.  If you are not interested in personally profiting from your invention, it can still be important to patent. Open disclosure works for some technologies, but is more difficult for concepts that require significant development investment before they can become a useful product. Without a patent, companies are unlikely to make that development investment, because there will generally be no potential for financial return on their investment.  The choice between public disclosure and patented commercialisation is one that should be discussed with your TTO to find the best option for your technology.

Questions to ask: Is open publication or patent protection the best course for your technology?

Step Five: Connect the dots

The idea of sales and marketing may seem foreign to a lot of university inventors, but you’ve likely been doing this all along.  Instead of convincing funders that your research will result in valuable products or outcomes, you need to convince investors that some of the value you intended to create really exists. 

Remember that research you did on the technology landscape? You can use it to identify companies or investors who may be interested in your technology. Ideally, you have even had preliminary discussions with some of them during the course of your project. You also need to evaluate your invention before approaching business partners, considering your prototype’s availability and stability, project documentation, and basic aspects of business and marketing (e.g. market assessments).  There are also a number of commercialization options to explore: seed funds, accelerator programs, Angel and Venture Capital investors.  TandemLaunch, for example, is a seed fund specializing in multi-media technologies that offers financing, industry connections, development staff and infrastructure on an equity basis.

At this point, you are ready to plunge in the next phase of commercialization. Gather a team, build a product (or licensable technology package) and hit the road. That’s a topic for another day.

Spin-Off vs Start-Up, Technology Transfer , , , , , ,

MBA or PhD – Picking the right degree as a University Entrepreneur

13 Comments Posted by on August 1, 2011

A lot of undergraduate students ask me whether they should pursue an MBA or a technical PhD as a foundation of their entrepreneurial career. I have pursued both at some point, and frequently meet (and invest in) entrepreneurs with both degrees. Each has advantages but overall I’d recommend a PhD for most tech entrepreneurs. Here is why:

Education: Both degrees will teach you something. The MBA focuses on case studies and financial concepts (e.g. accounting). A PhD emphasises independent systematic research and domain knowledge (e.g. electronics). The latter is simply more valuable for a tech entrepreneur. Steve Blank is right that most of the great entrepreneurs were Scientists and Engineers, not MBAs.

Moreover, a well-trained technical PhD will have no problem at all picking up financial concepts on the side if needed. The reverse doesn’t work at all. I came into my MBA program (Drexel, Technology Management) with an Science Bachelor (UBC H.B.Sc. Physics). There was *nothing* in any of my courses that wasn’t trivial with good skills in math, excel and Wikipedia. I have since then found this to be true for *all* aspects of “business” other than the informal aspects like Sales which cannot be taught in school anyhow. Building a business is hard, but the fundamentals, literally, aren’t rocket science.

Certification: Much of the value of an MBA is condensed in the piece of paper. Don’t laugh – this is a very real effect in a lot of domains. My wife (B.Eng., MBA) has a very successful corporate management career (Proctor & Gamble, Nortel, McKinsey & Co). Her MBA definitely contributed to that career progression. But the MBA certificate is a lot less relevant for entrepreneurs. It doesn’t matter at all for proven operators (i.e. those with successful exists in the past). Newcomers will be technical co-founders with a PhD or business co-founders with an MBA. A dozen of the latter will fight over one of the former at any networking event. That should be a hint about the relative value.

Relationships: This is where MBAs shine. You will meet lots of other bright people who can become your support network in your future career. A PhD is just too isolationist in nature to be useful in this area. Ironically, the best way to overcome this shortcoming of a PhD program is to become a student entrepreneur. Very few career options require more interaction with diverse stakeholders. So being a good entrepreneur while studying will effectively force you into more relationships than an MBA ever would. That said, in a fair comparison, the MBA will still be much more valuable in this category.

Financial Impact: Unlike a corporate career, the earning power of an entrepreneur is defined entirely by the quality of your work and not your pedigree. Neither degree has an advantage in this regard. But the PhD dominates on the other side of the financial equation: cost. PhD tuition fees are generally much lower than in the MBA program of the same university. In fact, many universities offer scholarships to anybody who makes it into their graduate program. MBA schools are profit businesses so this difference isn’t going away. A PhD can also have a long term impact on the financials of your start-up. It gives you access to several types of academic grants, allows you to co-supervise graduate students (a great way to get smart engineers into your team while they are still at school), and makes it massively either to get technical tax credits for your business.

Alignment with Entrepreneurship: This is the ultimate argument in my mind. You can do your PhD while building a tech start-up. It’s incredibly hard to do the same with an MBA. A technical founder should be able to leverage at least half of her start-up work for the PhD (and vice versa). The MBA program offers no such leverage at all. That’s the difference between success and failure for your start-up.

I am seeing this playing out at TandemLaunch right now (and saw it over and over before). We have a PhD student interested in a technical leadership role for a new portfolio company. This will combine nicely with her PhD work; any paper or patent that she writes at the company will be directly “credited” to her PhD; there are scholarships designed specifically to fund her work on the boundary of academia and entrepreneurship; and the overall alignment will be strong enough that her PhD won’t take any longer despite contributing to a company “on the side” (mine got shorter). Universities *want* her to have impact in the real world.

Her comparison was just accepted into an “elite” business school. No scholarships for him, just 5 times more tuition. No encouragement for his entrepreneurial career either; no way to get any consideration for the fact that he has already build a successful marketing business and might not need “Introduction to Marketing”. He won’t even be able to use his company work as a case study or homework assignment. Zero alignment or leverage. Encouraging real world impact? Not so much…

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Why we do what we do

5 Comments Posted by on June 21, 2011

For the last few months I have shared stories and opinions about university entrepreneurship. I figure it’s time to talk about the “why” rather than the “how”. Specifically, why do we try so hard to bring university technology into the world?

First same background: I spent my career commercialising university innovation as an inventor, entrepreneur and operator across technical, strategy and business functions. I love building technology organisations. That’s the basic motivation. You need to love what you to in order to be good at it.

But why universities? Why not websites or apps – a market that is about as frothy as it has ever been? I am successful serial entrepreneur with dozens of software patents and a PhD in computer science, EE and physics. Until recently I had an office right smack in Silicon Valley. I raised eight rounds of financing from over 50 investors. With that background, why am I not on Sand Hill Road where cheques are currently falling from the sky for teenagers with a landing page? Why focus on universities, an environment shunned by almost all investors today?

Because it’s the right thing to do and nobody else does it!

Technology has to improve lives. I believe that down to my very core. It doesn’t have to solve world hunger but in some form it should make lives easier, better or less environmentally impactful. Some websites and apps do this quite nicely, but creating the 17th Groupon clone to cash in on the bubble seems hardly the right choice. University technology almost always addresses meaningful human issues. It might be misguided in terms of market, implementation and economics but the goal is worthy.

Over 90% of our Nobel Laureates did their work at universities. The vast majority of technical revolutions came out of university labs. University research funding in the US alone accounted for $39B in 2008. That’s 3.5 times more than the entire basic research budget of the US economy at $12B. And almost all of it will have been devoted to solving fundamental life-improving issues.

Yet, less than 5% of all US products and services contain university intellectual property. That’s the other side of the coin. Our universities are exceptional at creating high value knowledge but truly pathetic at getting it into our hands. Unfortunately, technology without users is useless.

This tech transfer inefficiency is the result of cultural, political and economic gaps between university and industry. That leads me to the second half of my statement above: Nobody else is trying to fix this. Venture investors are moving up stream. We have gone from VC partners placing $5M per year on average in 1997 to $35M in 2007. The new Super Angels and Accelerators have re-introduced smaller early stage amounts but virtually all with an exclusive focus on websites. That leaves preciously few resources for university technology transfer.

At TandemLaunch we are committed to bridging this gap. We recognise that traditional investors are moving up stream for sound economic reasons. Giving money to a multi-disciplinary team of business-savvy founders in a frothy market yields better results than giving it to a lone university researcher. So we give more than money. We provide co-founders, team members, facilities, back-office services, industry connections and just about everything else needed to bring the risk profile of a university project in line with that of a traditional start-up (and yes, that includes money as well).

And it seems to be working. My first wave of commercialising inventions from just under a dozen universities yielded a steady 40-60% IRR from 2002 to 2007. Early results from the second wave at TandemLaunch look promising as well. Ultimately time will tell. We might succeed wildly; fine-tune the model; or even tackle the problem with a different approach altogether. But we will keep trying. It’s the right thing to do!

Spin-Off vs Start-Up, Technology Transfer , , , ,

Hustling for Seed Money

1 Comment Posted by on May 25, 2011

I gave a talk on entrepreneurship for students at Polytechnique Montreal today and the topic of seed money came up. Seed money are those few dollars needed to pay a lawyer, establish your initial network, find a business model and do all those other things needed to actually raise an initial investment round (and maybe even splurge on some food while you are doing this). Here are some tips to make it through this stage of the entrepreneurial process:

Grants: Universities are awash with grant program, bursaries, research funding and awards. A decent university entrepreneur ought to cover initial research cost with academic grants (if you can’t convince academic reviewers then the venture financing route will be very painful…). Other programs can cover your basic survival needs (i.e. food). Volume is key for these programs. Try to apply for something every week.

Frugality: It’s amazing how much money and time you can squeeze out of today’s student lifestyle. I meet countless students who bemoan their lack of funds while toting multiple subscription i-somethings in their designer jacket. Get real. If money is a barrier then strip away all the conveniences of our luxury society: no parties (unless you get free food), no booze, nothing that has a subscription (cell phones, TV, Netflix, newspapers, etc.), shared living, no car, nothing but used goods, etc. Doing so can significantly extend the initial runway of your venture and thus its chances of success. And if this sounds like an unpleasant lifestyle, keep in mind that you are doing it to fuel your million dollar opportunity while lots of people on the planet are doing the same just to survive.

Hustle: If all else fails, you simply need to get out there and make some cash. As a foreigner I was cut off from most university grants and my otherwise ultra-frugal lifestyle included $20k/year in incompressible tuition. Cash generation is essential under those conditions but avoid getting stuck in it. Try to find opportunities that can run in parallel to your main venture (and/or education). In my case, I set up a scripted brokerage system for this brand-new “Ebay” thing: My system would purchase auctions with bad headings (e.g. “Collection for Sale”) and then instantly re-list with keywords pulled from the main text (e.g. “17 Beanie Babies”). First seller ships to second buyer and the delta funded my life.

Whatever you do, keep your eyes firmly locked on the primary entrepreneurial goal. Seed money has only one purpose: get you to the point of having partners, business model and funding. Every dollar or minute spent on anything but the pursuit of those goals will be wasted. Sound like too much single-minded hustling? Well, it’s only good training for your future start-up!

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10 Tips for Student Entrepreneurs

5 Comments Posted by on February 15, 2011

Starting your own company out of university is a tricky business. You tend to have other things on your mind – like getting your degree. Here are some practical tips for university students who want to commercialise their technology.

1. Write Everything Down: Most university ventures are formed around intellectual property so you need to make that foundation as strong as possible. It is nearly impossible to retro-actively “clean up” your patents. Keep good lab books, use books with numbered pages and get your supervisor to sign your books every month or so. Keep your emails, time-stamp documents and use good backup policies for digital data. The US still uses a “first to invent” framework for patent priority. While your start-up is unlikely to engage in the legal wrangle known as interference, your future acquirer or licensees will be much more comfortable with a well-developed history (and comfort translates directly into dollars).

2. File Disclosures: Get into the habit of writing a short invention disclosure BEFORE you write your papers. In fact, I recommend that you write the invention disclosure as soon as you have clarity about your research path. They are free and don’t take long. Frequent disclosure writing will give you a good case history for your inventions but, more importantly, it gets you into the habit of thinking about invention as deliberate acts in your university life.

3. Talk to your Tech Transfer Office: Your Tech Transfer Office can help you manoeuvre through a lot of the early challenges. And they (usually) do it for free. Establish a relationship with the relevant tech transfer officer and keep in regular contact. They love hearing from students so don’t feel like you are intruding.

4. Don’t rely on your Tech Transfer Office: While a great sounding board, the Tech Transfer Office isn’t going to build your business for you. They can’t (no money, no staff, no risk capability). Every university has dozens if not hundreds of inventions where the inventors are just waiting for the Tech Transfer Office to “make it happen”. It won’t, until you get out there and build the business.

5. Leverage your Supervisor(s): For probably the last time in your career you are surrounded by world-class scientists who will help you for free. Beyond the obvious assistance with technical issues, you can ask them for advice on your business plan, for funding options, and even for networking suggestions. They will likely know a lot more potential investors, collaborators and business partners than you. Even a professor without any start-up experience will add credibility to your venture, especially for non-venture funding (e.g. commercialisation grants).

6. Network on Campus: Reach out across campus for other professors in related fields, other graduate students and anybody else who might be helpful. Most high value innovation comes from the overlap of problems and solutions form different technical fields. Try to find collaborators in different departments who can help you with specific problems but also broaden the scope of your project. For example, I started in the Physics department but early on set up collaborations with Computer Science for much of the core algorithm development.

7. Network off Campus: It might feel like it, but you really aren’t the first student to launch a company. Lots of people have done it before or contributed to new start-ups via funding, mentorship or executive work. But you will almost never find them on campus. This is one of the inherent problems of university spin-outs: Success implies departure. So you have to get out into the broader community and build relationships. Try to especially find those university entrepreneurs who have come before you but are still accessible enough to be of immediate help to you. Meet-Ups and entrepreneurship events are a good start for this, but ultimately nothing beats asking your Tech Transfer Office for past spin-outs and contacting the corresponding CEOs directly. Play the alumni angle for all it is worth!

8. Get Start-Up Grants: Canada offers some great ways to seed-fund your early commercial activities without giving away equity. Many of these options are tied to universities (e.g. the I2I program provides funding for university-industry pre-commercial collaboration). At BrightSide we raised in the neighbourhood of $6M in equity financing (over many rounds). Effectively matching this was another $5M in various grants and credits – many of which were only made possible through our close collaboration with universities. Not only is this free money, it can greatly reduce the cost of venture money later on.

9. Learn to be a Leader: Creating your own company will challenge your leadership skills. The university environment is a great place to practice those skills in relative safety. Don’t fall into the trap of becoming the lonely grad student at the bottom of the hierarchy. At the very least get some undergraduate students into your project and function as their supervisor. This will require some coordination with your professor but is well worth the effort. Those students are also a great source for initial hires into your start-up once you leave campus.

10. Start Now, Don’t Wait: More important than everything else, start now! Don’t wait until your degree is comfortably completed. Get out there, start a business and push forward. Set up a company, even if it is just a shell early on. Aside from immediate benefits such as tax credits (if you set up your employment with the company properly), this will force you to reach out to the world. Go out, learn about the market and then push your research efforts into the right direction. The faster and earlier you can start this iteration, the more value you will get out of your graduate research when you finally switch it into your start-up.

Entrepreneurship, Spin-Off vs Start-Up, Technology Transfer Offices , , , ,

Founder Control – It’s about positive influence, not control!

Leave a Comment Posted by on December 13, 2010

Paul Graham recently published an essay on founder control of start-ups. How much control over the business should the founders have once the company reaches a certain size? Paul’s answer bucks the “golden rule” of investor control past Series A. But what does control actually mean?

As valuations for early stage ventures shoot into the sky, so does the perceived need for investors to protect their deals. A lot of those new terms focus on asymmetric distributions of wealth (e.g. participating preferred with liquidation preference). But slightly less obvious is an increasing desire to have a higher level of control over the venture. These terms don’t deal with money directly so they are often overlooked by entrepreneurs.

Control terms range from fairly benign additional access to company information to more aggressive requests such as guaranteed seats on the board. Of course the most fundamental level of additional control isn’t even mentioned explicitly in the term sheet: unless your articles of incorporation and drag along clauses are very sophisticated, each class of shares can veto major decision.

So what are those terms really good for? Have investors used them to steer companies towards greatness by making sure that their superior wisdom is heard? Frankly, I don’t think so and the dismal performance of the Venture Capital industry in the last decade seems to support me here. Forced control only addresses those cases where the major stakeholders disagree for bad reasons. And when that happens it is usually already too late for the company anyhow. There are of course many good investors out there who will actually contribute greatly to a company. But I would be surprised if they actually needed control terms to do so.

Picture a board meeting during the early days of my first start-up. The directors in the room with me are:

  • Inventor of the core concept, Provost of the source university and founder of half a dozen spin-offs including running one for a decade
  • Entrepreneur and self-made multi-billionaire in the medical systems space (we were focused on medical displays back then)
  • Computer scientist, Dean of Engineering at Princeton and on the Board of Microsoft today
  • Entrepreneur and builder of organisations with hundreds if not thousands of staff

None of these people had any operational connection to the company (e.g. management roles). Some made big investments while others only invested modest sums to add a “stake in the game” to their board position. Collectively, they represented the interests of the founders, the universities supplying the intellectual property and the investors. Our board evolved over the years, but this is a pretty good indication of the types of people involved. None of these individuals held a majority of the shares, nor did any of them represent a group of shareholders with anywhere near voting control. Founders collectively had majority control of the company until about the fourth or fifth round of financing (some founder, including myself, also invested so the line is a bit blurry).We had a common share cap table so in strict legal terms their “control power” was near zero.

Does anybody really think that this group couldn’t influence the direction of the company because they didn’t have preferred shares or majority control? That the management team wouldn’t have listened extremely carefully if they all agreed? It would have been certifiably insane to ignore their input.

Of course we had the occasional disagreement on strategy at board meetings, the odd crisis and plenty of lively discussion. But at the end of the day these people had tremendous influence on our business and were some of the greatest mentors I have ever had. Some might not even realise it, but all of them had a profound impact on my way of thinking in some way or another.

Empowering investor terms would have added absolutely nothing to the company – at least nothing good. In fact, I would argue that they are only relevant when major stakeholders behave irrationally or have conflicting agendas. The former ought to be something that good bi-directional due diligence between founders and investors can mostly eliminate. If a crazy person slips through the system somehow then you are in a world of pain anyhow, regardless of legal terms. In the latter case of conflicting agendas you will just end up amplifying the conflict. Give people the tools to pursue their own (conflicting) agenda and they will do so. Entrepreneurial ventures are about alignment of interest so any departure from that alignment should come with an extremely good reason, not just because “that’s how it is always done”.

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Inventors don’t pitch (at least the university ones don’t)

2 Comments Posted by on November 22, 2010

Investing in university innovation is very difficult. In fact, I would argue that it is nearly impossible for traditional venture funds. Part of this is the inherent expectation gap between university inventors and venture capitalists. The latter wants focused, multi-disciplinary founders (tech & biz), and universities generally don’t have those. I wrote previously about some strategies used by TandemLaunch to address these difficulties through hands-on assistance but there is a much more basic problem to overcome first.

The traditional venture capital system relies on entrepreneurs and founders to seek out the money. Decades of funding scarcity have conditioned entrepreneurs to craft business proposals, hone their elevator pitch to minimize the time drain on the VC partner, and willingly travel all over the map to get an audience with the investor. Been there, done that.

This limits the business development activities of traditional investors to brand building and similar activities that guide the flow of eager entrepreneurs to their office rather than the one next door. There are exceptions, but the vast majority of investors still operate this way. In nine round of financing I don’t remember of a single investor actually coming to our office or pro-actively engaging in any other way.

With university inventions they will wait forever in their offices…

University inventors don’t pitch, or at least not in the format expected from the traditional investment community. Part of this is a basic cultural conflict. Where VCs are “the man” in the traditional entrepreneurial game, university professors hold that spot at universities: their time is very precious compared to the rest of their environment (i.e. students), people come to them (e.g. office hours, lectures, etc.), and they have a mentorship role with an implied superiority. Moreover, they have access to substantial funding without having to knock on dozens of doors with their hat in hand. They might bemoan the administrative effort required for grant applications but imagine the outcry if NSERC were to require grant applicants to fly to Ottawa, present a 5-30 minute pitch while their audience twiddles with BlackBerries, subject themselves to merciless grilling leading to a 1:50 or so rejection rate, and then be told that they have to give up some control over their project in exchange for the money.

So the first thing you need to do if you are serious about investing in university technology is to go out and find deals. University Tech Transfer Offices can help you because they effectively aggregate some of the inventions for their institution. But at the end of the day you need to spent time on campus finding those brilliant sparks.

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Spin-Off vs Start-Up

1 Comment Posted by on November 10, 2010

In the last few posts I covered the fundamental differences between university spin-offs and traditional start-ups. If you haven’t read the posts as they were made, I recommend that you start reading the sequence from the bottom up. All posts are under the Spin-Off vs Start-Up category and the direct links are as follow (in order of reading, not of posting)

Spin-Offs vs Start-Ups Introduction
Customer Engagement & Metrics
Budgets & Payroll
Founder Focus
Intellectual Property & Secrecy

Spin-Off vs Start-Up

Intellectual Property & Secrecy

4 Comments Posted by on November 4, 2010

For the last few days I have been staring at the title for the last topic in my “Spin-Off vs Start-Up” mini-series. Unlike the topics of focus, budget and customer development, it seemed really hard to write about intellectual property without a long explanation of the patent system. Thankfully, a panel presentation on Intellectual Property at BDO last night reminded me again how fundamental the differences between spin-offs and start-ups are.

Mark McLeod, a seasoned software start-up CFO and fresh partner at RealVentures, presented a practical guide to intellectual property. His message was that patents are useless because start-ups don’t have the financial resources to actually make use of the protection afforded by patents. Moreover, trade secrets also don’t work because investors don’t sign non-disclosure agreements during their due diligence process. Mark’s conclusion is absolutely right for traditional start-up and absolutely wrong for university spin-offs (or comparable technology ventures)!

The two business types use intellectual property very differently. Traditional start-ups use intellectual property to protect their business and Mark’s problem is spot on. It takes millions of dollars to fund effective patent litigation and start-ups don’t have that kind of money. University spin-offs on the other hand don’t just protect their business with patents, patents are their business.

Building a technology manufacturing company has become almost impossible in North America and Europe. Outsourced manufacturing, fabless design and patent licensing have become the dominant business model for Western technology companies. These models have in common that intellectual property is the value carrier between the innovation and productisation groups. As such, intellectual patents are effectively the output of the technology business. Bluntly put, if a technology spin-off doesn’t have patent coverage it doesn’t have a product.

Once patents and other intellectual property make the transition from protecting your product to becoming your product, your view on intellectual property needs to shift accordingly. Patent protection doesn’t become a safety mechanism that can be assessed on the basis of cost and risk, but rather a product investment essential to the success of your business.
The shift is similar for Mark’s secrecy concerns in the investment process. Trade secrets are usually impossible to maintain during investment due diligence in start-ups and spin-offs alike. But the implications of this are radically different. Most start-ups can blissfully ignore the loss of secrecy because the value of their secret idea is marginal anyhow. The real value of conventional start-ups doesn’t come from the initial business idea but rather the follow-on implementation (e.g. leadership, corporate processes, marketing and market adoption, etc.). The potential damage of exposing your secret is therefore marginal and relying on the ethics of you potential investors is probably just fine.

Not so for technology spin-offs! Non-confidential exposure of your idea will destroy or at least substantially limit your ability to obtain patent protection which in turn removes the foundation for your entire venture. That’s true even if your investor is the most ethical person on the planet. It is absolutely essential that you file at least a provisional patent application before you make the rounds in the investor community. Mark is right in that investors hate non-disclosure agreements, so early patent filings are really the only way to protect the future of your business. Fortunately, university spin-offs usually have the financial resources to obtain this protection. Just don’t forget to do it!

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