The Basics of Technology Funding and Business Deals

1. The Basics of Technology Funding and Business Deals Rosemary French Innovation Strategist IC2 Institute, University of Texas at Austin

2. Biographical Info Rosemary French, BA Innovation Strategist @ IC2 Institute • Expertise in Licensing: • Managed Life Science portfolio of over 100 patents alongside a Senior Licensing Specialist at the UT Austin OTC • Strategic partnership formation for early-stage R&D for over 20 selected high-value technologies • Patent license agreement negotiation: 15 licenses signed • Start-up creation: identified and vetted potential CEOs, negotiated startup licenses; mentored entrepreneurs to create investor-ready pitches

3. Biographical info continued • OTC stats: • UT Austin OTC: $25.6 MM FY 10-11 • 150+ disclosures, 300+ patents processed FY 10-11 • 34 US and 28 Foreign patents issued in FY 10-11 • Involvement in International TTO Initiatives: • Performed on-site training and mentoring at two TTOs in Portugal, conducted research on 12 incubators across Portugal • Worked with over 50 innovators to provide strategic technology development and commercialization mentoring

4. Key Learning Topics 1. Identifying technology funding vehicles 2. Rationale for R&D partnering relationships 3. Basic business deal structures 4. Basic business negotiation techniques

5. Fact On an average, only 5% to 20% of R&D sees the light of day …the rest wither away on the shelf over time. (The Aberdeen Group, Boston)

6. Discussion • What is the goal of technology commercialization? • Why create a TTO?

7. Creating a Tech Commercialization Hub Pieces of the tech commercialization puzzle: University research TTO – Commercialization Strategies University-Industry Partnerships R&D, Start-up Company Incubation Efforts Enhance technology commercialization outcomes, university reputation

8. Developing TTOs to Leverage Research for Public Benefit Lessons Learned: 1. Establish networks of TTOs • Mexican government encourages its public technology institutes to establish TTOs as networks • Example: Portugal TTO Network generated through UTEN • Small TTOs – difficult to gain international recognition • UTEN: established common framework for best practices • TTOs can exchange contacts through the network • International visitors can vet the top technologies from the entire network instead of visiting one institution at a time 2. Define Clear Rules on IP Rights • Encourage researchers to commercialize their ideas

9. Percent of R&D Financed by Private Sector

10. Low Level of Patenting in LAC Public funding of research in LAC has emphasized the generation of conceptual knowledge but has been less efficient at energizing technological innovation such as the production of patents

12. R&D Investment in LAC • Challenge: Private participation is relatively low in LAC (% of R&D financed by private sector) • the majority of countries in LAC invest less in research and development (R&D) than other countries with similar income levels • LAC: Less than 50 percent of R&D investments are financed by private industry, which contrasts with the experience of dynamic global innovators such as China, Korea, and the United States

13. Things to Consider • What are some ways to increase interaction between your university and potential industry partners? • Examples at UT Austin: “Ready to Commercialize” vs. UT system event

14. Sponsored Research Example

15. CardioSpectra, Inc. • Prof. Milner in collaboration with Interventional Cardiologist Marc Feldman, MD at the UT Health Science Center – San Antonio • developed an Optical Coherence Tomography (OCT) diagnostic catheter for detecting vulnerable plaque. • allows doctors to better predict the likelihood a patient will suffer a heart attack based on vulnerable plaque, • provides diagnostic capabilities currently unavailable through existing technologies such as MRI, computed tomography (CT), and ultrasound devices. • Milner and Feldman founded CardioSpectra, Inc., a company through which the OCT system and catheter were marketed. • Sold to Volcano Corp. for $25MM, with additional milestone payments of $38MM

16. 1. Identifying technology funding vehicles • Key Concept: Funding technologies and funding companies are two different things • When you ask for money, you need to know what you are selling • Colombia example

17. How to fund companies: • Friends, Family and Fools • Private Equity – VCs and Angels • Government Funding • National Science Foundation • SBIR (Small Business Innovation Research) • DARPA (Defense Advanced Research Projects Agency)

18. How to fund technologies: • University sponsored research (not typical) • Government grants • Industry sponsored research • Examples of Sponsored Research at UT

19. Funding Technologies • Strategic R&D Alliances between Industry and Research Centers • Mexico Example: the aeronautics alliance between several companies in Queretaro, universities and a public technology institute (established joint R&D lab in aeronautics – the first in Mexico).

20. When can a company become involved with a university technology? Company Sponsored research Funding: Company Formation Initial Technology Prototype Developed By Inventor Start-up Company formed Commercialization Roadmap: STP Commercialization Timeline

21. 2. Rationale for R&D Partnering Relationships • University-industry relations consist of a variety of activities, including: • Sponsored Research • Licensing • Gifts and endowments designated for colleges, schools, departments, or individuals • University-industry exchange programs and student internships. • Continuing education and training of professionals

22. Rationale for R&D Partnering Relationships (continued) • Participation of industry representatives in campus advisory groups • Cooperative research projects • Use of university facilities on a fee-for-service basis • Industrial parks – R&D facilities housed on university property • Faculty consulting

23. Why R&D Partnerships with Industry? • Collaboration between industry and research • Create knowledge with a specific industrial application in mind • R&D partnership is about business deals and funding • Pursue Sponsored Research Opportunities • Enhance commercialization output • Enhance university reputation

24. Activity • Make a list of 4 companies that could be potentially interested in licensing your technology and explain your rationale.

25. Creating a strategic visions for University-Industry Partnerships • Applied research focus • Will your TTO actively pursue SRAs? • Office of Sponsored Projects • What kinds of firms will you target? • Large, leading international firms? • SMEs? – local sectors • Industry/market sector focus?

27. Defining the Scope of Collaborations • Guiding Principle # 1: A successful university-industry collaboration should support the mission of each partner. Any effort in conflict with the mission of either partner will ultimately fail. • University mission: education of students, creation and dissemination of knowledge • Industry mission: create value for investors, provide useful goods and services, expand the state of the art Source: National Council of University Research Administrators and the Industrial Research Institute

28. University Contribution to the Industry Mission • Retention of Trained Work Force: Training of future and current industry workforce (students) through undergraduate and advanced degrees • Publication: Contribution to the general knowledge base for public benefit Advancing the state of the art in a field • Knowledge Transfer: Acting as a filter to distill, from the general public knowledge base, a subset of that knowledge particularly applicable to industry’s product needs • Sponsored Research: Performance of specific research on behalf of industry Source: National Council of University Research Administrators and the Industrial Research Institute

29. University Contribution to the Industry Mission (continued) • Technology Transfer: Licensing inventions and developments (Intellectual Property) for commercial purposes, including revenue generation • Providing access to university-owned equipment, materials, facilities and specialized resources • Fostering economic development that expands markets • Objectively testing, evaluating and reporting on new technology

30. Industry Contribution to the University Mission • Employing students and graduates • Donating (equipment and money – either unrestricted or earmarked e.g., for scholarships, research, or facilities) • Providing either materials or funding for student internships and faculty sabbaticals • Employee time and knowledge donation through involvement in activities such as assisting student projects, guest lectures, service on thesis committees, service on advisory boards. • Material Transfer: Enabling access to industry-owned equipment, materials, facilities and specialized resources Source: National Council of University Research Administrators and the Industrial Research Institute

31. Industry Contribution to the University Mission (continued) • Applied Research: Providing leading-edge research directions • Sponsored Research: Providing financial and/or in-kind support for specific research activities of interest to the industry partner • Paying technology licensing fees and royalties, which support ongoing research and educational programs • Publication: Contributing to general knowledge base (publication) • Technology Transfer: Bringing university contributions to the public in the form of goods and services

32. University Constraints • Must educate students • Must perform research for public benefit • Must operate within changing federal and state rules and regulations, e.g. non-profit tax rules, export regulations and increased regulations on the use of humans, animals and hazardous materials • Must manage potential and actual conflicts of interest and commitments • Must be consistent with all sponsors • Academic year limitations on student and faculty time • Facing federal funding that is limited or nonexistent • Lack of match between industry segmentation of research and university segmentation (shared constraint)

33. Industry Constraints • Research investments must show returns • Can distinguish basic and applied research, but distinction not always recognized by universities • Differences between external and internal research must be recognized and planned for by industry • External research must be part of a competitive business plan and budget • Must establish agreements in a commercially timely manner • Must establish agreements to ensure the ability to commercialize with appropriate returns • Research funded by industry usually requires clear goals, milestones, and specific time frames for completion

34. A Long Term Relationship is the Desired End State • Guiding Principle # 2: Institutional practices and national resources should focus on fostering appropriate long-term partnerships between universities and industry. • university/industry partnership extends human intellectual reach and is key to regional competitiveness, innovation and economic development

35. Establishing Long-Term Relationships with Industry Partners • The value of a long-term relationship can be greater than the sum of the individual transactions, and the relationship between the university and the industry partner may be more important than the results of one isolated project. • individual institutions should examine their policies, training, reward structures and business practices with an eye to whether they promote long-term partnering

36. Establishing a Framework that Encourages Long Term Collaborations • Guiding Principle #3: Universities and industry should focus on the benefits to each party that will result from collaborations by streamlining negotiations to ensure timely conduct of the research and the development of the research findings. • Reducing time spent in negotiating terms

38. Working with Industry: Key Considerations • IP rights – current and future joint IP • Material transfer affect on IP rights • Sending a sample to a company • Receiving equipment/material from a company

39. 3. Basic Business Deal Structures • Challenges of Making a Deal Happen • Licensing vs. Spinout vs. Divestiture • Patent License Agreements: Goals and Prospective Outcomes

40. Fact On an average, only 5% to 20% of R&D sees the light of day …the rest wither away on the shelf over time. (The Aberdeen Group, Boston)

41. A Commercialize Execute B Protect & Enable the Business and/or License C Divest/Donate (25%-35%) (2%-5%) (50%-60%) 2 1 3 Core Related Non Core Unrelated Non Core As a result… 10_ 9_ 8_ 7_ 6_ 5_ 4_ 3_ 2_ 1_ | | | | | | 0% 20% 40% 60% 80% 100% % of Patents/Other IP

42. Discussion • How many technologies does your TTO manage? • How many provisional patents would you file? How many full patents?

43. Challenges: Technology to Market • Disconnect between R&D and potential market needs • Most IP are only part of a solution • IP developed for one use, ends up far more useful in another area • Lack of business sense • Lack of radical entrepreneurs/best practices • The ability to first say “yes” and then figure out “how” • Sense of risk aversion coupled with fear of failure • Failures are a necessary part of success • Lack of qualified risk capital • Big bets, big wins Source: International Business Accelerator, 2010

44. What does this mean for TTOs? • Proactive engagement with 20-30 potential licensees per technology is required to obtain a license • Focus on the technologies with the lowest risk and highest potential reward • Actively engage with industry: what does industry want/need? Does the technology fill that need?

45. Converting IP into Cash Idea! Research & Development Patents Intellectual Property License Business Spinout Divest Equity Upfront Fee/ Royalties Cash Return On Investment “ROI” Return On Investment “ROI” Source: International Business Accelerator, 2010

46. Commercialization Models Source: International Business Accelerator, 2010

47. Divestiture: Valuation • Cost-Based Method • This is the minimum that you should accept • Materials and Supplies • Lab time (use of equipment, electricity, resources) • PI and team hours (weighted) • Discounted Net Present Value • Seven years credible sales/Revenue Projections • Directly attributable to your IP • 20-30% discount rate • Market Value • What the buyer is willing to pay • Underlying purpose of acquiring IP

48. Licensing Valuation • Early stage technology = high risk • Fees and royalty rates are rarely large • Most royalty rates are in the 3-6% range (at best) • Deciding factors: • Type of technology • Development stage • Size of potential market • Profit margin for anticipated product • Amount of perceived risk • Strength of the patents • Projected costs to bring a product to market

49. What is the technology worth? A patentable idea increases in value with every step of the cycle. Source: Licensing Executive Society, Inc. The Basics of Licensing.

50. How do I determine the value of an idea? • Factors that influence royalty rates: • The strength and scope of the protected IP; • The expense necessary for a license to reach full production; • The cost of any additional R&D required; • The exclusivity or non-exclusivity of the licensing agreement; • The geographic scope of the license; • The competitive product, processes, and technology available to the prospective licensee; • The total market and its estimated growth; • Common industry or standard license rates; and, • Whether the license covers all or part of a process or product. Source: Licensing Executive Society, Inc. The Basics of Licensing.