The Evolution of the OTC

1. The Evolution of the OTC University Led Startups The Texas A&M University System

2. Define Your Mission and Measurements • How do you want the university to define your mission? • How do you want to be measured?

3. What Tools Can Be Applied In Your Model? • Portfolio management? • Involvement in developing industrial relationships/research programs? • Involvement in strategic research initiatives? • Economic development mission? • University led startups? • International startup partnerships?

4. TAMUS Approach • Inventor led spin-out vs. university led spin-out • Small equity stake vs large equity stake • No investment vs cash investment • No university business involvement vs university board seats • Part time professor CEO vs full time CEO • Small university upside vs large university upside • Create spinouts because we have to, not because we want to

5. What Are Spin-Out Opportunities? • Goldilocks technologies • Not developed enough to attract licensees • Developed enough to attract angels • Disruptive technologies • Next steps usually involve further research at the university • Early payback to the university • Value add step is relatively inexpensive • Opportunity is fundable

6. Types of Innovation • Sustaining Innovation • Better products • Sold to existing, attractive customers • Incumbents have the advantage • Disruptive Innovation • Simpler, more convenient product • Sells for less money • Goes after new or unattractive customers • New entrants have an advantage

7. Reasons Disruption Works for New Entrant • Target market is unattractive customers or non-consumption • Incumbents likely will not fight for the market share • Allows focus on serving a set of customer’s needs • Low end customers get “good enough” products at low cost • New customers get simplicity and convenience

8. Two types of Disruption • New-market Disruption • New customers enabled by simplicity, portability or product cost • After a foothold is gained, sustaining improvements increase market share • Examples – pocket radio, PC, cellphone • Low-end Disruption • Addresses least profitable, over served existing customers • After a foothold is gained, go up market • Examples – minimills, Wal-Mart, Kia

9. New Market Disruption Litmus Test • Large population, previously not able to purchase due to lack of money, equipment or skill • Previously, customers had to go to an inconvenient centralized location

10. Low-end Disruption Litmus Test • Are there over served customers looking for “good enough” products • Can the business model make profit at lower end discounted prices • Is the innovation disruptive to all significant incumbents

11. What Is Disruptive • Disruption is not just about technology • Business models can be disruptive with no significant technology advances • Very innovative technologies may not be disruptive at all • Disruption is ultimately about how you make money • Who are the customers • What problems are you solving

12. What is Fundable? • Large market • Competitive advantage • Experienced management • Market pull • Identifiable value inflection point • Exit strategy • Profit potential for the investor • Where are your opportunities strong or weak?

13. Strengthening the Weak Points • Large market weakness • Most challenging to overcome • Minimize the investment needed • May think about partners more than pure investors • Competitive advantage weakness • Understand the market pain clearly • Focus on competitive advantage in the next steps of research • Focus on competitive advantage in the business model

14. Strengthen the Weaknesses • Management weakness • Rarely have identified management early • Cast a wide net • Build a bench of possible CEOs • Market pull weakness • Get the voice of the market through market research • Talk to potential customers • Reach out to potential partners

15. Strengthen the Weaknesses • No clear exit strategy • Think about partners rather than pure investors • Look for comparable companies and exits • Understand comparable exit values • Investor profit potential is not clear • Shorten development timeline • Lessen investment needed • Get to market faster

16. NewCo Opportunity Review Process • Opportunities identified by licensing staff • Internal review of opportunities • Internal pitches of the vision of a company • Internal analysis of “why a spin-out”? • Analyze the technology, market, intellectual property, and internal support for a spin-out

17. Potential Blind Spots • Intellectual property • Have an attorney review your intellectual property position • Freedom to operate, not just patentability • Internal support • Make sure the inventor still cares • Does the plan fit with the inventor goals?

18. Start-up Development

19. Phase I – Project Screening Work done by Licensing Staff • Invention Disclosure • Technology Assessment • Identification of Products and Services enabled by the technology • Engagement as Potential Start-Up Project • Determination of inventor interest • Determination of Member interest

20. Phase I – Project Screening Work completed by New Ventures Team • Market Analysis • Size of market(s) • Size of market segment(s) • Competitive Analysis (per market segment) • Competitors (sales of products/services) • Research competitors • Freedom to operate • Integrate information to create Assessment Report on Start-Up Potential • Inventor and Member interest • Market Analysis • Competitive Analysis • Go/No Go Decision

21. Phase II – Company Formation • Business Plan Development • Rationale • Milestones • Funding needed • Licensing Terms • Exit Strategy • Internal Fundraising (cash for equity) • OTC • Members • External parties • Team Formation • Scientific Advisory Board • Research Team (e.g. TAMUS researchers who will develop research proposals and conduct the research) • Management (external)

22. Phase II – Company Formation • Creation of Start-Up Proposal • Business plan • Risk profile • Expected research and equity upside potential • Submission of start-up proposal for approval (must be approved by Chancellor) • Drafting corporate documents • Filing for incorporation of the new company • Founding investment made • CEO contract signed • Execution of license

23. Phase III – Business Plan Execution • Fundraising by management • Assistance from OTC • Short time line with specific goals • $1,000,000 within 12 months • Fundraising success leads to success fee for CEO After funding • R&D as needed • Completion of milestones • Achievement of objectives of exit strategy / termination of license

24. Typical Deal Breakdown • Caveat is that all deals are different • Starting point is a total investment of $75,000 • OTC invests $25,000 • TAMUS member invests $25,000 • Research Valley Angel Fund invests $25,000 • Starting point for equity break down is: • OTC 5% set aside for commercialization services • Inventors 10% set aside to keep their interest • Each of the 3 investors receives 28.33% • CEO is compensated 5-20% equity upon funding

25. Tools Needed to do Spinouts • Ability and resources to develop business plans and market research • Access to angel capital or venture capital • A bench of CEOs • A source of internal capital or affinity funds • Legal advice on freedom to operate and corporate formation