Start-Up Companies, the University

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  • 1. From Innovation to Industry Hosted by: School of Biological Sciences Office of Technology Alliances GSM Center for Entrepreneurship & Innovation June 11, 2004
  • 2. Thank You to Our Sponsors:
  • 3. All Conference Attendees Will Receive this CD: Introduction Program Speakers Presentations Sponsors Resources for Start-Ups Hosted by : School of Biological Sciences Office of Technology Alliances Center for Entrepreneurship & Innovation Reports : Start-Up Companies Founded on UCI Technologies Faculty/Industry Partnerships Faculty Handbook UCI Technologies Available for Licensing
  • 5. OPTIMISM FOR START-UPS #1 Venture investing is coming back
  • 6. Biotechnology and Medical Device Venture Investing in 2003 * Data from the PricewaterhouseCoopers - Thomson Venture Economics – National Venture Capital Association Moneytree Study
  • 7. OPTIMISM FOR START-UPS #2 Big Pharmas must fill their pipelines
  • 8. Top Ten Selling Drugs in 2003
    • Total 2003 Sales - $ 40 Bn
    • Percent of Sales off Patent by 2010 – 82%
    2008 $ 2.6 Bn Wyeth Effexor 10 2007 $ 2.7 Bn Merck Fosamax 9 2006 $ 2.8 Bn BMS Pravachol 8 2013 $ 2.9 Bn J&J Procrit 7 2006 $ 3.0 Bn Pfizer Zoloft 6 2006 $ 3.5 Bn Glaxo Paxil 5 2011 $ 4.2 Bn Eli Lilly Zyprexa 4 2007 $ 4.2 Bn Pfizer Norvasc 3 2006 $ 4.9 Bn Merck Zocor 2 2010 $ 9.2 Bn Pfizer Lipitor 1 Year off Patent 2003 Sales Company Drug
  • 9. Substantial Revenues at Risk Due to Patent Expiry 2009-2013 2003-2008 % % % % % %
  • 10. OPTIMISM FOR START-UPS #3 The rewards for success can be great
  • 11. Eyetech Pharmaceuticals: A Successful Deal with Pfizer
    • Since its inception in 2000, Eyetech Pharmaceuticals has:
      • Raised $150M of private equity
      • Completed IPO (ticker: EYET) raising $146M at $21/share
      • Employed over 150 people in 3 states (Boston home office)
      • Eyetech recently negotiated a landmark deal with Pfizer:
      • Develop & commercialize Macugen™ in all ophthalmic indications, including Age-elated Macular Degeneration and Diabetic Macular Edema. (Phase 3)
      • Entails US co-promotion, profit-sharing, R&D funding, ex-US royalties and equity investments of $770M
  • 12. OPTIMISM FOR START-UPS #4 UCI has the experience and the capability to help start companies
  • 13.  
  • 14. UCI Start-Up Company Activity
    • 30 companies created, 23 still active
    • 242 jobs created, 202 of which are in Orange County and 240 are in California.
    • License/option agreements with active start-ups transferred rights to:
      • 40 issued patents
      • 84 patent applications
      • 10 copyrighted works
    • UCI Start-Ups have contributed over $30M to UCI :
      • $21M in research funding
      • $2.8M in patent costs to protect UC-owned inventions
      • $5.2M in royalties and fees
  • 15. New Drug Discovery Center Under Early-Stage Development Mission is two-fold: 1. To promote transdisciplinary efforts in basic drug discovery research 2. To facilitate the validation, optimization and commercialization of potential new drugs discovered through these efforts Champion: Dr. Daniele Piomelli Department of Pharmacology
  • 16. Start-Up Companies, the University & the Faculty Entrepreneur
    • An Overview Larry Cohn, Partner Stradling Yocca Carlson & Rauth
    • The University Perspective David Schetter, Assistant Vice Chancellor Research & Technology Alliances, UC Irvine
    • The Faculty Entrepreneur Perspective Gary Lynch, Ph.D., Professor Psychiatry & Human Behavior, College of Medicine, UC Irvine
  • 17. OVERVIEW
    • What Technology is Suitable for a Start-Up?
    • Alternatives to Forming a Start-Up
    • Faculty Considerations: Why Commercialize? What Impacts?
    • Academics vs Biotech
    • Disclosing and Assigning Inventions
    • Starting and Developing the Company
    • Financing the Start-up
    • Operating the Start-up
    • Exits
  • 18. What Technology is Suitable for a Start-Up?
    • A great invention does not necessarily make a successful business
    • Two classes of inventions
      • Incremental improvements
      • Breakthrough or a platform technology
    • Start-ups with multiple products/services are more likely to be successful
  • 19. Alternatives to Forming a Start-Up
    • Publish and put in the public domain
    • Out-license through the Office of Technology Alliances
    • UCI releases invention – individual out-licenses to an entity
  • 20. Faculty Considerations
    • Why commercialize your invention?
      • Professional recognition
      • Doing good for mankind
      • Part of the University’s mission as a public research institution
      • Financial rewards New area of intellectual pursuit – business
  • 21. Faculty Considerations: (continued)
    • Impacts on the individual inventors and founders
      • Do you want to be a professor or an entrepreneur?
      • Inventor’s role in company
        • Technology founder - equity interest
        • Consultant
        • Scientific Advisory Board member
        • Management – full-time or part-time
        • Board of Directors – member or Chair
  • 22. Faculty Considerations: (continued)
    • Impacts on the individual inventors and founders (continued)
      • Significant drain on time for:
        • Research and teaching
        • Family and friends
        • University and department administration
      • Interferes with academic relationships
      • Financial interest in the start-up creates conflicts of interest and conflicts of commitment
  • 23. Cost
    • Time and lots of it companies eat up as much time as is available….
    • ATAD Airline travel addiction disorder (ATAD) is the number one psychiatric disorder in contemporary US corporations. Incidence in white, male executives over age 45 is nearly 100%. Victims are characterized by an irresistible urge to take a flight when they have been home for more than 2 weeks. This leads to a constant nagging to go on useless trips. This will not be a problem for any of the growing number of academics who already suffer from ATAD. But if this does not include you, then remember that ATAD, at best a nuisance, is contagious and at present untreatable.
  • 24. Academics v Biotech
    • No evident reason that research productivity should suffer.
      • more outside activity but gain in collaboration and point of view
      • new standards for evaluating work can be healthy
      • large increase in the amount of money being spent on the project generally results in much greater progress than otherwise would be possible.
  • 25. Academics v Biotech
    • The major balance problem arises from having two lifestyles.
      • Many, perhaps most, founders coming from universities find themselves slowly distancing themselves from their old lives or slowly returning to it.
  • 26. Disclosing and Assigning Inventions
    • Signing Patent Acknowledgement is a condition of UC employment
    • Disclosure of all patentable inventions is required as is assignment of those within scope of employment or when UCI resources are involved
    • Administered at UCI by the Office of Technology Alliances
    • University may release rights back to the inventor (or to federal government if federally funded) if not commercializable
  • 27. Disclosing and Assigning Inventions (Continued)
    • University will seek to commercialize inventions while protecting the University’s rights
    • Competing interests: Fairness of Opportunity vs. Economic Development.
    • UCI announces opportunity via publications and Web-avoid “Pipelining”
    • Inventor(s) share in proceeds of University out-licensing
  • 28. Starting and Developing the Company
  • 29. Shaping and Selling the Idea “…. Truth! What is truth ? ….” P. Pilate ( 0030 AD)
    • Change your mindset
    • You have been trained to present things in NIH language
    • The NIH et al process is weird; e.g., no performance review; degree of expected exaggeration
    • To the world at large, your current way of shaping and presenting ideas is bound to seem odd.
    • The above probably has more to do with the failure of academic scientists to communicate with entrepreneurs than anything to do with the complexity of the material being presented.
  • 30. Who is to be involved?
    • Academic colleagues do not always make the best business partners
    • Business consultants – the world is full of new business “consultants” who would like to assist you. Proceed with caution.
    • Professional advisors – attorneys, accountants, FDA regulatory professionals
  • 31. The Leonardo Principle
    • Common Business solution: hire a few da Vinci’s
    • Tech solution: buy a statue. there is only one da Vinci….don’t waste your money on cheap imitations
    • On the other hand, the blimp sized Ego commonly found in academic science can throw a start-up completely out of balance.
    Many tech problems do not have a business solution e.g., Need a Mona Lisa for the new palazzo
  • 32. The Business Plan
    • Technology hurdles
    • Regulatory hurdles
    • Competitive landscape
    • Market realities – cost of products/service
  • 33. Securing Intellectual Property Rights
    • In life sciences, patent rights are essential.
    • Inventions disclosed to and patents prosecuted by the University.
    • Start-up needs to secure rights from the University, through OTA
  • 34.
    • Stage 1: Option to acquire license – useful to “lock-up” rights while organizing and seeking financing
      • Term of option approximately one year
      • Low up-front cost
      • Must cover patent prosecution costs during option period
    Acquiring property rights – A two-stage process…
  • 35.
    • Stage 2: After organizing and concurrently with seeking initial financing, finalize license from the university
      • The entire business may live or die with this license agreement.
      • Inventor/entrepreneur’s conflict of interest in the license relationship
      • University will require diligent commercialization
      • Payments to the University.
        • Cash – patent expenses, upfront fees, milestones, royalties
        • Equity (stock) in start-up company
        • University sharing with inventor – cash/stock.
    Acquiring property rights – A two-stage process…
  • 36. The Start-up Landscape Early Stage Company License Rights Up Fronts, Milestones, Royalties Invention Information Financial Split Consulting Consulting Fees Academic Inventor Technology Transfer Office Family Colleagues Department Public/Media University Admin. Competitors, Investors Corporate Partners
  • 37. The Inherent Tensions
    • Create and propagate knowledge for the public good
    • Narrow Scope of License
    • Revenue
    • Academic Freedom
    • Control of Intellectual Property
    • Diligent Development
    • START-UP
    • Financial return to investors, founders and employees using knowledge
    • License
    • Expense
    • Confidentiality
    • Control of Intellectual Property
    • Commercial Flexibility and Uncertainty
  • 38. UCI/Start-Up Collaborative Research
    • Implemented through a research contract
    • High leverage for the start-up (use of labs, equipment, instrumentation)
    • Payment of full overhead required
    • Conflicts of interest need to be disclosed and managed
    • Provides access to improvement inventions & new inventions in the field
    • Fulfills early-stage diligence requirements
  • 39. A”Win-Win-Win” Strategy for Industry/UC Partnering & Overhead - Royalty Shares UNIVERSITY PRINCIPAL INVESTIGATOR SPONSOR/ LICENSEE OFFICE OF TECHNOLOGY ALLIANCES Direct Cost Revenue Revenue from Fees, Royalties Salary/Facilities Intellectual Property New Knowledge/Diligence Commercial Rights
  • 40. Finding Initial Backers
    • PATENTS…. shape the idea before bringing it to the university let alone to initial backers.
    • PUBLICATIONS…. play a much larger role than is generally recognized.
    • PRESS…. let the university press office open the doors.
  • 41. Economist articles >> Defense companies >> VCs >> Meno Corp >> Synaptics The Press Is a Whimsical But Sometimes Useful Creature 5 July Two successive but unrelated articles in a major magazine prompt a startup 16 August
  • 42. New York Press Really Counts Because That’s Where the Money Is The New York Times Prompts the Formation of a Second Company The New York Times >> New York Investment Bank >> Cortex >> IPO 2 years later One year later….
  • 43. But Be Careful: The Press can Turn On You In a Flash The LA Times several years later.
  • 44. Finding Initial Backers
    • Be warned: Raising money is probabilistic …….chance and historical accident play a huge role.
    • The law for finding initial backers: “Use a big N to compensate for a low p“.
  • 45. Financing the Start-up
    • Develop the business model and reflect it in a well drafted business plan
    • Be realistic in financing needs
      • Development always takes longer and costs more than planned
      • Do not develop a Maybach when a Toyota is what will sell
  • 46. Financing the Start-up: Financing Sources
    • Boot-strap with personal internal resources
      • Maximum control
      • High personal financial risk
      • Limited funds may slow development
    • Friends and family financing
      • Give up less control
      • Relationship issues
      • Limited funds may slow development
      • No “deep pocket”
  • 47.
    • Government grants
      • Give up little control
      • Spend a lot of time writing grant proposals
      • Slow funding
      • Limited funds may slow development
    • Business angels
      • Give up more control
      • Often a hit-or-miss proposition
      • May or may not find “deep pocket”
      • Investors may have unrealistic expectations
    Financing the Start-up: Financing Sources
  • 48. Financing the Start-up: Financing Sources
    • Incubators
      • Short-term solution only
      • Expensive early stage assistance
    • Venture capital
      • Ultimately you will likely relinquish control
      • Will press hardest on valuation – expensive funding
      • Bring hands-on expertise
      • Bring wide network of industry and financial contacts
      • If company is progressing, additional funds are available
  • 49. Financing the Start-up: Financing Sources
    • Corporate venture capital/strategic alliance
      • Wide variety of forms – for example:
        • Up-front cash for distribution right when product is developed
        • Straight equity investment
        • Collaborative development with funded R&D costs.
      • Beware of entangling alliances which restrict future operations or exits
  • 50. Setting Up the Company
    • 1st strategy: build the company and the products will follow
      • IPO about 2 years after starting the company
      • Second round financing (15MM) about 4 years later Large building, full scale laboratories, senior scientists, senior business people
    The law of irresistible consumption : if you have it, you will probably spend it.
  • 51. Setting Up the Company
    • 2nd strategy: build the product (1 or 2) and the company will follow
      • Series A for $3.5MM. Build and test a system for classifying human brain waves. Secure IP for an in vitro model of human brain aging.
      • Series B for $4MM. Multi-center testing. Launch 1st product 2002. First partnership. No sunk costs, university partners, minimal staff.
    The law of irresistible consumption : if you have it, you will probably spend it.
  • 52. Setting up and Operating the Start-up
    • Academic or professional management.
    • Relationships with Management and the Board of Directors
    • Protecting intellectual property
    • Segregating duties as a consultant/officer from those of a professor – avoiding conflicts of interest.
    • Incentives – Returns to the Founder-Scientist
  • 53. Exits
    • Acquisition
      • Role of the faculty entrepreneur in selling the company
        • Risk allocation between founders and investors
        • Post-closing consulting, non-competition.
      • Structures
        • Tax consequences
        • Liquidity
    • IPO
      • Risks of being officer or director of a public company