The commercialization process


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Presented by Dr. Tom Corr , CEO – Waterloo Research and Technology Park Accelerator Centre & Associate Vice President, Commercialization – University of Waterloo

Part of the Ontario Post Doctoral Fellowship Networking Event, October 6, 2008

Research Funding
Who Owns the Intellectual Property?
Commercialization Options
Dealing with VCs
Outcomes of Commercialization Efforts

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The commercialization process

  1. 1. ONTARIO POST DOCTORAL FELLOWSHIP NETWORKING EVENT October 6, 2008 Dr. Tom Corr CEO – Waterloo Research and Technology Park Accelerator Centre & Associate Vice President, Commercialization – University of Waterloo [email_address]
  2. 2. TOPICS <ul><li>Research Funding </li></ul><ul><li>Who Owns the Intellectual Property? </li></ul><ul><li>Commercialization Options </li></ul><ul><li>Dealing with VCs </li></ul><ul><li>Outcomes of Commercialization Efforts </li></ul>
  3. 3. Research Funding <ul><li>Where does the funding come from (OCE, NSERC, CIHR, etc.). </li></ul><ul><li>Governments spread around the $ (federal and provincial) usually based upon competitive applications. </li></ul><ul><li>Range from $10K POP grants to multi-year, multi-million long term funding. </li></ul><ul><li>Most researchers spend a lot of time applying for grant $ to fund their research (i.e. pay for equipment, students, and conferences). </li></ul>
  4. 4. <ul><li>At research institutions in Canada - typically the researchers own the IP, or the institution owns the IP, or some combination of the two. </li></ul><ul><li>Institution owned: McMaster (researcher can negotiate with the university for ownership and commercialization rights) </li></ul><ul><li>Researcher owned: Waterloo </li></ul><ul><li>Joint Ownership: UHN (1/3 to researchers, 1/3 to UHN, and 1/3 to researchers department) </li></ul><ul><li>Joint Ownership: UofT (50/50 - Researchers/UofT) until Disclosed </li></ul>IP Ownership Policies
  5. 5. <ul><li>IP Commercialization if University Involved in Commercialization </li></ul><ul><li>Waterloo: 25% to University and 75% to Researchers </li></ul><ul><li>UofT: 60% to University and 40% to Researchers </li></ul><ul><li>IP Commercialization if University NOT Involved in Commercialization </li></ul><ul><li>(i.e. researchers commercialize on their own IP) </li></ul><ul><li>Waterloo: 0% to University and 100% to Researchers </li></ul><ul><li>UofT: 25% to University and 75% to Researchers </li></ul><ul><li>These are just 2 examples – all universities have their own ownership and commercialization policies. </li></ul><ul><li>. </li></ul>
  6. 6. IP Ownership is a HUGE issue when it comes to commercialization…. <ul><li>Who owns what…future development </li></ul><ul><li>Researchers are typically obligated to DISCLOSE their research to the institution with the institution keeping rights for further research and teaching only . </li></ul><ul><li>Many times disagreements between researchers as to who invented what, and the % of any proceeds from commercialization that should go to each– especially difficult to deal with when researchers include profs and their students. </li></ul><ul><li>Clear ownership is needed before investors will fund or they will walk away from the deal. </li></ul><ul><li>Future development of same IP is also a big issue as some researchers (students) may come and go, which may result in issues about assigning interest in new but related IP at a future date. </li></ul>
  7. 7. What are a lot of professors focused on? <ul><li>Younger profs concerned about getting tenure. </li></ul><ul><li>How do they get it: </li></ul><ul><ul><li>Publishing papers </li></ul></ul><ul><ul><li>Doing more research </li></ul></ul><ul><ul><li>Teaching </li></ul></ul><ul><li>Commercialization of IP is not always high on their list – has implications for businesses who want to license/buy the IP and move the IP forward in conjunction with the researchers. </li></ul>
  8. 8. What’s in it for the researchers? <ul><li>Royalties (At UofT 60%-75% of royalties go to the researchers, at UW 75%-100%) </li></ul><ul><li>Equity in start-up </li></ul><ul><li>More $ to do research </li></ul><ul><li>Peer recognition </li></ul><ul><li>Does little to get tenure other than as a result of the papers that may be published on the on-going research, and sometimes publishing in itself is a huge problem in commercialization. </li></ul>
  9. 9. What do Technology Transfer operations at Universities do in the commercialization process? <ul><li>Pay to Protect IP – patents, trademarks, copyrights. </li></ul><ul><li>Assist in the developing of Business Plans and commercialization strategy. </li></ul><ul><li>Assist in getting additional grant funding to further develop IP (sometimes mandatory that the technology transfer office is involved NSERC –i2i). </li></ul><ul><li>Create start-up company when appropriate vehicle for commercialization. </li></ul><ul><li>Assist in raising financing for company. </li></ul><ul><li>Negotiate agreements with licensees. </li></ul>
  10. 10. Why do some research institutions only commercialize ~10% of the researchers inventions? <ul><li>Intellectual Property (IP or Invention) is pure research with no market potential. </li></ul><ul><li>Market is too small to bother going after. </li></ul><ul><li>Existing patents may not allow for the IP to be practiced. </li></ul><ul><li>Researchers have unrealistic expectations that the institution cannot meet (e.g value of IP) </li></ul><ul><li>However, researchers can take ownership of their IP and commercialize it themselves should they choose. </li></ul>
  11. 11. Commercialization Options: Spin-Off’s versus Licensing Pros and Cons
  12. 12. Licensing <ul><li>Typical Agreement Terms and Conditions: </li></ul><ul><li>Licensing (to start-ups or large corporations): </li></ul><ul><li>- royalty paid to researchers (and university if they are involved in the commercialization) based upon sales attributable to IP – typically around 5% of sales. </li></ul><ul><li>Milestones – if license is exclusive then minimum royalties typically apply as well as development milestones (especially in drug development). </li></ul>
  13. 13. Spin-Off Company <ul><li>New Company Created to: </li></ul><ul><li>License researchers technology and build a company around it. </li></ul><ul><li>Fund further research at institution with the aim of developing/improving technologies for license by the company. </li></ul>
  14. 14. SPIN-OFF’s <ul><li>Company formed in which researchers may be a shareholder. </li></ul><ul><li>Typically key researcher will be acting head of R&D (most researchers don’t want to leave the university except temporarily on paid sabbatical – research leave). </li></ul><ul><li>Given priorities of researchers it is sometimes problematic to get them on the critical path to commercialization – they sometimes get in the way and slow the commercialization process. </li></ul>
  15. 15. Spin-Off’s <ul><li>Until mid-1990s most research institutions IP was licensed to large companies (i.e. not spin-offs) that were in business related to the IP. </li></ul><ul><li>Some research institutions still have policy not to license IP to spin-offs (risk involved in licensing IP to under-funded start-up). </li></ul>
  16. 16. Industry Need <ul><li>Some large established companies not well suited to generating new lines of business and divisions. </li></ul><ul><li>Large companies look to M&A (Mergers and Acquisitions) as an alternative. </li></ul><ul><li>Companies will pay premium for small companies that are synergistic with their business mission. </li></ul>
  17. 17. What to consider when looking at the Spin-Off alternative to licensing? <ul><li>Lack of suitable receptor capacity (licensee) for IP. </li></ul><ul><li>Is IP a solid foundation for a new company and potential platform for additional synergistic IP? </li></ul><ul><li>Potential to be a $50 million+ public company? </li></ul><ul><li>Can funding and management be attracted to spin-off. </li></ul><ul><li>Potential return to inventors, research institution, and investors. </li></ul>
  18. 18. Other Factors <ul><li>Spin-offs may create more value quicker, as the potential value of shares may have more upside than licensing. </li></ul><ul><li>Royalties may flow sooner on licensing deals. </li></ul><ul><li>Licensing will have lot of up-front work but less than spin-off once agreements negotiated. </li></ul><ul><li>Bottom Line – Spin-offs take more effort than licensing, but have the potential for bigger financial upside in the long term. </li></ul>
  19. 19. Research Institutions Potential Role in Spin-Offs <ul><li>Impetus may come from the research institution, inventors, or investors to create spin-off. </li></ul><ul><li>If formed by research institution, there is the need for a “champion” to be identified to look after everyone’s interest. Must have the skills to deal with start-up companies. </li></ul><ul><li>Provide patent and legal financing. </li></ul><ul><li>Research Institutions role may range from very little, to creation and on-going management of company - especially until funding and management in place. </li></ul>
  20. 20. Research Institutions Potential Role in Spin-Offs <ul><li>Determine financing alternatives and pursue them (government, angels, VCs). </li></ul><ul><li>Promote the spin-off and potentially look for other IP. </li></ul><ul><li>Continuously consider the value of its shareholding, the impact of decisions on its share value, and look to maximize value and for exit strategy (IPO or company sale). </li></ul>
  21. 21. Cross Cultural Issues <ul><li>Investors need to understand: </li></ul><ul><li>IP requires time and investment before ready to market. </li></ul><ul><li>Likely a requirement to fund on-going commercially relevant IP research and development. </li></ul><ul><li>Researchers want freedom of research and control over their IP. </li></ul><ul><li>Researchers need to publish results. </li></ul>
  22. 22. Cross Cultural Issues <ul><li>Researchers need to understand: </li></ul><ul><li>Focus on marketing and market related issues is essential. </li></ul><ul><li>Market considerations require attention when R&D is underway. </li></ul><ul><li>Significant funds need to be raised and invested to develop products and to market them. </li></ul><ul><li>Companies need to operate at an accelerated time scale compared to academia. </li></ul>
  23. 23. Spin-Offs vs. Licensing - Summary <ul><li>Spin-Off’s are time consuming, risky, and take up a lot of time that may or may not, be better spent on licensing the IP if that option available. </li></ul><ul><li>Have potential for big upside under right circumstances. </li></ul><ul><li>Decision to do spin-off needs careful consideration and commitment from all parties involved. </li></ul>
  24. 24. <ul><li>It takes 10 times more time to manage a spin-off than it does a licensing transaction </li></ul>
  25. 25. Investors – what do they think? <ul><li>Attitude is everything…unless the company is paramount in mind of entrepreneurs and researchers - don’t invest. </li></ul><ul><li>Getting customers and learning from them is the best way to guide commercialization – not just doing more research without industry input. </li></ul>
  26. 26. Investors – What do they think? <ul><li>Close governance is extremely important to force focus. </li></ul><ul><li>Dilution is forgotten if successful and irrelevant if a failure. </li></ul><ul><li>While plans change (and so they should), having one is helpful. </li></ul>
  27. 27. Recurring pitfalls and themes <ul><li>Overestimating the science/technology and one’s capabilities </li></ul><ul><ul><li>Lack of realism regarding the actual stage of development of the science/technology </li></ul></ul><ul><li>Poor understanding of the customer and his/her value chain </li></ul><ul><ul><li>Proactive ignorance of challenges involved in developing and realizing value </li></ul></ul><ul><li>Disconnect between business and the science </li></ul><ul><ul><li>Underweighting of importance of demonstrating progressive commercial achievement </li></ul></ul>
  28. 28. <ul><li>Late stage grants (OCE, NSERC). </li></ul><ul><li>Some granting agencies getting wiser and some of them fund the companies licensing the IP – not funding the researchers as they want to see commercialization of the IP nor more research done. </li></ul><ul><li>Angel Investors – typically invest in start-ups where they have had prior experience with their marketplace ( ). Valuation issues – convertible debt. </li></ul><ul><li>Funding also comes from start-ups and large corporations. </li></ul><ul><li>Spin-offs – funding from shareholders/early stage investors </li></ul>Where does the money come from at this EARLY stage?
  29. 29. <ul><li>typically look to make minimum investment of $1 - $5 million (over time) and want to do later stage deals (revenues, customers) </li></ul><ul><li>Looking to get 10 times their money back in 5 years </li></ul><ul><li>Fund based upon milestones and future valuations based upon milestones ( beware the ratchet) </li></ul>Later Stage VC Funding
  30. 30. Later Stage VC Funding <ul><li>Initial valuations based upon all the classic models (e.g. sales multiples, DCFs. earnings multiples, etc) don’t work. However forget all that as most start-ups are worth $1 million - $2 million to VCs – very rarely do you see exceptions. </li></ul><ul><li>Important that expectations are agreed to by both sides – you have both got a new partner in your life. </li></ul>
  31. 31. Deal and Negotiation - steps/process/documentation <ul><li>Business plan development </li></ul><ul><li>Who to take to </li></ul><ul><li>Negotiations </li></ul><ul><li>Term Sheet </li></ul><ul><li>More Negotiations </li></ul><ul><li>Close </li></ul><ul><li>REMEMBER – 1 deal in 100 that looks for VC funding actually gets funding. </li></ul><ul><li>The majority should forget about VC funding and try bootstrapping – read ART OF THE START by GUY KAWSAKI. </li></ul>
  32. 32. Why deals fall apart <ul><li>Investors don’t have comfort in IP ownership </li></ul><ul><li>Investors don’t realize that they are dealing with research – as opposed to detailed business plans and products that are ready to go. </li></ul><ul><li>Long time to market which equates to lots of investment – especially for life sciences deals – regulatory issues. </li></ul>
  33. 33. Why deals fall apart <ul><li>Researchers don’t invest time that is required. </li></ul><ul><li>Researchers lose interest in the research and move on to other areas of research interest or move to other institutions. </li></ul><ul><li>Patents get rejected (more important in institutional research than in typical IT deals). </li></ul><ul><li>Expectations that grant $ will fund operations which it seldom does </li></ul>
  34. 34. SUMMARY <ul><li>Most Canadian research institutions have a researcher friendly policy which allows the researcher to gain most of the financial upside from their inventions. </li></ul><ul><li>There is a lot of commercialization assistance available for researchers who are coachable (MARS, Accelerator Centre in Waterloo, OCE, technology transfer offices, etc). </li></ul><ul><li>The investment community is always looking for good IP to invest in but don’t just focus on VCs for funding. </li></ul>
  35. 35. SUMMARY <ul><li>Successful research typically leads to more funding for on-going research – huge focus on commercialization outcomes by granting agencies. </li></ul><ul><li>More funding is being put into Canadian research and commercialization than ever before. </li></ul><ul><li>There has never been a better time for commercialization in terms of the support and funding available. </li></ul>
  36. 36. QUESTIONS