Entrepreneurship 101: Ontario Research Institution Commercialization

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Speaker Tom Corr, Associate VP Commercialization, University of Waterloo Office of Research covers topics such as:
* Which is best - licensing or start-up?
* Who owns my invention?
* How do I work with my Tech Transfer Office?
For more information:
http://www.marsdd.com/magnoliaPublic/mars/Events/Event-Calendar/Ent101/2007/introcommercializing-20071107.html

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Entrepreneurship 101: Ontario Research Institution Commercialization

  1. 2. ` ONTARIO RESEARCH INSTITUTION COMMERCIALIZATION Presented by: Dr. Tom Corr CEO – Waterloo Research and Technology Park Accelerator Centre & Associate Vice President, Commercialization – University of Waterloo [email_address] November 7, 2007
  2. 3. 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. 4. 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. 5. <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, and then Researcher has the option to own. </li></ul>IP Ownership Policies
  5. 6. <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. 7. 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. 8. 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. 9. 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. 10. 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. 11. 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. 12. Commercialization Options: Spin-Off’s versus Licensing Pros and Cons
  12. 13. 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. 14. 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. 15. 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). </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. 16. 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. 17. 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. 18. 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. 19. 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 upside in the long term. </li></ul>
  19. 20. 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. 21. 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. 22. 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. 23. 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. 24. 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. 25. <ul><li>It takes 10 times more time to manage a spin-off than it does a licensing transaction </li></ul>
  25. 26. 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. 27. 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. 28. 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. 29. <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 ( www.tvg.org ). 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. 30. <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. 31. 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 $1.5 - $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. 32. 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 – 200 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. 33. 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. 34. 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. 35. 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. 36. 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. 37. QUESTIONS

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