1 © 2003 massachusetts institute of technology outline of a conversation commercializing...

1© 2003 Massachusetts Institute of Technology

Outline of a Conversation Commercializing Intellectual Property

from Universities

Kenneth P. Morse, Senior Lecturerand Managing Director

MIT Entrepreneurship Center

55 Hayward Street, Room E39-115 Cambridge, MA 02142 USA

phone: +1-617-253-8653 fax: +1-617-253-8633

e-mail: [email protected] http://entrepreneurship.mit.edu

22 January 2003


Desired Outcomes of this Meeting

1. Exchange Views and Experience, with the goal of supporting your work

2. Compare/Contrast Policies, Programs, and Practices MIT TLO New Venture Creation Public vs. Private Approach

3. Some Best Practices in U.S. Universities, and at MIT

4. The Quality of our Students Steadily improving More and more interest in starting new ventures Why?


Caveats and Credits1. I apologize; I have almost no knowledge of

Norwegian IP Practices

NTNU’s experience and interests

2. I doubt that the elements of the MIT or Stanford venture creation system can or should be transplanted or adapted to your University-Business situation

3. This presentation relies heavily on material prepared by my friend and colleague Steven Brown, Senior Technology Officer, MIT TLO, and Carl Accardo, Senior Advisor, Office of Corporate Relations. Their assistance is gratefully acknowledged.

4. I will use only a fractions of these slides

5. I believe that highly interactive discussions are best. Please participate actively, STET


MIT’s Venture Creation Culture1. Heritage:

“... the interest of Commerce and the Arts, as well as of General Education, call for the most earnest cooperation of intelligent culture with industrial pursuits.” (MIT’s founder William Barton Rogers)

2. We must all Compete: Recruit Best Faculty Recruit Best Students Win Funding for Research Projects

Philosophy: “Eat what you shoot.”

(if you can’t “sell,” you starve... and move along...)

3. Cultural Imperative (anti-ivory tower): Genius inventions are not enough. The job is not done until a new technology is...

... reduced to practice

... effectively commercialized

... and evangelized, until

... it becomes a global standard.


Excerpt from MIT Charter

“ ... by the name of Massachusetts Institute of

Technology, for the purpose of instituting and

maintaining a society of arts, a museum of arts,

and a school of industrial science, and aiding

generally, by suitable means, the advancement,

development and practical application of science

in connection with arts, agriculture,

manufactures, and commerce...”


Mission Statement of the MIT Entrepreneurship Center:

To train and develop leaders who will make

high tech ventures successful

“I want you to be the premier global center for entrepreneurship, and to be recognized as such.”

“We must not only be the best. We must also serve as a model for others and ensure that, together, we all make a significant global impact in this vital field.”

MIT President Charles M. Vest, July 1996


The Problem We are Working to Solve: There is a shortage of excellent entrepreneurs who can make

start up ventures very successful. MIT Engineers and Scientists are generally aware that teamwork is

essential: 80-95% of “purely technical” spin-offs fail, while, 80-95% of MIT teams which combine marketing, business, and

technical skills succeed. Talented Managers need both training and real world experience

so they know markets, know people and are known/respected: undergraduate science/engineering combined with practical

experience in successful companies, and… management training, including entrepreneurship, followed by,

repeated sales and marketing successes in substantial companies.


The MIT EDPMIT Entrepreneurship Development Program

27 - 31 January 2003

Participants learn from: “Live case studies” of successful MIT entrepreneurs; Our faculty and the MIT entrepreneurial spirit; and Route 128 venture capitalists, lawyers, and institutional

investors.

In 1999, 25 participants came from Taiwan, Ireland, Cambridge (UK), Germany, Thailand, France, & US.

In 2000, 65+ persons came from 10+ countries. In 2001, 95+ persons came from 16+ countries In 2002, 70 persons from 13 countries In 2003, 101+ persons……

A one-week program tailored to the needs of future entrepreneurs, university entrepreneurship faculty and staff, and economic development professionals


Student Organizations: MIT$50K

MIT $50K Entrepreneurship CompetitionFinals on Wed, 14 May 2003.

Designed to encourage students and researchers in the MIT community to act on their talent, ideas, and energy to produce tomorrow's leading firms.

Business Plans are judged by a panel of experienced entrepreneurs, venture capitalists, and legal professionals.

“Not all business-plan competitions on university campuses are equal… [the MIT $50K] is more equal than all the others.”

- Inc. Magazine, March 1998


Student Organizations: MIT$50KTomorrow’s Leading Firms

In its thirteen-year history, the MIT $50K has created: 59 firms and over 1800 jobs $275 Million in Venture Capital invested Aggregate market capitalization has ranged from $5.5 – $40 Billion

Teambuilding + Mentors + Education + Networking + Capital

Entrants include MIT graduate and undergraduate students as well as faculty.

Students from every MIT School and 27 Departments participate (Teams including Sloan students are consistently the strongest entries….)


Student Organizations: MIT$50KEvery MIT School participates in the MIT

$50K Competition

Management

EngineeringOutside

Science Architecture

Humanities

Spring ‘01 MIT $50K: 135 Entrants

Spring ’02 MIT $50K: 110 Entrants

Feb ’02 $1K: 125 Entrants


Student Organizations: MIT$50K

A Few Success Stories…

•Distributed Computing

•2000 MIT $50K Runner up

•Funded by Kleiner Perkings and Common Angels

•Software to improve Internet Searching

•1998 Co-Winner

•$29M Funding

•Sold to AskJeeves for $507 million in 2000

•Devices to transcribe writing to computer

•1997 Runner-Up

•$13M Funding

•Product Launched

•Next generation customer support

software

•1996 Winner

•Acquired by Cisco for $325M in 1999

•New Signal Processing Semiconductors

•1995 Participant

•Over $10M Funding

•Acquired by Broadcom for $1.19B in 2000

•Rapid Internet Content Delivery

•NASDAQ: AKAM

•Market Cap of $3.6B

•Internet business

solutions delivery •NASDAQ: CBIS


Student Organizations: MIT VCPI Club

Over 200 participants came from throughout the MIT entrepreneurship community, including:

Keynote Speakers: Robert Metcalfe, Venture Partner, Polaris Ventures Mr. Richard Testa, Co-Founder and Chairman, Testa, Hurwitz

& Thibeault Thomas J. Colatosti, President and CEO, Viisage

MIT Students and Entrepreneurs-to-Be Boston-Area University Students 59 Venture Capitalists MIT Alumni and Successful Entrepreneurs Entrepreneurial Professional Services Organizations

01 December 2001

http://www.mitvcpi.com


Student Organizations: MIT VCPI Club

MIT Keynote Speakers (already confirmed): Geoffrey Moore, Mohr Davidow Ventures; Author of “Crossing

the Chasm” and “Inside the Tornado” Clayton Christensen, Harvard Business School; Author of

“Innovator’s Dilemma” and other articles on disruptive technology

Over 20 partner-level VCs already committed Panels and tracks include: Trends in European VC, Seed

Investing, Biotechnology, Nanotechnology, Security, Corporate VC, Private Equity, GP/LP Issues, New Venture Models, etc.

MIT Students, Alumni, and Entrepreneurs

07 December 2002

http://www.mitvcpi.com


Student Organizations:Sloan Entrepreneurs

Mission:

To foster entrepreneurship at Sloan and help students identify the best entrepreneurial learning activities and opportunities

To promote entrepreneurial networking events within Sloan, the greater MIT community, other local MBA programs and established Boston organizations


MIT Entrepreneurship Society (1)

Mission: To establish an entrepreneurial support network

among MIT students and recent alumni/alumnae

To promote productive interaction with MIT faculty, staff, students, other alumni/alumnae, and MIT-related new ventures

To establish a stream of funds and other intellectual and material contributions to ensure MIT’s continued excellence in education and research



Fall 1997: Gary Culliss, at Harvard Law School, teams up with Steven Yang, ‘98 EE to enter the MIT $50K Entrepreneurship Competition.

Mike Cassidy, AA ‘86, and the winner of the MIT $50K with Stylus Innovations in 1991, joins the student team as a mentor, then as CEO.

May 1998: Direct Hit wins the MIT $50K. Mike, Gary, and Steven close $1.1 million in venture capital

financing the day after winning the $50K. By May 1999 AOL, Lycos, HotBot, Microsoft, ICQ, and

ZDNet are Direct Hit’s customers. January 2000: Direct Hit was acquired by AskJeeves for

$507 million

Direct Hit Technologies, Inc. http://www.DirectHit.com

Examples of the MIT E-Society Network at Work



Alex Laats, PH ‘88, working at the MIT Technology Licensing Office meets two MIT undergraduates, Pehr Anderson, ‘98 EE, and Chris Gadda, ‘98 EE, at a MIT $50K seminar on intellectual property.

July 1996: They found NBX Corp as PowerVoice. MIT invests in the company, and brings along Morgenthaler

Ventures. (David Morgenthaler, ME ‘40) March 1999: 3Com acquires NBX for $90 million. Bob Metcalfe, ‘68 EE/’69 MG, founded 3Com with a group

of fellow MIT alumni. (After many years as a pundit at International Data Group, founded by Patrick McGovern, Jr. ’59, Bob is now a Partner at Polaris Ventures.)

Examples of the MIT E-Society Network at Work

NBX Corporation http://www.nbxcorp.com


University-Business CollaborationMyths and Realities 1/2

Royalties are a significant source of revenue for the University. Industrial sponsors are convinced that technology licensing revenue

provides major funding to university and make our inventors wealthy.

Companies expect a quick return on technology transfer investment. Just license the technology and wait for the royalty checks to start

pouring in.

Companies are eager to accept new technology from universities. Universities are full of great product inventions that simply need to be

manufactured and brought to market.

Universities should broadcast availability of technology for licensing. Why don’t you put all your inventions on your web page?

The technology transfer office easily finds the licensee. Just pick up the telephone and call the obvious companies.


University-Business CollaborationMyths and Realities 2/2

With the exception of the very occasional “blockbuster,” university licensing revenues are small. UCSF-Stanford: Cohen/Boyer (gene splice), Yamaha (music synthesis) Florida State: Taxol (cancer drug): Wisconsin: vitamin D, Warfarin (anti-coagulant) Columbia: Axel (gene expression); Michigan State: Cis-platin (cancer) University of Florida: Gatorade (sports beverage)

Don’t expect product royalties for 8-10 years. Technologies are embryonic; they take time to develop and gain market acceptance.

Most companies (and especially VCs) want quick time-to-market.

Publishing lists of available technology is not effective; a targeted approach is much more successful. Attracts many “unqualified” inquiries Appropriate licensee needs to be found and convinced Companies come looking for specific technologies and are receptive Requires the involvement of the inventor

At MIT, the inventor is the best source for leads. Well over 50% of the time, the inventor identifies the licensee.


Critical Success Factors – Commercializing University IP 1/4

Quality of technology Strong patent(s) Supports several new products Large market potential

Quality of management Focused strategy Thorough market understanding Realistic product development plan

Quality investors Track record building successful businesses Network of connections with partners/customers Personal involvement with business Access to money over long term

Passion Technologists Management Investors

Net: People are the most important part of the process.



Targeted marketing of technology Focus on very few companies. Build and maintain relationship with inventors, potential licensees, entrepreneurs, and venture

capitalists. Source for leads

Inventor 56% Licensing Officer 20% Company inquiry 15% Research sponsor 6%

Having found a potential licensee, tailor the terms to fit Shared risk Low initial fees Equity in partial-lieu of royalty Reasonable royalty rates Diligence provisions

Minimum investment, $$ and personnel Product development milestones Sales milestones Sublicensing requirements



Environment Legal

Low cost to early stage companies Mentoring

Financial Seed capital Angels Inexpensive insurance

Contract services Design Prototyping Manufacturing

Supportive culture MIT Entrepreneurship Center MIT Enterprise Forum Network of Business Angel/Venture Capitalists Network of Entrepreneurs



Strong University support for technology transfer office Permits hiring staff with significant industrial experience

Financial support for office infrastructure

Ability to invest in patents that will take years to provide return.

Holistic Approach to support by University Real Estate Office Industrial Liaison Program Freedom for Professors to engage in entrepreneurial ventures Strong Faculty and Practitioners in Entrepreneurship Center


M.I.T. Royalty Policy: Incentives for all Participants

Royalty distribution

1. First, deduct 15% to cover operating expenses of TLO

2. Then, deduct out-of-pocket expenses, usually patent costs

3. Distribute one-third of what’s left to inventors (equally, unless agreed otherwise)

4. Adjust remainder with respect to TLO actual operating expenses

5. Subtract out-of-pocket expenses for unmarketable patents (write off bad inventory)

6. Divide remainder equally: 1 ½ to MIT Department (Mechanical Engineering, EE, etc ½ to M.I.T. General Fund


People and Dialogue are Key

Published lists of IP are not very useful

Inventors provide ~50% of the leads

Our graduates are very helpful

What they initially ask for is seldom what they need

What we initially offer is seldom what they will use

Matching University IP to Corporations


Bringing University IP to Market

“It never works well with big companies. They focus their energy on showing why the new technology won’t work. I always prefer to start a new company; focus, energy and commitment.”

Professor Robert Langer, Langer Lab

Kenneth J. Germeshausen Professor of Chemical and Biomedical Engineering

Keynote Speaker, MIT Venture Capital Conference (07 December 2002)


Emphasize Proactive Personal Contact:

For the inventors, investigators and TLO team

With serial entrepreneurs, and their networks

Small/medium sized companies

Multinationals

Service providers (Accounting, Legal, ...)

Venture Capitalists, Business Angels

Identify the champion

Collect and share contacts liberally (network node)


M.I.T. TLO: Negotiating Startup Licenses

Public disclosure, NDA, Option, License

Cash/equity and terms f(busplan)

No two licenses the same (deal making skills)

Simpler structure preferred (company building skills)

Make introductions to people, $, services

Competition: no preferred providers (VC’s, legal, etc.)

Follow due diligence provisions closely

Renegotiate when needed to improve success

MIT does not want a board seat


MIT TLO: Typical Startup Equity Terms

Single digit % of equity

% maintained thru $5 to $10M raised

Proportional antidilution thereafter

Future participation rights


Components Issue fees Maintenance fees Diligence Royalty as % of Sales Patent costs Research sponsorship Discovered products

Typical costs $5K to $50K ~50% of expected RR Can’t leave on shelf 1% to 8% $25K to $200K Not required Variable

MIT TLO: Typical Startup Equity Terms


MIT TLO: License Negotiation Issues

Scope of the Field of Use

Exclusive, Co-exclusive or Non-Exclusive

Licensed Product Definition

Diligence Terms

Mandatory Sublicensing (if all fields of use)

Warrantees, Insurance

Royalties, Maintenance, Issue Fee, Equity, Anti-Dilution


Conflict of Interest Issues with Startups

MIT Policy:

Inventor can’t receive research funding from

Company if inventor has equity

Inventor must first meet educational responsibility

to students

Inventor may not consult to Company more than 1

day in 7


Ownership Issues with Startups

M.I.T. owns the patent or copyright, except

(in rare cases) when:

Not invented under Government or

Business sponsorship, and

No significant use of M.I.T. funds or

facilities


Publication Issues with Startups

Mission of the University is to produce knowledge and provide it to the public.

The right and freedom to publish is more important in an academic setting than financial goals.

Faculty can’t delay publication of results that startup would like to keep confidential


MIT Startup History

20 to 30 startups/yr with MIT technology

~2/3’s still in business over last 10yrs

~1/3 have had a liquidity event

Many acquired by larger organizations

(does not include firms started by MIT alumni without MIT licenses)


M.I.T. Start-Ups by Category

0

10

20

30

40

Bio

tech

/Pha

rma

Mat

eria

ls

Mec

hani

cal

Sem

icon

duct

ors

Rob

otic

s

Nu

mb

er o

f S

tart

-up

s


M.I.T. Start-Ups by Location

0

25

50

75

100

Mas

sach

uset

ts

Cal

ifor

nia

New

Jer

sey

Pen

nsyl

vani

a

Con

nect

icut

New

Yor

k

Tex

as

One each in:ColoradoFloridaIdahoMarylandNew HampshireNorth CarolinaVirginiaCANADA


Some Examples of Purchases

3Com bought Voice Power “voice over IP”

Phillips bought Active Impulse “laser ultrasonics”

Adobe bought NFX “face morphing”

Data Security bought RSA “encryption software”

Goodman bought LightLabs “optical coherence

tomography”

Alkermes bought AIR “controlled release inhalation

therapy”

Mentor Graphics bought Virtual Machine Works

“semiconductor design software”


Corporate Participation Options

Direct licensing of identified patent from

university – traditional

Sublicense total package from startup

Fund projects with startups and obtain rights

Direct equity investment in startup


Joint venture with startup

Major (>M$) seed funding but peer reviewed

Incubate startup in local laboratory

Precompetitive industry consortiums MIT Media Lab BioProcess Engineering Center (BPEC) Others

Corporate Participation Options


MIT’s Patent and Licensing Goals

Creation and dissemination of knowledge [primary]

Tech Transfer and Company Startups [secondary]

If these conflict, academic goals take precedence

See that ideas are practiced broadly

Maximize benefits to general society

Enhance the educational process

Create companies and jobs

Provide funds to patent future ideas

Provide modest income to MIT


The Invention Funnel: Disclosures to Licenses

~ 500 Inventions Disclosed to MIT

~ 300 Patents Filed

~ 180 Patents Issue

~ 120 Licenses/Options


Typical MIT TLO Revenue/Expenses

~ $30 M Gross Revenue/year

~ $20 M Distributed (inventors, depts, and MIT)

~ $7 M Legal Fees

~ $3 M Operating expenses

$1 to 50 M$ Received from Equity Cash-outs


Institutional Structure for Licensing Office

Director of Licensing reports to VP-Research,

then Provost, and then Institute President

Staff 30Licensing Officers (TLO’s)

8Associate Licensing Officers 6Staff Attorney 1Support 15

• MIS, Govt Compliance, Accounting, Records, Admin, Assist


TLO Decision Making Process

One person manages from disclosure to expiration

No committee to review licenses

Director signs each license

Some variance TLO to TLO in deal terms

TLO’s are on straight salary, no incentives

Pursue any technology that can make it

Maximize # of technologies licensed, not return


Licensing Tactics

Emphasize enthusiastic and cooperative inventors

Screen technology offered

Provide clear, transparent, predictable policies

Implement rapid, and straightforward procedures

Offer flexible terms

Be willing to adapt to changing circumstances


Leverage Regional Resources Financial – seed, angel, venture capital

Contract services – design, prototype, manufacture

Supportive culture – entrepreneur network, alumni network,

venture capital network, start-up clinics, Entrepreneurship

Lab student teams, others

Legal and Accounting services – low cost, mentoring

MIT Industrial Liaison Program (ILP)

MIT Real Estate

MIT Treasurer


University Factors

Strong support for Technology Licensing Office

• Financial support for office infrastructure

• Hire experienced, technically trained, business-oriented

staff with industrial experience

• Provide for early investment in patents

• Willingness to stand behind aggressive enforcement of

patent rights

• Entrepreneurial Real Estate team, Treasurer


Institutional Factors Supporting Startups

Easy to form/dissolve collaborations intra/inter

Permeable intra/inter organizational boundaries

Limited hierarchy, multiple paths

Broad participation in entrepreneurship competition (http://50k.mit.edu/)

Entrepreneurship is holographic and respected

Cost of failure is low

Entrepreneurship Center has helped build strong links to startups, VCs and Angels


The Entrepreneur: A Special Species? What does the successful high tech entrepreneur look like?

1. Integrity

2. Leadership

3. Impatient; bias toward action (with analysis).

4. Quick clock speed

5. Modest ego. Seeks and accepts coaching. Recognizes, and hires to overcome weaknesses.

6. Willing to be different, but knows it (not oblivious).

7. Pragmatic; willing to compromise (in order to move forward).

8. Rejoices in others’ victories (no petty jealousy).

9. Driven to solve a valuable problem for customers (not driven by money or technology).

10.Able to attract world class talent.

* With special thanks to Duncan McCallum @ Flagship Ventures

Net:

pH of Stomach = 1-2 σ > average


Our Message to Entrepreneurs:Building Your Company

Need an “A” Team – “3K” experience Serious Technology – sustainable advantage

Solve an important, valuable problem… For clients who have money … Who want to pay well… With a short sales cycle… And will buy more, soon …

YOUR VALUE PROPOSITION MUST BE COMPELLING, QUANTIFIABLE, PROVEABLE, REFERENCEABLE, AND EASILY EXPLAINABLE…


Business Plan Suggestions (1/2) Executive Summary:

Name your first ten customers Be brief

Business Plan: Be optimistic, but realistic Know your competition’s numbers Be brief

Advisors: Get good people with gray hair (or no hair) involved early Understand that investors will call them

Focus on how and why prospective customers will buy from you, and pay you money.

Focus on milestones (more than calendar dates).


Business Plan Suggestions (2/2) Plan how to build your company without any outside investment (bootstrap). Acquire a

customer(s).Then, maybe, you are ready to speak to VCs. Most entrepreneurship judges focus on

Customer needs Value proposition Sustainability Team

Your investors should bring you both customers and management talent (Akamai case).

Realize that business plan competitions are an educational process. It does not particularly matter if you win.*

*It does not matter “that you won or lost, but how you played the game .” (Grantland Rice)


Financing Case Study: Akamai (1/3) Akamai – A leading provider of outsourced e-

business infrastructure services and software. Founded by MIT students and faculty, in response

to businesses’ need to speed up access to their web sites, for content and transactions.


Financing Case Study: Akamai (2/3)*1. $50K finalist, not winner (1998)2. “Value-add, not valuation” philosophy of funding3. Financing brings:

Credibility Customer/partner introductions Management expertise Faster growth Cash

4. First round: angel investors First customers Network deployment

* Special thanks to Jonathan Seelig, Co-founder, and frequent guest lecturer at MIT Sloan School


5. Second round: VCs Build operations & management Battery Ventures & Polaris

6. Third round: Broadband & International Baker Communications

7. Fourth round: Industry leadership, standards, & cachet Apple, Cisco, Microsoft

8. IPO: Serious company “Currency” for growth + acquisitions

Financing Case Study: Akamai (3/3)*


Traditional vs. Entrepreneurial Career Paths

High School

University

Big Company

Retire

High School

University

Practical Experience

Management Training

Well Managed, High Growth Firm

Startup Venture

Another Startup?

Venture Capital or Angel Investor

Never really retire


Critical Success Factors in Entrepreneurship

1. Believe that Startup Ventures can Succeed: Parent(s) who are entrepreneurs Early contact with successful entrepreneurs Exposure to success stories and case studies.

2. Gain practical, real world experience before, during and after university studies.

3. Be willing to be Unusual/Unconventional.

4. Agree to Embrace Risk, and possibly failure.

5. Want to leave a large Company.

6. Live in a society that sees the above as normal, not a strange exception.

7. Entrepreneurs ask themselves: “What do we want to do?”• We want to make a world class product whatever it is. • We want to have fun doing it. • We want to get involved in a business area or business segment

that is at its ground floor and in its infancy.

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