ENTREPRENEURSHIP 101

ONTARIO RESEARCH INSTITUTIONCOMMERCIALIZATION

October 17, 2006

Dr. Tom CorrDirector of Commercialization

IT and CommunicationsInnovations at University of Toronto

tom.corr@utoronto.ca

TOPICS

• Institutional Research• Commercialization Options• Dealing with VCs• Outcomes of Commercialization Efforts

PERFORMANCE OF RESEARCHERSScience Watch Study: Bulletin October 11th, 2005*

• Publications*- U of T published 25,883 papers between

2000 & 2004.- UBC - 14,819- McGill - 13,996Citations- U of T leads in citations

*http://www.sciencewatch.com/sept-oct2005/sw_sept-oct2005_page1.htm

INNOVATIONS AT THE UNIVERSITY OF TORONTO

MaRS Centre

MANDATE: To commercialize theinventions generated from the $2million per day that the universityspends on research

RESOURCES:- 11 Tech Transfer professionals in

LS/PS/IT areas

- Review ~200 DISCLOSURES per yearfrom researchers and take on ~20 –this is not an unusual ratio foruniversities in Canada

What does Innovations at the UofT do in thecommercialization process?

• Pay to Protect IP – patents, trademarks,copyrights.

• Develop Business Plan and commercializationstrategy.

• Assist in getting additional grant funding tofurther develop IP (sometimes mandatory thatInnovations is involved NSERC –i2i).

• Create start-up company when appropriatevehicle for commercialization.

• Raise financing for company.• Negotiate agreements with licensees.

Why do some research institutions onlycommercialize ~10% of their Disclosures?

• Intellectual Property (IP or Invention) is pureresearch with no market potential.

• Market is too small to bother going after.• Existing patents may not allow for the IP to be

practiced.• Researchers have unrealistic expectations that

the institution cannot meet.However, researchers can take ownership oftheir IP and commercialize it themselvesshould they choose.

• At research institutions in Canada - typically theresearchers own the IP, or the institution owns the IP,or some combination of the two.

• Institution owned: York, McMaster, St Michael’sHospital

• Researcher owned: Waterloo

• Joint Ownership: UHN (1/3 to researchers, 1/3 to UHN,and 1/3 to researchers department)

• U of T - Joint Ownership (researcher/UofT) untilDisclosed, and then Researcher has the option toown. Therefore either University or ResearcherOwn (or both).

IP Ownership Policies

IP Ownership is a HUGE issue when itcomes to commercialization….

Who owns what…future development

• Researchers are typically obligated to DISCLOSE their research tothe institution with the institution keeping rights for further researchand teaching only.

• Many times disagreements between researchers as to who inventedwhat, and the % of any proceeds from commercialization that shouldgo to each– especially difficult to deal with when researchers includeprofs and their students.

• Clear ownership is needed before investors will fund.

• Future development of same IP is also a big issue as someresearchers (students) may come and go, which may result inissues about assigning interest in new but related IP at a futuredate.

Research Funding

• Where does the funding come from (OCE, NSERC,CIHR, etc.).

• Governments spread around the $ (federal andprovincial) usually based upon competitive applications.

• Range from $20K POP grants to multi-year, multi-millionlong term funding.

• Most researchers spend a lot of time applying for grant$ to fund their research (i.e. pay for equipment, students,and conferences).

What are a lot of professors focused on?

• Younger profs concerned about getting tenure.• How do they get it:

- Publishing papers- Doing more research- Teaching

Commercialization of IP is not always high ontheir list – has implications for businesses whowant to license/buy the IP and move the IPforward in conjunction with the researchers.

What’s in it for the researchers?

- Royalties (At UofT 75% of royalties go to the researchersand 25% to the UofT. If Innovations at UofT is managingthe commercialization, then 60% of royalties go to theresearchers and 40% to UofT).

- Equity in start-up- More $ to do research- Peer recognition

Does little to get tenure other than as a result of thepapers that may be published on the on-going research,and sometimes publishing in itself is a contentious issue.

Commercialization Options:Spin-Off’s versus Licensing

Pros and Cons

Licensing

Typical Agreement Terms and Conditions:

• Licensing (to start-ups or large corporations):- royalty paid to researchers/university basedupon sales attributable to IP – typically around5% of sales.

• Milestones – if license is exclusive thenminimum royalties typically apply as well asdevelopment milestones (especially in drugdevelopment).

Spin-Off Company

New Company Created to:

• License researchers technology.

• Fund research at research institution withthe aim of developing technologies forlicense by the company.

SPIN-OFF’s

- Company formed in which researchers may be ashareholder.

- Typically key researcher will be acting head ofR&D (most researchers don’t want to leave theuniversity except temporarily on paid sabbatical).

- Given priorities of researchers it is sometimesproblematic to get them on the critical path tocommercialization – they sometimes get in theway and slow the commercialization process.

Spin-Off’s

• Until mid-1990s most research institutions IPwas licensed to large companies (i.e. not spin-offs) that were in business related to the IP.

• Some research institutions still have policy not tolicense IP to spin-offs.

• Created when difficult to find licensees amongstexisting companies or when more value can becreated by commercializing in a spin-offcompany.

Industry Need

• Some large established companies notwell suited to generating new lines ofbusiness and divisions.

• Large companies look to M&A (Mergersand Acquisitions) as an alternative.

• Companies will pay premium for smallcompanies that are synergistic with theirbusiness mission.

Characteristics of Establishedversus Spin-Off Company

Characteristics Established Spin-Off

Adaptability Easily adopt new IP closely Take advantage of lead aligned with existing mktg. times with early stage plan and products companies and grows

them in time for market entry.

Flexibility Fixed operating procedures Ability to change directionand are not adept at quickly.developing early stagetechnologies

Characteristics of Establishedversus Spin-Off Company

Characteristics Established Spin-Off

Focus Hindered due to Focus on developing company preoccupation single technology with existing products opportunity &and revenue streams concentrate on moving it to

the market.

Relationship May be located far Inventors typically become IPfrom university with champions and perform ongoingimplications for R&D sometimes vital toon-going support by successful technology transferinventors

What to consider when looking at theSpin-Off alternative to licensing?

• Lack of suitable receptor capacity (licensee) for IP.

• Is IP a solid foundation for a new company and potential platformfor additional synergistic IP.

• Potential to be a $50 million+ public company?

• Can funding and management be attracted to spin-off.

• Potential return to inventors, research institution, and investors.

Other Factors

• Spin-offs may create more value quicker, as thepotential value of shares may have more upsidethan licensing.

• Royalties may flow sooner on licensing deals.

• Licensing will have lot of up-front work but lessthan spin-off once agreements negotiated.

Bottom Line – Spin-offs take more effort thanlicensing, but have the potential for bigger upside inthe long term.

Research Institutions Potential Role inSpin-Offs (e.g. Innovations at UofT)

• Impetus may come from the research institution,inventors, or investors to create spin-off.

• If formed by research institution, there is the need for a“champion” to be identified to look after everyone’sinterest. Must have the skills to deal with start-upcompanies.

• Provide patent and legal financing until costs recovered.

• Research Institutions role may range from very little, tocreation and on-going management of company -especially until funding and management in place.

Research Institutions Potential Role in Spin-Offs

• Manage matters related to protection of IP andtransfer of IP to spin-off.

• Build Business Plan.

• Assist in finding management team & advisoryboard.

Research Institutions Potential Role in Spin-Offs

• Determine financing alternatives and pursuethem (government, angels, VCs).

• Promote the spin-off and potentially look forother IP.

• Continuously consider the value of itsshareholding, the impact of decisions on itsshare value, and look to maximize value and forexit strategy (IPO or company sale).

Cross Cultural Issues

Investors need to understand:• IP requires time and investment before ready to

market.• Likely a requirement to fund on-going

commercially relevant IP research anddevelopment.

• Researchers want freedom of research andcontrol over their IP.

• Researchers need to publish results.

Cross Cultural Issues

Researchers need to understand:

• Focus on marketing and market related issues isessential.

• Market considerations require attention when R&D isunderway.

• Significant funds need to be raised and invested todevelop products and to market them.

• Companies need to operate at an accelerated time scalecompared to academia.

Spin-Offs vs. Licensing - Summary

• Spin-Off’s are time consuming, risky, and takeup a lot of time that may or may not, be betterspent on licensing the IP if that option available.

• Have potential for big upside under rightcircumstances.

• Decision to do spin-off needs carefulconsideration and commitment from all partiesinvolved.

It takes 10 times more time tomanage a spin-off than it does alicensing transaction

Investors – what do they think?

• Attitude is everything…unless thecompany is paramount in mind ofentrepreneurs and researchers - don’tinvest.

• Getting customers and learning from themis the best way to guide commercialization– not just doing more research withoutindustry input.

Investors – What do they think?

• Close governance is extremely importantto force focus.

• Dilution is forgotten if successful andirrelevant if a failure.

• While plans change (and so they should),having one is helpful.

Recurring pitfalls and themes• Overestimating the science/technology and one’s

capabilities– Lack of realism regarding the actual stage of development of the

science/technology

• Poor understanding of the customer and his/her valuechain– Proactive ignorance of challenges involved in developing and

realizing value

• Disconnect between business and the science– Underweighting of importance of demonstrating progressive

commercial achievement

• Late stage grants (OCE, NSERC).

• Some granting agencies getting wiser and some of them fund thecompanies licensing the IP – not funding the researchers as theywant to see commercialization of the IP nor more research done.

• Angel Investors – typically invest in start-ups where they have hadprior experience with their marketplace (www.tvg.org). Valuationissues – convertible debt.

• Funding also comes from start-ups and large corporations.

• Spin-offs – funding from shareholders/early stage investors

Where does the money come from at thisEARLY stage?

- typically look to make minimum investment of $1- $5 million (over time) iand want to do laterstage deals (revenues, customers)

- Looking for a 60% IRR per year and to get out in3 to 8 years

- Fund based upon milestones and futurevaluations based upon milestones (beware theratchet)

Later Stage VC Funding

Later Stage VC Funding- Initial valuations based upon all the classic

models (e.g. sales multiples, DCFs.earnings multiples, etc). However forget allthat as most start-ups are worth $1.5 - $2million to VCs – very rarely do you seeexceptions.

- Important that expectations are agreed toby both sides – you have both got a newpartner in our life.

Deal and Negotiation - steps/process/documentation

• Business plan development• Who to take to• Negotiations• Term Sheet• More Negotiations• Close

REMEMBER – 1 deal in 100 that looks for VC fundingactually gets funding.

Try bootstrapping – read ART OF THE START by GUYKAWSAKI.

Why deals fall apart

- Investors don’t have comfort in IPownership

- Investors don’t realize that they aredealing with research – as opposed todetailed business plans and products thatare ready to go.

- Long time to market which equates to lotsof investment – especially for life sciencesdeals – regulatory issues.

Why deals fall apart

- Researchers don’t invest time that is required.

- Researchers lose interest in the research andmove on to other areas of research interest ormove to other institutions.

- Patents get rejected (more important ininstitutional research than in typical IT deals).

- Expectations that grant $ will fund operationswhich it seldom does

SUMMARY- Most Canadian research institutions have a researcher friendly

policy which allows the researcher to gain most of the financialupside from their inventions.

- There is a lot of commercialization assistance available forresearchers who are coach-able (MARS, IUT, OCE, etc).

- The investment community is always looking for good IP to invest in.

- Successful research typically leads to more funding for on-goingresearch.

- More funding is being put into Canadian research andcommercialization than ever before.

There has never been a better time for commercializationin terms of the support and funding available.

QUESTIONS