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Maturing Early-Stage Biomedical Research; Proof of ConceptProgram Objectives, Decision Making and PreliminaryPerformance at the University of Colorado

Rick Silva, PhD*, David N. Allen, PhD*, and Richard J. Traystman, PhD***CU Technology Transfer, UC Denver; CU Technology Transfer**Office of the Vice Chancellor for Research, University of Colorado Denver

Section I. Introduction: Scope and ContentThis manuscript focuses on organizational objectives, decision criteria and performance ofbiomedical technology commercialization programs as a context for understandinguniversity technology maturation programs. The primary contention is that universitytechnology maturation programs are not different in kind from public and private technologydevelopment programs, and the difference from these broader programs is primarily adifference of degree related to aspects of the university research context.

The University of Colorado (CU) has developed three different programs within its overallProof of Concept (POC) funding process. Although the CU POC program relates to all areasof university technology, for this manuscript data will be presented from three programelements solely related to biomedical technologies (therapeutics, diagnostics, medicaldevices and to a lesser extent, tools and materials). In order to understand the objectives,decision criteria and performance of CU’s POC programs, it is important to understand howthe program developed and evolved. Conclusions are provided in the form of lessonslearned, and implications for university technology transfer practice. The main work on thetopic is descriptive and primarily derived from practitioner reports and promotionalliterature (Johnson, 2005).

There has been a philosophical debate about whether it is the proper role of universities todevelop technology, spin companies out, and commercialize technology and how to resolvethe conflicts apparent in such activity. Faculty and administrators are divided, to variousdegrees, on this issue at many institutions (Siegel et al, 2003). Economic development andpolitical leadership of many economic regions see their respective universities and publicassets with a broader role than just advancing the frontiers of science. Universities are seenas economic engines, beyond the people they employ and educate. Many universities areseen as an integral and critical component of the knowledge economy. The progression is asfollows: science leads to knowledge, which in turn leads to technology, which in turn leadsto products and services, which in turn lead to business creation and eventually sustained joband wealth creation. The progression is not a consequence of happenstance; it must beplanned and skillfully executed (Vohora et al. 2004). The major gap in this economic

Corresponding Author: Richard J. Traystman, PhD, Professor, Vice Chancellor for Research, University of Colorado Denver,Anschutz Medical Campus, M/S F520, P.O. Box 6508, Aurora, CO 80045, Tel: +1 303 724 8155, Fax: +1 303 724 8154,[email protected].

NIH Public AccessAuthor ManuscriptMed Innov Bus. Author manuscript; available in PMC 2010 July 22.

Published in final edited form as:Med Innov Bus. 2009 April 1; 1(1): 52–66. doi:10.1097/01.MNB.0000357626.97020.e5.

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development system is generally agreed to be the transition from technology to product(Gulbranson and Audretsch, 2008).

Section II. The problem and context for University Proof of Conceptprograms

Most United States university intellectual property is derived from basic research. Theresearch component of faculty evaluation is focused on research productivity as defined bythe quality and quantity of peer reviewed publications. Essentially, biomedical investigatorsare rewarded for advancing understanding about basic biological processes and/or humanhealth circumstances. The key point is that annual compensation, promotion and tenure isnot predicated on intellectual property (IP) outputs, such as inventions and patents, orcommercial outcomes, such as creations of therapeutics, diagnostics or medical devices.

University biomedical discoveries can be identified (via investigator disclosure) andprotected (via patenting), but due to the early nature of the biomedical technology, it isdifficult to find an adopter and champion willing to develop and commercialize thediscovery (Shane, 2002). Biomedical technologies generally involve greater developmentand commercialization risks compared to other university technologies in the physical,engineering, materials, and information sciences. Compared to other university technologies,biomedical technology is even farther “over the horizon” due to longer patent prosecutionrisk, human safety and efficacy risk, risk of capital continuation, and reimbursement risk. Inmany cases, biological discoveries lack a clear definition of the product, lead marketapplication, and business/revenue model.

Because most discoveries and inventions made in the context of a research institution withsupport from federal research grants, most of these inventions are typically immature whendisclosed to the institutional technology transfer office (Jensen and Thursby, 2001). Patentapplications, or even issued patents, are not normally stand alone, market-ready assets, norare they the core of a viable development program. Furthermore, uncertainty with respect totechnical feasibility, clinical feasibility, and market feasibility usually remain when aninvention is submitted to the institutional technology transfer office. Most technologiesdisclosed to technology transfer enterprises are not the result of a market driven process andthus not immediately ‘transferrable’ to a private sector. The discovery, invention, ortechnology must evolve into a comprehensive development program to be conducive tosignificant capital investment and thus transfer to private investors.

Public funding of these key validation steps is not within the mission of most federalfunding agencies. The obvious exception is the Small Business Innovation Research (SBIR)program and its companion program the Small Business Technology Transfer program(STTR). Although these two programs are widely perceived as successful contributors todevelopment of early stage technology, their budgets constitute less than three percent of anagency’s extramural research budget. The vast majority of public research funds aregenerally allocated to projects that advance the creation of new knowledge and scientificprinciples, not validation of existing concepts. Preclincial drug development, prototypedevelopment, assay development, and assay validation are usually (traditionally) not suitableaims for federal grant funding.

The therapeutics business development model is unlike any other technology businessdevelopment model, to the extent that some claim to be a “broken” business model (Gilbertet al., 2003). All this equates to greater business risk; however the risk is usually mitigatedby large markets associated with many unsolved medical problems, the potential forsignificant clinical impact and possible immense financial success. At universities,

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technology commercialization success is highly associated with biomedical researchcapacity producing one, but not many, human therapeutic royalty streams (AUTM, 2008).The biomedical research enterprise and technology transfer experience at CU is consistentwith the phenomena described above.

University technology maturation programs are relatively new, so much so, that noinferential empirical research is available. The main work on the topic is descriptive andprimarily derived from practitioner reports and promotional literature. Given there is noinferential empirical research on the topic of POC funding and efficacy, for an empiricalfoundation one has to turn to scholarly areas relevant to this topic. Scholarly research onearly-stage technology development addresses a wide array of topics. Various organizationsin the technology development value chain make decisions analogous to university POCdecisions. Within the context of a technology development organization, resourceallocations are made to advance organizational objectives such as capital attraction,licensing transactions, revenue generation, clinical impact, and professional attribution. Thecriteria for POC decisions slightly differ by the type of organization undertaking thetechnology development activity (i.e. technology transfer office, venture organization,clinical research institute). In that light, five different funding models relevant to early stagetechnology development are used to examine objectives, decision criteria and performancerelevant to POC activity:

1. University entrepreneurship, in particular commercialization of university IP,which is generally know as “technology transfer”,

2. Philanthropic early-stage university investing, in particular disease foundations,

3. Federal government early-stage university technology development programs, inparticular the SBIR/STTR programs;

4. Business and economic development intermediary organizations, in particularbiomedical business development organizations and biomedical businessincubators, but including local, state, and regional economic development agencies,

5. The early stage technology development firm, including institutional venturecapital and private individual (“business angel”) financing

Domain 1 - University EntrepreneurshipFor the university entrepreneurship domain the primary objective is technology adoption.Most university technology licensing managers report the mission of their office is toadvance commercialization of their university’s IP (Colyvas et al., 2002), and not revenuecreation (Collier, 2008). Other objectives may also apply such as regional economicdevelopment, faculty retention, and clinical and societal impact (Gulbranson and Audretsch,2007).

Most university technology transfer enterprises are built to protect and license intellectualproperty generated within the research enterprise of the host institution. Most large publicuniversity Technology Transfer Offices (TTOs) are lean and highly leveraged organizations,meaning they receive a large number of invention disclosures relative to the staff, financialresources, and breadth of expertise in house. TTOs tend to focus their time and moneywhere they think they can have an impact. Consequently, the decision process revolvesaround which disclosures to commit resources and matching intellectual assets with partnersin the marketplace. Due to limited patent budgets, and the high cost of geographically broadand sustained patent prosecution, many TTOs have to make difficult choices and prioritizeassets in the portfolio (proceed or abandon) as patent prosecution becomes incrementallymore expensive and time consuming at each step. As a result of the resource constraints,

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most TTOs act as a funnel or filter between the research enterprise and technology market.TTOs focus their resources on two fundamental activities: 1) buying time throughmethodical patent prosecution, and 2) gathering information about market viability of aparticular project or product. Alignment of the commercial drivers, research program, andpatent prosecution process is usually not under the strict control of the TTO, and in fact theTTO rarely has meaningful influence on research direction outside of projects fundeddirectly by the TTO. This is an important point that will be revisited later.

A traditional funding model for nascent product development programs is a research fundingor collaborative partnership with an operating company, usually a pharma, biotech, medicaldevice or diagnostics company, whereby the company provides research funding, andpayment of patent costs, in exchange for IP rights to the subject project outcomes.Generally, these arrangements result in traditional license transactions with the technologytransfer enterprise if the results look promising. It can, however be quite complicated toinvolve a new licensee company (typically called an academic spinout or university start-up)in this relationship between the research institution and the larger company. Usually, this isbecause of the competitive implications the academic spinout might create for the largercompany. However, where rights can be divided by field, or other alignments of interestbetween the three parties (research institution, academic spinout, and large operatingcompany) are feasible, corporate sponsored research deals can be catalytic to thedevelopment of an IP portfolio and development roadmap for a startup. A small handful ofUniversity of Colorado spinouts have achieved critical proof-of-concept threshold throughsuch creative partnerships with large companies and the University.

In summary, most TTOs act as an IP intermediary for more mature and market ready assets,maintain and pursue IP protection, and to some extent help guide the commercializationprocess in a logical direction. Funding for such applied research and influence of researchaims usually comes from non-Federal agencies and University sources.

Domain 2 - Philanthropic research funding and investing modelA recent trend in philanthropy has been to fund applied research that accelerates theadvancement of diagnostics, vaccines and therapeutics into clinical validation trials. Suchfunding has benefited high risk, high reward ventures, where the most applied, but cuttingedge research tends to happen. The term applied to such funding is venture philanthropy(Letts, Ryan and Grossman, 1997). The premise is that risk capital is provided to promisingteams and technologies at a stage where a financial return on investment (ROI) may not bereadily or easily achievable, but at the same time, the private sector is best positioned toclinically advance the technology Although the investment goals of such philanthropicorganizations might not be ROI based per se, the organization retains a carried interest in theventure and participates in financial upside or at least secures a return of their fundingdownstream. Such funding sources are often slightly downstream of POC funding activity ofmost technology transfer enterprises. Many foundations have historically been averse tosubsidizing private, for-profit entities, but some have seen the biomedical technologydevelopment ecosystem more holistically and realize that some for-profit companies can becapable and productive partners in the advancement of promising biomedical technologies.This is perhaps most true in therapeutics, where large scale clinical trials are almost alwaysfinanced by the private sector. The retained interest through royalty stream and/or equityinterest allow such funding initiatives to be “evergreen” or self replenishing. Examples ofthis approach are evident in the activities of the Juvenile Diabetes Research Foundation andPuretech Ventures:, Cystic Fibrosis Foundation Therapeutics, Inc., BIO Ventures for GlobalHealth, FastCures, the MS Socienty, and the Michael J Fox Foundation. This blending ofphilanthropic funding with capitalist incentive models and venture investment discipline, has

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come into favor among some successful tech entrepreneurs and investors, turnedphilanthropist, such as Bill Gates, Warren Buffet, Michael Milken and others.

Domain 3 – US Government Small Business Innovation Research (SBIR) and SmallBusiness Technology Transfer Research (STTR) programs

Historically federal research agencies such as the National Institutes of Health funded basicresearch and not development. With the creation of the SBIR (in 1982) and later the STTRprogram (in 1992), federal research agencies directed some attention to technologydevelopment. Recently, SBIR business development follow-on funding has becomeavailable for successful Phase I and Phase II awardees through the NIH and the NationalCancer Institute’s Rapid Access to Interventional Development programs (RAID) and othersimilar clinical development grants.

At a national level, the objective is increased technological innovation for sectors identifiedas important priorities by federal agencies and federal political leadership. Some politicaljurisdictions, particularly states, have pursued SBIR/STTR assistance programs directedtoward increasing applications and funding success for companies residing within thepolitical jurisdiction under the guide of a more comprehensive economic developmentstrategy, targeting high technology companies. Entrepreneurial inventors take it uponthemselves to seek and secure funding through the SBIR and or STTR mechanisms. Phase Igrants, generally in the $100–150,000 range, can be a scientific validation of a researchprogram and a catalyst for some sources of POC funding. Some state and regional economicdevelopment programs, and technology transfer and incubation organizations also provideassistance and proactively drive the pursuit of SBIR/STTR funds on behalf of clientcompanies. Examples of this are: the State of Kentucky, Pittsburgh Life SciencesGreenhouse, the Illinois Innovation Challenge Program and the Wyoming Phase 0 program.A few states provide or have provided matching funds for SBIR/STTR awards, such asKentucky, Colorado, Texas, Arizona, Oregon, North Carolina, Michigan and Oklahoma.

Relatively few pieces of the commercial roadmap must be in place to secure Phase I SBIRfunds. Phase II funding, generally in the range of $750,000 to $1.5M, requires many aspectsof a commercial plan, but does deeply delve into key intellectual property questions, marketviability issues, and a strategic and sustainable funding model. A phase II award mightaddress critical precommercial milestones, but such an award does not generally convert anacademic venture into an investor ready venture.

Domain 4 – Business development intermediary organizations, in particular biomedicalbusiness development organizations and biomedical business incubators

Technology oriented business incubators and public business development programsemerged in the mid 1980’s (Allen and Levine 1986), with biomedical specific programsemerging soon thereafter. Public business development organizations, which are typicallynon-profit organizations organized at local/regional/state levels, are driven by economicdevelopment objectives, specifically job creation and economic diversification. Businessincubators, a subset of this larger category, are driven by various objectives, with the generalobjective of public incubators being economic development, specifically job creation (Phanet al., 2005). Bioscience incubators are typically closely affiliated with research universitiesand in a much small number of cases, venture capital firms. As part of their service offeringstechnology incubators typically provide business development and investor networkingfunction. For example, four academic sites of the University of Colorado (Aurora, Boulder,Colorado Springs and downtown Denver) are independent entities, but each have anaffiliation with the CU Campus in that vicinity. Each campus works with a distinct andregionally based business development and incubation organization (Fitzsimons

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BioBusiness Partners, Boulder Innovation Center, and Colorado Springs TechnologyIncubator and the Bard Center for Entrepreneurship, respectively).

Economic Development Model—Bioscience companies can be scalable, attract largeamount of capital to a region, state, or municipality, and thus result in the creation of highpaying, high skill jobs. Some economic development (ED) agencies are becoming savvyabout programs to assist nascent biomedical companies reach a viable threshold and secureventure financing (vs. bricks-and-mortar infrastructure investments). It is common for urbanED organizations, particularly ones with affiliations with academic medical centers, to haveprograms directed to the critical need for early stage, patient, risk tolerant capital necessaryto get biomedical ventures to their first professional financing round. Most ED supportprograms require some commitment to the region, which can limit company mobility andattractiveness for an investor out of the region. ED program evaluative criteria can rangefrom financial ROI measures (such as loan repayment, royalty revenue and equityownership) to measures of job creation success. Despite potential complications associatedwith funding from an ED agency, such funds can be an important component to the pre-venture capital financing plan for a nascent biomedical company.

Typically program investment diligence is not as extensive as would be undertaken byventure capital investors. The process for making funding decisions shares some of theattributes of peer-reviewed basic research (review by relatively homogenous peers) withadditional criteria directed to technology development. The basic economic developmentobjectives of these public organizations leads to a set of decision criteria biased toward jobcreation and near term impact. Consequently, the most scalable ventures, those developingnew therapeutics, can be disadvantaged if criteria for support are biased toward requiring orrewarding near term outcomes.

Domain 5 – The early stage technology firmFor this domain the primary POC objective is return on investment (ROI). The institutionalventure capital industry (VC) and the angel capital industry best represent this domain andhave been called the “essence of capitalism”. As the VC industry has grown over the past sixdecades, it has gradually moved away from its seed capital origins to more later-stage, largerinvestments. During 2007, the seed venture capital investments constituted about 4% of thetotal $29.4B VC investments. Life sciences constituted 31% of the total VC investments in2007 (PWC MoneyTree, 2007).

Business Angel financing is thought to be as large as institutional venture capital, but angelinvestments are primarily small size (approximately $100,000 per investor with three to tenindividuals composing most angel investor syndicates). Accordingly, angel investing ismany times larger than the institutional seed capital industry. However, angel investing inbiomedical start-ups is about as frequent as VC seed investing, given relatively few angelshave biomedical experience and feel comfortable with the risks posed by biomedicalinvesting. Within the university context, a few seed capital funds and business angelnetworks have been created, including the Baylor Angel Network, MIT Angels, HarvardAngels, and Tech Coast Angels.

The Integrated Ecosystem—The University of Colorado has evolved toward anintegrated venture development process that coordinates all of the sources of precommercialfunding, coupled with the entrepreneurial and operational advisors and drivers critical tobuilding a viable start-up company. A coordinated commercial plan and developmentroadmap from the very beginning can ensure impactful use of each source of funds, withinthe inherent limitations each source of funding might impose. In a perfect world, a venture

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financing would present the fewest limitations and require the least effort and cost tomanage. In reality, most nascent academic ventures have to bootstrap themselves tofinancial viability (i.e. develop a credible development and business plan and secure a first“smart angel money” commitment) by reducing the fundamental types of early risk thatpreclude ROI-based venture investment such as technical viability, some preclinicalfeasibility, early financing, intellectual property and market acceptance risks Elements of aviable and investment quality venture are usually:

• an experienced and credible entrepreneurial driver or team with relevant operatingand fundraising track record;

• viable patent estate with issuable and enforceable patent claims and freedom tooperate in the specified field;

• proof of technical concept package, with some clarity of regulatory barriers; and

• readily evident business and revenue model

Getting a good handle on these early risks, allows venture investors to focus on risks theyare more comfortable assessing and managing such as execution and business model risks,systemic financial market risks (capital availability when capital is needed), clinical andregulatory risks and market risks. The aforementioned sources of maturation funding can behelpful in compiling the complete package (and risk reduction) necessary to attract venturefinancing. In fact, a rule of thumb used by some professional venture investors requires thatthey commit more than five to ten times the amount of capital previously committed toventure, ostensibly to ensure a sense that the team and technology have a solid foundation(and track record) upon which to build value. The elimination of compound risks certainlyimproved the odds of success and degree of confidence investors has in their ability tosuccessfully grow a business and obtain a return on investment. To the extent this rule ofthumb holds true, POC funding is not only a catalyst for venture financing, but perhaps therate limiting step and catalyst in many cases.

The inherent development, regulatory, and financing risks of early stage biomedicaltechnology, coupled with biomedical technology investors (financial and strategic) trendingtoward risk-aversion (Fishback et al., 2007), lower valuations, and generally higher hurdlesto investment, means many TTOs find themselves in the technology maturation business.POC programs can be a catalyst for downstream capital investment, and facilitate transfer ofthe technology, if the POC investment programs are designed to lower the activation energyof that downstream investment.

Section III: Other University POC Maturation Funding ModelsGeneral technology transfer enterprise (POC) funding model

Many large research universities have one or more proof of concept or seed funding models,with varying objectives and funding uses (reviewed by Johnson, 2005). Some are based onan ROI model such as Baylor College of Medicine Ventures, early stages of ARCH VenturePartners, Illinois Ventures, and the Boston University VC fund. Others are catalyst or pre-seed funds with a primary objective of facilitating downstream capital attraction such as theDespande Center at MIT. Funds can be segregated based upon intended use of funds, withuses including: scientific validation, business and regulatory planning, product prototypingand development, and clinical development. Generally, early stage aims like scientificvalidation and planning fit the risk profile of catalyst funds, where ROI funds tend tosupport later stage objectives such as regulatory and business development and clinicalvalidation.

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Many, but not all, catalyst POC funds require some form of repayment or carried interest:ROI funds will certainly have such provisions. Repayment can be in the form of cash orstock, and can be at a set time or deferred until financing or revenue generation. Most fundsstrive to be sustainable or evergreen by recovering capital from successful projects for laterredeployment, whether at nominal value or a multiple of the original amount. Whatever thepayback provisions and stage of deployments, most POC funds share a common goal:advancement of technologies stuck in the technology gap between research funding andprivate investment.

Section IV: The University of Colorado POC Maturation Funding ProgramsThe University of Colorado proof of concept funding program involves three distinct typesof awards: 1) Proof of Concept grants (POCg), 2) Proof of concept investments (POCi), 3)State of Colorado matching grants (POCsb).

The POCg program is a seeding program offering grants to faculty inventors of $10,000 to$25,000 to generate key preliminary data for downstream grants. The funding roadmap for aPOCg project usually leads through SBIR/STTR, federal funding or POCsb funding. Thekey milestone is usually technical proof of principle in a simple and cheap experimentalmodel system. POCg awards are usually given with the intent of either licensing or spinningtechnology out in a new venture. The decisions are largely made internally, with the input ofexternal advisors of an ad hoc basis. This program requires the University to tolerate themost risk, but given the small capital commitments, this program has the most potential tolead to high leverage in the form of larger boluses of capital inflow downstream. These aregrants and are not repaid.

The POCi program is the University of Colorado’s most focused and specialized fundingmechanism. Up to $100,000 of funding is provided to a University spinout in the form of anonrecourse convertible loan. Conversion is usually triggered by a qualified financing of apredetermined amount. The key milestone is usually one that would enable venture or angelfinancing, but sometimes enable an SBIR or STTR award. A POCi award requires acommercial driver or champion, often in the CEO role, to lead fundraising efforts andmanage the early business development activities of the nascent venture. Funding decisionsare recommended by a venture capital advisory panel, based upon their assessment of theproducts and concepts most likely to attract venture funding into a stand alone startupcompany.

The POCsb program is largely subject to the legislative mandate and restrictions in the statebill that allocates the matching funds. Grants up to $200,000 are provided to universityinventors for promising technologies that are likely to support Colorado-based venturebacked start-up companies. The funding decisions are recommended by a panel of venturecapitals and biomedical operating executives. Key milestones are variable, but must clearlylead to a logical, likely, and appropriate funding source. This program is most flexible instaging, but very focused on advancing technologies and concepts that can support stand-alone, scalable ventures given the economic development mandate of the legislationenabling the program.

The strategic goals of the University of Colorado POC program, in the context of thebiomedical development environment are represented schematically in Figure 1. There aretwo parallel and fundamental development tracks, business and technical, for any nascentbiomedical product originating from a research institution. The University of Colorado POCprograms are designed to address gaps in both elements of the development continuum byfunding both technical and business development.

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Section V: Overview of Outcomes and Lessons Learned from the CU POCprograms

The University of Colorado has experienced some early success since its launch of the POCiprogram in 2004, the POCg program in 2005, and the POCsb program in 2006. Overall,roughly half of the projects receiving POC funds have been licensed to commercial entities.However, a more meaningful measure of validation and success of these programs are thecapital commitments occurring downstream of those licenses Table 2. The program hasaveraged a 20X amplification of initial capital investment based upon slightly more than $5million of POC investments through the University of Colorado (Table 2 and Table 3).

Follow-on grant and angel funding was distributed across technology categories similar toPOC allocation, but venture funding was heavily focused on therapeutics (Figure 3). Notsurprisingly, therapeutics projects resulted in the greatest amplification of CU investment atnearly 30 X. In fact, while slightly more than half of POC projects funded were therapeuticsprojects, those projects accounted for 94% of the downstream capital attracted.

When looking at POC and follow-on funding distribution across the various CU POCprograms, the most mature program, POCi, tends to have the most amplification. In thesame vein, the least mature program, POCsb, shows the least amplification because most ofthe capital commitment under that program has been recent and follow-on funding has notfully materialized. That program was launched in 2006, and projects are just beginning tomature into viable and investment quality programs. A note about methodology is in order.If a single project received multiple POC awards, the follow-on funding is attributed to theprogram in which the last or largest award was issued, to minimize bias in the methodologyfor measuring leverage for a first, smaller investment or grant.

Case studiesTaligen Therapeutics was the first recipient of a POCi award from the University ofColorado TTO in 2004. Taligen was founded to develop antibody therapeutics targeting thecomplement system, thus the potential to address a broad array of clinical unmet needs.Preliminary in vivo characterization of proof of concept antibody therapies was fundedthrough POCi. Data from POCi studies were leveraged to attract SBIR awards in 2005 and aseed investment by a state of Colorado sponsored venture capital program. In 2006 Taligenclosed on a $3.8 M series A financing led by a California venture capital firm. After hittingkey milestones with Series A funding, Taligen was able to secure a $65 M commitment andclosed a Series B financing in January 2008.

Keys to Taligen’s success were:

• Clearly defined milestones and path to the next round of funding

• Committed commercial driver to step in as CEO and move the company forward

• Resolution of IP licensing and ownership issued under the POCi and through TTO,in support of financing diligence

Serendipitously, Taligen was the first and most leveraged POCi investment in the Universityportfolio. With such an example to learn from, minor refinements have made the POCiprogram highly successful, both in the proportion of projects that receive downstreamcommercial support and the aggregate dollars those projects have attracted. While it isvirtuous to learn from failure, it is fortuitous to learn from success.

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Sierra NeuropharmaceuticalsSierra Neuropharmaceuticals Inc. (Sierra) was founded in 2005 to develop proprietaryformulations of nonproprietary psychotropic drugs of known safety and efficacy. Sierra’stechnology and IP platform takes advantage of intrathecal delivery of psychotropic drugsthat have pharmacologic profiles rendering them suboptimal for systemic delivery. Originalproof of concept work was enabled through a $25,000 POCg award in the spring of 2006.Preliminary data on a novel formulation of clozapine were leveraged to get a POCsb awardof $190,000 to support formulation and regulatory development for other drugs. Venturecapital firms were keenly interested in addressing the unmet need for neurocognitivediseases and the potential for Sierra’ s platform to provide entry into that lucrative market. Alocal entrepreneurial group, who had experience raising $400 million in financing andexiting a prior University of Colorado start-up licensee therapeutics company, providedguidance and assistance to the scientific clinical founder of Sierra. The team assembled aviable and credible business plan and was able to close a $21.5 million series A financing in2008, led by two local venture capital firms and a third Boston firm.

Sierra is an unusual University spinout in two respects: the scientific founder was at theforefront of fundraising activity and continues (successfully) to be the CEO of the company,and a therapeutics company going from inception to series A in less than three years. Marketconditions and prudent use of early capital allowed the founders of Sierra to slip into thewindow of opportunity in a hot market area.

Endoshape Inc.Endoshape is a biomedical engineering platform company founded in 2005 to develop novelbiocompatible shape memory polymer materials for endovascular and intraluminal clinicalapplications. Endoshape’s scientific founder was the beneficiary of a $10,000 POCg grantaward in September of 2005 and a second $20,000 proof of concept grant in January 2006.Funding was used to optimize polymer materials for application in vascular stents andcharacterize materials properties in ex vivo and benchtop proof of concept studies. Thoseprojects were encouraging, a commercial champion was engaged, and a $100,000 POCiproposal was awarded to perform in vivo performance and biocompatibility studies. ThesePOC awards led to over $1.2 million in nondilutive SBIR funding to date.

Endoshape represents the third company the faculty founder funded based on CU IP, withminimal dilutive capital. Endoshape is an interesting case study, though still a developingsuccess, in that they have used to POC funds to validate a materials platform and getdownstream grant funding, then effectively utilized State of Colorado matching funds tomature IP diligence and hone market strategy and prioritize product developmentopportunities prior to seeking any venture capital funding. Venture capital financing and exitmultiple remain to be determined, but the company has successfully reached early stagemilestones without dilutive financing, and continues to plot a course forward with minimalstalls and pitfalls.

Summary of case studiesA common theme emerges as driving fundraising success of these spinout companies:

• a strong and compelling scientific founder who is persistent and coachable

• the importance of an involved entrepreneurial team or champion, early

• seed capital to validate the deal and nucleate the team

A POC program that can direct resources to the right opportunities and people, can createsignificant impact for an institution and a bioscience industry cluster.

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Section VI: ChallengesPOC funding in a research institution creates some tensions between two major constituentsin the technology development ecosystem: the faculty inventors (the sell side) and theventure and entrepreneurial community (the buy side). These tensions are result of wellknown cultural and value differences among the two constituents (DeFrancesco, 2008;Sparey and Gliubich; 2008). It is critical for both participant to understand the context andobjectives of POC funded research.

Faculty inventors often apply the same principles of merit and objective to POC proposals,as they would a grant application to a federal funding agency. The goal of the latter type offunding mechanism involves advancing the frontiers of knowledge, often through the use ofthe most cutting edge analytic methods, and elegant experimental designs. The goals of thetypical POC project are derived from questions posed by the venture and entrepreneurialcommunity or industry advisors. These questions rarely involve the most elegant lines ofinquiry, and consequently are not viewed by inventors and faculty entrepreneurs asscientifically valuable and publishable in top tier journals. The goals of POC projects are toaddress questions of technical, clinical, and market feasibility, which usually do not advancethe frontiers of science. Managing expectations of faculty inventors early in the POCprocess is critical to establishing a credible investment process in which faculty are willingand motivated participants.

Most effective POC programs utilize advisors or panels from the entrepreneurial communityand industry. These industry and entrepreneurial participants usually have valuable marketand/or clinical domain expertise and have experience in evaluating new technologies forinvestment by the organizations to which they are/were affiliated. Thus, these advisors cometo the process with criteria suited for major venture or development program investmentsthese advisors are accustomed to evaluating. Advisors and panelists must be aware of, andshare consensus about, the investment objectives for the POC program. The investmentobjective is usually a milestone corresponding to the next round of capital which would be aseed, Series A, or capital commitment from a licensing partner. It is critical that theevaluation process not be established with exactly the same criteria one would expect afinancial investor to use for Series A venture investment or a licensee or strategic investor touse for capitalization of a biomedical development program. In reality, the scope of mostPOC investments is an order of magnitude smaller and an order of magnitude more riskythan investments advisors are accustomed to evaluating. While a few similar investmentprinciples and disciplines may be applicable, the risk profile for a POC project will almostalways be preclusive of such a sizable capital commitment. The advisory process shouldreflect the practicalities of the high risk but small investment paradigm. The critical “smartmoney” investment milestone (not near term ROI, per se) must always be at the forefront ofany POC investment decision, Furthermore, the advisory group must always be cognizant oftheir role in defining that milestone for the TTO and faculty inventor, rather than decidingwhether the project is ready for Series A or a corporate investment.

While the benefit of a robust POC process is iterative refinement of a technologydevelopment program that might be “too early” for POC investment, it is critical thatentrepreneurial advisors or potential investors do not perceive the unsuccessful proposal/program as damaged goods, whereby there is a negative validation effect when a project isnot funded. One of the most common mistakes technology transfer enterprises can make isproviding ambiguous feedback to an applicant, such as: “…the project is too early”. Thedamaged goods issue is partially mitigated through clear communication of why a projectwas not funded and what an applicant can do to position the project more competitively inthe next round of applications. A clear, candid roadmap of pitfalls and milestones can put a

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projects true merits and challenges in an objective and proper perspective. This kind ofcandor is especially difficult when the proposal simply does not involve the right people orskills, or worse, involves the wrong people. Projects that are truly too early and lack meritfor larger POC investments might be candidates for smaller programs in the $10–50,000range if there is a clear milestone.

Institutional politics might also come into play in how programs are administered andpotentially impact relative distributions of funds among departments, colleges, or otherinstitutional business units. The most effective programs will externalize the decisionprocess by substantially involving industry advisors in the funding decisions. Some seemerit in having a scientific and/or clinical capacity in advisory panels. This is often easilyaccomplished through industry advisors and venture capitalists who have a solid technicalbackground.

In summary, most of the inherent challenges in a POC program can be somewhat mitigatedthrough implementation of the following best practices:

1. Clear statement of POC program objectives (i.e. down stream capital commitmentto a project after achieving a critical technical milestone)

2. Clear statement of investment discipline for advisors

3. Management of inventor expectations around acceptable project aims

4. Distinguishing objectives of POC funding from traditional research funding

5. Clear statement of milestones that represent a value inflection for a recipient

6. Clear homework assignments and interim milestones for unsuccessful applicants

A robust and objective evaluation process should flesh out the critical risks and milestonesinherent in the roadmap of any technology maturation project and build a long-term trackrecord of success that lends credibility to the POC program and the TTO administering theprogram.

When recently speaking at a faculty seminar at CU, a tenured colleague faculty memberfrom the University of Wisconsin - Madison asked if the several hundred million dollars ofdown stream capital investment in technologies from a university really is a measure ofsuccess, in light of some of the struggles and failures a biopharma partner of venture firmmight experience with a university originated development program. A fair question givenwithering drug pipelines in big pharma and losses experienced by many biotech companieswho have licensed or acquired early-stage product development programs from researchinstitutions. Given a research institution’s limited and appropriate role in the technologydevelopment ecosystem, the next round of investment is an appropriate measure of successfor both a POC program and the technology transfer enterprise running it. It is the goal offinancial investors to exit at a high multiple, and the goal of strategic investors to acquiremarket share through their deals. Research institutions are generally best suited to matureassets to a transferrable stage of development and hand them off to partners with theappropriate capabilities and resources. Downstream capital investment (in a diverse array ofprojects) is arguably one of the best measures of the effectiveness of a TTO. The Universityof Colorado has sought to build capacity and focus resources to optimize and not maximizethe degree of vertical integration.

Section VII. Implications for University Technology Transfer OfficesThe core competencies of top performing technology transfer enterprises are:

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1. credible and positive relationships with the primary customer - faculty inventors

2. ability to identify and articulate inventions within disclosures

3. following, and perhaps sometimes nudging the research toward enablement andestablishment of an optimum IP portfolio

4. execution of fair and timely license agreements

The foundation for a successful technology transfer enterprise is an integrated system withcapabilities in asset identification, articulation, development, maturation, and the businessdevelopment and capital allocation activity necessary to elicit investment and derive valuefrom the technology pipeline.

Two emerging capabilities common to these more effective and elite technology transferenterprises are:

1. business development activity with key participants in technology development andinvestment value chains

2. mapping commercial and market drivers for a given technology and guidingrelatively modest POC investments to align the risk profile of a technologydevelopment program with the profile of a viable investment for a biomedicaldevelopment project

The additional business development and investment activity of university TTOs has theeffect of nucleating entrepreneurial teams and drivers to move nascent technology towardthe profile of an investable opportunity. POC investment gives a program or project thecredibility necessary, the critical mass, to attract necessary entrepreneurial management,technical talent, and downstream resources necessary to get a program through a keyviability milestone. Viability milestones for a novel, first in class therapeutic is often avalidated target and IND enabling data package; for a diagnostic, retrospective validation ofa formatted assay on an FDA- acceptable analytic platform in a relevant clinical cohort; for atherapeutic medical device, demonstration of proof-of-principle in an animal disease model.Arguably, such success in reaching validation milestones should be the primary objective ofan academic TTO and proper place for transfer to another more capable participant in thetechnology development value chain.

Institutional research administration will face policy and fiscal implications when projectsare funded through TTOs. These intrainstitutional funding activities have the added benefitof being highly leveraged sources of research funding in that they can be augmented witheconomic development funds, federal matching funds, donor funding, or even privatematching funds. The case is usually compelling for reduced facilities and administrativeoverhead for projects funded through the intrainstitutional transfer from a technologytransfer enterprise. However, the matching funds and source of that match can present aquandary for research administrators trying to maintain a reasonable degree of fiscal parity(and baseline F&A rate expectations) among various research funding sources.

Most POC funds, especially those operated by public universities, have an economicdevelopment objective, which generally puts a successful POC program and the projects itfunds, on a trajectory toward a fast-growing, well capitalized start-up company. The facultyinventor is often a key contributor to the financing and growth of the company, whichpresents many potential inherent conflicts of interest and conflicts of commitment.Consequently, robust POC programs should go hand in hand with a robust institutionalconflict of interest policy and best practices.

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In summary, an effective POC program can be an extension of the research enterprise of itshost institution, and augment the clinical impact of such institutions, through advancementof fundamental and applied research into novel biomedical technologies and on into theclinic. Leveraged POC funding has the potential to amplify the impact of traditional federalgrants and intrainstitutional funding many fold. Coordination of POC funding withdownstream investors and market drivers can provide the best results if success isdownstream investment. However, the process for funding decisions, nature of researchaims, and fiscal administration require different practices by administrators and freshperspective among faculty participants. It is critical for the university TTO to effectivelywork with all business community and institutional stakeholders and build institutionalconsensus about the value and management of all aspects of the POC program to ensure theprogram is credible and effective, inside and outside the host institution.

ReferencesThe Money Tree Report. Q2. PriceWaterhouseCoopers. 2007 www.pwcmoneytree.com.Allen, D.; Levine, V. Nurturing Advanced Technology Enterprises: Emerging Issues in State and

Local Economic Development Policy. New York: Praeger Publishers, NY; 1986. EntrepreneurialDevelopment and Small Business Incubator.

Association of University Technology Managers (AUTM). FY 2006 Licensing Activity Survey.Deerfield, IL: 2007.

Collier AJ. Identifying Superior Performance Factors Relevant to Australian University TTOs.Comparative Technology Transfer and Society 2008;Volume 6(2):61–87.

Colyvas J, Crow M, Gelijins A, Mazzoleni R, Nelson RR, Rosenberg N, Sampat BN. How douniversity inventions get into practice? Management Science 2002;48(1):61–72.

DeFrancesco L. Interviews with nine leading scientists who founded startup companies reveal somecommon themes and lessons. 2004 Published online: 22 March 2004, doi:10 1038/bioent 796.

DelCampo A, Sparks A, Hill R, Keller R. The transfer and commercialization of university-developedmedical imaging technology: opportunities and problems. IEEE Transaction on EngineeringManagement 1999;46(3):289–299.

Feldman M, Feller I, Bercovitz J, Burton R. Equity and the technology transfer strategies of AmericanResearch Universities. Management Science 2002;48(1):105–121.

Fishback B, Gulbranson CA, Litan RE, Mitchell L, Porzig M. Finding Business Idols: A New Modelto Accelerate Start-Ups. Kauffman Foundation Report.

Gilbert J, Henske P, Singh A. Rebuilding Big Pharma’s Business Model. In Vivo: The Medicine andBusiness Report 2003;Volume 21(10)

Grigg T. Adopting an entrepreneurial approach to universities. J Eng & Tech Mgmt 1994;11(3–4):273–289.

Gulbranson Christine A, Audretsch David B. Proof of Concept Center: Accelerating theCommercialization of University Innovation. Ewing Marrion Kauffman Foundation Report. 2007

Jensen R, Thursby M. Proofs and prototypes for sale: the licensing of university inventions. AmEconomic Rev 2001;91(1):240–259.

Johnson J. Mind the Gap: The evolution of technology commercialization, the growing funding gap,and what research institutions are doing about it. Report: University of Minnesota Office of theVice President for Research. 2005

Letts CW, Ryan W, Grossman A. Virtuous Capital: What Foundations Can Learn from VentureCapitalists. Harvard Business Review. 1997 March;

Shane S. Executive forum: university technology transfer to entrepreneurial companies. J BusinessWriting 2002;19(1):537–552.

Siegel D, Waldman D, Link A. Assessing the impact of organizational practices on the productivity ofuniversity technology transfer offices: an exploratory study. Research Policy 2003;32(1):27–48.

Sparey T, Gliubich F. Nature Bioentrepreneur. 2008 Published online: 10 April 2008, doi:10.1038/bioe.2008.4.

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http://www.pwcmoneytree.com

Vohora A, Wright M, Lockett A. Critical junctures in the development of high-tech spinoutcompanies. Research Policy 2004;33(10):147–175.

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Figure 1.Schematic diagram of the Colorado Biomedical Venture Development model employed bythe University of Colorado. There are two parallel development thrusts represented by theupper and lower half of the diagram, Technical Development and Venture Development,respectively.Technical Development is largely funded through federal research funding and doneprimarily within the University of Colorado through traditional academic research grantsthrough the NIH and other federal agencies, SBIR/STTR subawards, POCg, and POCifunding from the Technology Transfer Office.Venture Development generally occurs outside the University of Colorado, within startupcompanies, often with support from the entrepreneurial community, and is financialsupported through State of Colorado matching fund grants for business development.Preclinical stage development work often falls into both technical and venture developmentclassifications and has been funded through essentially every funding program, dependingupon the needs and sources of funding for a specific project or company. Rarely is venturecapital or pharma partnering a major component of the preclinical funding model. TheColorado venture development process is focused on the advancement to clinical stage.Clinical stage development work is almost exclusively from partnering and venture sources,given the large capital requirements.

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Figure 2.

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Panel 1: Relative number of projects receiving University of Colorado Proof-of-Concept(POC) awards by technology type.Panel 2: Relative funding distribution of primary POC investments and grants into projectsby technology type.Panel 3: Amount of follow-on external Grants in POC awardee projects, by technology type.Panel 4: Amount of follow-on external Angel and Seed Investment in POC awardee projects,by technology type.Panel 5: Amount of follow-on external Venture Investment in POC awardee projects, bytechnology type.Panel 6: Amount of follow-on external TOTAL Capital in POC awardee projects, bytechnology type.

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Figure 3.

Panel 1: Relative funding distribution of primary POC investments and grants into projectsby POC program.Panel 2: Amount of follow-on external Grants by POC awardee projects, in POC program.

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Panel 3: Amount of follow-on external Angel and Seed Investment in POC awardee projects,by POC program.Panel 4: Amount of follow-on external Venture Investment in POC awardee projects, byPOC program.Panel 5: Amount of follow-on external TOTAL Capital in POC awardee projects, by POCprogram.

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Table 1

Summary of University of Colorado Proof of Concept funding programs, scope, aims and funding objectives.

Program Form Scope and Criteria Example endpoints

Proof of Concept grant (POCg) $10,000 to $25,000Grant to faculty laboratory

IP expansion, concept validation,enable NIH and Foundation grantsfor translational projects

Study proof-of concept moleculein vitro; format an assay forclincially relevant biomarker; builddevice prototypes

Proof of Concept investment(POCi)

Up to $100,000Loan (uncollateralized) to CUstartup company, with IP fromCU, convertible to stock

Clinical or commercial proof ofprinciple; "investable endpoints"

In vivo efficacy of proprietarytherapeutics; prospectivevalidation of a diagnostic; in vivoevaluation or performace testingof a device

Proof of Concept State BillPOCsb)

Up to $200,000Grant to faculty laboratory

Broader aims from POCg tocommercial; should augmentventure quality projects

Preclincial or clinical evaluation;pre-regulatory work; projectsdefined as investment-contingentby venture investors


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Table 2

Summary of projects funded under University of Colorado POC programs and relative success if licensing andleverage multiple, for the four primary technology categories representing POC investments. NumberFunded represents number of projects allocated POC funds. Number licensed represents number of fundedprojects in which an exclusive option or license agreement, requiring a capital commitment, has beenexecuted. Leverage multiple represents POC dollar commitments divided by capital commitments (grant orinvestment) to that project downstream of the exclusive license or option agreement.

Technology TypeNumberfunded

Numberlicensed

% transfersuccess

LeverageMultiple1

Materials and Tools 2 1 50% 0.00

Device 20 9 45% 4.49

Diagnostic 10 5 50% 2.54

Therapeutic 37 17 46% 30.96

69 32 46% 21.00


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Tabl

e 3

Sum

mar

y of

Pro

of-o

f-C

once

pt (P

OC

) inv

estm

ents

and

gra

nts a

t the

Uni

vers

ity o

f Col

orad

o by

tech

nolo

gy ty

pe. C

olum

ns re

pres

ent v

ario

us so

urce

s of

prim

ary

fund

ing

(PO

C A

war

d A

mou

nt) a

nd fo

llow

-on

fund

ing

by so

urce

and

in T

OTA

L. L

ever

age

repr

esen

ts P

OC

Aw

ard

Am

ount

div

ided

by

TOTA

Lfo

llow

-on

fund

ing

for t

hat c

ateg

ory

and

is a

prim

ary

mea

sure

of P

OC

pro

gram

eff

icac

y.

Num

ber

ofPO

C A

war

d A

dditi

onal

Proj

ects

Tec

hnol

ogy

Typ

eA

mou

nt G

rant

Fun

ding

Ang

el In

vest

men

tV

entu

re In

vest

men

tT

OT

AL

Lev

erag

e M

ultip

le1

2M

ater

ials

and

Too

ls$

75,0

00.0

0$

-$

-$

-$

-0.

00

20D

evic

e$

1,08

7,40

2.00

$1,

550,

000.

00$

1,30

0,00

0.00

$3,

081,

057.

00$

5,93

1,05

7.00

5.45

10D

iagn

ostic

$75

6,16

9.00

$2,

106,

557.

00$

-$

750,

000.

00$

2,85

6,55

7.00

3.78

37Th

erap

eutic

$3,

358,

449.

00$

2,50

6,70

6.00

$3,

693,

105.

00$

99,1

50,0

00.0

0$

105,

349,

811.

0031

.37

69$

5,27

7,02

0.00

$6,

163,

263.

00$

4,99

3,10

5.00

$10

2,98

1,05

7.00

$11

4,13

7,42

5.00

21.6

3


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Tabl

e 4

Sum

mar

y of

Pro

of-o

f-C

once

pt (P

OC

) inv

estm

ents

and

gra

nts a

t the

Uni

vers

ity o

f Col

orad

o by

PO

C P

rogr

am. C

olum

ns re

pres

ent v

ario

us so

urce

s of

prim

ary

fund

ing

(PO

C A

war

d A

mou

nt) a

nd fo

llow

-on

fund

ing

by so

urce

and

in T

OTA

L. L

ever

age

repr

esen

ts P

OC

Aw

ard

Am

ount

div

ided

by

TOTA

Lfo

llow

-on

fund

ing

for t

hat c

ateg

ory

and

is a

prim

ary

mea

sure

of P

OC

pro

gram

eff

icac

y.

Follo

w-o

n

Prog

ram

POC

Aw

ard

Am

ount

Gra

nt F

undi

ngA

ngel

Inve

stm

ent

Ven

ture

Inve

stm

ent

TO

TA

LL

ever

age

Mul

tiple

1

POC

i$

1,00

0,00

0.00

$2,

656,

706.

00$

1,50

0,00

0.00

$73

,481

,057

.00

$77

,637

,763

.00

77.6

4

POC

g$

730,

627.

00$

2,57

4,26

0.00

$1,

400,

000.

00$

8,00

0,00

0.00

$11

,974

,260

.00

16.3

9

POC

sb$

3,54

6,39

3.00

$93

2,29

7.00

$2,

093,

105.

00$

21,5

00,0

00.0

0$

24,5

25,4

02.0

06.

92

$5,

277,

020.

00$

6,16

3,26

3.00

$4,

993,

105.

00$

102,

981,

057.

00$

114,

137,

425.

0021

.63


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