Heard it from the Horses' Mouth: What Venture Capitalists Like and Don’t Like to See when Doing University Spinoffs

This is part of my ongoing series on University Entrepreneurship.

The annual University Startups Conference put on by NCET was held in Washington DC last week and was well attended by investors and university personnel alike.  Through the course of multiple panels and discussions, a good cross-section of venture investors from very reputable firms weighed-in candidly on both what they like to see and what they don’t like to see when they try to spin-out companies from university tech transfer offices.  Many colorful stories were exchanged to say the least.

Here are some quick bullets straight from the proverbial horses’ mouth that may be of help.

 VC’s like to see:

·       Platform technologies

·       Great faculty “stars”, great scientists, great science

·       Rich entrepreneurial culture and community throughout the university

·       A "go-to person" at the tech transfer office with entrepreneurial experience

·       A tech transfer office that’s “all about throughput” and getting deals done quickly

·       Deal terms that are flexible because "business models change over time"

VC’s do not like to see:

·       Slow-moving offices that take too long to get a deal done

·       "Mismatches" in terms of respective legal counsel (turn-around time, skill, expertise)

·       “Greedy” tech transfer offices with onerous deal terms

·       "Big egos" at the tech transfer office that get in the way of deals

·       Business plans. VC's prefer to have a short summary and decide for themselves


For Part 22 in this Series, click here

New York City’s Academic Institutions: A Stunning Engine of Innovation


Many of us who have the distinct pleasure to live and work in New York’s entrepreneurial ecosystem and/or Silicon Alley have no inkling of the staggering role its local academic institutions play in the realm of innovation, licensing, and start-up formation. I can tell you that until approximately six years ago I had no idea of the sheer scale of it all.  It  is certainly true that the majority of this output is in the realm of health sciences/biotech, but much is being done to stimulate entrepreneurship from engineering, computer science departments, the undergraduate ranks and the business schools.  (More on this in subsequent posts).

Just look at these hard numbers:

Annual Research Funds:                                       $1872 million

Annual  Inventions:                                                 643

Annual New Licenses and Options:                      193

Total Active Revenue Generating Agreements: 566

Annual Gross Licensing Revenue:                       $509 million

Annual Number of Start-up Companies:             20

Number of Start-up Companies to Date:             188



Source: New York Academic Consortium (NYAC)


For Part Twenty in in this Series, click here

University Spinoffs: A Stunning Track-Record of Success

Hat-throw graduation  

This is part of my Series on University Entrepreneurship.

 Recently I met an entrepreneur at a function who, upon learning that I ran the Venture Lab at Columbia University asked me why he should pay any attention to the university space at all- telling me that he had never heard of any successful university spinoff companies. I responded by saying that I wasn’t surprised and that this view is actually a common misconception. I went on to point out that companies with household names such as Google, Lycos, Genentech, Gatorade, Hewlett Packard, Polaroid and others were all formed around university intellectual property. He was definitely shocked to hear this and we subsequently had a pleasant discussion about the Bayh-Dole Act, the spinoff process, and essentially the whole fascinating landscape of university entrepreneurship. 

I have conversations like this so often that I thought I’d share a few statistics about university spinoffs to which I can refer entrepreneurs and investors in the future. 

  • Over 400 university startups are created each year based on federally funded R&D.
  • Google, Netscape, Genentech, Hewlett Packard, Polaroid, Lycos, Sun Microsystems, Silicon Graphics, Chiron, Amgen, Regeneron and Cisco Systems are all examples of university startups.
  • 68% of university startups created between 1980 to 2000 remained in business in 2001, while non-university based startups experienced a 90% failure rate during that same time period
  • 1/3 of SBIRs reported involvement with a university including scenarios where either the founder was a former academic, university faculty were consultants, universities were subcontractors, or graduate students were employed
  • 8 percent of all university startups go public, in comparison to a "going public rate" of only 0.07 percent for other U.S. enterprises - a 114x difference
  • By way of example, as of FY 2009, Columbia University has spun-off over 100 companies historically, over twenty of which have either been acquired or gone public, over 30 of which have been venture-backed at some point in their life-cycle, leading to the creation of in excess of 1500 new jobs.

(Sources: NCET2 and Columbia Technology Ventures)

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For Part Twelve in this Series, click here

Deal Terms for University Spin-Offs

Oxford cool crowned head

This is part of my Series on University Entrepreneurship.

 Everyone asks about deal terms at some point, so we may as well address it sooner than later. Let’s say you’ve now visited a few tech transfer offices and you are ready to talk to their New Ventures person about spinning out some IP into a start-up.  What kind of deal terms should you be looking for?

The reality is that every deal is different and so it’s difficult to generate a one-size-fits-all response. Also be mindful that university tech transfer offices across the country vary greatly in their approach to start-ups.

Here are some very general guidelines to a fair deal that you may find helpful, however:

  • In most cases you should obtain an exclusive license to the technology in the fields in which you intend to operate
  • In most cases you should seek to back-end the economics of the deal and stay away from high up-front license fees
  • You should be prepared to partner with the university and let it have an equity stake in the company. (We will have a separate series of posts on equity considerations as there are many nuances here).
  • You should mutually agree to some diligence milestones that lay-out time-lines for things like first product sale and in some cases capital-raised or revenue targets. These should have built-in flexibility and not be harsh
  • Royalties depend a great deal on the industry in which you’ll be operating but should never be a yoke around your neck- allowing you to operate with a comfortable margin

If you’re not getting a deal done that reflects a win-win you should quickly move on, but such negative outcomes are less and less frequent. More and more offices understand the challenges of launching a start-up and, when a talented entrepreneur is at the table, increasingly have the right approach.


For Part Nine in this Series, click here

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Angel Investing (3): Judging the Team

Rodin_Thinker                Ranpic193 gorilla face close up monkey thinking hand eyes

This is part of my Series on Angel Investing.

Another observation I’ll make is this. With the advent of the internet we’ve obviously seen a remarkable democratization of information and in particular, unprecedented access to heretofore difficult-to-obtain information. Previously arcane disciplines such as venture capital, for example, have been “opened-up” and laid bare for anyone with a laptop and some free time to explore.  Chess is another example. In the past decade the internet and sophisticated chess software programs have created the phenomenon of the 12 year old Grandmaster! No longer are years of practice and study with dusty old chess tomes and wizened instructors required for a really talented human being to acquire the knowledge needed to ascend to this kind of playing strength. Now 10 year olds can course through thousands of classical grandmaster games with the click of their mouse and, through pattern-recognition and raw talent traverse in a few years’ time a landscape that required almost a decade of study only a generation ago. Do we even need to discuss the technological revolution we’ve seen in golf? Videos, DVD’s, handheld GPS devices to tell you the yardage, hybrids, belly putters, and titanium shafts lined with kryptonite. Everyone has access to equipment that Sam Snead could have only dreamed of.  We now see things that are shocking to the senses as a result. I already mentioned the spectacle of the baby Grandmaster in chess. What about that celebrity golf event I stumbled upon on TV a few years ago? Remember that kid actor from the movie Sixth Sense who could “see dead people”? I watched this tiny fellow stride up onto the tee like King Kong, suddenly pull out his driver like it was Excalibur and start smashing huge drives way out there on every hole. I think he was hitting it past Marky Mark. He'd probably hit puberty by then but still looked like he was maybe 15 years old to me. No doubt he’d shelled out a lot of his movie royalties for professional golf instruction out in L.A.

For the most part though, most of us who are not quite in the league of the Andreesens, Kasparovs and Tiger Woods’ of the world are simply walking around with an immense amount of superficial information in our heads. (Certainly an order of magnitude more than our parent’s generation). Thousands of Google and Wikipedia searches, films, DVD’s and the like are no doubt responsible for this.

And in this particular context- which involves the judging of entrepreneurs, you’ve simply got to be aware that plenty of people looking for funding have read pretty much everything that’s available on the net having to do with raising capital. So what I’m saying is that a ton of entrepreneurs you’ll meet all “know what to say”.  You’ve just got to get good at seeing when they don’t “know of what they speak”.

The bottom line is: just look for authenticity. You’ll know it when you see it.

For the next post in this Series, click here.

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University Spin-Offs (5): Angels in our Midst?

Angel in stone at Notre Dame

This is part of my Series on University Entrepreneurship.

 Angel Investors are the absolute life-blood of start-ups and early-stage investing in this country.  Angels are the ones who get involved with entrepreneurs at the earliest, highest risk stages of a venture, bringing that essential capital- as well as a high degree of support and enthusiasm. Let me take this one step further:

Angels are also the life-blood of university spin-offs.

It is actually a common misconception that university spin-offs emerge from the academy with venture-backing. Despite an enormous amount of bluster and braggadocio in the industry, this is actually the exception as opposed to the rule. The overwhelming majority of university spin-offs emerge from the academy ab-initio with angel funding (if they actually have funding of some kind). It's the hope that after a year or more of development, some percentage of such companies will be ready for a traditional institutional venture-round of financing.

Is it true that sometimes there is such an appealing mix of well-baked and extraordinary technology and the availability of a committed team that a company will spin-out of the academy with institutional venture financing? Yes, it does happen and that's terrific. But again, most of this heavy lifting is done by angels and/or angel/entrepreneurs at this nascent stage.

The emphasis on venture financing one encounters at various tech transfer conferences and public discourse on the matter thus misses this essential point and may be a contributing factor to the fact that many tech transfer offices do not recognize the importance of Angels to this ecosystem. 

As someone who has been on both sides of the table, my view is that when those in tech transfer offices run into legitimate and respected people who happen to be Angels, we ought to respect their time and enthusiasm. They are most often folks who have run successful businesses before, love being helpful and want to stay active in the arena of company building. 

For Part Six in this Series, click here

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Angel Investing (2): It's Personal

Handshake 2 entrepreneurs

This is part of my Series on Angel Investing.

So I’ve established in a rather primitive post that I believe the leader/team is essentially everything.  If you’re in the world of start-ups and early stage investing I’m sure you’ve heard this from certain people over the years. I did too. But the funny thing was, hearing it only means so much. You don’t really come to understand what this truly means until you live through it and feel the pain of mistakes you’ve made personally and also through the good times when your decisions have actually worked out.

Wait, did I just coin another aphorism?:

Angel Investing is Personal.

Yes. It’s all about people and human relationships. And just like any other activity involving other human beings it can be a ton of fun and in some cases, quite frustrating.

What it comes down to is finding and backing people who have the right combination of qualities, experience, talent and character and supporting them as much as you can. (We'll get into just what I think these qualities are in future posts).

So if you are looking to get into angel investing you really need to think about this in a profound way. Talk to a bunch of experienced angels before you dive in.  Most of the time we hardly realize how little we actually know when we start participating in a new activity.

For Part 3 of this Series, click here.

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Angel Investing (1): A High Risk Activity

Roulette old school  

This is part of my Series on Angel Investing.

There’s loads of material on angel investing on the web. You can also dig up a slew of statistics about angel investing, angel groups, exit rates and find a bunch of charts various well-intentioned academics have concocted. 

I’d like to begin this series with one core principle that’s been driven home to me after just about a decade doing this.  It’s definitely a more simple take: Angel Investing is just another form of gambling, nothing more, nothing less.

If you're steeped in mathematics and find this statement somewhat imprecise, I'll provide a formula:

Traditional Angel Investing = Gambling

Yes of course you do your diligence. Of course you’ve assessed it like a 10 foot birdie putt from every angle.

But make no mistake. You’re simply betting on one thing:

Another human being.

I guess this is my way of saying that in my experience, nothing else approaches the importance of the leader and the team.

For the next post in this Series, click here.

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University Spin-Offs (4): Professor as CEO?

Oxford professor wth pipe

This is part of my Series on University Entrepreneurship.

 A question that comes up often at various conferences is whether the inventor/professor should leave the university to launch the start-up as the CEO. Whereas in extraordinary situations this may be appropriate, for the most part, it is not a good idea for a number of reasons.

Ideally, a university spin-off, (like any other start-up), should be run by an experienced and talented entrepreneur with a deep network of contacts. It’s just a fact that most professors are not in this category. Most investors can regale you with a few unfortunate tales of woe in which they violated this maxim and backed a CEO professor who left the university to spin-off a company. There are less such cautionary tales of late because most experienced investors just won’t do this again. The investment community has learned from its mistakes over the last 10-15 years.

The other reason it’s not such a good idea is that the inventor/professor can be incredibly valuable to the spin-off without leaving the academy. He or she can keep working in the lab, keep teaching students and at the same time serve as a Chief Scientific Advisor and shareholder in the company. Most schools allow a professor to hold equity in a spin-off so long as the spin-off does not fund research in the professor’s academic lab.

The last major reason the professor should stay put is that often, one can achieve a  very effective ‘technology transfer’ simply by hiring a graduating PhD student from the professor’s lab. This is often a terrific way for the start-up to benefit on an ongoing basis from the human/technical expertise/know-how that is so critical to the future development of the ultimate product.  


For Part Five in this Series, click here

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University Spin-Offs (3): Suffering from Entrepreneur's Block?


Columbia Gate

This is part of my Series on University Entrepreneurship.

 If you’re an entrepreneur looking for your next start-up, of course it’s probably best to have your own idea for a company. No doubt you’re enmeshed in your city’s local entrepreneurship network- but if you really have a bad case of entrepreneur’s block and haven’t come up with anything worthwhile lately, you might consider paying a visit to your local university tech transfer office. Never heard of tech transfer you say? Been too busy building companies? Ok, start reading my first posts on this subject,  

http://bit.ly/d1aCk and catch up on this thread.  

You may be amazed to learn that some universities spin-off up to a dozen companies a year based on their IP. Sure it’s true that some of these are “faculty-vanity” plays, but there’s plenty of good companies emerging from the academy.  

I’ll let you in on another fact: If you’ve got a few successes in your past, you’ll be very welcome when you show up. See if they have a person running their start-up arm, sometimes called  “new ventures” or “the venture lab”.

So pay a visit, introduce yourself and they’ll keep an eye out for you.


For Part Four in this Series, click here

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University Spin-Offs (2): A Quick Primer

Harvard gates

This is part of my Series on University Entrepreneurship.

American universities serve as an enormous and profound engine of innovation for the US and the world. Many people are surprised to learn that many companies with household names originated in the academy. Google, Lycos, Genentech, Gatorade, Chiron, Hewlett Packard, Polaroid and many others are companies formed around university intellectual property. 

Each year literally billions of dollars in federal funding flow into universities around the country in the form of grant funding and provide the motor for the operation of countless labs and ground-breaking research in medicine, software, engineering, robotics, clean tech and biotechnology.

For many years, however, university technology often just “sat on the shelves” and was rarely commercialized throughout the 20th century. With the advent of the Bayh Dole Act of 1980 all this changed and universities were given ownership of this valuable technology. Many opened in-house technology transfer offices, the mission of which was to see these inventions commercialized and brought out for the benefit of society. The results have been nothing short of transformative. See these links below to learn more about what has been called “perhaps the most inspired piece of legislation to be enacted in America over the past half-century," according to The Economist. ("Innovation's Golden Goose," an opinion piece published in the Dec. 12, 2002, edition)”.



The bulk of this massive success has been driven primarily through straight licensing activities in which the universities have licensed IP directly to established companies (ie. big pharma, etc.) which has led on occasion to the development of life-changing drug development and enormous revenues flowing back to the universities in the form of licensing fees.

As I mention above, however, in the past 10-15 years, it has become more and more common to see universities spinning off start-up companies based on university IP, in which the university retains an equity stake and a royalty stream. In that university IP is “early stage” and often not commercial grade, it is often necessary and appropriate that a start-up be launched around this fledgling technology so as to be able to bring it through the proof-of-principle stage whether this be a beta version of the software, a prototype of a medical device or animal testing in the case of drug discovery projects.  This “gap” between laboratory IP and a commercializable project is known as the “valley of death” in the industry. It is essentially the job of the tech transfer office to determine what IP within the university is commercializable, to protect it when and where appropriate via the patent process, and then to help the technology across this valley either through straight licensing or through the start-up route.


For Part Three in this Series, click here

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University Spin-Offs (1): The vaunted gates creak open and entrepreneurs peer inside

Cambridge university gate

This is part of my Series on University Entrepreneurship.

Entrepreneurs lurking within the hallowed halls of the academy? An oxymoron for centuries no doubt. An outrage, even, for some purists. 

It all began for me some six years ago when a colleague invited me onto an ivy league campus to introduce me to the university's technology transfer office.  The what? I had never heard of such a thing! Once I entered however, I was stunned by what I saw. An entire universe of innovation and technology at its most nascent, rawest stage. Hundreds of technlogies, hundreds of millions of dollars in research funding pouring into a multitude of labs each year, a host of brilliant minds and nobel laureates feverishly at work. Yes it was raw and savage- but beautiful too in a way. It was like entering the Thunderdome in MadMax- you know, "two men enter, one man leaves".

I was the one who stayed for a while....

Since that day I've been enmeshed in the arcane world of university spin-offs (on both sides of the table) and have actively been involved in spinning out approximately 35 such start-ups based on university intellectual property (IP). It is an absolutely  fascinating and rapidly growing field, a sub-set of university tech transfer but an increasingly important one. If university tech transfer is only 28 years old, (its birthday was the passage of the Bayh-Dole Act of 1980), then university spin-offs must just be entering their teen-age years by now.

In a sense, those of us who participate either as investors/entrepreneurs or as the new ventures specialists within universities, are writing the story of university spin-offs as we speak.  Some universities are farther along down this road than others, but more and more university tech transfer offices are realizing the advantages of having a dedicated Start-Ups/New Ventures program run by an entrepreneur/investor-type focused on cultivating the investment community and spinning out companies based on university intellectual property.

In this series I'll be writing about the phenomenon and practice of spinning-out companies from the academy. Please join if you're interested. The imposing old gates have definitely creaked open and the call has gone out to entrepreneurs:

"Welcome to Thunderdome"... let's have some fun inside.


For Part Two in this Series, click here.


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