5 Tips for Venture Investing in University Inventions

Investing in university ventures is difficult but worthwhile. The following are a few things to consider when you are negotiating investment deals with universities. All of this comes from my own experience and might not reflect the engagement with your particular university.

1. Know who you are engaging

University Technology Transfer Officers (TTOs) are neither entrepreneurs nor lawyers (the two common contacts for a traditional venture investor). They are a curious mix between business developer without strong incentives and legal administrator without formal background. Your common TTO has a technical PhD (university value system at work) and very little off-campus work experience.

Add a high turn-over and a low frequency of equity deals per TTO, and you get significant knowledge variability. Some TTOs are exceptionally well versed operators, while others need an explanation of basic terminology (e.g. “vesting”). Of course both types usually share the same generic TTO title.

Try to physically meet your TTO counterpart early on to get a sense of their experience. Make sure that you carefully explain terminology of your world. Ask them to return the favour and carefully explain the university context to you. Universities have their own culture and vocabulary when it comes to commercialisation. The more you normalize your language, the better your chances of closing a deal.

2. Licensee vs. Investor

It is truly unfortunate that most university investment deals are considered a “license”. For a traditional license the TTO is usually approached by companies that have established an internal need for a certain technology and would like to procure it. The licensee wants something and the TTO has it.

The inverse is true in the venture world where it is the entrepreneur who wants the money and the investor who has it. Even in today’s frothy market, entrepreneurs pitch to VCs, write business plans, travel to partner meetings, etc. University inventors don’t pitch (or do any of the other things that you would normally expect as an Angel or venture investor). Instead, they often genuinely believe that they are doing you a favour by taking your money. Don’t get offended when this happens. It’s a consequence of their (sheltered) reality and not intended as a negotiation stance.

3. Charter vs. Folklore

Universities have a lot of fundamental charter constraints. These are unavoidable and as an investor you just need to learn to live with them. But universities also have a lot of folklore that at first glance appear like charter issues. A classic example would be the often-quoted Bayh-Dole Act in the US: “We cannot sell the technology [Charter: Bayh-Dole prohibits assignment] so we need an ongoing royalty [Folklore: Bayh-Dole makes no provision whatsoever about payment modality]”.

Understanding these differences can be critical for business decisions (e.g. the inability to collect a lump sum payout would scuttle most venture investment deals for technologies with long times to market whereas the inability to assign wouldn’t be a deal killer for the same investor). Beyond studying policy, your best bet is to ask the TTO to provide not just the “rules” but also the reasons behind them.

 4. Risk is Anathema  

University inventors aren’t just risk-averse. They don’t just assess risk and then decide against taking it – they often genuinely don’t understand the concept of risk. This usually pops up during the valuation process. Inventors, and to some degree TTOs, tend to over-value ideas. On the flip side, they tend to under-value human contributions. I have had TTOs question why we would allocate equity to (low or unpaid) employees of the venture at all.

 De-coupling past from future is your best bet for crossing this chasm. The past is sunk cost. The value of the invention has nothing whatsoever to do with the (government) money spent to get there and everything to do with the commercial opportunity going forward. You should therefore make a distinction between those inventors who will make substantial operational contributions post-founding and those that won’t. The latter will be adequately provided for by the university portion of the deal. The former should be treated as founder. Simply ignore the fact that they will also receive some proceeds through the university channel. Mixing up these two types will give you nothing but grief.

 5. Don’t Screw Them

It’s so easy. Universities are early (common) shareholders; they don’t have a voice in the company; their value contribution is mostly made already (IP injection); and they usually don’t fight back. It would be so easy to squeeze them just a bit more out of the cap table. Fight.That.Thought!

Every time that an investor or entrepreneur screws a university, it becomes part of the global university folklore. Universities and their Tech Transfer Office are like a hive mind. I recently had a TTO tell me straight-faced that “we always get diluted to nothing in equity deals” – at a university that has never actually done an equity deal. Hive mind.

Their concern is real and they get screwed often enough. But everybody who screws them a bit makes life massively harder for hundreds of upstanding investors and entrepreneurs. You are poisoning the well in the backyard. Don’t do it.

19 thoughts on “5 Tips for Venture Investing in University Inventions

  1. Excellent piece, and very true. Add to it the fundamental distinction between what many entrepreneurs offer or at least try to offer to VC’s — a value proposition — and what university TTO’s offer — a license to or ownership of raw IP — and you can see how disconnects both as to process and value are endemic.

    • Thanks for the comment Richard. I agree. In part, our job at TandemLaunch is to transform raw IP into a value proposition (to a large company or follow-on investor). That requires investment, prototype development and business scoping – all things that are structurally very difficult for a university for lack of relevant people, tools and funding.

  2. As the comments say, it is a good piece. Having spent a good few years working in the technology transfer arena in the UK, I recognise the truth in most of them. But I don’t accept all of them (and I wonder if this is because there are inherent differences between the US and the UK markets?):
    1. I agree that TTOs have a range of experience but of those that I meet, my sense is that a majority have had commercial, “real world” experience. The tech transfer profession in the UK has matured over the last few years and I think that it would be wrong to assume that most TTOs are inexperienced and wet behind the ears. There are, of course, exceptions!
    2. I don’t agree with the premise to this one. A licence deal is different to an investment and I think TTOs understand that. More to the point, while there may still be an old guard that assumes that they deserve investment regardless of the merit of the technology, most researchers are more savvy than that and are perfectly prepared to put the time in to presenting to and courting investment. They know full well that investors often will not countenance investing without a commitment from the academic to stay involved.
    3. I agree in the sense that investors would do well to spend some time understanding the drivers and priorities of universities and researchers but things are different in different jurisdictions.
    4. I really don’t agree with this one. Researchers understand risk and they understand failure. To my mind, it is the investors that demonstrate risk aversion by insisting on veto rights, anti-dilution and liquidation preference provisions. The investors will get the lion’s share of any upside so surely the risk should rest with them? And I am not convinced by the argument that researchers over value the technology. How much of this claim is a function of the fact that investors will want to drive the price down? In any case, I see valuation as just another part of the negotiation process.
    That said, I do agree about de-coupling the past. The researchers have sunk a great deal of time and effort into developing the technology and their backers have provided funds to support this research and the patenting costs. It is legitimate for them to want to see some return but I agree that those who will not be involved any further should be satisfied with their university revenue sharing provisions.
    5. I agree. Investors can get a reputation incredibly quickly…

    • Great comment Stephen. Thanks. I am going to address these with pretty blunt statements for the sake of brevity and polarization. There are obviously shades of grey for each issue.

      1. There are of course many TTOs with experience. But at least in North America I still find that the entry hiring practice is biased towards technical PhDs. That’s just silly in my opinion – the equivalent of already having a world-class CTO (the prof) and then hiring another slightly less domain savvy technologist as your VP Biz Dev. Ask yourself how many TTOs that you have met have successfully build and sold companies. In the ideal world that would be close to 100% – and I doubt that we are at 10% today…
      2. As an entrepreneur I raised 8 rounds of equity financing from a total of around 60 investors. That meant engaging 500+ potential investors at their location and pitching so much that even a decade later I can still remember my first pitch deck almost verbatim…
      On the flip side, we receive over 95% of our project submissions by pro-actively reaching out to TTOs (5% are TTOs reaching out to us). Number of times that a TTO has actually shown up at the office to pitch their project (at least before we go to their campus for the first few meetings): 0; number of times that an entrepreneur shows up at my office to pitch: 2 so far this week…
      4. I share your dislike for complex term sheets. All venture rounds above used common shares only and TandemLaunch today invests on the same basis. That said, I think your comment illustrates the point about misunderstanding risk, investment and licensing. For a license the value of an invention is the amount that the customer is willing to pay (“market value”). In the investment case there is no customer so that value is quite literally zero. Equity distribution therefore cannot be about value, it has to be about risk. The investor risk is easy to assess in dollars. The entrepreneur is presumably paid substantially below market and thus risks that compensation gap. University inventors work at market rate and their career is in no way tied to innovation (much less commercialisation). As such, their risk is zero regardless of how many years they worked. A corporate research scientist under the same conditions can work for 30 years on a project and at the end she still won’t get a single piece of equity. No downside, thus no risk and no upside.
      I am not at all advocating eliminating university/professor equity. But the point is that risk upside isn’t about maybe getting more than market. It’s about maybe getting more and maybe getting (a lot) less. Upside and downside potential balance at the point of risk equilibrium.
      There is (and should be) a sharp non-linearity between an inventor who just contributes the invention and one who is even a little bit involved in the commercialisation process (risking extra time without immediate compensation). The former gets his portion of the university piece. The latter gets an equity stake that is often comparable or larger than the whole university stake.

  3. Great piece, well done. I have the scar tissue from every side of this- running a TTO, as a director of a spin-out, and as an early stage VC. I would add one more piece of advice- be patient. Recognise that this is not the top of the list of priorities for those you are engaging with and therefore they will take time to get comfortable. Also, as there are distinctly different parties (the university != academic != the senior post-doc != the entrepreneur != TTO office != academic department) lots of individuals can slow things up as they all have slightly divergent interests and priorities.
    Good luck!
    Ed

    • Very good point Ed. I live this every (looong) day. I remember sponsoring a chair at a university and most of the effort was devoted to getting a dozen inner-university entities lined up. A phenomenal tech transfer officer ultimately cut through a lot of red tape, only to later get berated (by the previously unencountered 13th entity).

  4. Well concieved piece, Helge. As a former Director of a TTO, your statements certainly ring true (albiet embarrassaing for universities).

    I would add that entrepreneurs and investors alike should seriously consider incorporating engagement with the postdocs (per Ed French’s comment above) into the license language (example: 6 months of technology development consulting, minimum 200 hours). This is critical for two reasons: (1) Often the postdocs have solid technical expertise and have contributed as much or more to the original innovation as the faculty inventor, and (2) On average, postdocs tend to be more motivated AND more entrepreneurial than faculty (particularly tenured faculty) and are more inclined to work with or in a startup for equity and a Subway sandwich.

    Do not underestimate the value that the postdocs bring to the start-up equation. These are lessons learned the hard way.

    Regards,
    DS

    • Thanks for the comment Doug. I completely agree that post-docs and grad students are incredibly valuable “knowledge carriers”. At TandemLaunch, we try hard to place the student/post-doc inventor in either an entrepreneurial leadership or, at least, development capacity. In both cases they will have a significant equity stake in the venture.

      Part of this is my own bias showing – I used to be that student-founder :)

  5. Great discussion! Invaluable information for someone like myself who is moving into the tech transfer/business development area after a research career followed by a biotech/pharma career followed by an MBA that I’ll complete soon and want to put to work.

    Having been a post-doc myself, I agree they are much closer to the work and often hungry for more than their current situation.

  6. Pingback: Licensing Technologies from Universities | Belief Without Evidence

  7. Great peice. I have a question for you Helge. TTOs are oftern faced with the problem of recieving some innovative work but not being able to connect with investors. One way to start a conversation with investors is to get recommendations from thier partner companies (who through networking you hopfully have a connection with) in order for them to be interested. My question is, (question is also to any readers): What methods do you find the most useful in insighting interest in the innovation as an investor or TTO office without having to network your way in?

    • Interesting question Joshua. Investors live in a world where deal information is easily accessible and they can make quick “initial scan” decisions. Websites like Angel List have turned this into an art form. So the first step should be to ensure that your technology offering is readily visible and accessible (see some tips here: http://techentrepreneurship.com/2012/01/03/where-tto-technology-listings-fail/ ). About 1/3 of TTOs approaching TandemLaunch for example still demand a non-disclosure agreement before providing any background about the technology or allowing communication with the inventor. That’s very difficult for a university-focused investor like us and a death sentence for any interaction with a traditional venture investor.
      Once your information is readily visible, I would focus your search on investors who have experience dealing with universities. Without that background, investors will look for traditional information like market traction, founding team, etc. – none of which is usually available in a normal tech transfer scenario (if it is, then that team with traction should be able to get into the door of traditional investors). University-experienced investors will instead look for information such as patent status (priority dates, issued vs. application, international coverage, prior art, etc.), availability of grad students (for knowledge transfer), level of current engagement of the faculty member (i.e. has she moved on to other topics?) and high level deal requirements from the university (e.g. valuation range, investment required, etc.). Especially the latter is often very difficult to extract from TTOs (yet utterly standard for any normal company to mention right away during any fund raising pitch).

      • Thanks, thats really useful. I have one last question however, in your opinion, what is the best method you have seen for a TTO gaining your attention? for instance, documents, e-mails, videos, socail media? do you know of any trends in this market? or do you think its situational on who you are talking to in the value chain? e.g investors, manufactor, end-users, etc.

      • It is pretty situational. Getting in touch with us at TandemLaunch very easy (just send us an email). But that’s because it is our business to work with TTOs on joint commercialisation. Reaching conventional investors is much more difficult because you are “competiting” for access with established startups looking for financing. Your best bet is to do exactly what those startups do (engage via referrals in the VC’s portfolio, build websites to attract interest, build up a brand on venues like Hacker News, etc.). Reaching manufacturers is probably the hardest as they usually aren’t looking for technology at all (at least not at the university level). A few companies have IP scouts but most don’t. So you are stuck with traditional business development: find a contact on LinkedIn (or equivalent), engage, work the contact to the next better/closer person, and so forth. No different than any other enterprise sales scenario except that you are trying to sell IP.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s