How to kill a university spin out
There are lots of ways to screw up in entrepreneurship. There are particular challenges in commercializing university technologies. Getting from the lab to the marketplace, from benchtop to bedside, is fraught with many valleys of death. This is the first of a series of posts about those pitfalls. In this post I describe three case studies of real things that happened to real people around intellectual property, founder partnerships, and the interaction between business and science people.
Background. In my work with Carnegie Mellon’s Project Olympus, for which I fill the role of Embedded Entrepreneur, and in my past as co-founder and President of LaunchCyte, I have worked closely with academic researchers and faculty inventors. My goal is to commercialize breakthrough innovations into startup companies that develop products, provide jobs, and, hopefully, create wealth (so that we can do this all over again).
While there is much literature out there for budding entrepreneurs, I find that the material is not suited to academic entrepreneurs. I define academic entrepreneurship as commercialization stemming from deep technical research conducted within an academic institution. Academic entrepreneurship is the process of bringing to market the innovations discovered in the academic laboratories. There are two commercialization options for academic entrepreneurs: licensing to an existing company or creating a startup. My focus is on the latter.
Transferring research technology into a startup requires a process approach as the path from the lab to the market, from raw technology to product, is long and risky. While the process may not appear to vary significantly from that for typical startups, the environment within a university presents its own set of unique challenges to academic researchers and faculty inventors. Faculty researchers may be experiencing academic entrepreneurship for the first time. And they may not be comfortable with that.
Faculty researchers are experts in their fields; but many have little experience with startups. As a result, they risk making avoidable mistakes in pursuing commercialization and spinning out companies from universities. Three common areas where academics can benefit from a better understanding of the issues are the subject of my case studies below: intellectual property, founder partnerships, and the interaction between business and science people.
Case study #1, The importance of intellectual property protection
Intellectual property (IP) is the strongest and most common basis for a university technology transfer office’s interest in an invention. Strong IP represents value for licensing and startup creation. In an academic setting, IP usually refers to patents, although the discussion below is applicable to trade secrets, copyrights, and other forms of IP. Many of us focused on commercialization at our nation’s research universities bemoan the all too common occurrence of public disclosure before a patent is filed. There are subtleties to this area that are important for a researcher/inventor to understand.
Protecting IP starts with a discovery or invention. Research universities generally have a technology transfer office that processes invention disclosures and makes decisions about whether a patent should be filed. Tech transfer offices resulted from the Bayh Dole Act, (Public Law 96-517 Patent and Trademark Act of 1980), which allocates to non-profit research institutions ownership of innovations made under federally funded research programs. In effect, the Bayh Dole Act recognizes creativity and innovation as national resources. The Act promotes investment by the private sector in commercialization of federally funded research discoveries for the public good, i.e., the market. And the U.S. patent system is an important vehicle which permits delivery of the resource to the public. A patent provides a legal monopoly for a period of years (20 or 21 depending on whether a provisional application was filed). Private investment in a new idea is often tied to the concept of proprietary IP – patents, trademarks, trade secrets, know how, etc. What this means is that an academic researcher needs to understand the process of appropriate IP protection so that they can work with the technology transfer office to protect their IP. Otherwise, they may lose valuable IP protection.
So, IP is important. However, there lies an inherent dichotomy between invention disclosure/IP protection/commercialization and the tenure system. How many academic institutions reward activities associated with commercialization? Are patents or participation in spinout companies considered successes of the academic’s portfolio of achievements? Are academic researchers on the path to tenure rewarded by entrepreneurial pursuits? This issue can hamper or kill commercialization if a researcher is not motivated to march down the commercialization path.
Another issue here is the divergence between the academic’s need (pressure) to publish and the timeline and rules that must be adhered to for patent protection. A patent must be filed prior to public disclosure. Generally, an invention disclosure must be filed prior to the patent application, so the logistics of balancing the three – invention disclosure, patent application, and publication – can be overwhelming. Does the academic know if sending in a paper for publication constitutes a public disclosure (generally not, but this can vary by publication)? What about grant applications? Or conference presentations that get posted on websites prior to the conference proceedings? A conscientious researcher serious about commercialization will check with their tech transfer office prior to article or grant submission. Managing these diverse timelines can defy the best of intents. A common occurence? Publication prior to IP protection.
But, what is the effect of public disclosure prior to IP protection? As one researcher answered to me recently when I informed him that the conference posting of his presentation just lost us the international patent rights to his inventions, “Wow, that’s harsh.” In this instance, the researcher had inventions that solve real world problems and are highly commercializable. He didn’t even know that the conference would post the presentations prior to the talk! Now he knows to check with the conference coordinators about early postings of presentations, but it was an easy thing to overlook at the time.
Lesson learned is that ANY public disclosure of proprietary information can compromise your IP position. I asked Reed McManigle, Senior Manager, at Carnegie Mellon’s Center for Technology Transfer and Enterprise Creation to give me a brief primer on how public disclosure impacts patent rights. Here is what he says:
Two terms need to be understood before we get to the rules.
- “Public disclosure” is essentially any communication that takes place with someone outside of your same employer without an agreement of confidentiality. This would include publications (typically not during the review period which is pursuant to confidentiality, but as soon as anyone not subject to confidentiality can access it) (hard copy AND electronic – e.g. on your website, a journal or conference web site, abstract book, etc.), presentations, posters, conversations, emails, government proposals (typically not during the review period, but after funding because of the potential for access through the Freedom of Information Act), theses (as soon as they hit the library shelf or are available electronically, whether anyone ever looks at them or not).
- “Enabling disclosure” means that you have provided enough information such that someone “skilled in the art” could understand and recreate the invention “without undue experimentation.” Sometime just saying the concept is enough to be enabling. Sometimes a conference abstract or poster is enough.
So the rules are:
- As soon as you publicly disclose enabling information, most countries will no longer allow you to file a patent application, as they have an “absolute novelty” standard, and they consider it to be no longer novel if people know about it. The US has been excepted from this for one year but that may change under some new patent laws. More on that on New Venturist to come!
- If you want to preserve the maximum possible IP rights, give your technology transfer office an invention disclosure with adequate time to review and process before you publish. Typically if you give us an invention disclosure at the same time that you submit a manuscript for review, our process can run in parallel and we can beat the publication date. Keep us informed of publication dates.
- Use confidentiality agreements when disclosing enabling information to people outside of your institution!
Case study #2, Pick your partners carefully
I have had several new businesses blow up over founder disagreements regarding roles, equity, and control. One researcher, I’ll call her #1, was interested in forming a new venture based on her technology if it could be a sizable business, i.e., in excess of $5M a year in revenues. #1 had been in a startup before, was the inventor behind the technology, and disclosed the invention properly to her institution. The other researcher (I’ll call him #2) was in a different field and at a different academic institution. He desired only a lifestyle business, and he would be happy with a few contracts totaling several hundred thousand dollars a year. He also really wanted to be President, and he wanted control (at least 51%) of the equity of the company. #1 was skeptical that #2 could handle the roles and responsibilities of a majority share of a startup and she suggested that they bring in a third party CEO to balance out the founders’ equity.
#2 thought that this proposal was a travesty to their professional and personal relationship and objected vehemently. I explained to them that the amount of stock allocated initially was a moot point moving forward as percentages were likely to change significantly as a result of investment and growth. In the future, ownership by the founders would be largely determined by ongoing participation and specific roles. I encouraged them to think about the status of the company a year or two from now, when within the company there might be a CEO, product development people, and marketing and sales employees. As a full-time academic, what hope did #2 harbor to remain a majority shareholder of an ongoing business with full-time employees?
The squabbling continued, to the effect of delaying the formation of the newco, putting grant applications on hold, and muddying the waters of responding to RFPs from potential customers. Most significantly, #1 became discouraged because she wanted partners to move this venture forward and never intended to be the sole driver behind the startup.
This venture is compromised because the expectations and goals of #1 and #2 were not aligned. The founders waited to talk about equity, roles, and control. Had they communicated their goals early on they might able to resolve their issues.
Lesson learned: know thyself (strengths and weaknesses) and if you partner to fill the gaps, then know thy partner. Make sure that you discuss early and often your goals and strategies for the business. Make sure that the success of the business is what comes first, not someone’s ego or personal ambitions. And put it in writing!
Case study #3, Marriage between business and science, or divorce?
In the world of commercializing new technologies and startups business and science often must partner. One needs the other. This means that there are plenty of great opportunities for entrepreneurs looking for the next great thing within research universities where inventions originate. At most research universities we relish successful match making between an entrepreneurially-minded business person and a technologist/inventor. Easy to accomplish? Definitely not! For one thing, it’s hard to find the match. For another, even a potential match can go south because expectations are not met or misunderstandings abound.
For example, I remember a university project whose scientists found a potential CEO. They worked together for a few months towards a mutual end of forming the company, which they all knew would be the beginning of a long road ahead. They talked to funding partners, conducted market research, and outlined the opportunities. The problem was that they never discussed salary or equity for the scientific founders or the CEO until it was very late. So late in fact, that they were at the lawyer’s office to craft the incorporation documents! When asked “What is the equity split?” the potential CEO said, “The research team gets 49% split among them and I get 51% and a $250,000 salary.” The researchers were flabbergasted and, with no experience under their belt to guide them one way or another, they just walked away from the deal and the CEO.
The research team didn’t want to cede control; the potential CEO didn’t want the researchers in control. They both missed the point that how the pie was split would change over time as funding rolled in and roles were clarified. The research team didn’t know what startup CEOs usually receive in salary, benefits and equity. The potential CEO never thought to bring the issues up with the research team beforehand and pave the way towards a negotiation. The potential CEO would have negotiated down from his opening offer, but the researchers didn’t understand that negotiation is standard in the business world. They took the offer as take it or leave it. And leave it they did, delaying the formation of a startup where time to market is always a strong consideration.
Conclusion: The case studies above are merely samples of some of the pitfalls that academic entrepreneurs face in marching along the commercialization pathway. It is my hope that featuring some of the very real issues that academic entrepreneurs face can help all of us learn so that we can avoid these and other mistakes as we focus on the goal of getting an innovation to market.