crowdfunding to commercialize inventions and innovations through startups - thomas sharbaugh

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University Crowdfunding University Economic Development Association Tom Sharbaugh September 29, 2014

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There has been much news coverage of Internet-based crowdfunding recently, including stories about entrepreneurs who have funded diverse projects through donation crowdfunding on popular sites, such as Kickstarter, as well as stories about the developing federal securities laws for investment crowdfunding. With large dedicated pools of alumni, universities and colleges may be particularly well positioned to take advantage of crowdfunding as a means of funding the development of inventions and innovations by their scientists. The securities laws with respect to investment crowdfunding are still evolving and will impact how broadly this trend will be adopted.

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Page 1: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

University Economic Development Association

Tom SharbaughSeptember 29, 2014

Page 2: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

1995—Two grad students meet at Stanford

1996—Begin work on Internet app

1998—Receive $100k from angel investor

1998—Form company with license of Stanford patent

1999--$25 million of venture capital

2004—IPO market value of $1.67 billion

2004—Stanford yields $336 million

Page 3: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Page 4: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Total Crowdfunding Market

Page 5: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

What is it?

› Roots in Crowdsourcing and Microfinance Wikipedia Grameen Foundation

› Making a big task possible by breaking it down into multiple smaller tasks

› Internet is ideal for this

Page 6: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Many older examples

› Jerry Lewis’ Labor Day Telethon

› NPR Fund Drives

› United States saving bonds

Page 7: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Early adopters: often used by rock groups going on tour

•CD of concert

•Concert tickets

•Back-stage pass

Page 8: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Crowdfunding

DonationInvestmen

t

Page 9: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Donation crowdfunding

› Kickstarter, Indiegogo, RocketHub and more

› Rewards are often included

Similar to an NPR fund drive

› University programs typically have nominal rewards

Page 10: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Donation crowdfunding

› All or nothing vs. keep it all

› Platform/credit card fees—8% to 10%

› Huge marketing/public relations burden

Social media

Page 11: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Page 12: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Page 13: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Risk of “cannibalizing” University contributions

› Loyal pool of potential donors

› Target other potential donors Non-alumni Alumni non-givers Millenials/recent grads

› Increases donor base for future contributions

Page 14: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

SpecificNon-

ResearchProjects

University Donation CF

Annual Fund

Specific Research Projects

Page 15: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Unrestricted Contributions to Annual Fund

• Specific time period

• Columbia

• Vassar

Page 16: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Contributions to Diverse Student Projects

• Band uniforms

• Campus flood

• Sports team

• Philanthropic trip

Page 17: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Research-specific donation Crowdfunding

› University’s own site, or

› Independent academic platforms

Experiment.com Petridish.org Fundageek.com--closed

Page 18: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Research-specific donation crowdfunding

› Promotional efforts are essential

Social media

Possible use of University donor lists

› Rewards

Page 19: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Research-specific donation crowdfunding

› Tax-deductions

Up to 40% “discount”

Cannot contribute to benefit specific individual

Page 20: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

University research platforms

• Donations to universities

• May tap into alumni

• Tax-deduction likely

• Generally, no rewards

Page 21: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Non-university research platforms

• University may/may not be involved

• Tax-deduction uncertain

Page 22: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

SpecificNon-

ResearchProjects

University Donation CF

Annual Fund

University

Startups

SpecificResearchProjects

Page 23: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Startup businesses

› ~75% of inventions are never licensed

› University can license technology to new company

› University receives minority equity stake

› Some universities have “incubators”

Page 24: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Startup businesses

› Working capital has to come from somewhere

Further research, production, marketing, etc.

› Alumni are a receptive pool of potential investors

Page 25: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Startups vs. licensing

› Pro: more potential gain as part owner

› Pro: gains linked to company-wide performance

› Pro: promotes local job growth

› Con: big licensee likely more stable

› Con: big licensee likely has management experience

Page 26: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Brookings Institution: “University Start-ups: Critical to Technology Transfer”

Page 27: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Types of Crowdfunding “return”› None—donations to a cause (22%)› Reward

Usually something consumed Often the new product being produced

› Prepurchase right Right to buy the new product

› Financial Ownership or interest on a loan

Page 28: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Financial return = “security” status under Federal and State securities laws

› Regulate the offering of securities

“Registration” unless exempt

Significant disclosure requirements

› Regulate those engaged in offering and sale

Page 29: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Regulation D exemptions—pre-JOBS Act› Rule 506—unlimited dollar amount

Unlimited “accredited” investors and up to 35 “sophisticated” investors

“Accredited” investors

Net worth (excluding home) > $ 1 million Annual income > $200,000 ($300,000

with spouse) Often include “angel” investors

Page 30: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

JOBS Act of 2012

› Two big changes relative to capital raising:

Title II—general solicitation for offerings up to $5 million if directed solely at accredited investors

Title III—up to $1 million through a “funding portal” to unlimited number of investors

Page 31: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Title II Crowdfunding

• Not just for startups

• Early adoption by real estate developers

• Prodigy Network closed on two hotel projects

• $31 million

• $25 million

Page 32: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

JOBS Act of 2012

› Title III Crowdfunding exemption

SEC published proposed rules October 23, 2013

Comments received for 90 days

CANNOT use exemption until final rules are published

Still waiting for final SEC rules

Page 33: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

JOBS Act of 2012

› Title III “Crowdfunding” exemption

Must use a “funding portal ” or registered broker/dealer

General solicitation—possible with Internet

May raise up to $1 million during a 12-month period

Page 34: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

JOBS Act of 2012

› Title III “Crowdfunding” exemption

Investment limitations over 12-month period

If income or net worth is < $100,000: greater of $2,000 or 5% of income or net worth

If income or net worth is > or = to $100,000: up to $10% of income or net worth but not more than $100,000

Page 35: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

JOBS Act of 2012

› Title III “Crowdfunding” exemption

Disclosure requirements

Narrative description of the company and its business

Financial statements

Offering > $500,000, audited financial statements

Page 36: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Is Crowdfunding better under Title II or III?Title II (accredited

only)

Title III

Maximum offering

Unlimited $1 million

No. of investors Unlimited Unlimited

Investment limit per investor

Unlimited Yes, based on income/net worth

Investor disclosure None required As specified by SEC

Intermediary Not required Required

General solicitation(social media)

Yes No

Page 37: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Federal investment Crowdfunding

› Title II: Available now

Only accredited investors

› Title III: Not yet available

Crowdfunding “for the masses”

Page 38: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

State securities regulation

› Most states require registration or an exemption

Usually have exemption for offerings to limited number of investors

› New Federal crowdfunding exemption under Title III will preempt state registration requirements

› States can still pursue fraud investigations

Page 39: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

State attempts to sidestep federal rules

› Single-state crowdfunding

› Reliance on intrastate exemption

› Offering to residents of a single state

› General solicitation possible

Page 40: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Practical startup issues

› Lack of liquidity

No trading market initially and perhaps indefinitely

› Possible large number of stockholders with diverse goals

Page 41: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Frequently Asked Questions:

› Isn’t licensing much easier?

Page 42: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Frequently Asked Questions:

› Isn’t licensing much easier?

› Is it realistic to expect alumni and others to donate for research?

Page 43: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Frequently Asked Questions:

› Isn’t licensing much easier?

› Is it realistic to expect alumni and others to donate for research?

› Do universities ever retain majority ownership in tech startups?

Page 44: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Frequently Asked Questions:

› Could startups just do an IPO?

Page 45: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Frequently Asked Questions:

› Could startups just do an IPO?

› Can a university use a broker?

Page 46: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Frequently Asked Questions:

› Could startups just do an IPO?

› Can a university use a broker?

› Why not solicit venture capital firms?

Page 47: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Frequently Asked Questions:

› Could startups just do an IPO?

› Can a university use a broker?

› Why not use venture capital firms?

› What is impact on other stages of financing?

Page 48: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

How big is the market?

› Forbes magazine

Title II--$20 billion

Accredited investors

Title III--$2 trillion

Non-accredited investors

Page 49: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

Follow Innovosource to monitor university investment activity

› http://www.gapfunding.org/community/news/

› Recent news:

University of California has new $250 venture fund

Innovate Indiana startup gets $10 million in venture round

Illinois starts fund for startups at IL-based universities

University Crowdfunding

Page 50: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

Page 51: Crowdfunding to Commercialize Inventions and Innovations through Startups - Thomas Sharbaugh

University Crowdfunding

University Economic Development Association

Tom SharbaughSeptember 29, 2014