The Basics of Technology Funding and Business Deals

Rosemary FrenchInnovation Strategist

IC2 Institute, University of Texas at Austin

Biographical InfoRosemary French, BAInnovation Strategist @ IC2 Institute

•Expertise in Licensing: • Managed Life Science portfolio of over 100 patents

alongside a Senior Licensing Specialist at the UT Austin OTC

• Strategic partnership formation for early-stage R&D for over 20 selected high-value technologies

• Patent license agreement negotiation: 15 licenses signed

• Start-up creation: identified and vetted potential CEOs, negotiated startup licenses; mentored entrepreneurs to create investor-ready pitches

Biographical info continued

• OTC stats:– UT Austin OTC: $25.6 MM FY 10-11– 150+ disclosures, 300+ patents processed FY 10-11– 34 US and 28 Foreign patents issued in FY 10-11

• Involvement in International TTO Initiatives: – Performed on-site training and mentoring at two TTOs in

Portugal, conducted research on 12 incubators across Portugal

– Worked with over 50 innovators to provide strategic technology development and commercialization mentoring

Key Learning Topics

1. Identifying technology funding vehicles2. Rationale for R&D partnering relationships3. Basic business deal structures4. Basic business negotiation techniques

Fact

Discussion

• What is the goal of technology commercialization?

• Why create a TTO?

Creating a Tech Commercialization Hub

Pieces of the tech commercialization puzzle:University research

TTO – Commercialization StrategiesUniversity-Industry Partnerships

R&D, Start-up Company Incubation Efforts

Enhance technology commercialization outcomes, university reputation

Developing TTOs to Leverage Research for Public Benefit

Lessons Learned:1. Establish networks of TTOs

– Mexican government encourages its public technology institutes to establish TTOs as networks

– Example: Portugal TTO Network generated through UTEN– Small TTOs – difficult to gain international recognition– UTEN: established common framework for best practices– TTOs can exchange contacts through the network– International visitors can vet the top technologies from the

entire network instead of visiting one institution at a time

2. Define Clear Rules on IP Rights– Encourage researchers to commercialize their ideas

Percent of R&D Financed by Private Sector

Low Level of Patenting in LAC

Public funding of research in LAC has emphasized the generation of conceptual knowledge but has been less efficient at energizing technological innovation such as the production of patents

R&D Investment in LAC

• Challenge: Private participation is relatively low in LAC (% of R&D financed by private sector)

• the majority of countries in LAC invest less in research and development (R&D) than other countries with similar income levels

• LAC: Less than 50 percent of R&D investments are financed by private industry, which contrasts with the experience of dynamic global innovators such as China, Korea, and the United States

Things to Consider

• What are some ways to increase interaction between your university and potential industry partners?

• Examples at UT Austin: “Ready to Commercialize” vs. UT system event

Sponsored Research Example

CardioSpectra, Inc.• Prof. Milner in collaboration with Interventional Cardiologist Marc

Feldman, MD at the UT Health Science Center – San Antonio– developed an Optical Coherence Tomography (OCT) diagnostic

catheter for detecting vulnerable plaque. – allows doctors to better predict the likelihood a patient will suffer a

heart attack based on vulnerable plaque,– provides diagnostic capabilities currently unavailable through existing

technologies such as MRI, computed tomography (CT), and ultrasound devices.

• Milner and Feldman founded CardioSpectra, Inc., a company through which the OCT system and catheter were marketed. – Sold to Volcano Corp. for $25MM, with additional milestone

payments of $38MM

1. Identifying technology funding vehicles

• Key Concept: Funding technologies and funding companies are two different things

– When you ask for money, you need to know what you are selling

• Colombia example

How to fund companies:

1. Friends, Family and Fools2. Private Equity – VCs and Angels3. Government Funding

a. National Science Foundationb. SBIR (Small Business Innovation Research)c. DARPA (Defense Advanced Research Projects

Agency)

How to fund technologies:

1. University sponsored research (not typical)2. Government grants3. Industry sponsored research

• Examples of Sponsored Research at UT

Funding Technologies

• Strategic R&D Alliances between Industry and Research Centers – Mexico Example: the aeronautics alliance

between several companies in Queretaro, universities and a public technology institute (established joint R&D lab in aeronautics – the first in Mexico).

When can a company become involved with a university technology?• Commercialization Timeline

Initial Technology Prototype DevelopedBy Inventor

Commercialization Roadmap: STP

Start-up Company formed

CompanySponsored research

Funding: Company Formation

2. Rationale for R&D Partnering Relationships

• University-industry relations consist of a variety of activities, including:– Sponsored Research– Licensing– Gifts and endowments designated for colleges, schools,

departments, or individuals– University-industry exchange programs and student

internships.– Continuing education and training of professionals

Rationale for R&D Partnering Relationships (continued)

– Participation of industry representatives in campus advisory groups

– Cooperative research projects– Use of university facilities on a fee-for-service basis– Industrial parks – R&D facilities housed on university

property– Faculty consulting

Why R&D Partnerships with Industry?

• Collaboration between industry and research– Create knowledge with a specific industrial

application in mind

• R&D partnership is about business deals and funding

• Pursue Sponsored Research Opportunities• Enhance commercialization output• Enhance university reputation

Activity

• Make a list of 4 companies that could be potentially interested in licensing your technology and explain your rationale.

Creating a strategic visions for University-Industry Partnerships

• Applied research focus• Will your TTO actively pursue SRAs?

– Office of Sponsored Projects

• What kinds of firms will you target?– Large, leading international firms?– SMEs? – local sectors

• Industry/market sector focus?

Defining the Scope of Collaborations

• Guiding Principle # 1: A successful university-industry collaboration should support the mission of each partner. Any effort in conflict with the mission of either partner will ultimately fail.– University mission: education of students,

creation and dissemination of knowledge– Industry mission: create value for investors,

provide useful goods and services, expand the state of the art

Source: National Council of University Research Administrators and the Industrial Research Institute

University Contribution to the Industry Mission

• Retention of Trained Work Force: Training of future and current industry workforce (students) through undergraduate and advanced degrees

• Publication: Contribution to the general knowledge base for public benefit Advancing the state of the art in a field

• Knowledge Transfer: Acting as a filter to distill, from the general public knowledge base, a subset of that knowledge particularly applicable to industry’s product needs

• Sponsored Research: Performance of specific research on behalf of industry

Source: National Council of University Research Administrators and the Industrial Research Institute

University Contribution to the Industry Mission (continued)

• Technology Transfer: Licensing inventions and developments (Intellectual Property) for commercial purposes, including revenue generation

• Providing access to university-owned equipment, materials, facilities and specialized resources

• Fostering economic development that expands markets

• Objectively testing, evaluating and reporting on new technology

Industry Contribution to the University Mission

• Employing students and graduates• Donating (equipment and money – either unrestricted or

earmarked e.g., for scholarships, research, or facilities)• Providing either materials or funding for student

internships and faculty sabbaticals• Employee time and knowledge donation through

involvement in activities such as assisting student projects, guest lectures, service on thesis committees, service on advisory boards.

• Material Transfer: Enabling access to industry-owned equipment, materials, facilities and specialized resources

Source: National Council of University Research Administrators and the Industrial Research Institute

Industry Contribution to the University Mission (continued)

• Applied Research: Providing leading-edge research directions

• Sponsored Research: Providing financial and/or in-kind support for specific research activities of interest to the industry partner

• Paying technology licensing fees and royalties, which support ongoing research and educational programs

• Publication: Contributing to general knowledge base (publication)

• Technology Transfer: Bringing university contributions to the public in the form of goods and services

University Constraints• Must educate students• Must perform research for public benefit• Must operate within changing federal and state rules and

regulations, e.g. non-profit tax rules, export regulations and increased regulations on the use of humans, animals and hazardous materials

• Must manage potential and actual conflicts of interest and commitments

• Must be consistent with all sponsors• Academic year limitations on student and faculty time• Facing federal funding that is limited or nonexistent• Lack of match between industry segmentation of research

and university segmentation (shared constraint)

Industry Constraints• Research investments must show returns• Can distinguish basic and applied research, but distinction not

always recognized by universities• Differences between external and internal research must be

recognized and planned for by industry• External research must be part of a competitive business plan

and budget• Must establish agreements in a commercially timely manner• Must establish agreements to ensure the ability to

commercialize with appropriate returns• Research funded by industry usually requires clear goals,

milestones, and specific time frames for completion

A Long Term Relationship is the Desired End State

• Guiding Principle # 2: Institutional practices and national resources should focus on fostering appropriate long-term partnerships between universities and industry.

• university/industry partnership extends human intellectual reach and is key to regional competitiveness, innovation and economic development

Establishing Long-Term Relationships with Industry Partners

• The value of a long-term relationship can be greater than the sum of the individual transactions, and the relationship between the university and the industry partner may be more important than the results of one isolated project.

• individual institutions should examine their policies, training, reward structures and business practices with an eye to whether they promote long-term partnering

Establishing a Framework that Encourages Long Term Collaborations

• Guiding Principle #3: Universities and industry should focus on the benefits to each party that will result from collaborations by streamlining negotiations to ensure timely conduct of the research and the development of the research findings.

• Reducing time spent in negotiating terms

Working with Industry: Key Considerations

• IP rights – current and future joint IP• Material transfer affect on IP rights

– Sending a sample to a company– Receiving equipment/material from a company

3. Basic Business Deal Structures

1. Challenges of Making a Deal Happen2. Licensing vs. Spinout vs. Divestiture3. Patent License Agreements: Goals and

Prospective Outcomes

Fact

As a result…

10_

9_

8_

7_

6_

5_

4_

3_

2_

1_

% of Patents/Other IP

| | | | | |0% 20% 40% 60% 80% 100%

3

1 2

(2%-5%)

ACommercializeExecute

(50%-60%)

BProtect & Enable the Business and/or License

(25%-35%)

CDivest/Donate

Related Non Core Unrelated Non CoreCore

Discussion

• How many technologies does your TTO manage?

• How many provisional patents would you file? How many full patents?

Challenges: Technology to Market• Disconnect between R&D and potential market needs• Most IP are only part of a solution• IP developed for one use, ends up far more useful in

another area• Lack of business sense• Lack of radical entrepreneurs/best practices

– The ability to first say “yes” and then figure out “how”• Sense of risk aversion coupled with fear of failure

– Failures are a necessary part of success• Lack of qualified risk capital

– Big bets, big wins

Source: International Business Accelerator, 2010

What does this mean for TTOs?

• Proactive engagement with 20-30 potential licensees per technology is required to obtain a license

• Focus on the technologies with the lowest risk and highest potential reward

• Actively engage with industry: what does industry want/need? Does the technology fill that need?

Converting IP into Cash

Return On Investment “ROI”

Patents

Business

Spinout

Equity

Intellectual Property

Research & Development

Upfront Fee/Royalties

LicenseDivest

Cash

Return On Investment “ROI”Source: International Business Accelerator, 2010

Commercialization Models

RETURNS BENEFITS DRAWBACKS

DivestitureCash (one-time) One time windfall cash Loss of IP

Technology License

Upfront Fees & Royalties

Control over pricing and profits

Control over operations

Responsibility (documentation, installation & maintenance)

Sales force & staffing Warranties, liability

Business Spinout Equity

Potential of high returns Responsibilities off-loaded

to Spinout

Limited control - pricing & operations

Higher initial costs Dilution by outside investors Losses upon failure

Source: International Business Accelerator, 2010

Divestiture: Valuation• Cost-Based Method

– This is the minimum that you should accept• Materials and Supplies• Lab time (use of equipment, electricity, resources)• PI and team hours (weighted)

• Discounted Net Present Value– Seven years credible sales/Revenue Projections

• Directly attributable to your IP• 20-30% discount rate

• Market Value– What the buyer is willing to pay

• Underlying purpose of acquiring IP

Licensing Valuation• Early stage technology = high risk

– Fees and royalty rates are rarely large– Most royalty rates are in the 3-6% range (at best)

• Deciding factors:– Type of technology– Development stage– Size of potential market– Profit margin for anticipated product– Amount of perceived risk– Strength of the patents– Projected costs to bring a product to market

What is the technology worth?

A patentable idea increases in value with every step of the cycle.

Source: Licensing Executive Society, Inc. The Basics of Licensing.

How do I determine the value of an idea?

• Factors that influence royalty rates:– The strength and scope of the protected IP;– The expense necessary for a license to reach full production;– The cost of any additional R&D required;– The exclusivity or non-exclusivity of the licensing agreement;– The geographic scope of the license;– The competitive product, processes, and technology available to the

prospective licensee;– The total market and its estimated growth;– Common industry or standard license rates; and,– Whether the license covers all or part of a process or product.

Source: Licensing Executive Society, Inc. The Basics of Licensing.

Evolution of Agreements in Commercialization

What’s Missing from the List??

Consultancy Agreements can and usually do happen at various stages in the commercialization process.

Scenario 1• Researcher at Public Institution want to engage in

collaborative research exchange with an interested partner.• Proprietary Chemical/Biological Materials Developed are

Present• Examples would Include:

– transgenic animals– cell lines & cultures– Antibodies– Microorganisms (Bacteria, enzymes, yeast, etc.)– vectors (plasmids, baculoviruses)– chemicals (including drugs/pharmaceuticals)

CDA vs. MTA

• MTA’s take CDA’s a step further by covering:– Permitted Use of Materials– Prohibited Use of Materials– Access to Results– Use of Results– Publication Rights– Ownership of Resulting IP– Royalties Can be Introduced

Scenario 2• Researcher wants to enter into a research collaboration

with another partner• Can be Public or Private, but usually academic or research

focused in nature• Can cover almost any level of science• Examples:

– Joint researcher grant applications– Co-Orientation of PhD student research outside of home institution– Co-Technology Development– Shared Laboratory Space and Equipment for Research Among

Institutions

Key Components of Inter-Institutional Agreements

• Roles and Responsibilities in Research• Governs Resource Allocation• Resulting IP Ownership Splits are Pre-Defined

and can be Re-Negotiated during research• Defines PI and Co-PI relationship• Defines Responsible Party for Publication

and/or Commercialization Efforts

Scenario 3

• Researcher has a proprietary IP on an invention which has garnered commercial interest

• Interested Party would like to exclusively evaluate IP for validity and applicability to it’s own needs

• Interested Party wants to:– To acquire a particular right (e.g. a patent licence) or asset (e.g. a

patent);– To require another party to enter into an agreement (in a specified

form) or to negotiate the terms of a further agreement;– To evaluate materials, products or assets to determine whether to

enter into further agreements (such as further research or licensing arrangements).

Evolution of a Licensing Deal

• No single process for developing a licensing deal

• Critical factors for success:– Networking– Research– Proactive marketing tactics

Evolution of a Licensing Deal

1. Establish mutual interest at the non-confidential level.

a. IP rights can be lost if the idea is disclosed without taking adequate precautions.

b. Licensee may ask to see related publications.c. Multiple discussions needed to develop trust and

interest.a. Can get discouraging – don’t give up!

Option Agreement Characteristics

• Provide Right of First Refusal• Usually involves a Fee • Generally Provides Exclusivity• Limited in Time (Usually up to 6 Months)• Can be Stand Alone or part of other

types of agreements (i.e. clause)

Scenario 4

• Researcher’s Lab has developed Method for Drug Discovery

• IP is Present• Industry (or Increasingly Institutions) want

access and control of technology future development

• Term Sheet has been Presented• Negotiations have concluded

Critical Elements of Licensing Agreement

• Definition of IP to be transferred• Geographical Coverage• Fields of Use• Exclusive vs. Non-Exclusivity• Third Party Rights• Sublicensing• Recovery Provisions• Royalty Rates• Patent Payments and Maintenance Responsibilities• Up Front Fees and Payments• Development Fees and Requirements• Others

Example of PLA Terms

• Patent License Agreement • Patent License Agreement for Startups

Resources For You

• Praxis Unico http://www.praxisunico.org.uk/resources/practical-guides.asp

• AUTM (Assoc. of University Technology Managers)

• LES (Licensing Executives Society)

Evolution of a Licensing Deal

1. Non-disclosure agreement if there is interest to discuss a potential licensing opportunity.

a. Licensee is often reluctant to sign an NDA.

2. Due Diligence – Both Sidesa. Licensee: does the technology have real

commercial potential?b. Licensor: motives for licensing, types of past

deals with universities, current related products and level of success

Patent License Agreement: Basic Goals

1. Refund patent costs and future conversion fees2. Ongoing considerations to the university (a royalty)3. Required minimum annual royalties after a specified period

of time regardless of actual sales4. Performance milestones to assure that the university’s

technology enters the market

PLA: Basic Goals (continued)

• This "formula" hopefully assures:– technology is developed to completion and put in the

stream of commerce– a fair return to the university– the technology is returned to the university should the

licensee not pay the minimums or achieve the specified performance milestones.

Evolution of a Deal

4. License Negotiationa. A license is a tradeb. It only happens when both sides

conclude that they will benefit by entering the deal more than the cost, or loss, required to make the deal possible.

Basic Terms and Conditions of a Patent License Agreement

In general, all licenses fall into three categories, namely:

1. Exclusive: Only the licensee can exploit the license.2. Sole: Both the licensee and licensor can

exploit the license (this kind of license is relatively rare).

3. Nonexclusive: The licensor and an unlimited number of licensees can exploit the license.

Patent License Agreement Terms• Patent Fees: Licensee is expected to repay all

patent costs to date, and to cover future conversion fees

• Payments associated with Diligence Milestones– Sponsored Research– R&D Milestones associated with a fee– First sale of Licensed Product

• Sublicense fees• Annual royalties• Equity

Royalty Rate Definition

• are usage-based payments made by one party (the "licensee") to another (the "licensor") for the right to ongoing use of an asset, sometimes an IP.

• Royalties are typically agreed upon as a percentage of gross or net revenues derived from the use of an asset or a fixed price per unit sold of an item of such, but there are also other modes and metrics of compensation.

Determining Royalty Rate

• No such thing as an industry standard patent royalty rate

• On the average, royalty rates tend to run between 4-6% of “Net Sales”

• Other important factors to consider:– Minimum royalties

• It is unwise to draft a license agreement, especially exclusive licensing agreements, unless there is a provision for minimum royalties.

Determining Royalty Rate

• The primary purpose of minimum royalties is to give the licensee an incentive to exploit the license.

• Royalties Based on Net Sales– Generally paid quarterly– “Net Sales” are usually defined as gross sales

minus usual trade discounts, taxes, transportation and returns.

Licensing: Setting a Royalty Rate

The 25% Rule•Usually applied to set a royalty rate

• Estimate the licensee’s operating profit (related to your IP), over royalty period

• Divide that total profit, by the net sales over that period = Profit rate• Royalty rate = 25% of the profit rate

•Can also be used for a single payment deal• Estimate the licensee’s operating profit (related to your IP), over royalty

period • Licensor’s share = 25% of operating profit• Single payment = Probabilistic net present value of (25% of operating profit)

•The 25% “rule” applies only if both sides agree to use this method

* Goldscheider et al. “Use of the 25% rule in Valuing IP”

Licensing: Royalty Rates Lower Limit Upper Limit Median

Chemicals 0.5% 25.0% 3.6%Computers 0.2% 15.0% 4.0%Consumer goods 0.0% 17.0% 5.0%Electronics 0.5% 15.0% 4.0%Energy 0.5% 20.0% 5.0%Food 0.3% 7.0% 2.8%Health care 0.1% 77.0% 4.8%Machine / tools 0.5% 25.0% 4.5%Pharma & biotech 0.1% 40.0% 5.1%Semiconductors 0.0% 30.0% 3.2%Software 0.0% 70.0% 6.8%Telecom 0.4% 25.0% 4.7%

(3% to 7%)

* Goldscheider et al. les Nouvelles. Dec. 2002

4. Basic Business Deal Negotiation Techniques

1. What Makes a Good Negotiator?2. Preparing for Negotiations3. Patent License Agreement: Negotiating

Terms

Qualities of a Good Negotiator

Negotiation Myths

• “The average person is not tough enough towin at negotiations”– Negotiation is not a combat sport; bullies are

not successful for very long.• “Negotiation is all-or-nothing. You are eithera winner or a loser”– Negotiations should be a win-win proposition.

Negotiation Myths

• “Only good talkers make good negotiators”– Good listeners make the best negotiators.• “Negotiation requires people who are selfishand rude”– Not rude but okay to be assertive, not timid• “Women do not make effective negotiators”– Women generally tend to be better listeners

and more collaborative.

Profile of a Negotiator

Are you a good negotiator?

• How much experience do you have with license negotiation?

• How confident are you with your negotiations skills?

• What has gone well for you in your past negotiation experiences?

• What has not gone well? How can you be more prepared next time?

Negotiation’s 4 Outcomes

1. Lose-Lose – Neither party achieves their needs or wants – e.g. exercise exclusive option sponsored research

2. Win-Lose, Lose-Win – One party makes outstanding gains while the other one loses out

Negotiation’s 4 Outcomes

3. No Outcome – Parties are not able to come to terms that they can agree upon – Not always a bad thing; better not to do a deal than to do a bad deal

4. Win-Win – The needs and goals of each party are met

Negotiation’s 4 Outcomes

• Three keys to creating a win-win outcome – Avoid narrowing the negotiation down to one

issue – Realize your counterpart does not have the

same needs and wants you do – Do not assume you know your counterpart’s

needs

Recap• University-Industry Partnerships

– Focus on developing a relationship– Be careful about IP

• Funding technologies and funding companies are two different things– Create unique pitches for every meeting

• Win-win negotiation– Be prepared– Be flexible and focus on the relationship– Know when to walk away

Questions?

Preparing for Licensing Negotiations• Who are the parties to the prospective agreement? (University, R&D organization, Large Co., Small Co.)

• What are the objectives of each party? (Is there a basis for a commercially viable agreement?)

• What are the performance expectations? (Is each party able to perform what the other expects?)

• Who should drive the licensing negotiations? (Internal Drivers vs. External Drivers)

• Does IP owner provide R&D, Tech support, know-how, consultants, or other deliverables in addition to IP?