The Evolution of the OTC
University Led Startups
The Texas A&M University System
Define Your Mission and
Measurements
How do you want the university to define
your mission?
How do you want to be measured?
What Tools Can Be Applied In Your
Model?
Portfolio management?
Involvement in developing industrial
relationships/research programs?
Involvement in strategic research
initiatives?
Economic development mission?
University led startups?
International startup partnerships?
TAMUS Approach
Inventor led spin-out vs. university led spinout
• Small equity stake vs large equity stake
• No investment vs cash investment
• No university business involvement vs university
board seats
• Part time professor CEO vs full time CEO
• Small university upside vs large university
upside
Create spinouts because we have to, not
because we want to
What Are Spin-Out Opportunities?
Goldilocks technologies
• Not developed enough to attract licensees
• Developed enough to attract angels
Disruptive technologies
Next steps usually involve further research
at the university
• Early payback to the university
Value add step is relatively inexpensive
Opportunity is fundable
Types of Innovation
Sustaining Innovation
• Better products
• Sold to existing, attractive customers
• Incumbents have the advantage
Disruptive Innovation
• Simpler, more convenient product
• Sells for less money
• Goes after new or unattractive customers
• New entrants have an advantage
Reasons Disruption Works for New
Entrant
Target market is unattractive customers or
non-consumption
• Incumbents likely will not fight for the market
share
Allows focus on serving a set of customer’s
needs
• Low end customers get “good enough”
products at low cost
• New customers get simplicity and convenience
Two types of Disruption
New-market Disruption
• New customers enabled by simplicity,
portability or product cost
• After a foothold is gained, sustaining
improvements increase market share
• Examples – pocket radio, PC, cellphone
Low-end Disruption
• Addresses least profitable, over served existing
customers
• After a foothold is gained, go up market
• Examples – minimills, Wal-Mart, Kia
New Market Disruption Litmus Test
Large population, previously not able to
purchase due to lack of money, equipment
or skill
Previously, customers had to go to an
inconvenient centralized location
Low-end Disruption Litmus Test
Are there over served customers looking
for “good enough” products
Can the business model make profit at
lower end discounted prices
Is the innovation disruptive to all significant
incumbents
What Is Disruptive
Disruption is not just about technology
• Business models can be disruptive with no
significant technology advances
• Very innovative technologies may not be
disruptive at all
Disruption is ultimately about how you
make money
• Who are the customers
• What problems are you solving
What is Fundable?
Large market
Competitive advantage
Experienced management
Market pull
Identifiable value inflection point
Exit strategy
Profit potential for the investor
Where are your opportunities strong or
weak?
Strengthening the Weak Points
Large market weakness
• Most challenging to overcome
• Minimize the investment needed
• May think about partners more than pure
investors
Competitive advantage weakness
• Understand the market pain clearly
• Focus on competitive advantage in the next
steps of research
• Focus on competitive advantage in the
business model
Strengthen the Weaknesses
Management weakness
• Rarely have identified management early
• Cast a wide net
• Build a bench of possible CEOs
Market pull weakness
• Get the voice of the market through market
research
• Talk to potential customers
• Reach out to potential partners
Strengthen the Weaknesses
No clear exit strategy
• Think about partners rather than pure investors
• Look for comparable companies and exits
• Understand comparable exit values
Investor profit potential is not clear
• Shorten development timeline
• Lessen investment needed
• Get to market faster
NewCo Opportunity Review Process
Opportunities identified by licensing staff
• Internal review of opportunities
• Internal pitches of the vision of a company
• Internal analysis of “why a spin-out”?
Analyze the technology, market, intellectual
property, and internal support for a spin-out
Potential Blind Spots
Intellectual property
• Have an attorney review your intellectual
property position
o
Freedom to operate, not just patentability
Internal support
• Make sure the inventor still cares
• Does the plan fit with the inventor goals?
Start-up Development
PHASE 1
ASSESSMENT
• Invention Disclosure
• Technology Assessment
• Identification of Products
and Services enabled by
the technology
• Engagement as Potential
Start-Up Project
•Determination of inventor
interest
•Determination of Member
interest
• Market Analysis
•Size of market(s)
•Size of market segment(s)
• Competitive Analysis (per
market segment)
•Competitors (sales of
products/services)
•Research competitors
• Integrate information to
create Assessment Report
on Start-Up Potential
•Inventor and Member
interest
•Market Analysis
•Competitive Analysis
• Go/No Go Decision
PHASE 2
START-UP FORMATION
• Business Plan Development
• Rationale
• Milestones
• Funding needed
• Licensing Terms
• Exit Strategy
• Internal Fundraising (cash for
equity)
• OTC
• Members
• External parties
• Team Formation
• Scientific Advisory Board
• Research Team (e.g. TAMUS
researchers who will develop
research proposals and
conduct the research)
• Board Members (OTC)
• Management (external)
• Creation of Start-Up
Proposal
• Submission of Start-Up
Proposal for Approval
(must be approved by
Chancellor)
• Drafting corporate
documents
• Filing for Incorporation of
the new company
• Execution of License
PHASE 3
BUSINESS PLAN
EXECUTION
• Fundraising by
Management
• R&D as needed
• Completion of Milestones
• Achievement of objectives
of exit strategy /
termination of license
Phase I – Project Screening
Work done by Licensing Staff
Invention Disclosure
Technology Assessment
Identification of Products and Services
enabled by the technology
Engagement as Potential Start-Up Project
• Determination of inventor interest
• Determination of Member interest
Phase I – Project Screening
Work completed by New Ventures Team
Market Analysis
• Size of market(s)
• Size of market segment(s)
Competitive Analysis (per market segment)
• Competitors (sales of products/services)
• Research competitors
• Freedom to operate
Integrate information to create Assessment
Report on Start-Up Potential
• Inventor and Member interest
• Market Analysis
• Competitive Analysis
Go/No Go Decision
Phase II – Company Formation
Business Plan Development
• Rationale
• Milestones
• Funding needed
• Licensing Terms
• Exit Strategy
Internal Fundraising (cash for equity)
• OTC
• Members
• External parties
Team Formation
• Scientific Advisory Board
• Research Team (e.g. TAMUS researchers who will
develop research proposals and conduct the research)
• Management (external)
Phase II – Company Formation
Creation of Start-Up Proposal
• Business plan
• Risk profile
• Expected research and equity upside potential
Submission of start-up proposal for approval
(must be approved by Chancellor)
Drafting corporate documents
Filing for incorporation of the new company
Founding investment made
CEO contract signed
Execution of license
Phase III – Business Plan Execution
Fundraising by management
• Assistance from OTC
• Short time line with specific goals
o
$1,000,000 within 12 months
• Fundraising success leads to success fee for CEO
After funding
R&D as needed
Completion of milestones
Achievement of objectives of exit strategy /
termination of license
Typical Deal Breakdown
Caveat is that all deals are different
Starting point is a total investment of
$75,000
• OTC invests $25,000
• TAMUS member invests $25,000
• Research Valley Angel Fund invests $25,000
Starting point for equity break down is:
• OTC 5% set aside for commercialization services
• Inventors 10% set aside to keep their interest
• Each of the 3 investors receives 28.33%
• CEO is compensated 5-20% equity upon funding
Tools Needed to do Spinouts
Ability and resources to develop business
plans and market research
Access to angel capital or venture capital
A bench of CEOs
A source of internal capital or affinity funds
Legal advice on freedom to operate and
corporate formation