The Basics of Technology Funding
and Business Deals
Rosemary French
Innovation Strategist
IC2 Institute, University of Texas at
Austin
Biographical Info
Rosemary French, BA
Innovation 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 vehicles
2. Rationale for R&D partnering relationships
3. Basic business deal structures
4. Basic business negotiation techniques
Fact
On an average, only 5% to 20% of R&D
sees the light of day
…the rest wither away on the shelf
over time.
(The Aberdeen Group, Boston)
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 Strategies
University-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 Fools
2. Private Equity – VCs and Angels
3. Government Funding
a. National Science Foundation
b. SBIR (Small Business Innovation Research)
c. DARPA (Defense Advanced Research Projects
Agency)
How to fund technologies:
1. University sponsored research (not typical)
2. Government grants
3. 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
Sponsored research
Initial Technology
Prototype Developed
By Inventor
Company
Funding: Company Formation
Commercialization
Roadmap: STP
Start-up Company formed
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 UniversityIndustry 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 universityindustry 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 inkind 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 Happen
2. Licensing vs. Spinout vs. Divestiture
3. Patent License Agreements: Goals and
Prospective Outcomes
Fact
On an average, only 5% to 20% of R&D
sees the light of day
…the rest wither away on the shelf
over time.
(The Aberdeen Group, Boston)
As a result…
A
B
C
Commercialize
Execute
10_
(2%-5%)
Protect & Enable
the Business and/or License
(50%-60%)
Divest/Donate
(25%-35%)
9_
2
1
8_
7_
6_
5_
4_
3_
3
2_
1_
|
0%
Core
|
20%
Related Non Core
|
40%
|
60%
% of Patents/Other IP
|
80%
Unrelated Non Core
|
100%
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
Research & Development
Patents
Intellectual Property
Divest
License
Business
Spinout
Cash
Upfront Fee/
Royalties
Equity
Return On Investment “ROI”
Source: International Business Accelerator, 2010
Commercialization Models
RETURNS
Divestiture
Technology
License
Business
Spinout
Cash (onetime)
BENEFITS
 One time windfall cash
 Control over pricing and
Upfront Fees &
profits
Royalties
 Control over operations
Equity
 Potential of high returns
 Responsibilities off-loaded
to Spinout
Source: International Business Accelerator, 2010
DRAWBACKS
 Loss of IP
 Responsibility
(documentation, installation &
maintenance)
 Sales force & staffing
 Warranties, liability
 Limited control - pricing &
operations
 Higher initial costs
 Dilution by outside investors
 Losses upon failure
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
Confidentiality Agreement
Material Transfer Agreement/InterInstitutional Agreement
Options
Licensing Agreements
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 nonconfidential 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/re
sources/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 Sides
a. 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 fees
2. Ongoing considerations to the university (a royalty)
3. Required minimum annual royalties after a specified period
of time regardless of actual sales
4. 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 Negotiation
a. A license is a trade
b. 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
Chemicals
0.5%
Computers
0.2%
Consumer goods 0.0%
Electronics
0.5%
Energy
0.5%
Food
0.3%
Health care
0.1%
Machine / tools 0.5%
Pharma & biotech 0.1%
Semiconductors 0.0%
Software
0.0%
Telecom
0.4%
Upper Limit
25.0%
15.0%
17.0%
15.0%
20.0%
7.0%
77.0%
25.0%
40.0%
30.0%
70.0%
25.0%
Median
3.6%
4.0%
5.0%
4.0%
5.0%
2.8%
4.8%
4.5%
5.1%
3.2%
6.8%
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 Negotiations
3. Patent License Agreement: Negotiating
Terms
Qualities of a Good Negotiator
Negotiation Myths
• “The average person is not tough enough to
win at negotiations”
– Negotiation is not a combat sport; bullies are
not successful for very long.
• “Negotiation is all-or-nothing. You are either
a 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 selfish
and 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
• Negotiation
consciousness
• Listening
• The ability to ask
good questions
• High aspirations
• Patience
• Flexibility
• Focus on satisfaction
• Willingness to take
risks
• Solving the problem
• Willingness to walk
away
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?