On May 20, 2013 a group of national experts in technology transfer convened in Washington, DC to discuss how to improve the nation’s effectiveness at bringing federally-funded research to market. Neil Kane was honored to be an invited guest at this Summit. A summary of the meeting was the topic of this month’s blog post on Tech Cocktail. A full copy of the report can be found on the home page for this blog www.beliefwithoutevidence.com in the Flash Widget in the lower right hand corner…you can download the report there.
In today’s guest post on Tech Cocktail I talk about the essential elements surrounding licensing technologies…either to augment your product development efforts (by licensing technology into your company) or to create a new revenue stream by outlicensing technology that you’ve developed.
Here is a link to an Op-Ed piece that Crain’s Chicago Business ran today about the unfortunate state of funding for emerging nanotechnology companies. I’d welcome your thoughts and comments…either here or on the Crain’s site.
It’s hard not to be excited about the future after you watch this.
I’ve written and talked about the cultural differences between entrepreneurs and career researchers. Lately I’ve discovered a new one:
Scientists: Are afraid of making bad decisions. As a result, they are slow to make difficult decisions.
Entrepreneurs: Optimize around fast, not perfect, decision making with constant iteration.
Loyal readers know that I work with professors and career scientists and help them commercialize their work, often through the formation of a startup company. The professor’s role is as a founder of the startup, usually with an experienced entrepreneur or business person as a co-founder. Professor-founders should ensure there is a good alignment of incentives between themselves and the business people running the company and cede the business decisions to the business people. When professors insert themselves into operational decisions, they often find themselves completely out of their element.
The reason is that business is an art, not a science. You never have perfect information, you never have all the resources you need, and you never have enough time. But experienced business people understand that business these days is all about making quick decisions and iterating and adjusting. When things don’t work out, as they frequently don’t, you learn from the decision, fix what you can, and move on. This paradigm throws career scientists way outside their comfort zones. They respond to this discomfort by slowing everything down which often becomes a leading indicator for failure.
Earlier today I got the opportunity to provide witness testimony for the U.S. House of Representatives Committee on Science, Space, and Technology Subcommittee on Research and Science Education in a hearing called Innovation Corp: A Review of a New National Science Foundation Program to Leverage Research Investments. The session was chaired by Mo Brooks of Alabama. The ranking member is Daniel Lipinski of Illinois. I was a Mentor in the first cohort of I-Corps in the fall of 2011 at Stanford University.
Also providing testimony were:
Dr. Thomas Peterson, Assistant Director, Directorate for Engineering, National Science Foundation
Mr. Steve Blank, Lecturer, Stanford University and the University of California at Berkeley
Dr. Gabriel Popescu, Assistant Professor, Department of Electrical and Computer Engineering,University of Illinois at Urbana-Champaign
Dr. Andrew Mazar, Director, Program for Developmental Therapeutics and Entrepreneur-in-Residence Innovation and New Ventures Office, Northwestern University
My full testimony follows, and I’ve also posted a full .pdf file in the Box widget on the lower right hand corner of the page for easier downloading.
Testimony from Neil D. Kane, President, Illinois Partners Executive Services,
U.S. House of Representatives’ Subcommittee on Research and Science Education,
Committee on Science, Space and Technology
Field Hearing: “Innovation Corps: A Review of a New National Science Foundation
Program to Leverage Research Investments”
Delivered July 16, 2012
I’d like to thank Chairman Brooks, Ranking Member Lipinski and the other members of the Committee for the privilege and honor to speak to you today. I represent on today’s panel the perspective of an Innovation Corps Mentor. Last fall our team, now known as GlucoSentient, Inc., was part of the first cohort of the Innovation Corps program.
You can think of me as the proverbial serial entrepreneur. With a degree in mechanical engineering and an MBA, I spent the first part of my career in large companies like IBM and Microsoft in a variety of engineering and customer facing roles. About 12 years ago I saw an opportunity to apply my technical and business experience to help researchers, typically from universities and federal laboratories, commercialize the fruits of their work. My involvement is sometimes as a consultant or advisor, and on more than a few occasions I have been the CEO of a startup company formed to commercialize this work. My focus tends to be on innovations derived from the engineering sciences with an emphasis on advanced materials and nanotechnology. On this journey I was the Entrepreneur-in-Residence at the Research Park at the University of Illinois at Urbana-Champaign, and earlier I was co-Executive Director of the Illinois Technology Enterprise Center at Argonne National Laboratory. Through these efforts I was involved in the launching of innovative companies such as SolarBridge Technologies, a maker of micro-inverters for photovoltaic systems; Semprius, a leading flexible electronics company; and Advanced Diamond Technologies, a pioneer in the synthesis of diamond from natural gas. Together these companies have raised over $110 million. Currently I am involved in a number of projects, all based on university research, and I hope they become as successful as these companies.
Continuing with the Nine Guiding Principles, onto Principle Three.
Everyone knows that raising private capital to finance a startup is difficult. This post is not going to tell that story. There are zillions of articles and blog posts about how to raise money. Maybe someday I’ll write one too.
The federal government has myriad programs available that fund the development of critical technologies. The government is typically interested in two kinds of technologies: 1) Those where the government has a critical need and doesn’t have a commercial source available (such as with new treatments for diseases, for example); or 2) Where the government needs to stimulate R&D in areas where the private sector may not invest—such as in alternative forms of energy or renewable energy. For example, recently the Dept. of Energy (http://arpa-e.energy.gov/ ) issued a request for information about energy storage technologies. In 2010 after the Gulf Oil Spill, the government immediately started funding the development of technologies that would accelerate the clean-up and environmental remediation of the Gulf Coast.
More importantly, some of this money is set aside in programs targeted at small businesses, so you won’t be competing with Northrop Grumman or Boeing for the funds. The SBIR (Small Business Innovation Research) program (http://www.sbir.gov/) is a Congressionally mandated program that obligates those federal agencies that sponsor research (Dept. of Defense, Dept. of Energy, National Science Foundation, etc.—11 agencies in all) to set aside 2-3% of their external R&D budgets for qualifying small businesses. If you have less than 500 employees and the majority of your ownership is held by individuals who are U.S. citizens, you are a qualifying small business. [Note: Just a few weeks ago the requirements were overhauled, and relaxed somewhat to permit venture-backed companies to be eligible, so these parameters may be slightly incorrect. See the links at the bottom for further details.] Over $2 billion goes to small businesses through this and its sister program, the STTR Program (Small Business Technology Transfer)—which permits co-development with universities or federal laboratories.
You can get up to $150,000 to prove the feasibility of your work in a Phase I SBIR and then can get another slug of money for more advanced product development in a Phase II—over $1 million in total. At the end of the day, the government might even become a customer of yours. In the meantime, they’ve paid to de-risk your technology in a manner that does not require you to give up equity…and once you’re done with the work, you’ll be a much better candidate for raising venture capital or angel financing. Astute VCs will recognize the competitiveness and oversight of the SBIR program as a proxy for good technical due diligence, and the achievement of having gotten through the process itself gives you high marks with investors. Some states offering matching grants to small businesses on top of SBIRs. And because the SBIR program is competitive, the government is permitted to sole source from you if your technology was the subject of an SBIR.
Here’s the important point
The government money provides leverage but you cannot subsist on it alone since you’ll have some necessary expenses like patenting, marketing costs and incorporation fees that can’t be charged to government projects. The SBIR money must be used for technical development consistent with the proposal you submit. So you need both flavors of money to get started.
These programs are competitive. I’ve heard anecdotally that something less than 20% of all Phase I proposals are funded. Writing government proposals is a skill that must be developed, and if you get good at it, it can pay off handsomely. At my last company, Advanced Diamond Technologies, we used government grants to fund risky projects that our investors never would have allowed. Some of the bets paid off and we killed some others that didn’t pan out. All of the commercial products that company sells today at one time were the subject of SBIRs. Over a period of about 7 years we received roughly $5 million in SBIR grants, plus about $4 million dollars more through other government programs on top of the $12 million we raised from equity investors. In the eyes of our stakeholders, we had $21 million to fund product development and build our company, but we only were diluted to the tune of the $12 million we got from equity investors. That is leverage.
But there’s no free lunch…it can take 6-12 months to secure grant funds. You need a team of capable people with the right backgrounds to be able to credibly execute the work, and you need access to the facilities that are required to perform the work. Through the STTR program you can leverage the facilities of universities—as well as their researchers—if your company doesn’t have all the ingredients yet itself.
The SBIR/STTR programs provide support for the physical sciences (advanced materials, nanotechnology, electronics, telecom), biological sciences, health-related issues and advanced computing. You probably won’t find much in the way of federal funding for a web company or social media startup that doesn’t have a lot of technical risk, but if you’re on the leading (bleeding) edge, leverage your capital with government money.
If you’ve received SBIRs and/or STTRs, please share your stories.
- Helping Small Businesses to Drive Innovation (whitehouse.gov)
- Senate Okays Changes to Program for High-Tech Start-Ups (news.sciencemag.org)
A common way for startups to get going is by taking technology invented at a university (or federal laboratory or similar public institution) and “transferring” it to the commercial sector by creating a startup company whose main mission is to develop the technology and turn it into a viable business. Frequently the university inventors of the technology are also founders of the startup company.
I’ve met many people pursing this path of forming companies, especially those people who were with me in the National Science Foundation’s Innovation Corps program. There were 21 teams in our class at Stanford University, and those that will now be starting companies, which is most of them, will need to license technology from their associated universities.
I’ve been through this process many times. Like all things, one gets better at it with experience. But the first time I had to license technology I felt very vulnerable because I had no idea what I was doing, nor what my expectations should be, whereas the university had decades of experience, hundreds of transactions to reference and lots of data they could use. Here are some guidelines that may be helpful if you’re doing this for the first time.
Much of the work that I have done involves transferring technologies out of academia or federal laboratories. The framework for academic spinoffs is that typically there are technical co-founder(s) who are the subject matter experts in the technology. But investors have declared the days of “professors as CEOs” to be over. So often there is a business person who is also at the table at the founding of the company to handle the business matters and to provide a steady hand as the company takes off. I’ve been that business person at least six times. Through those experiences I’ve come to learn that the way career scientists think are very different from the way entrepreneurs think even when they share the objective of wanting their startup to succeed. Call these differences in perspective, or cultural issues, if you will, between the motivations of academics and entrepreneurs.
Academics make their reputations based on what they know. They don’t “profit” from this knowledge until they publish it and can explain to others how to reproduce their work. Only then is their professional reputation enhanced and their research validated. Publication success is often a key factor in deciding whether an academic wins research grants or is offered tenure. For many academics, the recognition they gain by advancing knowledge in their field is sufficient motivation. But they will not see a meaningful financial reward for their work unless it is commercialized, usually by founding a successful business.
The pursuit of money by business people if often repugnant to dyed-in-the-wool academics, Continue reading