WASHINGTON, DC – University technology-transfer offices seeking venture capital to fund startup companies should support a culture of innovation at their school, manage inventor expectations, and streamline bureaucracy, according to preliminary findings of a survey conducted by the University of Southern California’s Stevens Institute for Innovation.
In addition, the survey revealed that crucial deal components include platform technologies, a foreseeable exit strategy, and continued involvement by faculty inventors.
Krisztina Holly, vice provost of innovation at USC and executive director of the USC Stevens Institute, presented snippets of early results from the survey during a keynote presentation at the 2008 University Startups conference, co-hosted here last week by the National Council on Entrepreneurial Tech Transfer, the National Science Foundation, and the National Institutes of Health, among others.
Following her talk, Holly, who was previously the founding executive director of the Massachusetts Institute of Technology's Deshpande Center for Technological Innovation, told BTW that the survey results are currently more qualitative than quantitative, and her office hopes to extract more data from the results for possible publication in the future.
Nevertheless, she said that it was valuable to share some of the survey’s top-line findings at the university startups conference to help attendees better understand reasons for the oft-cited disconnect between tech-transfer officials and VCs. Her presentation also served as a lead-in for a VC discussion panel on improving the university startup process.
For the survey, the USC Stevens Institute worked with an undisclosed third-party research firm to conduct 94 15- to 30-minute interviews with early- and seed-stage venture capitalists nationwide. The interviews were conducted between November 2007 and February 2008 and covered a wide range of industries and US geographic regions, according to the USC Stevens Institute.
Interview subjects were at the partner or managing director level, and a prerequisite for their participation was that they had previously considered or invested in businesses spun out of universities. In addition, the interview subjects’ available investment funds ranged in size from $5 million to $300 million, and included investments in the life sciences, IT, consumer products, internet businesses, and clean tech/energy.
Examples of questions posed to VCs included, “‘What motivates you?’ ‘What challenges do you face in working with universities?’ and ‘How can universities add value to their IP?’” Holly said during her talk.
One of the most consistent findings was that deal flow motivated VCs more than anything else.
“In my past experience, I’ve seen a lot of startups getting funded out of a university setting. I saw the value in working with the venture capital community,” said Holly. “And I also saw the common hazards when the cultures clashed.
“There’s just a very small subset of university technologies that make sense to pull out and build a corporate entity around.”
“At the end of the day, the venture capitalist’s end game is return on investment for their limited partners, so their lifeblood is deal flow,” Holly said. “But there’s just a very small subset of university technologies that make sense to pull out and build a corporate entity around.”
In other words, the survey revealed that a majority of VCs are frustrated by seeing too many ideas that are difficult to understand, and make less sense as startups than as licensing deals to established companies.
Holly said that no one knows for sure whether something will be a success or not, and VCs certainly don’t expect tech-transfer offices to make that judgment for them. However, they don’t want to see ideas that aren’t viable as VC-backed startups.
Some notable responses from survey participants included that “universities have no idea … what makes a standalone business viable,” and often present prospective investors with ”an exhaustive list of unintelligible titles in academese that doesn’t really mean anything to me and is basically unreadable.”
Holly said that the survey revealed that one of the requirements for a viable VC-backed startup firm is a path to a big exit in the near future. “That depends on the industry, but usually we’re talking at least $200 million within five to seven years,” Holly said.
Furthermore, the IP that investors are being asked to support “can’t just be a feature or product; it needs to be a platform,” Holly said. “Otherwise it’s best as a simple licensing deal.”
These VC requests also give universities the opportunity to add more value to the IP they are marketing, in particular by providing a bit more due diligence. According to the survey, examples of information that VCs would like to see more often from tech-transfer offices include: the basic technology concept in “clear, concise terms;” “cost basis;” “competitive landscape and market analysis;” “anticipated time to revenues;” and “anticipated time to liquidity.”
Holly commented that the last two items were cited as often being unrealistic, and that about four of five VCs USC Stevens spoke with said that they usually add a full two to three years onto the projected time to market for university technology-based business plans. “VCs are looking for a very specific business profile, and they are frustrated when the university doesn’t understand that,” Holly said.
Another factor that increased the likelihood of a VC-backed university startup deal was the continued involvement of the faculty inventor — but not too much involvement.
Indeed, the role of the faculty entrepreneur is of critical importance, Holly said. Venture capitalists expect the people to come with the deal, “including graduate students and postdocs if possible.” But they do not want them to ultimately run the company, she stressed.
Holly said that many VCs said that inventors and entrepreneurs tend to be very attached to their ideas. This means that they can act as effective evangelists for the technology, which can help move a deal along; and can provide meaningful recommendations and research contributions to further develop the technology.
“Every single VC we spoke with mentioned this without fail [that] they expect the inventors to be part of the deal,” Holly said. “And these inventors need to be coachable team players who … value the investors’ expertise.”
Faculty inventors should also be realistic about the limitations and prospects of their technology. As such, university tech-transfer offices can play a crucial role by advising and coaching entrepreneurs so that they “can mature as business people,” said one VC survey respondent.
As another survey participant illustrated, “We had a deal fall through … [and] with a little bit of coaching the inventors could have had more rational expectations.”
Lastly, many VCs said that for them to work with universities on a regular basis, the schools must foster an “ecosystem of entrepreneurship,” Holly said. This means a “top-to-bottom culture that breeds and fosters innovation,” she said.
“This goes through every part of the university system, [and] has implications for admissions, faculty promotions, policies, research funding and, of course, technology transfer,” she said.