BETHESDA, Md. – University startup companies and a healthy venture capital industry to seed them are more important than ever to the US economy and to its continued global competitiveness, according to various speakers at a university startups conference held here last week.
Despite this, a disconnect remains between venture capitalists, university technology-transfer offices, and university spinout companies for a number of reasons, underscoring the importance of other early-stage sources of funding for startups, such as state and federal agencies and angel investors, speakers said.
Various experts from universities, VC firms, and government agencies shared their views on the state of VC-university relationships during the University Startups Conference, co-organized by the National Council on Entrepreneurial Tech Transfer, the National Institutes of Health, and the National Science Foundation, and co-hosted by the University of California and University of Maryland.
The purpose of the conference, according to organizers, was to facilitate a discussion between US universities, research institutions, and venture/angel investors on how to create and fund high-impact startups. Proceedings from the conference will be published in a report entitled “Enabling Innovation” to be released in May 2008.
Mark Heesen, president of the National Venture Capital Association, helped set the tone for the meeting in a keynote presentation addressing the overall current state of the VC industry in the US.
According to Heesen, a number of policy changes in the US in the late 1970s and early 1980s spurred the growth of VC-backed startup companies, none more important than the Bayh-Dole Act, which Heesen said has been “extremely important to the long-term viability of the venture capital industry.”
Heesen said that NVC has found that after a relative lull in VC investment in university startups in the past several years, particularly in the area of life sciences and biotechnology, activity has picked back up tremendously over the past year.
“There has been explosive growth in biotech and life sciences-related venture capital this year,” Heesen said. “Over the first two quarters, we’ve seen more money go into life sciences – both in biotech and medical devices – than ever before, even at the height of the biotech bubble of years past.
“We have also seen a doubling in the amount of money going into clean tech in the past year,” Heesen added. “It’s not being flooded with money, but it is still significant.”
Still, Heesen said, a dramatic change in US global competitiveness has occurred in the last five years, much of it due to VCs souring on US-based ventures. Reasons for the downturn in activity have included the litigious culture in the US, which exceeds that of other countries “by far;” a difficult regulatory environment; and the US tax structure, which, “while not as bad as in several other countries, is still viewed disfavorably,” he said.
Meantime, issues in other countries that had traditionally been viewed as negatives – such as the physical infrastructure and tax structure in India, and the legal system in China – are increasingly viewed as being “not as big a deal” to US-based VCs, Heesen said.
Countries such as India and China have become attractive landscapes for US-based VCs because they have promoted a culture where the “entrepreneur is king,” Heesen said. “It’s a real wake-up call to the US,” he said.
Heesen also said that policy changes in the US — such as the Small Business Administration’s decision in 2003 to make companies that are majority owned by VC firms ineligible for Small Business Innovation Research grants, and pending patent reform legislation — continue to threaten the general health of the VC industry.
Although the US House of Representative last week passed legislation that would again make majority venture-backed companies eligible for SBIRs, the fact that such a situation did not exist for the past few years has been troubling, according to Heesen.
“Allowing VC-backed companies to take part in the SBIR program is important,” he said. “The thought that a university spinout with six or seven employees and with VC backing cannot get SBIR funding is completely illogical to us.”
Regarding patent reform legislation, Heesen suggested that NVC and venture capitalists in general are somewhat stuck in the middle of the debate.
“Many people have characterized the patent reform debate as being biotech versus the IT industry, but we don’t see it that way per se,” he said. “It’s actually been difficult for NVC because the patent bill as written pits individuals and corporations with a lot of patents versus individuals and companies with little to no patents.
“Some VCs will say, ‘I don’t give a hoot about patents,’ while some will say, ‘If you do not have iron-clad patents, we will not invest,’” Heesen added. “I have not been able to understand why this difference exists in the VC community.”
Other speakers, such as Charles Wessner, director of the Program on Technology, Innovation, and Entrepreneurship at the National Academy of Sciences, warned that perceptions of an extremely healthy investment environment in the US may hinder other necessary means of translating university innovations into commercial products.
“Innovation is key to maintaining a country’s competitive position in the global economy, and small businesses and universities play a key role in that innovation,” Wessner said.
Challenges to continued development of university startups include the need for improvement in the US education system, inadequate state or university support for commercialization, and insufficient research funding for R&D expenditures, Wessner said.
Wessner also cited the 2005 NAS report entitled “Rising Above the Gathering Storm” as having influenced some thinking among the university, governmental, and VC communities since its release.
The report dispels several “myths” of early-stage innovation and start-up companies, including the myth of perfect markets, or “if it is a good idea, then the market will fund it.” In fact, Wessner said, the landscape is littered with good ideas and valuable IP that have not garnered the resources necessary to bring them to market.
“Another myth is that VC pockets are wide and deep, and that there is little to no need for government funding for research,” Wessner said. Such thinking, he added, fails to underscore the importance of reinvigorating dwindling research budgets at federal agencies such as NIH, a sentiment that has been mirrored in other scholarly reports and papers over the past year (see BTW, 9/24/2007).
Speaking the Language of Business
The conference also included several panels for venture capitalists to share their views on VC-university relations and how they could be improved.
One such panelist, Jonathan Silver, founder of VC firm Core Capital Partners, disclosed some of what he termed the “dirty little secrets” of the VC industry.
First and foremost, Silver stressed, VCs “are in this business to make money” and as such, often experience a breakdown with university tech-transfer offices that are more interested in moving as many technologies as possible from the bench top to the market.
“VCs as firms are generalists,” Silver said. “Not surprisingly, we can’t be experts at everything. Thus, we may not always understand at first blush the importance of what your Nobel laureate professor is doing. Tech-transfer offices need to learn how to speak the language of business to us.”
Silver added that in general, VC-university relationships are making progress, but still have some issues, most of which revolve around stalemates at the negotiation table. “We have thousands of opportunities to choose to invest in, and if it’s too hard to negotiate a deal right off the bat, we will probably pass for the next opportunity,” Silver said. “It’s a partnership whose only value to you is to strike a deal.”
“Another myth is that VC pockets are wide and deep, and that there is little to no need for government funding for research.”
Silver also said that schools need to give their faculty inventors more freedom to be entrepreneurs. “If a technology is dependent upon the professor who invented it, they need a way to get back to their career at the university if they agree to be a part of the company,” he said. “We can’t start a company without having the inventor involved, and if that inventor doesn’t have a safety net to resume his career, then he might not choose to participate.”
Maryland Seeks Angels
Members of a panel on the state of tech transfer and venture capital in the state of Maryland said that they believe one important way to bridge the widening gap between university startups and VCs is to secure more funding from state and federal programs and, even more importantly, from angel investors.
Steve Walker, general partner at Maryland-based early-stage technology investment firm Walker Ventures, said that Maryland has an enormous wealth of available technologies and resources, but has still had difficulty in linking the two.
According to Walker, Maryland consistently ranks as one of the richest states in the US; and, with more than 80 federal laboratories or agencies, 300 R&D centers, 17 incubators, and several prominent research universities, “has more basic and applied research being done in a 30-mile radius than anywhere in the world,” he said.
Despite this, there is a base of 350 or so early-stage companies in the state that “have garnered some early investment, want to take the next step,” but can’t find sufficient funding. “Will VCs come to the rescue here?” Walker asked rhetorically. “Not really, as most are not interested in early-stage investing.”
Steve Kubisen, senior director at the Johns Hopkins University Technology Transfer Office, said that universities and states are charged with “facilitating the front end” of the investment and commercialization process.
“We need more deals up front with state and federal funding sources to attract more angels, which in turn will attract more VCs,” said. “This will help us develop an ability to fund early-stage ventures and to build a critical mass of quality deals.”
One way that JHU hopes to facilitate this process is by holding a series of angel investment workshops at the school, the first of which is scheduled to take place this month. The workshop will include so-called “speed pitching” of ideas from university interests to potential angel investors, educational forums, and networking opportunities.
Maryland is already attempting to bridge the gap with its Technology Development Corporation, or TEDCO, program, a state-funded organization that is widely considered to be the largest early-stage investor in the country, including VC firms. For the fourth consecutive year, TEDCO last year ranked first on Entrepreneur magazine’s “VC 100” list of the most active early- and seed-stage investors in the nation for providing 22 early-stage funding awards in 2006.
To date, 71 companies have received funding from TEDCO’s Maryland Technology Transfer Fund (one of several of the agency’s funding programs). TEDCO’s awards are typically in the range of a few hundred thousand dollars, a size that is more appropriate for startup companies than the typical VC investment amount, Walker said.
“Typical first-round funding awards of $10 million to $15 million are too much,” Walker said. “These companies need $350,000 to $500,000 or so, and angel investors are the people that are going to do that. Angels don’t typically need a giant return in two years like VCs do.”
Walker said that there is a strong history of angel investment in Maryland, but there is room for improvement. “Angel groups have been around, but there is no real organization,” Walker said.
To try and remedy that, Walker Ventures, in collaboration with TEDCO and Maryland-based research universities, hopes to build a database of early-stage companies in which TEDCO has already invested, and provide the resource to various angel investment groups in the state. “We need to make what is happening in the state very visible.”
Another possible solution is to partner with the Ewing Marion Kauffman Foundation to bring its seminar on the power of angel investing to various venues in the state, Walker said.
According to Walker, this seminar, which has met with some success in spurring angel investments in other states, has only been held once in the Maryland/Virginia area, and Walker and colleagues are hoping to get individual counties to fund the seminar in their region.