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USC Stevens Institute Issues White Paper Designed to Strengthen University-VC Relations

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Tech-transfer officials from the Stevens Institute of Innovation at the University of Southern California this week published a white paper offering tips to academic tech-transfer professionals or faculty members seeking to improve ties with venture capitalists.

The paper compiled the results of nearly 100 interviews with US-based VCs and found that university administrators need to better understand VCs' business goals; support and educate their entrepreneurs; streamline the tech-transfer process; improve access to university inventions and inventors; and support a "culture of innovation" at their institutions.

According to its authors, the white paper is intended to serve as a launching pad for universities seeking to do more deals with VCs in an effort to create startup companies around their technologies.

"A key piece in developing a healthy ecosystem, in any area, is to improve the efficiency of converting university research into viable, growing startups," Krisztina Holly, USC's vice provost for innovation and primary author of the white paper, said in a statement.

"We hope that by empowering university tech-transfer professionals with the key findings from our study, we will help build and strengthen our economy nationwide," she added.

For the survey, published on the USC Stevens Institute website, the 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 between November 2007 and February 2008.

All of the interview subjects were at the partner or managing director level of active venture funds that invest in seed and early-stage companies in a wide variety of industries, including life sciences, IT, consumer products, internet businesses, and clean tech/energy.

The interview subjects were also geographically diverse, with 36 percent from northern California; 21 percent from southern California; 15 percent from the Midwest US; 12 percent from the Northeast; 6 percent each from the South and Pacific Northwest; and 4 percent from the mid-Atlantic region.

Holly, who is also executive director of the USC Stevens Institute, shared some preliminary findings of the interviews in October with attendees of the National Council on Entrepreneurial Tech Transfer's annual University Startups conference in Washington, DC (see BTW, 10/8/2008).

Released this week, the final version of the white paper, "Venture Capital-University Interface: Best Practices to Make Maximum Impact," includes many more specific examples of how university tech-transfer officials can improve their relations with VCs.

For instance, many VCs interviewed stressed the importance of universities familiarizing themselves with VCs' business goals. In general, this involves generating above-market returns for their partners through successful exit strategies, typically an IPO or acquisition.

According to the paper, venture partners generally receive 2 percent of their fund's committed capital as an annual management fee and an additional 20 percent of the fund's net profits, which creates heavy incentives to make successful investments.

Eighty percent of VCs interviewed said that universities typically miss the mark when considering the time it takes to market an invention, and that they usually add two to three years to the stated time to market for a university venture.

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VC expectations vary by industry segment, as well. As an example, funds that manage life sciences portfolios expect to participate in multiple investment rounds as the idea matures over the course of seven to 10 years, according to the paper. VCs specializing in software or IT, on the other hand, might expect a relatively low initial investment and a path to an exit within five years.

The interviews also revealed a unanimous opinion among VCs that their preferred source of deals is a trusted person in their network, as opposed to technology showcases or bulletins. As a result, it is important for tech-transfer professionals and faculty members to avail themselves of these professional networks.

Interviewees also indicated that universities need to do a better job of supporting and educating their entrepreneurs. One of the most important findings in this category is that VCs consistently believe that involving the innovator is as important as the idea itself.

The survey summarized this idea with a quote from one undisclosed VC from the Northeast US: "It's not about the technology alone; at the end of the day it’s about people and it’s about the business team surrounding these technologies," the investor said. "You have to have people who are thinking through the technological and business sides of things.”

The survey also revealed that researchers should be prepared to take time off to become involved with a spinout company, and, if they are unable to make that commitment, they should be prepared to allow a graduate student familiar with the technology to make that leap.

As far as the actual tech-transfer process goes, the VCs' suggestions mirrored those often espoused by company executives — namely, streamline bureaucracy. Although VCs are sensitive to universities' need to protect their investments, arguments over IP minutiae often throw up a roadblock, according to the survey.

“Technology transfer should screen and package the technology, make the introduction, then step back and get out of the way,” one undisclosed partner in a technology venture fund in Southern California said in an interview.

In general, investors stressed that they would like to see universities make an effort at expediting and facilitating the deal process, including "a standardized, transparent deal process," according to the paper.

The last two general categories discussed in the paper are universities improving access to and increasing visibility of inventions; and fostering a "culture of innovation" at their school.

In terms of improving access, tech-transfer professionals need to coach would-be entrepreneurs to present their ideas in business terms rather than "academese." They also must ensure their inventions aren't simply "solutions without a problem," but instead address a clear market need.

Universities also need to be more proactive by approaching investors with succinct pitches and keeping them in the loop on potential deals, according to the white paper. Examples of proactive outreach include sending senior staff members to meet with VCs and employing professors as entrepreneurs-in-residence at venture funds.

Lastly, in the area of supporting an entrepreneurial ecosystem on campus, schools would do well to find new avenues and sources with which to fund research, thereby taking some of the earliest risk away from VCs; and to offer up university resources to startup companies so as to reduce their capital expenses.

This latter point, however, can be a potential minefield for a non-profit institute, according to the paper's authors, because of issues such as conflict of interest and potential tax code violations.

The USC Stevens Institute believes that the white paper can serve as a starting point for universities wishing to increase their startup frequency and success through better relations with investors.

"Although this paper isn’t a roadmap for spinout success or a comprehensive set of solutions to some of the issues facing technology transfer professionals, our hope is that this research sparks a productive, long-term dialogue within and between the university and venture capital communities, and serves an important first step toward refashioning university technology transfer as a more straightforward, more productive, and more mutually beneficial process to maximize the impact of university innovations," the authors wrote.

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