I
am Tim Keane, from Marquette University and it is a pleasure to be here today. In these next few minutes, I would like to tell you something about how our angel group works with technology transfer startups to establish and to grow new businesses.
Who We Are
U.S. Speaker Tim Keane (right) during a local press interview.
Marquette University is a Jesuit institution with 12,000 students. In addition to schools in science and liberal arts it also has an engineering school and a business school as well as a faculty in health sciences.
Earlier this year the university has announced a new center for entrepreneurship to bring the entrepreneurial experience to all of our students. Its goal will be to provide learning experiences for students in all disciplines who are interested in starting and growing new enterprises at sometime in their careers.
There is an active angel network at the university. It consists of friends and alumni of the University, and has about 65 members. They include former entrepreneurs who have sold their companies; some current entrepreneurs, usually on their second or third company, professionals in medical research, pharmaceuticals, health care, software, and manufacturing; several money managers and venture capitalists, as well as lawyers and current and former corporate executives.
They are capable of bringing tremendous expertise to assist new startups in the process of becoming successful. This is really the secret of angel investing. We believe that the people in the business make all of the difference. When you judge businesses that are highly successful it is always the people who create the success. In the same way our angel network members bring very high quality experience and willingness to help. They are the reason we are successful.
What We Do
We look at more than 150 opportunities per in a wide range of areas including health care and software. We invest our own money as individuals in the businesses that we select. Our intention is to make a good return and help the companies grow and prosper.
Technology Transfer Practices
The process of technology transfer is well known. There is no lack of scientific research to support transfer activity. In fact, here in Milan Doctor Marisa Meloni, CEO of VitroScreen, is testing some new reagents developed in our chemistry department at Marquette University. The hope for the scientist at Marquette is that these new reagents are eventually licensed to a large established company. But I’d like to talk to you today about the smaller group of technology transfer opportunities that are candidates for becoming new startup businesses.
In the United States, less than 10% of all technology transfer licenses go to startup businesses. Last October, Prof. Robert Taber, Vice Chancellor for Corporate and Venture Development at Duke University in North Carolina spoke to business leaders in Milan, Turin, Trieste and Padua. He said that of Duke's 4,783 licenses, 462 had become new companies. At The University of Wisconsin, about 7% of all licenses become new companies. This is because most patents have traditionally been licensed to larger, established companies. When I worked at GE Healthcare in the 1970s, GE was a very active acquirer of new university licensed technology, and at some level has continued to do this today.
Licensing to large companies has traditionally been a way to generate some revenue for the university, but typically not with the large payoffs associated with successful startups.
This May Be Changing
However, there are many factors that are causing this to change. My colleagues at the technology transfer office at The University of Wisconsin see a trend in larger companies licensing practices. Rather than acquire licensed technology, they wait until the technology has been proven in a company. When the new startup has a working product and customer acceptance, and in some cases has established both market price and a distribution system, they buy the company.
While licensing activity is still very robust, new technologies that do not yet have a market are less interesting to larger companies. They tend to want to wait and see what the company is able to develop.
As one example, In Wisconsin, we recently had a company, Tomotherapy, that was a technology transfer startup in 1997. The idea was to provide radiation therapy for cancer with a very complex beaming algorithm. No medical equipment company was interested because the idea was radical and had never been done. The founder and a small group of investors set out to prove its value. It is now in wide use in hospitals throughout the world. The company went public on May 9, raising $250MM. It’s stock has risen 11% this month and its total market value is now just over 1 Billion.
In another example, we are co-founding a company right now in the area of anesthesia monitoring. The inventor is well known and has developed a new method for measuring small quantities of anesthesia gas as it is being used in surgery. It is a new way to solve an old problem and promises more accuracy at lower cost. Again, however, there is not a market yet and its success will require hospitals to do an old process – gas monitoring – in a new way. Larger companies are not interested in licensing, and the inventor wishes to prove the technology in the marketplace.
The implication of this trend is that universities must work harder to take advantage of radical new inventions. They need to connect inventors to those people who can work the scientists to build these startup companies, especially in areas of technology breakthroughs.
How Technology Transfer Offices Identify Patents with Startup Potential
How do technology transfer offices decide whether a patent is better for a startup or a license to a larger company? Here are a few criteria in use today.
- Platform technology: Can this technology support a range of products? We believe the anesthesia monitoring technology can do that in many applications, especially in pollution control in industry. These would be applications beyond the medical area. Are there many patents in a crowded field, such as in heart stents? In that case, license to a larger company, since the existence of many patents is probably an indication of an active market.
- Or can there be freedom to operate – a relatively uncrowded field. This is determined by looking at all of the patents in a given area to see if others have patented similar ideas or if there is a wide area that has not been patented. If a license is for a technology for which a market already exists it is much more likely to be licensed to a larger company as in the case of new inventions in stents, where many companies actively compete for new ideas.
- Does the technology still require scientific discovery or is it ready for engineering work? Most investors prefer not to start companies with a high degree of unknown scientific risk.
- What is the technology transfer office's belief in the size of the market and how fast it might grow? Do they think, in general, that the market will support an adequate return for investors – so that we the company can be financed. Investors will do this more thoroughly but it is very helpful for the licensing office and the inventor to have a good idea of the overall opportunity. What is the likely exit for this company? Who might buy it? (Or, like Tomotherapy, might it become a public company?). Finally, what does the inventor want? If the inventor wants to be involved with a startup, then this may be a good direction to take.
Angel Investor Considerations
If the technology transfer office believes this may be a startup opportunity, we then will begin the process of considering whether we might be interested. It goes without saying that we must believe the people in the company are capable of leading the company to the next level of success.
We then ask – what value can our network bring to the company? These might include
- Designing the business model, by which I mean “How does the company make money?” The business model is the combination of factors that describe the business. It includes the market the business will serve, the perceived value delivered to the customer which determines profitability per unit of sale, and the sustaining factors which allow the company to thrive over the long term. Correctly testing and identifying winning models is the essential investor startup skill.
- Can we assist in recruiting management when the young company will need it? In the anesthesia business, one of our members owned a company in the gas industry. He was so enthused about the new company that he hired a president for his old company, and took over the management of the new company. In another example in a medical service business, we recruited the President of GE Healthcare Far East to come back to the US and run the company.
- Can we introduce the company to the next level of investors when they need it? And are we aware of who those investors may be prior to our initial investment?
- Of course we are very interested in the business model. Not only how big the market is, but also, what is the problem this technology solves? Is the test that finds an animal’s disease in minutes rather than days a big enough problem to move the market? The business model in the anesthesia business is “less costly more reliable” measurements of surgical anesthesia gases and toxic emissions. Is this important enough to cause people to change what they are doing? And so forth.
- Will our technology create a barrier to entry to help prevent others from entering this market? In the anesthesia business we still are reviewing the competitive barrier issues.
- How will we realize the value of this business? We seldom see any cash flow payments during the life of the company since we want the company to generate cash to grow its business not to pay investors. The medical services business will be sold to a competitor who wants to become a public company; Vital Sensors will probably be acquired by a large, public company; in the anesthesia business buyers will include both industrial equipment companies and healthcare businesses. Because of market size disparities the commercial buyers will probably pay more.
- And then we come to the risk and reward profile.
Risks and rewards.
This is a simple chart! To draw, but perhaps not to build from the data. We gather all of the information we have discussed, markets – customers – engineering cost and timing and so forth, and bring it together to build this chart. We use this graph to visualize the risk in the business proposition – total cash needs and total time required to be sustainable. It helps us as investors to really understand the sum of our other work in the product and market areas.
It allows us to know the total amount of the investment to be spent, on the left hand side, and at what time the company will begin to generate its own cash and become self sustaining. Sometimes this timeline is quite long and the cash quite large. Sometimes this cash will be invested in several rounds over time.
Then we'd like to know how long until it builds cash and ultimately is sold for some value that is a multiple of cash. Our most recent sale in medical services is being sold for four times revenue, which is about twelve times earnings.
Expected Returns
We think carefully about our expected returns. We do this analysis so that we can expect that they can meet our financial goals within a reasonable time. Our preferred minimum return is 5 times our money in five years. This is an internal rate of return of about 38% per year on a compounding basis. That medical service business is 129% annual rate of return. This is our best achievement so far. It was 12 times our money in about three years.
Assessing Risk and Reward
So, to manage risks, we expect the company to plan for expenses. We want them to avoid large structural costs and fixed expenses. We believe that entrepreneurs should excel at finding and using resources they do not own. We do plan for some cost overruns so no one is surprised when they happen.
We often invest in several stages over the first year or two as the company achieves milestones. This reduces our risk and keeps the entrepreneur focused on results. We plan the sale of the company based on achieving its goals that make it market worthy – usually these goals are customer sales related – and we keep an eye on the market. If the market for this product grows rapidly we may sell the company earlier to achieve a better result. This is a better result for the company too because a larger owner with a growing market will provide substantial opportunities to the company and its employees. I’ve already discussed our return calculations.
What We Have Learned
Top Ten Best Practices we have learned in working with technology transfer businesses:
- The inventor is the most important person in the business, whether he works in the business or not. Without his commitment to helping the business succeed, chances for success are much smaller.
- Spend lots of time making sure that the people in the company are the right people. Know what critical experience and skills will be needed and make sure it is there. All successes and all failures can be attributed to people.
- We must always remember that there is plenty of money to be invested but too few really good ideas. As soon as we have made an investment we become members of this team and our sole focus is on helping them succeed so that we may be worthy of their effort and their respect. Over communicating our expectations, hopes and goals will build a more trusting and more successful company.
- There is no substitute for experience in the process of assessing and investing in companies. We seek to cooperate with other investors and universities so that we may have access to as much experience as we can get.
- We tell entrepreneurs that who they take money from is much more important than the relative price they pay for it. We are very careful about our investment partners for this reason. It would be a terrible idea for an entrepreneur to take what we call “dumb money” – from unsophisticated investors who may have restrictions or controls about what the company can and cannot do, for instance.
- It is more important to prove that a market exists and that a product works than it is to build infrastructure. We actively discourage companies from hiring when they can use contractors, from thinking about developing their own manufacturing, or in any way building too many fixed costs. Fixed costs can be a real burden in a situation of cost overruns.
- When companies do hire, hire slowly and accurately. The cost of hiring quickly and making mistakes is very costly in many ways.
- A simple business model is always better than a complex business model. A tested business model that is also new and innovative is best.
- Before you write the first check, have an agreed upon exit plan and strategy.
- Always remember that entrepreneurship is at the opposite end of the spectrum from administrative or bureaucratic behavior. It is a never ending process of innovation, Identification of opportunity; marshalling resources; action/exploitation; and, harvesting.
This has been a very brief overview. I am not only glad to answer your questions but also to talk with you afterwards. And do not forget about the consequences of experience!
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