Venture Capital Considerations for University Tech Transfer Offices

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Venture CapitalConsiderations for University
Tech Transfer Offices

• Presented by
• Gene Schleppenbach and Mark Catan
• Miles Stockbridge P.C.
• and
• Mark Frantz
• RedShift Ventures, Inc.

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Understand the Sources of Funding

• Many different sources of financing
• Venture capital
• Angels professional and friends family
• Federal government (various grant programs SBIR
  and STTR)
• State and local government economic development
  programs
• Strategic investors (established companies in the
  industry)
• Important to understand the investment objectives
  of each

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Who has the and at What Stage?

• Stages of Venture Capital
• Know when and under what circumstances venture
  capital is a realistic possibility.
• Seed (100K-1 million) -- typically used for
  product (alpha and earlier) and BPlan development
• Early Stage -- Series A (1 - 5 million) --
  product needs to be developed (beta or beyond),
  solid BPlan, core management team, and some
  significant interest from a player in the target
  industry
• Expansion Capital (5 - 15 million) -- need to
  have the product fully developed, proof of market
  (meaningful sale to a player in the market),
  solid management team and B Plan

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• Venture Economics
• Most venture funds have a 10-12 year target life
  cycle, which shapes its receptivity to new
  investment opportunities
• Early stage venture funds strive to find 1-2
  investment homeruns on each deal, given the
  high betas on outcomes which is different from
  investment objectives of Angels and corporate
  investors/licensees
• Most funds look to earn at least gross annual
  returns in excess of thirty percent (30) over
  their term (approximately 22.5 annual net
  return)
• Most funds are almost fully committed within
  three - five years
• The evaluation analysis is keyed off of expected
  investment return (multiples on amount invested
  in the range of at least 5x to 20x)

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• Valuation Considerations
• The valuation that a company receives includes
  many considerations
• Whats been accomplished to date
• The long-term potential of the business
• The amount of money in this round, which is
  typically determined based on the funding needed
  to achieve targeted milestones
• The anticipated pre-money valuation of the
  company at the next round assuming increased
  valuation based upon application of proceeds
  invested in current round of financing
• The number of subsequent rounds required until
  liquidity event (IPO or sale, including the
  likely amount of each round)
• Because each deal is hopefully unique,
  comparables are of limited utility

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• What do VCs Look For?
• A compelling product or service (preferably
  paradigm shifting) in a new, high-growth market
• A clear path to commercialization go to market
  strategy
• Product at beta stage or beyond, with initial
  customer testing or, better, customer purchase
• Compelling unmet need that product or service
  meets
• Significant advantage to market or barriers to
  entry a strong IP position (both freedom to
  operate and power to exclude) is very helpful and
  a big differentiator

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• Financing Pre-VC
• Self finance as much as possible -- not even
  friends and family, much less professional
  angels, will invest if you do
• not have a well conceive idea and plan
• Fiends/Family/Casual Angels make sure they
• understand the risk, properly document and dont
  over
• Value
• Professional Angels harder to find professional
  angels
• they understand they are a bridge to early stage
  VC, so
• need to conclude VC fundable. Rarely take
  common.

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• Financing Pre-VC (contd)
• Federal Sources
• Government sponsored VCs (In-Q-Tel OnPoint)
  similar to strategic partners
• SBIR/STTR
• Phase I (100K 6 months basic RD/feasibility)
• Phase II (up to 750K (sometimes higher at NIH
  for drug dev.) 12-18 months (3 years for drug
  dev) proof of concept/prototype)
• Phase III (commercialization previously no
  money and not much help changing landscape)

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• Financing Pre-VC (contd)
• State/Local many states have seed-level
  financing
• through economic development programs
• Strategic/Corporate Investors -- looking for
  technology that fits into their strategic plan

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• Do Your Own Diligence on VCs
• Differing stages of investment focus
• Different industry focuses
• Geographic considerations
• Management style -- active or passive management
• Competing companies in their portfolio?
• Personalities compatible?
• Strong syndicate to help with follow-on rounds?
• Help with distribution channels/sales and
  executive recruitment?

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Avoid Start-Up Pitfalls

• Do Not Create Hurdles to Investment
• Appropriately document equity commitments to
  co-founders or promoters involved in company
  formation and/or financing
• Avoid unconventional corporate or capital
  structures or insure convertible to standard
  structures
• Build management team with appropriate critical
  skill sets understand/acknowledge areas where
  there are holes and evolving needs as the company
  grows
• Avoid over/under valuing at seed round
  convertible debt can help
• Bottom lineget good people in and around the
  business and keep bad/not good enough people away
  from the business dont accept half solutions

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IP Essential Basics

• Investor due diligence will reward diligence and
  best practices WRT
• Title to IP (all required assignments in-hand)
• Patenting and defensive publishing directed to
  product ecosystem
• Freedom to operate including access to essential
  technology and materiel, particularly in view of
  rights of prior sponsors
• Practical knowledge of prior art and where the
  most important patent opportunities exist (the
  white space)
• An IP strategy Processes for using IP
  effectively
• IP clauses and other contractual restrictions on
  principal personnel
• Access to and ability to transfer non-IP
  intangible assets such as know-how, consulting
  agreements, relationships, special knowledge and
  business processes.
• Effective IP position reduces risk. Particularly
  important in view of fact that Universities will
  not permit strong representations and warranties
  or indemnification.

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Patent early. Patent often.
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IP Tendency to focus on research
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Product Ecosystem
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Its the value proposition (stupid)
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Its the value proposition (stupid)
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Values patents have
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Venture Terms

• The Term Sheet
• Obviously a key hurdle
• What does it take to get there?
• Diligence on the technology, the potential
  market, the team, the business plan, projections,
  etc.
• Partnership meetings/presentations
• Building a syndicate

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Investment Terms

• Valuation/Price per Share/Percentage of the
  Company
• Type of Security
• Preferred Stock
• Why Delaware?
• Anti-dilution
• Liquidation Preference
• Dividends
• Conversion

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Investment Terms

• Preemptive Rights - Pay to Play
• Voting Rights
• amends to charter or bylaws
• liquidation, dissolution
• increase in authorized existing preferred
• creating any new class of preferred on parity
  with or senior to existing preferred
• merger, consolidation, reorganization, sale of
  all or substantially all of assets
• redemptions
• declaring or paying dividends

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Investment Terms

• Redemption
• Registration Rights
• - demand, piggy-back, short-form
• Stockholders Voting Agreement

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Investment Terms

• Investor Rights Agreement
• Stockholder Restrictions/Obligations
• restriction on transfer of common
• right of first refusal/co-sale
• drag rights
• Affirmative Covenants/Protective Provisions
• Information Rights financials (budget,
  quarterly, annual) material filings (e.g., with
  regulatory agencies) law suits notices of
  defaults, etc.
• Board seats observer rights
  compensation/reimbursement/DO committees
  (comp/audit/exec.)
• Employees IP Assignment, non-compete and
  non-disclosure agreements standard terms of
  options (unless Preferred Director approval)

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Investment Terms

• Negative Covenants/Protective Provisions
• Expenditures/commitments re same
• Indebtedness
• Loans
• Hiring/firing key executives or key employees
• Compensation levels
• Changing business
• Changing locations

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