Start-ups and Business Incubation:

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Start-ups and Business Incubation The
Challenges and the Opportunities Presented
to Students to Start-ups By David Schetter
Assistant Vice Chancellor for Research UCI
Office of Technology Alliances May 6, 2008
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Challenges Facing Universities and the Role of
Start-up Companies
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Universities Need Research Funding Alternatives

• Federal funding becoming highly competitive
• State funding becoming highly restricted
• Many universities are growing rapidly,
  infrastructure being stressed
• Costs of research are increasing
• Conduct of research becoming more complex
• Regulatory requirements result in project delays
• Bottom line
• Research now takes longer, costs more and
  competition for available funds is Intense

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Industry is a Significant Research Funding
Alternative

• Industry offers universities a degree of freedom
  however,
• Larger companies have moved away from funding
  discovery research preferring to buy proven
  technologies or start-ups that own them
• Start-up companies founded on University
  technologies offer a route to research funding
  and technology commercialization
• Requirements include
• Strong Intellectual Property
• Coordination among University offices
• Flexibility on IP terms
• Attention to Conflicts of Interest and Commitment

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Challenges Facing Industry The Bio/Pharma
Technology Pipeline Example
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Top Ten Selling Drugs in 2003

• Total 2003 Sales - 40 Bn
• Percent of Sales off Patent by 2010 82

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Substantial Revenues at Risk Due to Patent Expiry
2003-2008
2009-2013






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Bridging Two Cultures

• UNIVERSITY
• Create and propagate knowledge for the public
  good
• Narrow Scope of License
• Revenue
• Academic Freedom
• Control of Intellectual Property
• Diligent Development

• COMPANY
• Financial return to investors, founders and
  employees using knowledge
• License
• Expense
• Confidentiality
• Control of Intellectual Property
• Commercial Flexibility and Uncertainty

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Why Should Industry Partner with Universities?

• Expands corporate RD capabilities
• Lowers RD costs and adds flexibility
• Provides access to matching grants and other
  sources of non-dilutive funding
• Provides access to scientific and technical
  expertise
• Facilitates recruiting of technical staff
• Enhances the corporate technology portfolio
• Licensing direct from University
• Start-up acquisition or strategic partnering

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Types of University/Industry Interactions

• Student Recruitment
• Internships/Externships
• Faculty Consulting
• Clinical Trials
• Technology Option or License
• Collaborative/ Sponsored Research

• Sharing of Materials, Equipment Facilities
• Industrial Consortia
• Gifts
• Affiliate Programs
• Continuing Education

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UC Commitment to Industry Partnering

• Decentralizing technology transfer to campuses
• Principles for Industry/UC partnering
• Open dissemination - Accessibility
  for UC purposes
• Public benefit - Fair consideration
• Informed participation - Objective
  decision-making
• Legal/ethical integrity - Impact on students
• Patent Policy changes and incentives
• Equity Policy
• Licensing flexibility for different industry
  sectors
• California Institutes for Science Innovation
• The UC Discovery Grant Program

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National Academy of Sciences Convocation, Fall
2006

• Theme U.S. global competitiveness
• Focus Rising Above the Gathering Storm report
• Challenge to participants Recommend one action
  your community could take within the next six
  months that would address the issues in the
  Report
• Attendees VP level executives from Orange County
  industrial firms, civic leaders, UC Irvine
  executives, community members, California
  Governors Office Rep
• Primary Recommendation Orange County needs more
  business incubation

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Orange County Business Incubation Network (OCBIN)

• Enhancing economic growth in Orange County
• New business incubation
• Collaborative RD
• Leveraging investment capital, services and
  business resources

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OCBIN-Connections

• Secure communications for matching vetted
  start-ups with VCs and qualified service
  providers (screening process)
• Start-ups access best in class on most
  favorable terms
• Sponsorships by OCBIN-Connections members with
  visibility on www.OCBIN.org

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OCBIN Corporate Partners

• Technology scouting
• Incubating new company technologies
• Collaborative RD
• Accessing UCI and the UC system resources

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The Incubation Ecosystem
Incubators
Portfolio Company
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The Incubation Process

• Pre-Incubation
• Identification of Incubation Prospects
• Vetting of Incubation Prospects
• Incubation
• Seed Capital Provided by Incubator Fund
• Mentoring by Incubator Staff and Advisors
• Support from Service Providers
• Transition from Technology to Product
• Series A funding as needed
• Post Incubation
• Continued Growth
• Pursuit of Exit Strategy

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Incubation Business Models
License-in/ Acquire Technology
Sub-License Technology to Customers
Improve Technology
Productize Technology
Open-Source Provide Services
Sub-License Technology to Customers
Sell Products via Channel or Direct
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Advantages of Incubation

• Inventors Retain Control of Technology
• UCI and Inventors Increase Revenue Share
• Inventors Can Focus on Technology
• Mentors Provide Guidance
• Additional Assistance from Service Providers
• Funding Provided as Needed
• Economic Development Stays Local

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UCI Virtual Incubation Model for Start-up
Companies

• Company founded on optioned/ licensed UCI
  technology and pre-seed capital
• Initial non-dilutive funding SBIR, STTR and UC
  Discovery Grants
• Provides for early stage technology development,
  leveraging UCI resources
• A web of agreements between the start-up company
  and UCI
• Sponsored/collaborative research, license/option,
  Material Transfer Agreements, Sales Service,
  sublease, gifts, consulting, subleases
• All standard terms with no exceptions to policy
• Management and integration of agreements is key

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UCI Virtual Incubation Model
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Virtual Incubation Model (continued)

• Conflict of Interest Review
• Without conflict there is no interest
  (Conflicts can exist but must be managed)
• Review of financial interests (income, stock,
  board or management position)
• Percent equity holding allowed for UC founder
  based on stage of financing and dilution
• Board membership discouraged and no tolerance for
  management position can serve on the Scientific
  Advisory Board but not as chair

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Virtual Incubation Model (continued)

• Sponsored Agreement Terms
• Full UCI overhead
• Improvement inventions rolled into
  license/option at no additional charge
• New inventions in the Field added to
  license/option for one-time fee
• First right to negotiate a license to new
  inventions outside the Field

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Virtual Incubattion Model (continued)

• Move to Non-virtual Status
• Company does strategic partnership with larger
  company including research funding, sublicense
  and co-development milestones
• UCI receives attributed income share of company
  partnering revenue and liquidity events
• Company raises next round of capital, moves out
  of virtual phase to own facilities carries out
  product development, production sales
• UCI receives license revenue on milestones and
  net sales

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Virtual Incubation with Incubators
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Take Home Messages

• Diligence on IP absolutely critical
• Solid business plan essential from R to D to
  regulatory all the way through certification and
  reimbursement
• Assessment of University inventor current and
  future projects and potential overlapping
  obligations is key
• Understand inventor motivations and expectations
• Understand investor motivations and expectations
• Communication, Communication, Communication
• A business incubator can provide needed services,
  expertise support, often on an equity basis
• Leverage University resources to the extent
  possible

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Thank you for your attention! David Schetter
Assistant Vice Chancellor for Research 949.824.7
297 schetter_at_uci.edu UCI Office of Technology
Alliances www.ota.uci.edu Orange County
Business Incubation Network www.ocbin.org May
6, 2008