Notes from 
The Muddle in the Middle

Understanding the Process of New Enterprise Development from University-Based Discoveries
February 9, 1999

Author

Life Cycle of New Enterprise Development

Thomas Churchwell, President and CEO, Arch Development Corporation, University of Chicago

Speaking to any perception of midwest cultural inferiority is complex. He contends that work here is on same level.

But that comparison misses the point:

  • Tech transfer and product launching has to be done together, which is a midwest trait, contrasted with coast methods, which tend toward the "benefit of a few."
    • AXIOMS
  • Big corps are not good at innovative technology
  • Universities and research organizations aren't good at Product Development
  • Most radically new products come from small business, and sometimes create entire new markets
  • This is a mainstay of US business, but there exist no programs to facilitate the process

    • It's a scary expression but "we may need to institutionalize entrepreneurship."

    For VCs, economic dynamics cause them to spend more time on raising and reinvesting money, and then focus on "big hits" vs. spending time on small corps - "1 or 2 hits."

    Formation of ARCH in 1986 from a long-term frustration at technology commercialization by AMGEN, without any return for U Chicago.

    When they come across a license/company question ARCH asks "why isn't it a company?" The other firms' definition of a company multi-employee, ready to go public rather than early stage.

    In creating the company, hire CEO and let them gather the executive team. Than have created an autonimous entity; after whichVC can only go to board meetings. Two unfortunates in this process:

    1. People who know the technology the best loose control
    2. To keep going, get defection econmics
    SECOND PHASE OF ARCH - "Bob Nelson model"
    Real model for success was to partner. Identify technology trends, the go off and option on other technology at other Universities, ~1 yr timescale. Then go out and synidicate a VC fund from investing partners.

    Get a great CEO - underlying theme is creating a good managment structure since, success is determined in management. (Seen many examples of company failing because of bad management of a technology, but hasn't seen a good management team fail with poor technology.)

    Bad aspects

    "RETURN ON TECHNOLOGY INVESTMENT"
    Fundamental tenent that drives the process is return on investment, risk adjusted. But ARCH distinguishes: They're in the game to get technology into the marketplace, and are looking for a return on technology investment.

    Behave differently if measuring success based on getting technology to market and view VC cash as only one tool/aspect of the investment process. Money is necessary, but VC needs to utilize other investing tools.

    Trying to create a network of VCs, tech transfer at Us, angel investors, and CEO "wannabes." When they look at CEO, they're looking for one with strength in Product Development. ARCH supplies the infrastructure such as lawyers and accountants (and insists on using thier people, rather than the CEO's buddy, etc.)

    Potential corporate partners have so many oppotunities, they'd rather wait out the success/failures, and pay the premium for a known success.

    ARCH's capital investment doesn't go into the infrastructure, but into the technology. They can show that for $220k Phase I grant, one can move from lab to animal trial success, and run the company for about 1 year.

    If they can't sell it, probability is high of no return. Invest with goal of getting corporate partners to purchase, rather than IPO route. They never invest in IPOs - "you don't get rich off IPOs." Dilution can be significant, example where they began with 75% ownership, and at sale had approximately 1% equity.

    SBIRs play important role in early stage funding. Churchwell also sees "infrastructure incubator" as valuable, and a "facility incubator" is "helpful"; however, the existing local Chicago facilities are adequate.

    FACULTY BENEFITS FROM ARCH
  • Faculty inventors get 25% of return
  • Biggest faculty benefit (perceived by him) is seeing product development get into marketplace and change the way we live
  • Also benefits faculty by helping them with the patent process, and other necessary infrastructure.

    • Panel Discussion - Venture Capitalists

    Moderator: Karen Bantel , Adjunct Associate Professor, Faculty Advisor Wolverine Venture Fund, UM Business School

    Seeing demands from students for more entrepreunial education, courses and resoursces. For the University, an external factor propelling more U tech transfer is the reduction of funding for academic research. Another external: amount of VC funding available in Ann Arbor is increasing. Present time can be described as the glory days.

    Rick Snyder, President, Avalon Investments

    U Positives

    Policies are good, identification and introduction of early stage is good 

    Good Attitude 
    - want to learn and improve 
    - working together
    U Negatives

    Practices can be improved, carthet of interest takes too long 

    Need to work on phenomenon of sprurious pricing- inventor revalues their invention triples after one phone call from an investor. 

    Attitude - no sense of urgency 

    Need to work on how much control is necessary 

    Universities could use additional assistance in proof of concept.
    VC Positives

    Growing in numbers
    VC Negatives

    Still too few people with "feet on the street" in touch with latest info. 

    Most local VCs are too young, need to mature in terms of their business model 

    Can do better in terms of infrastructure 

    All VC funds can work work much more on Human Resources to support CEOs 

    Need to do better team work
    General comments on working together:
  • There exist opportunites for Universities as a group to standardize and work better together
  • It would be appropriate to create a Michigan Venture Capital Association

    • Tom Porter, General Partner, Enterprise Development Fund

    EDF is an early-stage VC fund investing primarily in health care and high-technology. They have extensive experience commercializing University technology. They go where the opportunites are, since they don't have expert knowledge of the technologies up front. A network of peple to talk with helps accelerate the process.

    Empirical success factors:

    Prerequsites for a deal: When differences exist, the reason is that the players are often not lined up toward the same goals.

    What has not worked well?

    IDEAS
  • U should decide on their tech transfer goals and develop an intellectual management process which is consistent.
  • Establish more frequent and positive dialogue with seed investors with the goal of working to make the proces more user-friendly, both for the investigator and the investor.
    • IN RESPONSE TO QUESTIONS FROM AUDIENCE
  • U needs better mechnism to screen disclosure they have, and make a bet on them before they have asponsor.
  • U needs the best leagal expertise for intellectual property competetiveness.
  • U needs to be abel to better focus on getting into product with aspecific purpose, vs. generalized focus on a technology idea.

    • Tom Dickerson, Partner, Tullis-Dickerson & Co.

    "New kid on the block. Little direct experience to-date with UM, hence can't comment, so instead presents history of their firm. Characterizes themselves as in 3rd generation.

    1st generation - 1987. Investing in midstage ($5-20 M) health care, only the management is slightly different - they're not syndicated with other VCs. They're either in a control position or are the only instituional investor. See thenselves as support, providing managements teams and CEOs.

    2nd stage - 1994. Requested by Alabama. (As of 1994 only 2% of VC funding was managed in SE US, but %25 of R&D was occuring there.) T-D structured an agreement for first review and notice on investing - raised $10M. Then hired classic seed-stage CEO. Within 5 years obtained 17 deals, 9 based on university technology. Also brought in over $100 millition of venture capital based on their inital $10M.

    3rd generation - Now. Observed opportunites in two other states Nevada and Michigan, where significant R&D but few other VCs. Cited $900 M yearly R&D with only 2 other VCs in Ann Arbor.

    Birminham decided long time ago to support entrepreneurship among faculty.

    When tech transfer calls with technology, the VC owes them an quick answer.

    Tech Transfer Professionals Panel

    Fred Reinhardt, Director of Technology Transfer, Wayne State University

    Provided a detailed, extensive allegorical description of entrepreneurial financing using a horse-racing model - (if you want to really enjoy it, watch the videotape copy of his commentary!)

    Some additional comments:

  • Sloan has placed $12 million in early stage ventures, with $2.4 million of SBIR grants.
  • Free market is best - don't force an additional licensing deal into a startup, if possible.
  • MIT is noted as having one of the most stringent Conflict of Interest policies.

    • Ken Nisbet, Technology Management Office, University of Michigan

    3 categories of technology-based startups: Emerging / Developing / Spin-offs

    MAKING A STARTUP CLICK:

  • Identify the champion
  • Translate the technology into business Business plan:
  • Marketability - Must be Attractive, Accessible, Sustainable
  • Secure financing: Bridge funds, SBIRS
  • Obtain Partners - Team Development

    • What's currently working well in University tech-transfer:

    Improvements needed: Gave the example of Silicon Valley Financial Strength:
    -- Half of US 600 VC's are there
    -- $5.5 billion invested there over the last 5 years
    Culture:
    -- Frequent industry-university interaction
    -- Industry leaders teach courses
    -- University support from successful alumni
    Problems
    -- Housing expense and difficulties
    -- Labor shortage
    -- Traffic and general congestion

    WE NEED TO INSPIRE OTHERS WITH SUCCESS MODELS

  • Establish entrepreneurs' understanding to aid training them what to expect from VCs
  • Remember the problem we're trying to solve: creating the infrastructure to survive the next recession
  • Suggest a University Entrepreneurs-in Residence program
  • Do a better job of saying no to ideas which are not top-notch

    • Richard Sloan, Sloan Enterprises

    Sloan's focus is on transferring University technology into high-growth ventures. They get involved very early, in the "raw technology" stage. Draw upon private equity for seed investments. They can pick and choose what to invest in.
  • Angels differ in how they approach a venture financing, vs. the venture funds' focus on IRR
  • Sloan's typical first range funding is in the range of $500k to $2 million.
  • Primary technology source is University environment
  • Sloan assumes much of the cost of infrastructure, so the company doesn't have to be overburdened themselves

    • Tech-transfer process comments

  • Sloan "operates in the 'muddle'
  • "Don't overlook the importance of being able to bring in private equity"
  • Tech transfer offices in U's are bettering themselves: Previously Sloan used to have to screen the technology themselves via patents, etc. Now a list of potential technologies is presented to them
  • Address the fundamentals to compile the list
  • Important to distinguish/determine licensing vs. start-up opportunities.
  • Negotiating the deal: Difficult when inventor/University/VC objectives differ
  • Before contacting the marketplace, align the inventors and universities
  • Technologists & TMO executives should learn to think like entrepreneurs

    • What hasn't worked well:

    When innovations have been targeted to "wrong" institutions, i.e. a there's "working technology" but not suitable for VC investing

    RECOMMENDATIONS

  • Don't form exclusive relationships - cited example from Weizman Institute where a single VC organization had "first call" on all potential technology development. (For example, a first glance VC saying "no" can negatively stigmatize worthy technology
  • Ensure TMO executives understand the marketplace
  • Educate faculty about taking technology out of universities

    • Bob Filka, President, Michigan Renaissance Fund, Michigan Jobs Commission

    There's been a learning curve with respect to Michigan Jobs Commission Have been engaging in a lot of intangibles - cheerleading, advocating Instituting a University technology-transfer program. Engaging with other partners a significant marketing strategy Nontraditional partnerships must be supported

    Michigan Technologies Incorporated (MTI) background was intended to be a technology advocate, but needed to include it in a statewide organization with other structures. This led to the decision to form Engler's Economic Development Corporation (EDC)

    EDC with focus on Image, Technology and Real Estate (eg. "smart parks", clustering tech centers together)

    Faculty Inventors Panel

    Glen Barna, President and Co-owner, Infrared Telemetrics

    It was obvious there was a need for his technology and there was a market. Nevertheless, one of the co-inventors decided not to pursue entrepreneurship, and remained in the academic environment.

    Steven Goldstein, Prof. Mech. Eng. & Biomed. Eng., University of Michigan

    An important motivation is in doing something useful in your field - in his case biology/medicine, so one can do some good with respect to the public (here patients)

    He started Matrigen, then merged and became Selective Genetics and has now moved out of state.

    Aside observation: Previously UM shied away from developing medical devices, now (in an extreme example) a UM professor can conceivably run research under UM auspices for a company in which he/she has equity

    NOTED THE '4 Cs IN PURSUING A VENTURE: 1) Conflict 2) Connections 3) Control 4) Closure

    1. Conflict

      2. Refers to the various pulls that a U researcher feels re. time available to entrepreneurial venture vs. U research. Same for commitment to venture vs. U and loyalty conflicts with respect to the venture vs. University
    2. Connections

      3. Likely that a faculty member may be more well-connected to the major players active in current research. When technology is in the process of starting up he/she will need to sell the idea and company, based upon the expertise of a faculty member and their future role in company.
    3. Control

      4. Faculty member needs to deal with losing exclusive or large share of control of the technology, due to the business nature of the company. Faculty members often have trouble with this.
    4. Closure

      5. During late stages of a start-up venture business people involved in the company are looking forward to the faculty member's involvement fading away - faculty members have to learn to deal with this.
    Other comments:

    Vic Strecher, Professor, University of Michigan and Founder, HealthMedia

    Gave example of health expenses: Ford spends $1.4 billion/year on health care vs. $1.3 billion/year on steel. So changing peoples' health behavior can positively impact companies' bottom lines.

    For developing media focusing on behavioral health modification, UM is not a good business environment for trying to produce what people are requesting.

    Technology Management Office helped in:

    BE AWARE OF COMMON POTENTIAL PITFALLS/MISTAKES
  • Thinking that a product alone will establish a business. Need experts in finance and administration.
  • Can't start a business bootstrapping from a contract
  • Can't simultaneously work on establishing a venture and at the university as a full-time faculty member
  • While everyone in academia is smart, you're not necessarily smart in business

    • Sandra Gayk, Director, Intellectual Property & Tradmark Licensing, Michigan Technological University

    Provided a detailed story of a particular Michigan Technology Venture Fund scandal.

    Fred Erbisch, Director, Office of Intellectual Property, Michigan State University

    Outlined a long-term tech-transfer nightmare where almost everything that could go wrong, did go wrong.

    Fred Reinhardt, Director, Technology Transfer Office, Wayne State University

    Went through a detailed checklist of what a characteristic university-based venture start-up would be required to perform and conduct in order to successfully transfer the technology. (Couldn't do it justice via notes.)

    Additional comments:

  • Better in a bio-medical venture to do "effort" milestones rather than accomplishments. Example is filing a 510k by certain date, vs. obtaining 510k approval by certain date.
  • Hard for investors to value a company when it's still contained within a university
  • Important to reserve big equity and time to market the technology

    • Lecture

    Gary Bachula, Acting Under-Secretary for Technology, U.S. Dept. of Commerce

    Emphasized the need for Michigan to begin development of technologies for the next generation of automobiles.

    Also referred to a confidential report by another (not UM) Big-10 University that referenced the importance and effectiveness of TECH TRANSFER "TOOKKITS" which include

  • Research Parks
  • Entrepreneurial education
  • Access to specialty equipment by independent sector
  • Technology Commercialization Organizations
  • University-funded seed capital.