Start-ups and Business Incubation: Start-ups and Business Incubation:

The Challenges and the OpportunitiesThe Challenges and the Opportunities

Presented to:Presented to:

Students to Start-upsStudents to Start-ups

ByBy

David Schetter David Schetter Assistant Vice Chancellor for Research Assistant Vice Chancellor for Research

UCI Office of Technology AlliancesUCI Office of Technology Alliances

May 6, 2008May 6, 2008

Challenges Facing Challenges Facing Universities and the Role of Universities and the Role of

Start-up CompaniesStart-up Companies

Universities Need Research Funding Universities Need Research Funding AlternativesAlternatives

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

Industry is a Significant Research Industry is a Significant Research Funding AlternativeFunding 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

Challenges Facing Industry: Challenges Facing Industry: The Bio/Pharma Technology The Bio/Pharma Technology

Pipeline ExamplePipeline Example

Top Ten Selling Drugs in 2003Top Ten Selling Drugs in 2003

Drug Company 2003Sales

Year offPatent

1 Lipitor Pfizer $ 9.2 Bn 2010

2 Zocor Merck $ 4.9 Bn 2006

3 Norvasc Pfizer $ 4.2 Bn 2007

4 Zyprexa Eli Lilly $ 4.2 Bn 2011

5 Paxil Glaxo $ 3.5 Bn 2006

6 Zoloft Pfizer $ 3.0 Bn 2006

7 Procrit J&J $ 2.9 Bn 2013

8 Pravachol BMS $ 2.8 Bn 2006

9 Fosamax Merck $ 2.7 Bn 2007

10 Effexor Wyeth $ 2.6 Bn 2008

• Total 2003 Sales - $ 40 Bn

• Percent of Sales off Patent by 2010 – 82%

Substantial Revenues at Risk Substantial Revenues at Risk Due to Patent ExpiryDue to Patent Expiry

2009-20132003-2008

Abbott

Roche

Novartis

JNJ

AZ

BMS

Wyeth

Glaxo

Pfizer

Merck

7

9

21

15

16

15

3

18

37

40

0 20 40 60 80 100

Percent of 2003 Sales Coming off Patent

41

26

27

42

24

17

13

4

15

8% % % %% %

Bridging Two CulturesBridging 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

Expands corporate R&D capabilities

Lowers R&D 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

Why Should Industry Partner Why Should Industry Partner with Universities?with Universities?

Types of University/Industry Types of University/Industry Interactions Interactions

Sharing of Materials, Equipment & Facilities

Industrial Consortia

Gifts

Affiliate Programs

Continuing Education

Student Recruitment

Internships/Externships

Faculty Consulting

Clinical Trials

Technology Option or License

Collaborative/ Sponsored Research

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

UC Commitment to Industry UC Commitment to Industry PartneringPartnering

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 Governor’s Office Rep

Primary Recommendation: Orange County needs more business incubation

National Academy of Sciences National Academy of Sciences Convocation, Fall 2006Convocation, Fall 2006

Orange County Business Orange County Business Incubation Network (OCBIN)Incubation Network (OCBIN)

Enhancing economic growth in Orange County:

New business incubation

Collaborative R&D

Leveraging investment capital, services and

business resources

OCBIN-ConnectionsOCBIN-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

OCBIN Corporate PartnersOCBIN Corporate Partners

Technology scouting

Incubating new company technologies

Collaborative R&D

Accessing UCI and the UC system resources

The Incubation EcosystemThe Incubation Ecosystem

CorporatePartners

CorporatePartnersInvestorsInvestors

ServiceProviders

ServiceProvidersSponsorsSponsors

EconomicDevelopment

EconomicDevelopment

IncubatorsIncubatorsPortfolioCompany

PortfolioCompany

The Incubation ProcessThe 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

Incubation Business ModelsIncubation Business Models

License-in/ Acquire

Technology

License-in/ Acquire

Technology

Sub-License Technology to

Customers

Sub-License Technology to

Customers

Improve Technology

Improve Technology

Sub-License Technology to

Customers

Sub-License Technology to

Customers

Productize Technology

Productize Technology

Sell Products via Channel or

Direct

Sell Products via Channel or

Direct

Open-Source: Provide Services

Open-Source: Provide Services

Advantages of IncubationAdvantages 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

UCI Virtual Incubation Model for UCI Virtual Incubation Model for Start-up CompaniesStart-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

Research $

Futu

re R

ight

s

from

Res

earc

h

UCI Virtual Incubation UCI Virtual Incubation ModelModel

UCIResearch

LabOTA

FederalAgencies

SBIR STTR

UCDiscovery

Grant

InventionAt Risk Patent Filing

Research $

Sales & Service

Agmt

$

Funding Sources

Seed Funds

$R

esearch

Pro

po

sal

Opt

ion/

Lice

nse

Proprie

tary R

ights

$M

atch

ing G

rant

Proposa

l

Ma

tch

ing

Gra

nt

Pro

po

sa

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Sublease

UCDG $

UC

Dis

co

very

Gra

nt

$

Futu

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NewCompany

Virtual

Business Plan

IndependentCompanyPhysical

Virtual Incubation Model Virtual Incubation Model (continued)(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

Virtual Incubation Model Virtual Incubation Model (continued)(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

Virtual Incubattion Model Virtual Incubattion Model (continued)(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

Virtual Incubation with Incubators

UCIResearch

LabOTA

FederalAgencies

SBIR STTR

UCDiscovery

Grant

InventionAt Risk Patent Filing

Research $

Sales & Service

Agmt

$

Funding Sources

Seed Funds

$R

esearch

Pro

po

sal

Opt

ion/

Lice

nse

Proprie

tary R

ights

$M

atch

ing G

rant

Proposa

l

Ma

tch

ing

Gra

nt

Pro

po

sa

l

UCDG $

UC

Dis

co

very

Gra

nt

$

Futu

re R

ight

s

from

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NewCompany

Virtual

Business Plan

IncubatingCompany

IndependentCompanyPhysical

Take Home MessagesTake 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

Thank you for your attention!Thank you for your attention!

David Schetter David Schetter Assistant Vice Chancellor for ResearchAssistant Vice Chancellor for Research

949.824.7297949.824.7297schetter@uci.eduschetter@uci.edu

UCI Office of Technology AlliancesUCI Office of Technology Alliances

www.ota.uci.eduwww.ota.uci.edu

Orange County Business Incubation NetworkOrange County Business Incubation Networkwww.ocbin.orgwww.ocbin.org

May 6, 2008May 6, 2008