The Parable of the Venture Capitalist, the Entrepreneur and the Professor

 
This is part of my Series on University Entrepreneurship.

Entrepreneurs and venture capitalists know all too well that launching a successful startup is perhaps one of the most challenging and difficult of all human endeavors. (Please note my stress on the word "successful"). We've also learned that only a small sub-section of the human population are actually suited for this line of work. (They all must share some rare strain of DNA yet to be identified!)

I also like to say that there is actually an even more difficult endeavor. And though I say it in a tongue-and-cheek way- it's actually true. In my opinion, launching a successful university spinoff is much harder. 

The higher degree of difficulty has everything to do with the fact that the entrepreneur/vc/angel has the added hurdle of navigating the oftentimes arcane atmosphere of a given university before he or she can "spin-out" the technology. And depending on the particular university, this process can take anywhere from a couple of months to over a year!

You see, unlike a "normal startup", launching a university spinoff involves such steps as identifying and validating the university intellectual property, cultivating a strong relationship with the professor and the students in his lab, building a relationship with the appropriate people in the university's technology transfer office, and ultimately negotiating a license agreement and stock purchase agreement with them. This will entail agreeing to diligence milestones, sub-licensing fees, minimum annual royalties, reimbursing patent costs incurred by the university, paying royalties back to the university once you have a product and often making the university a minority equity partner in your venture.

It takes a special kind of person to pull all of these moving parts together and it is more than many seasoned entrepreneurs and/or investors can stomach. "It takes forever to get anything done there.... Why should I pay royalties to the university? ... The IP is just sitting there in the lab and I'm the one that's going to create all the value!", are all common refrains I have heard many times.

Mind you- these reactions are totally legitimate and natural without a doubt. For many, it may certainly not be worth the effort. Yet these criticisms always overlook a couple of key points about the nature of university technology that should be mentioned. First, some of the best and most commercializable work going on within the academy is world class and has often been under development for years- in some cases for almost a decade. Second, it is often the case that hundreds of thousands, even millions of research dollars have already gone into the underlying work by the time the entrepreneur/investor shows up for the first time. In many such cases, there is enormous value waiting to be unlocked. This would no doubt have something to do with the stunning historical IPO rate that university spinoffs enjoy.

Probably the most important and overlooked point of all, however, is the fact that the professor has often devoted his or her entire professional life to this work! In many cases these professors are world experts in this particular domain/technology.  This can simply be a priceless asset! Involving the professor as your chief scientific advisor and equity partner can thus bring with it an enormous positive effect.

I've actually posted about bridging this cultural divide between VC, Entrepreneur and Professor before, and have advocated for cultural sensitivity on both sides. Upon reflection I've come to realize that this is really not enough. After four years and with some fifty plus university spinoffs under my belt, I now understand that something much deeper needs to occur, and in this sense, a university spinoff is no different from any other startup. It will always be a story of human relationships and how successful and enduring these relationships will be. So now we arrive at a university spinoff distilled to its very core:

It is the parable of the VC, the Entrepreneur and the Professor...

It is their story to write and it will be a human story about their relationships, their level of trust, their communication and their collegiality and fellowship. 

If it is a story rife with avarice and smallness and conflict- all is lost and we have a failure on our hands. Time, money and resources will have been wasted. Years of people's lives. It is a tragedy.

On the other hand, if it becomes a story of respect, of trust, of friendship and cooperation, we have the necessary foundation upon which a successful university venture can flourish. I have not seen it work any other way.

 

For Part 25 in in this Series, click here

Comments

[David K. Park]

You should have some EPIR - entrepreneur professor in residence - at Columbia to help build those bridges. I may know one ; ) Being from academia I can only imagine how difficult that added layer must be. That's great you've been able to spin off 50+ ventures. Kudos!

[Dave Lerner]

:) thanks David... our program at the university is unusual in that the two of us who run the venture lab are actually entrepreneurs... we also have some go-to venture mentors from the venture and entrepreneurial community we can call-upon for their expertise....

[Porlando]

Nice post that answered some lingering questions I had. Good stats on the university IPO success rate -- it's easy to forget things like that.

[Dave Lerner]

thanks... it is easy to overlook some of these points and yet it's certainly not for everyone...

[James Elliott]

Dave
Very interesting post, I totally agree with the point you make about respect, trust, frindship and cooperation. I have found that in many universities, due the limited resources of the tech transfer team, 'cherry picking' of the best most comercialisable research occurs leaving other academics with potentially comercial research left rudderless. I have been involved with programmes which buys out the time of academics (early postgrad PhDs and Professors)teaches them some basic business skills and gives them the role of collating what is in the pipeline for each department and presenting it to the tech tranfer office at an earlier stage. This way people the academics know and respect can help nurture the up and comming research to a level of commercialibility.
In my current role as an Intermediary for IXC UK we have taken this to the next level of actually providing the industrial links for comercial collaborations.

[Dave Lerner]

Thanks James- it's an excellent solution, even for a larger tech transfer operation. This sort of "fellows" program can be very effective in triaging the inventions, I agree.

[Giff]

I can see how difficult this could be. One issue I came across recently was a professor's high expectations for equity level. This is a problem if they only plan on playing a limited role in the company. Academics live in a world of ideas and place huge value on ideas. However, to speak specifically about software/Internet startups, the idea is just the starting point, and rarely unique (usually many teams around the world have the same idea at the time totally unconnected with each other). Effectively productizing, and marketing/selling, and funding that idea is the huge undertaking. So with a mismatch of expectations and value placed on the importance of idea vs execution, politics, jealousy and a misalignment of incentives can thus ensue... all of which can shatter a startup.

[Brian]

David, your post caught my eye and reminded me of my first university IP deal. It was a small deal with a large land-grant university. I had to extract one commercial entity and deal with the use of a prof's IP and the university's ongoing use of the IP. I thought it was cumbersome but pretty clear what everyone's interests were. Of course, it didn't work that way. At one point, I asked the provost and department head with whom I was meeting, if they'd like me to step outside so that they could continue to bicker like children over what appeared to be nothing more than turf. Once outside, I called my partner who had worked with universities for many years and he gave me some great advice. He said, "The university is medieval. Once you accept that, it's easy." Thanks for sharing your successes.

[Dave Lerner]

Appreciate your sharing this experience Brian. My view is that if university's want to be in the commercialization game they should "admit it" and incorporate "business-friendly" practices. Otherwise, Kissinger's famous refrain about university politics will remain true: "University politics are vicious precisely because the stakes are so small." In your case, perhaps a line from Ving Rhames in Pulp Fiction is more appropriate given your use of the word "medieval". (I won't quote that line here)...

[Joseph Schmoke]

Interesting post and string of comments. Here's a story you may enjoy - if you don't harbor any (or too much) animosity towards for-profits. A longtime entrepreneur (since 1974), I took control of a failing degree granting private university in mid-2005. With a fifteen year background in online my team and I moved all the courses online seven months later. We saw that the convenience of online was especially appealing to working adults. But the rigor we maintained in the courses demanded face to face proctoring for all final exams. And over time we realized that our students weren't very happy having to locate a proctor, have the proctor approved by us, recontact the proctor to schedule a day and time for the exam, travel to the proctor's location, and in many cases pay a fee for the proctoring service. So in early 2008 we decided to call upon our friends in the tech industry and create an online exam proctoring service for our students. The service, which we eventually called ProctorU, was aresounding hit with students with a 99% usage rate. This success caught the eye of an accrediting agency and we were asked to explain our system and the students' feedback at a higher education conference (November 2008). At the conference we volunteered to tell other institutions how to set up a similar system at their college or university. But the schools weren't interested in learning how to set something similar up themselves; they wanted to know if we were interested in providing the service for them. So in January 2009 we spun ProctorU off into a separate for-profit entity (an LLC) and once we had market acceptance we turned the LLC into a corporation (October 2009) and distributed the shares proportionately to the shareholders of the university. Everyone is happy, including the shareholders, the institutional (and a few corporate) clients, and especially the online students who no longer have to head to a physical facility for an exam to be proctored. This went smoothly, I would venture, because we did not have to deal with academics or their bureaucracy and the small team directing the venture was led by experienced entrepreneurs.

[Dave Lerner]

Appreciate your sharing the story Joseph. What types of people/positions at the universities were you dealing with by the way?

[niall@digitaljet.ie]

David... great post... I do love the photo in your banner. This reflects my company life at the moment. I have a beautiful boat, a great crew, eager to set sail and we are waiting for the tide of investment to help us set sail.

Best

Niall

[Dave Lerner]

what a fantastic image! I wish you much success! thanks for your comment Niall... stay in touch!