BioTech Startup School@KU

1. BioTech Startup School@KU Spring 2019 KUMC Module 5: Revenue Model

2. Overview of SS@KU

3. First, some basics… • Definition: • Revenue model: • Process by which the venture is economically self sufficient • Identifies major income and outflow streams which together produce positive cash flows • Why you should care: • Positive cash flows enables: • Commercialization of your research which, in turn, provides distribution of socially benefitting innovation • Employment and education of worthy GRA students • Capital return to you, your department and the university to foster continued research development

4. First, some basics… • Revenue model choices: • Create your own new company for the purpose of undertaking all of the business disciplines associated with launching, growing a new business (ie: capital raising, staffing, manufacturing, marketing and distributing your innovation among others) • Create your own new company for the purpose of sublicensing your innovation to businesses already well established in the industry of choice to leverage their expertise in stated business disciplines.

5. Pros and Pros (of revenue model alternatives): Pros (of starting your own business) Pros(of sublicensing your innovation to an established industry entity) It’s not your business, but neither are: The personal and financial risks The challenges of doing something well which you’ve never done before You keep a (relatively) small percentage of the total sales, cash proceeds but you also have virtually no expenses And, last time we checked, you already have a full time job (which you like) • It’s your business: • You’re the boss • You call the shots • You keep all of the proceeds (ie: revenues, profits, cash flows) from your business

6. Let’s Look at the Numbers • Assumptions: • Market size assumes $1B growing +20%/year, consistent with most equity investor criteria • Market share assumes reasonable growth, accelerated due to established entity’s market prowess • Royalty assumed at standard 5% terms • Cost of Goods (manufacturing cost) assumes mid point between low end (15%) and highly technical, tight tolerance equipment (45%) • Marketing and Sales, General and Administrative expenses assumed, minimally at 40% of sales; in sublicensed version some legal and marketing maintenance expenses are assumed

7. Are we agreed? • So for the purpose of the next 15 minutes we will assume you will sublicense your innovation to an already established industry entity • If you want to chat about the other alternative, we’re happy to do so offline (and we’ve got several new venture creation courses you can take)

8. Five Steps to Commercializing your Research • Determine your innovation has commercial potential (restudy Module 1 of this Startup School curricula) and formalize the potential via a pitch, business plan or summary (we can help with this). • Formalize your organization legally (ie: LLC, Inc. etc.). • Recruit a team, establish a founders agreement: • Roles/Responsibilities • Compensation/Equity • Contingencies • Begin licensing discussions with your technology transfer center (CTC) - remember, in most cases the CTC has an interest in your innovation which must be procured so that you can sublicense the innovation).

9. Licensing Terms • Optimal licensing agreements: • Streamline the licensing process for faculty founders • Make the licensing terms: • More transparent and • More equitable to the inventor and to the university • To stimulate research commercialization, leading edge institutions have established licensing agreement formats which purposely produce less proceeds for the university (more for the company) to encourage more licensed innovation overall. • Lower university revenues/invention but higher volumes of inventions on which the university earns a lower royalty • Optimal licensing agreements recognize the startup’s early stage cash resource shortage and align compensation with startup’s proven success

10. Licensing Terms • Optimal licensing terms include the following: • Back end loaded deal structures with: • No upfront payments • No past patent costs (startup pays IP costs over established amount ~ $20K) • No annual minimum fees • No minimum royalties • One low flat royalty rate if/when sales occur (ie: ~ 2%/year) • Nominal level of non-dilutable equity (ie: ~ 1%) which is realizable on startup exit • See http://kuctc.ku.edu/swift-startup-licensefor example of optimal licensing agreement

11. Five Steps to Commercializing your Research • Determine your innovation has commercial potential (restudy Module 1 of this Startup School curricula) and formalize the potential via a pitch, business plan or summary (we can help with this). • Formalize your organization legally (ie: LLC, Inc. etc.). • Establish a founders agreement: • Roles/Responsibilities • Compensation/Equity • Contingencies • Begin licensing discussions with your technology transfer center (CTC) - remember, in most cases the CTC has an interest in your innovation which must be procured so that you can sublicense the innovation). • Develop the scientific basis for your innovation: • Obtain SS@KU and/or SHARP Hub grant funding for market research, customer discovery, etc. • Obtain SBIR funding to enable proof of concept and testing costs • Phase I SBIR funding covers feasibily and proof of concept (~$150K) • Phase II SBIR funding covers R&D based on Phase I results (~max $1M/year max 3 years) • Phase III SBIR funding covers commercialization (no NIH monies available) • Obtain private equity funding to commercialize innovation, produce clinical data (if required) and not covered by initial and secondary SBIR funding. Note: Lots more information regarding SBIR funding upcoming in Module 6 so let’s look at equity funding

12. Equity Funding • Defined: • Cash, required to meet commercially required milestones, provided in exchange for partial ownership in the new venture (your entity) • Requirements: • To interest potential investors you must have: • A projection of how much and a milestone schedule of when each tranche is needed (coincident with each milestone) • Rationale that the investment is attractive: • Business plan/pitch summary • Projected investor ROI based on reasonable financial forecast • An exit strategy (ie: sale, licensing to an established entity operating in that industry)

13. Investor Pitch Outline • Title & contactinfo • Problem • Solution • Traction • MarketOpportunity • WhyNow • Competition • CompetitiveAdvantage • BusinessModel • CustomerAcquisition • Team • Financial Projections • Funding & Use ofProceeds • Reasons to Invest • Next 12-18months See handout for details

14. Sources and Timing of Startup Financing: Equity Grant/ Foundation Support Timmons, New Venture Creation, 2010

15. Investor Targets(the likely suspects) • Strategic investors • Investors with existing interests in same or associated industries • Established entities in the chosen industry • Investment terms may be accompanied with options to purchase downstream • Typical investors include: Merck, Lily, Pfizer, Medtronic, J&J • Financial investors • Investors with no industry association but technical knowledge/expertise in researched space and interest in producing targeted ROI • Angels, angel groups, venture capitalists • Deal terms are highly negotiable but typically begin at mid teen ownership and increase with each milestone investment • High investment risk must be offset by significant reward potential so ROI target is 50%+ (within 5 years) • Typical investors include: Tech Coast angels, Investors Circle, Foundry Group, Ohio TechAngels; see https://www.angelcapitalassociation.org/

16. Equity and Non-Equity Funding • Non-equity funding sources: • Debt: not likely - no assets to collaterize the loan • Crowd funding (ie: Kickstarter, Indiegogo): maybe but startup could be too complex to generate understanding, interest • Equity crowd funding: possibly, currently carries many restrictions/regulations but likely to present downstream funding alternatives when universalized (also remains dilutive) • Equity funding: most entrepreneurs suggest that if you can avoid diluting your startup ownership, do so • But (old adage): 5% of a successful funded venture is better than 100% of an unfunded and unsuccessful startup.

17. Equity Investing: Do you need it? • Not necessarily, if: • If you can reach earlier exit goal with grant funding exclusively • Your startup can grow organically • You can establish strategic partnerships to obtain critical assets • You can establish alternative compensation plans: • Royalties on downstream sales • Endorsements in exchange for needed assets • You can create supplemental revenue streams (other applications of your research with nearer term revenue generation possibilities, think: canine or information).

18. Recap: Idea Generation to Exit via Licensing

19. Recap: Steps to Commercializing Your Research • Make sure you’re providing something people want • Validate problem you’re addressing • Validate proposed solution • Develop research to proof of concept/MVP stage • Formalize startup • Establish license from CTC • Legalize entity: organization structure, founders’ agreement, IP filing • Obtain grant funding • Interest potential downstream partners/sub licensors

20. And one more thing: Talk to us, maybe we can help