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Start-ups and Business Incubation: The Challenges and the Opportunities Presented to:

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. Challenges Facing Universities and the Role of Start-up Companies.

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Start-ups and Business Incubation: The Challenges and the Opportunities Presented to:

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  1. 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

  2. Challenges Facing Universities and the Role of Start-up Companies

  3. 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

  4. 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

  5. Challenges Facing Industry: The Bio/Pharma Technology Pipeline Example

  6. Top Ten Selling Drugs in 2003 • Total 2003 Sales - $ 40 Bn • Percent of Sales off Patent by 2010 – 82%

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

  8. 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 Bridging Two Cultures

  9. Why Should Industry Partner with Universities? • 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

  10. 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

  11. 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

  12. 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 Governor’s Office Rep Primary Recommendation: Orange County needs more business incubation

  13. Orange County Business Incubation Network (OCBIN) Enhancing economic growth in Orange County: • New business incubation • Collaborative R&D • Leveraging investment capital, services and business resources

  14. 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

  15. OCBIN Corporate Partners • Technology scouting • Incubating new company technologies • Collaborative R&D • Accessing UCI and the UC system resources

  16. Sponsors Service Providers Investors Corporate Partners Economic Development The Incubation Ecosystem Incubators Portfolio Company

  17. 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

  18. 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

  19. 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

  20. 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

  21. UCI At Risk Patent Filing ResearchLab Invention OTA Future Rightsfrom Research Future Rights from Research Proprietary Rights Research $ Research $ Option/License $ Sales & Service Agmt UCDG $ Matching Grant Proposal UC Discovery Grant $ NewCompanyVirtual Sublease IndependentCompanyPhysical FederalAgenciesSBIR STTR Business Plan Research Proposal $ Matching Grant Proposal $ UCDiscoveryGrant Seed Funds Funding Sources UCI Virtual Incubation Model

  22. 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

  23. 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

  24. 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

  25. UCI At Risk Patent Filing ResearchLab Invention OTA Future Rightsfrom Research Proprietary Rights Research $ Option/License $ Sales & Service Agmt UCDG $ IncubatingCompany Matching Grant Proposal UC Discovery Grant $ NewCompanyVirtual IndependentCompanyPhysical FederalAgenciesSBIR STTR Business Plan Research Proposal $ Matching Grant Proposal $ UCDiscoveryGrant Seed Funds Funding Sources Virtual Incubation with Incubators

  26. 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

  27. Thank you for your attention! David Schetter Assistant Vice Chancellor for Research 949.824.7297 schetter@uci.edu UCI Office of Technology Alliances www.ota.uci.edu Orange County Business Incubation Network www.ocbin.org May 6, 2008

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