BioTech Startup School@KU

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

2. 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 enable: • 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

3. 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.

4. 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

5. 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

6. 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)

7. 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.). • Begin licensing discussions with KU CTC (remember, in most cases KU has an interest in your innovation which must be procured so that you can sublicense the innovation). • Choose between two KU licensing options: • Swift Licensing option • Non-Swift Licensing option

8. KU Licensing Options: Swift vs. Non-Swift Licenses • The Swift Licensing option was created to streamline the licensing process for faculty founders, make the licensing terms more transparent and more equitable to the inventor and the university • Swift licensing option should produce less proceeds for the university (more for the company) to encourage more licensed innovation overall. • Here’s a comparison: • Repayment of patent costs incurred by KU on behalf of the inventor: • Swift pays up to $20K; non Swift requires repayment of all KU incurred patent costs • Fees: • Non-Swift fees include up front payments (~$5K-$10K), annual maintenance fee (~$5K - $25K) • Royalties: • Swift royalty rate is 2% of sales; non Swift royalty rate is 5% (bio) to 12% (tech) • Equity: • Swift provides a non-dilutable .95% equity for KU; non-Swift equity is negotiable (typically dilutable beginning at 5%) • Terms: • Swift licensing terms are non-negotiable; non Swift licensing terms are negotiable depending on perceived value of opportunity

9. 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.). • Begin licensing discussions with KU CTC (remember, in most cases KU has an interest in your innovation which must be procured so that you can sublicense the innovation). • Choose between two KU licensing options: • Swift Licensing option • Non-Swift Licensing option • Develop the scientific basis for your innovation: • 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

10. 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 cash is needed 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)

11. 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

12. 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 (not likely) • 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/

13. Recap: Idea Generation to Exit via Licensing