A confusing topic for many entrepreneurs is joint ownership of intellectual property. It often comes up in connection with joint development arrangements, subcontracting portions of work, joint ventures, and other collaborative projects involving intellectual property development, whether it be in connection with software, cleantech, medical device, drug development, or other technology-based initiatives. Continue reading The Confusing World of Joint Ownership of Intellectual Property
The recent $1 Billion Qualifying Therapeutic Discovery Project Credit program will be a real benefit to many area small life science and medical device companies. A surprise to many though when reading the requirements of the program is that limited liability companies (LLCs) that have as an owner a tax-exempt organization are not eligible for a grant under the program. Having a tax-exempt organization as an owner is more common than one might think. Many university technology transfer offices, such as the Wisconsin Alumni Research Foundation (WARF), are tax-exempt organizations and frequently hold an equity interest in the startups to which they license patents. As a result, those LLC biotech licensees are not eligible for a grant under the program. As the CEO of an LLC with which I work (but did not set up) said earlier this week about being excluded from eligibility, “Ouch! That stings! Another painful learning experience.”
LLCs are Typically Not the Best Choice of Entity for Emerging Technology Companies
The “LLC issue” for emerging companies extends well beyond this grant issue for therapeutic companies. I say this even though many attorneys recommend LLCs for virtually all contexts. Sure, LLCs have their place. I frequently advocate using them as holding companies, investment vehicles, and joint venture entities. Among other situations, it also can be appropriate to use them when there is a limited, small group of owners actively participating in the business or when the owners want to have a certain allocation of profits and losses that cannot be accomplished when using an S or C corporation. But for many emerging companies that have or plan to have outside investors, the LLC is often not the best choice of entity. Continue reading LLC Choice of Entity for Emerging Technology Companies
Regardless of whether they are called university spinoffs, spinouts, or just plain start-ups, the University of Utah sure has a lot of them: 23 that started just last year— that’s second best of all universities in the nation. Think about how impressive that is. Like many places here in the Midwest, Utah has not historically had the amount of venture capital, the number of serial entrepreneurs, or the depth of tech company managerial talent that much of the coasts and the handful of hotspots in between enjoy.
As might be expected in light of the economy and tight capital markets, the last 12 months have been atypically poor in terms of the number of start-ups coming out of many Midwest universities; most of our universities only had a handful or fewer new startups this last year. Of course, there were a number of tech companies that started up that were not based on university technologies and they shouldn’t be overlooked. But, this is the land of the Big 10 and other top universities, whose R&D dollars dwarf those spent at the University of Utah. University of Wisconsin’s federal R&D expenditures are consistently in the top three of the country and are more than three times those spent at the University of Utah. It’s not just the money spent, either. I’m told that roughly 50% of the world’s peer-reviewed nanotech articles come from an institution within a 200-mile radius of Chicago. Midwest universities are responsible for discoveries ranging from nuclear fission to stem cells. So, how can we better translate some of our incredible university-based science and technologies into more start-up companies in the region?
In this article, I outline some of the things that the University of Utah and the infrastructure around it has done to facilitate start-ups. I also outline some of the good things that are already happening here in the Midwest. Finally, at the end of this article, I put my “services” where my mouth is and offer free legal services (yes, free) in helping to encourage university start-ups. I also call upon others, whether they are investors, service providers, mentors, university faculty members, or government agencies, to think about or relook at what they can offer to encourage more university start-ups.
The University of Utah Tech Transfer Office Overhaul
The University of Utah has just under 29,000 students. For frame of reference, that’s roughly 70% of the student population of the University of Wisconsin-Madison. Its technology transfer office went through a significant overhaul in 2005 after a new University president (Michael Young) was appointed. The University created the Office of Technology Venture Development (Tech Ventures) to drive regional economic development and commercialization efforts. The group coordinates activities between the University’s Technology Commercialization Office (TCO) and other college and university groups. As part of the restructuring, a new Director was hired and the TCO established itself as what its Director refers to as a “service-based business.”
Since the restructuring in 2005, the University of Utah has averaged 20 start-ups per year. Compare that figure to the less than 5 per year average that the University had prior to the restructuring. The overwhelming majority of University start-ups in Utah are now started by professional management–not the professor/inventor as is often the case here in the Midwest. For the first year or two of the company, many of these entrepreneurs work part-time or telecommute from California or neighboring states. They will often split their time between more than one company during the company’s first couple years. The Utah start-ups are typically in the biotech, medical device, energy, Internet and software industries.
Utah’s Initiatives with Seed Stage Money, Entrepreneurial Talent, Communications, Research Support, and Venture Capital
I met the Executive Director of Technology Commercialization at the University of Utah, Brian Cummings, at a biotech/pharma collaborations conference last month in San Francisco. Brian attributes much of their success to the common vision, cooperation, and collaboration that is present across many Utah groups and constituencies—the University, investor groups, entrepreneurs, State government, professional services sector, etc. When I asked him about the challenges that many areas of the country face with the lack of seed and early stage capital and the lack of early stage professional management pool, he pointed out Utah’s efforts to address those areas and other issues:
- The University of Utah established a seed fund named KickStart that was launched in April 2008. It is expected to fund 20-30 start-ups that are involved in the clean technology, life sciences and software/engineering industries. Average size investment per company for the fund is $100,000 – $250,000.
- The TCO is currently establishing separate specialized investment funds that focus on key high-value research areas within the University, such as interventional medicine, software, imaging, and energy. Each of these funds will focus on early stage technology companies and be roughly $20 million each. The money is being raised by the TCO from private investors.
- The TCO actively recruits entrepreneurs to start companies in Utah. Brian mentioned that the Utah ski resorts have been a particularly fruitful place for recruiting management talent visiting from places further West.
- Venture Bench, a University-based accelerator, provides a suite of services for pre-revenue University of Utah start-ups, such as business plan development, market assessment, networking, accounting and insurance, federal and state grant application assistance, corporate governance counseling, legal costs, and state filings, each at no cost to qualified companies.
- The TCO has a myriad of other very popular programs, such as business plan competitions, law clinics, entrepreneur in residence programs, etc. Many of these programs are cross-disciplinary or involve different colleges within the University.
- There are multimedia initiatives (e.g., utahpulse.com) in place to help ensure industry news, opportunities, and trends are shared among the state’s newspapers, magazines, blogs, and websites.
- The Utah Fund of Funds, a state of Utah economic development program (currently, $300 million), was created to support early-stage and growth-stage companies in Utah. Rather than investing directly in specific companies, the Fund of Funds is structured to influence venture capital and private equity firms to focus more of their investment efforts on Utah ventures.
- The University has implemented what it refers to as a “virtual incubator” program for qualified small University of Utah start-ups. Under the program, each company receives a voucher that entitles them to a $50,000 credit for sponsored research conducted at the University to further product and market development of a given technology.
Current Midwest University Initiatives to Encourage University Start-ups
While the University of Utah has done a lot, not all of their initiatives would work or “fit” here in the Midwest. But, there are a number of initiatives that we should consider. I don’t mean to suggest by this article that Midwest universities have been standing still. To the contrary, there are a number of initiatives that are currently underway and good things that are happening here at Midwest universities and their surrounding infrastructures. Being from Wisconsin, I know the most about those in Wisconsin. For instance, at the University of Wisconsin-Madison, the Wisconsin Alumni Research Foundation (WARF) offers a number of translational (from concept/lab to patent/commercial application) grant programs (typically up to $50,000 each), such as the Draper Technology Innovation grants, the Industrial & Economic Development Research grants, and the Coulter Foundation grants. WARF will also soon launch a significant new program that is designed to further these translational efforts of moving technologies from the lab to commercialization (details to follow soon). WARF has also set up a “co-invest fund” to invest in University of Wisconsin early stage companies alongside venture capital firms and strategic partners. WARF fully deployed its initial $10 million co-invest fund and has deployed roughly 20% of its second $10 million fund. WARF was also instrumental in setting up an early stage company mentoring group called MERLIN. The mentors in the group consist of experienced area business people that volunteer their time to support area start-ups.
According to my former partner at Michael Best, Alec Fraser, the University of Wisconsin-Milwaukee has had success recently with its initiatives. Brian Thompson, President of UWM Research Foundation (UW Milwaukee’s tech transfer group), attributes some of their success to their industry focus and catalyst grant program. UWM has targeted applied research and commercialization efforts in healthcare, biomedical, water, advanced manufacturing, and energy industries. They work with area large companies and foundations, such as Rockwell Automation and the Lynde and Harry Bradley Foundation, to help fund grants that support the evaluation of technologies and moving the technologies from the lab to commercial applications. The UWM Research Foundation also provides some funding support for writing grant applications.
Other Midwest Initiatives to Improve Start-ups
The positive initiatives are not limited to the universities. For example, the number of angel groups in the region has grown considerably over the last few years, through the efforts of people like Joe Kremer, Dennis Serio, and Tom Still. Most of these groups continue to actively invest, despite the economic downturn. Some states in the Midwest, such as Indiana, Michigan, Wisconsin, Iowa, and Kansas, have adopted aggressive tax incentives to encourage investments in technology company start-ups. More Midwest-based law firms are making concerted efforts at creating specialized teams that focus on technology companies and venture capital. New mentoring groups like that headed by Terry Sivesind (MERLIN) have popped up to assist early stage companies. And of course, websites such as Mike Klein’s WTN Media (wistechnology.com), Russ Smestad’s BiotechProfiles (biotechprofiles.com), and midwestbusiness.com, among others, provide great communication platforms.
The AlphaTech Counsel Offer
While a lot is going on and many people are pouring considerable efforts in encouraging university start-ups, our raw numbers can and should be better. I know that we, collectively, can do more to facilitate more quality university start-ups in the Midwest. It’s always easy to point out what other people or groups should be doing. Instead, I like to think about what I can offer personally. So this is what I am willing to do. For any Midwest-based entrepreneur (or group of entrepreneurs) that is entering into discussions with a technology transfer office to license technology from the university, I am willing to offer free legal services to set up their organization and get them off on the right foot. Specifically, I will offer the legal services associated with the following, free of charge:
- Choice of entity counseling
- Articles and bylaws/operating agreement
- Initial subscription agreements
- Initial consents (incorporator, shareholder, and director)
- EIN application
- S election (if applicable)
- Negotiate license agreement with university tech transfer office
- Negotiate equity agreement with university tech transfer office (if applicable)
- Employee invention assignment agreement
- Employee confidentiality agreement
This offer is obviously subject to a conflicts check and compliance with applicable laws and doesn’t cover government filing fees. I’ll extend this offer at least until the end of 2009.
If you are involved or want to be involved with the commercialization of university-based technologies, I encourage you to consider (or reconsider) what you can do to better support both the number and quality of university start-ups. It does not matter whether you are an investor (or would-be investor), accountant, attorney, consultant, mentor, university faculty member or administrator, government employee, or entrepreneur, we all have a role. And, collectively, we can do a better job to ensure that more of the incredible discoveries that are coming out of our universities are commercialized through local efforts to produce promising companies with good paying jobs.