Working in Silicon Valley as a patent attorney and angel investor, I see a stream of great startups emanating from the Stanford University and UC Berkeley, among others. University research is a rich source of technology and a fertile ground for startups, particularly if the startups are located in an area with skilled entrepreneurs and venture funding. University spinoffs are companies that are founded by researchers or faculty members from a university and commercialize technology developed at the university.
There are many famous university spin-offs, but a few examples include:
- Google: Co-founded by Larry Page and Sergey Brin while they were Ph.D. students at Stanford University in 1998.
- Genentech: Founded in 1976 by Robert Swanson and Herbert Boyer, both faculty members at the University of California, San Francisco.
- Microsoft: Co-founded by Bill Gates and Paul Allen while they were students at Harvard University in 1975.
- Thermo Fisher Scientific: Spin-off of the Massachusetts Institute of Technology (MIT) in 1956.
- Amgen: Founded in 1980 by William K. Bowes Jr. and two scientists from the University of California, Los Angeles.
- Intel: Co-founded by Robert Noyce and Gordon Moore, both faculty members at Stanford University, in 1968.
These are just a few examples, but there are many other famous university spin-offs from institutions around the world. These companies are notable for their significant contributions to technology and industry, and for the wealth and jobs they have created. In my experience with startups from Silicon Valley universities such as Stanford University and University of California at Berkeley, university based spinoffs can bring several challenges and rewards.
Challenges:
- Funding: Starting a new company can be challenging, especially when it comes to securing funding. University spinoffs may have to rely on grants, angel investors, or venture capital to get started.
- Regulatory compliance: University spinoffs may have to navigate a complex web of regulations related to intellectual property, data privacy, and other areas.
- Commercialization: University spinoffs may have difficulty transitioning from basic research to commercialization, as they may not have experience in product development or marketing.
- Managing relationships: University spinoffs may have to manage relationships with the university, which may include licensing agreements, research collaborations, and other agreements.
- Managing intellectual property: University spinoffs may have to navigate complex intellectual property laws and regulations, and may need to secure patents or trademarks to protect their innovations.
Rewards:
- Economic development: University spinoffs can create jobs and economic growth, and can help to commercialize new technologies.
- Research and development: University spinoffs can provide a way for researchers to continue their work and develop new technologies after they leave the university.
- Technology transfer: University spinoffs can help to transfer technology from the university to the private sector, which can benefit society by making new technologies available to the public.
- Knowledge transfer: University spinoffs can help to transfer knowledge and expertise from the university to the private sector, which can benefit both the university and the private sector.
- Innovation: University spinoffs can help to drive innovation by providing a way for researchers to test and develop new technologies in a real-world setting.
Overall, while university spinoffs can bring many rewards, they also present a range of challenges that need to be addressed in order for them to be successful. It is important for universities and researchers to have a clear understanding of the regulatory, financial and legal requirements and to have a plan in place for managing these challenges.
One way to spin off university research is to create a startup company based on the technology or idea developed in the university research. This can be done by licensing the technology from the university, and then raising funding and building a team to develop and commercialize the product. Another way is to form a partnership with an existing company to commercialize the technology. It is also possible to form a joint venture between the university and a company to commercialize the technology. Additionally, some universities have technology transfer offices that can help researchers navigate the process of spinning off their research. This advice is for those who have conducted scientific research at universities and want to start a company to market it.
CEO and Leadership Issue
This is often a painful truth for founders: Unless you are willing to jump from research, your company is unlikely to succeed. You will need to make a conscious decision to step down so that you can launch the company.
Many scientists believe they should stay in academia and find a chief executive to launch a company based on their invention. This is almost always a bad idea. First, it is difficult to find a great leader to lead a company in this early stage. It is rare to find truly great CEOs, and they often have better opportunities than those who run an idea-stage startup without funding. Most scientists who try this approach fail to find a good CEO, or settle for a poor one. Even worse is if your university attempts to find you a CEO.
Even if you were able to draft anyone in the world to lead your company, it wouldn’t make sense. This stage has the best CEO because of the original research. People who did the initial research will be more invested in the venture’s success than anyone else. Because they have a greater domain knowledge than an outside CEO, they are better qualified to build a company around that field.
Another misconception is that research is complete and all that is left to do is commercialize it. This would be a good idea if it were true. It rarely turns out this way. You may find out that the market is looking for something different from what you have invented. This means that more research is needed. An outside CEO won’t be able to make the necessary adjustments, but original inventors will.
Funding the Startup
People are often unsure if they want to leave a secure academic job to pursue a startup. They take their idea to local venture capitalist firms and pitch it. They believe that if their idea is good, the VC firms will finance them. This validates the idea and allows them to transition from university into a well-funded business.
Although VC firms may occasionally finance spin-outs in this manner, most of the time they do not. Too many founders are turned down by VCs, and they conclude their idea is not viable. The problem is that it’s too early to raise capital from VCs due to lack of traction proof.
Many founders find themselves stuck in a Catch-22 because they won’t quit their jobs before raising money. They wait for an investor before they can quit their job. The investors wait for the founders of their company to be confident enough to quit their jobs.
Founders typically need to work full time for their company for at least 1+ year before they can raise a multimillion-dollar round from VCs. They can also self-fund their company by saving, obtaining government research grants, borrowing a small amount from family and friends, or raising small “pre-seed” rounds from angel investors, accelerators or seed funds.
Many times, others involved in research wish to stay at the university and still contribute. That’s fine. These people are sometimes called “academic founders” or “scientific founders”, and they can still be extremely helpful. The most important founders are those who will be working full-time.
Deciding who to include and when to spin off
Because it is frightening to leave, founders tend to wait too long. Academia can be a safe place. You are not being pressured to leave, and it seems risky to leave so you can keep delaying. It’s tempting to try and make technology perfect before it goes out of control. There are always more experiments you can do. You can’t stop the cycle.
The pace is another important adjustment. Startups are constantly racing against the clock. Your company will eventually run out of funds if you fail to reach milestones by the end of your current funding. This kind of constraint makes it difficult to focus. Founders who quit academia to pursue YC often report that they did more in three months than they did the previous year.
You’ll be able to make more progress at the university while you are still developing your technology. This is the best place to test your idea and do initial experiments. You can even do some testing of market demand for a new product, through programs like NSF I-Corps or just by calling up potential customers/stakeholders. However, this will eventually change and you will find yourself at a disadvantage as universities are not equipped to market technologies.
For founders who are not from academia, it is important to adjust to a different incentive system. You are rewarded for your publications and new discoveries in academia. There is no reward for publishing new discoveries in startups. Startups reward you only for making tangible progress towards a product that is commercially viable.
A typical spin-out scenario involves several people working on the research. This could include students, postdocs, and faculty. You must decide who will work for the company and who will stay at the university.
How to Divide the Pie
Once you have decided who will work full-time at the startup, and what each role will be in that team, you can divide equity or stock in the company. Often, university startup equity allocation mistakenly rewards past contributions when it should be for future contributions, mainly on funding and go-to-market success.
Equity should be equal or close to equal for founders who work full-time on the company. Full-time founders should have more equity than those who will be staying in academia. Unless they intend to remain hands-on, academic cofounders should not own more than 10%.
Government Initiatives That Can Accelerate University Spinoffs
In late 2022, President Biden signed the Inflation Reduction Act of 2022 (the “IRA”) and the Creating Helpful Incentives for Producing Semiconductors and Science Act of 20022 (CHIPS Act). Two divisions make up the $280 billion CHIPS Act package. Division A, which includes the CHIPS section of the package, is responsible for more than $52 Billion in federal funding to support U.S. semiconductor manufacturing. Division B authorizes substantial increases in federal funding to support research and innovation at various federal agencies. For example, the National Science Foundation (NSF) will receive $81 trillion over the next five-years.
A large portion of the new science funding will be used to support U.S. technical and scientific leadership in 10 crucial technologies, such as biotechnology and medical technology. The NSF funds approximately 2,000 entities each year. It funds primarily universities but also offers programs to support startups. This significant increase in federal funding will benefit both pharmaceutical R&D by collaborating with universities and early-stage investment into startups working on new drugs technologies through licensing existing IP or sponsoring future research. Given the large research grants, this is expected to drive new technology that can be spun-off and commercialized.
Understanding government rights and obligation
Federal funding for IP must conform to the Bayh-Dole Act. Bayh-Dole Act, a federal law, was enacted in 1980 to allow universities, small businesses, and non-profit institutions to own, patent, and commercialize inventions that were developed through federally funded research programs. U.S. law has the Bayh-Dole Act.
The U.S. has a preference clause in the Bayh-Dole Act that requires entities who are granted exclusive licenses for federally funded inventories to substantially manufacture them domestically, unless they obtain a waiver.
The patentee must grant the US government an irrevocable, nonexclusive, worldwide license. In addition, the government has the right to march in and require that patentee license the patent to others under reasonable terms.
There are many reporting and administrative requirements. Certain rights are reserved for the government. Companies should be careful to ensure compliance with Bayh-Dole when licensing IP from federally funded programs.
Negotiating with the Technology Transfer Office
You will need to negotiate intellectual property rights if you want to commercialize research that was started at a university. The technology transfer office at a university is responsible for negotiating intellectual property rights. It is important to contact this office as soon as possible. This will allow you to have more time to reach an agreement and let you know the layout of the land.
Before you talk to the tech transfer office, get in touch with other founders who have recently reached agreements with the same office. Ask for advice about negotiating strategies and to find out the terms they received. Investors, lawyers, and advisors are also available. It is important to collect as many data points as possible. It’s important to get the support of your professor, whether you’re a student/post-doc.
Professors are able to influence the decisions of universities and give them an edge over stubborn tech transfer offices. It is also important to ensure that there are no competing plans for the spin-out of the technology. They will help you secure a deal and give you credibility with investors by being onboard early as advisors.
A few universities have begun to use ” express licensing agreements”, pre-negotiated agreements that are easy to negotiate. These agreements typically contain four key terms:
- Equity. The university usually gets equity in the company. As long as the amount isn’t too high, this is acceptable. Typically, it is between 3-5% and 10%.
- Royalty. This is a percentage of your revenue or profits that you pay to the university. This can impact the ability of the company raise money or continue to operate. This should be kept to a minimum of 0. If that is impossible, you should keep the royalty rate at 5% or less and have it expire after a set number of years or a set amount of payments.
- Milestone payments. Milestone payments are: “You owe $500K when your company raises its first 10M” or “You owe $250K when your company reaches Phase II clinical trials.” Cash is often scarce during startup’s early years so you should keep your university payments as low as possible.
- Exclusivity. The university can theoretically license the same IP to another company to compete with you if the license isn’t exclusive. Although this sounds like a problem, it is often not. Initially, you can agree to non-exclusive terms, but have an option to convert to an exclusive license with boundaries set in advance so the cost does not rise exponentially when you have proven success. You can also request a right of first refusal.
If you feel the agreement is too burdensome, consider whether you really need it. It may be more cost-effective to create something similar in your own time. You might not be able to use what you license. Startups change all the time. Many companies have lost their fight over the tech transfer agreement. Then, a year later, they abandon the IP they worked so hard for. This can be prevented by ensuring that royalties are directly linked to the technology.
Instead of negotiating a complete license agreement right away, consider licensing the IP as an option. This option can often be cheaper and easier to obtain, and it allows you to delay the final negotiations for six to twelve month. This allows you to assess how much you’re using the IP before you commit to licensing it.
Do not wait to get an agreement before you start your company. It can take up to 6 months to get an agreement. Many investors, including YC, will finance companies even before there is an agreement. You have more leverage in negotiations if you make more progress on your company.
Leading the charge in IP and Patent Portfolio Building
Companies should take responsibility for patent preparation and prosecution once a licensing agreement has been in place. Universities often have limited IP budgets and resources. Companies should at a minimum consider including step-in rights for licensees in the agreement in case the university decides to abandon or forgo any IP rights.
Before submitting a manuscript or abstract to a conference, companies should consider reserving their right to review it. Sometimes, such submissions may be published online immediately or in a very short time. Companies should determine whether the submission is covered under any existing IP or whether a new patent filing is warranted based on that submission.
A company should determine if the missing inventor is required to give notice (e.g. through an employment agreement or consulting agreement). If IP is created in the course of their duties, university employees are usually required to assign it to the university. Problems can arise if the missing inventor is not an employee of the university and has no obligation to assign the IP to the listed patent owner or to assign it to a third party and in that case you need an assignment by the missing inventor to the third party, and the second one from the third to the listed patent owners.
Conclusion
There’s never been a better time for a university based startup. There is more funding than ever before and an established ecosystem to support founders at all stages. Most grad students and postdocs have to choose between working in academia or getting a job as an industry worker, but the option to become founders of an exciting startup may be the most alluring for these scientists.