Start-ups are still the best way to commercialize university IP, according to David Lerner, a serial entrepreneur, angel investor, and director of the Venture Lab at Columbia University Tech Ventures. However, university TTOs should imitate the start-up culture in their deal-making. In a post on peHUB, the public forum for private equity, Lerner recounts two business paradigms outlined by Chris Dixon, an early-stage investor and founder of the web site Hunch. The first, Dixon explains on his blog, is a transactional/legalistic approach to business that exchanges labor for money in the form of a contractual relationship. The second approach to business is based on trust, verbal agreements, reputation, and “enforcement” by the community rather than the legal system. Start-ups, Dixon says, are overwhelmingly governed by the latter approach.
Lerner juxtaposes these paradigms against the composition of U.S. university TTOs — most of which are steeped in the transactional/legalistic business culture, he asserts. “Most university administrators place great importance and faith in the opinions and judgment of their Office of General Counsel, and with good reason,” he observes. “Universities are often at the economic, cultural, and educational nexus of entire cities and must protect their interests and reputation, not to mention their endowments.” Since university tech transfer was only born in 1980 as a result of the Bayh-Dole Act, commercialization activity has been layered over an existing culture in most schools.
Nevertheless, TTOs should understand the distinction between licensing IP to large, existing companies and licensing IP to a fledgling entity that is being formed for the express purpose of commercializing that IP, Lerner maintains. “A small start-up comprised sometimes by nothing more than a courageous entrepreneur, a laptop, and some meager seed money can hardly wait six months to ink a deal with a university,” he writes. “Nor is it reasonable to expect such a person to pay large up-front licensing fees, immediately reimburse patent expenses incurred long before he/she entered the picture, or submit to massive and arcane paperwork.” Instead, TTOs should take their cues from the investment and entrepreneurial community, using these foundational steps:
- Assign a seasoned entrepreneur and investor as the dedicated point person for the TTO’s entrepreneurial/venture activities. This individual must come from and have the confidence and respect of the early stage entrepreneurial community.
- Shed as much of the “transactional/legal” paradigm as possible from the venture operation and adopt the business paradigm based on trust/reputation and community. The entrepreneurial and investment community will immediately recognize this as major progress.
- As an equity partner, treat start-ups in the TTO’s portfolio as partners, not simply licensees. Work with partners to facilitate success and delay compensation and upside revenues to the back end as much as possible.
- Streamline license and stock purchase agreement templates to speed up and facilitate deals.
- Keep deal terms fair and simple. Commercialization “is not about what you can ‘get’ from the entrepreneur along the way,” Lerner writes. “Rather, it’s about enabling them to win in what is an exceptionally difficult endeavor. An eventual sale or IPO of the company should be the shared goal — nothing else.”