In the third part of the continuing series on the broader topic of Fostering Life Science Innovation, we zoom in on the important concept of transitioning technologies from the university lab to the next stage of development. This is typically accomplished using three potential paths: Licensing the asset to a newly created start-up, licensing it to an established company, or using a variety of internal/external funding mechanisms to further advance the innovation before licensing. Each of these has pros and cons. First, the reader should be aware that I am presenting this through the filter of an investor who creates startups based on life science innovation sourced from research-focused universities around the world.
The process of advancing a promising idea or technology towards a licensing deal often begins with a conversation between the inventor(s) and the university technology transfer office. From the investor’s lens, the primary early objective of these discussions is answering several critical questions: Is the technology commercially relevant? Is it protectable? Is there a viable funding mechanism for moving the technology forward? Assuming that all of these questions can be answered affirmatively, the next step is identifying the best path forward for the specific innovation. This is rarely a one size fits all proposition and is often where a third party may become involved in the discussions. However, before licensing or optioning become reasonable opportunities, there are a few more questions that should be examined: Can the next phase of work be carried out in the inventor’s lab or are external resources required? How involved do the inventor and/or their team want to be in the next stage of development? Do they have the expertise necessary to move the asset ahead? How much funding is needed to reach a value-inflection point that would then make previously inaccessible sources of capital available? While the inventors, technology transfer office, and potential licensee may not always agree on what the best path forward is, all want to identify what the optimal trajectory is given the resources available in the form of talent, infrastructure, and funding.
Schematic representations of the overall process often depict the concept of university technology commercialization as a linear prospect. Those of us with firsthand experience transitioning university-stage ideas towards product realization understand that, in actuality, it is rarely straightforward (Figure 1).
University Spinouts. Many research-focused universities strive to create as many start-ups as possible, often pointing to this metric as a key indicator of economic success. In most cases, the primary inventor is involved in the new company (newco), either as the de facto CEO or supporting a non-university “business” lead. Another common approach is for someone from the inventor’s lab to become the first or primary employee of the company. If managed well, this tactic can work, especially if expectations are clearly defined. Factors that often benefit the stakeholders in this circumstance include delaying licensing the rights to the underlying IP until a minimum amount of dilutive and/or non-dilutive funding is secured, achieving technical milestones that are clearly identified within a reasonable timeline, and recruiting/adding necessary business and technical expertise. Inventor-led startups do, however, have a significant risk of failing, often the result of a lack of commercial development experience and conflicts of time and commitment with primary employers. University inventors (faculty, postdocs, graduate students) are usually scientists who are highly trained and skilled at focusing on answering very specific questions in their field of study. The myriad components that come into play after the fundamental research phase are rarely in their primary skillset (Table 1). Not only are the business concepts often largely foreign, but preclinical and later stages of research and development may be outside their wheelhouse as well. This is not to say that these skills cannot be learned, but rather that having individuals with many years of real-world knowledge can avoid the expected and understandable mistakes made when building core competencies from scratch.
Sidenote: I have looked far and wide for data on the success rate for inventor-led vs. non-inventor-led startups to no avail. I am increasingly surprised by the absence of this potentially impactful knowledge, especially given how much weight is placed on the pace of newco formation. Rarely do universities share the long-term outcomes of these efforts beyond the notable successes, which is unfortunate. Substantial insights could be gleaned from an in-depth analysis of all spinouts (both successful and unsuccessful) to identify the characteristics of the winners and apply these learnings to future efforts.
Table 2 below paints a somewhat stereotypical picture of the attributes of “inventors” and “innovators,” while in reality it is less black and white. Suffice it to say that rarely does one individual embody all the qualities required to ensure optimal outcomes in a university spinout.
A growing variation on spinning out university startups entails working with venture studios (also called venture builders or venture creators). Venture studios are structurally distinct from other forms of venture capital; while both operate within the startup ecosystem, a venture studio generates and validates a technology from its commercial origin. This hybrid model results in a similar entity created to advance a specific asset but differs in that the investor often dedicates experienced team members to the newco. The involvement of an early-stage venture group often provides other benefits, such as templated venture creation/legal structuring, access to follow-on funding, as well as the majority of required expertise listed in Table 1, not to mention the credibility afforded by having a committed investor involved at company inception.
Licensing to Established Companies. Instead of creating a purpose-built company to develop a specific asset, universities may elect to market the innovation with the goal of licensing the rights to the underlying IP to an established company already active in that space. A significant challenge with this approach is that the bar for the maturity level of the technology is markedly higher than it would be for a university spinout. Often, the goal of the previously described venture studio approach is to mature the technology to the point that it becomes attractive to larger, established companies. The term “established company” comprises a wide range of possibilities, ranging from small, nascent operations up to large, multinational organizations. Regardless of the perceived attributes of the prospective partner, there is no guarantee that an innovation once licensed to the partner is in capable hands. Therefore, extensive due diligence on the potential licensee is essential: What is their expertise in the specific area and type of technology they will be responsible for? What is their track record with in-licensed programs and for smaller, or less-established companies, can they provide references? Are the terms of the license favorable or would they be improved by further maturation within the university (see below) or spinout?
Continued Incubation in the University Setting. In reality, the vast majority of inventions developed at universities, even those that are commercially relevant, are far too early in the development continuum to be viable candidates for licensing to established companies. If there is interest in the opportunity, the terms proposed by the prospective licensee are liable to reflect the higher risk of the asset via lower values and significant back-ending loading. Accordingly, it often behooves the university to provide additional resources to further incubate the technology. This approach, however, does come with significant risk as it is often unclear how to best deploy funds to maximize increased value for the university and its stakeholders. That said, examples of translational support that can be accessed in the academic setting include—but are not limited to—internal grants, city, state and/or regional programs, disease-focused organizations, NGOs, philanthropic groups, and motivated individuals. More on this subject can be found at blog.victech.com/challenges-and-solutions-for-university-technology-commercialization-part-3-gap-programs.
In summary, for technological innovations created in a university setting, there are multiple paths forward to the next stage of development along the commercial path. Given the increasingly challenging environment for obtaining fundamental research grants, academic innovators and their support network would benefit from even more creative methods of attracting non-traditional funding. Whenever possible, it is also essential to ensure the flexibility to pursue multiple paths and pivot when needed. Avoiding situations where possible alternative routes are eliminated can be critical.
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About VIC Tech: We are a life science-focused Venture Studio, creating portfolio companies based on best-in-class innovation sourced from universities, national labs and institutes around the world. Our team provides the operational expertise during the initial start-up phase, ensuring maximal impact while mitigating burn, allowing as much funding as possible to be allocated towards de-risking the licensed asset.