Negotiating a university license

Universities are TechStars on steroids. Some of the most influential companies in the US can be traced back to university roots. (e.g. HP, Sun Microsystems, Bose, etc) As I wrote in my blog entitled Trolling for Technologies (and a good beer), I don’t suggest hanging out at the student union hoping that a good technology will drop like manna from above. That said, universities are increasingly paying attention to entrepreneurship (they know who the big donors are!). Many have appointed individuals to focus on bringing an entrepreneurial vibe across the campus. For example, David Lerner (at Columbia) or John Jaquette (at Cornell) are among the many great entrepreneurial torch-bearers that can help shorten the path to identify promising researchers and technologies within a university.

Once you’ve identified a technology that you’re considering licensing from a university, here are my suggestions for the negotiation with the licensing office:

Start with the option

The delta between a lab technology and a commercial product is huge. Given that, spend the time upfront to scope out the business plan and timeline. Start by simply optioning the technology. Options are cheap and generally quick. Also, most deals require the company to re-pay previous IP expenditures by the university (which can be pricey). By taking the option, you put off that expense until you’re certain the venture is a go.

Be informed

Talk to other ventures, as well as VCs, who have recently licensed technology from that particular university (and others). Track key terms – field of use, cash, equity, and royalty payments. This will give you context for what to expect and what a good/bad deal looks like. License only the IP for the fields you need.

Use the inventors and VCs … wisely

Licensing offices want to keep their faculty happy. Make sure the professor or key inventor is on board and encouraging the licensing office to get the deal done. This may be your single biggest point of leverage. The venture guys can provide a bit of leverage since they often won’t fund without the license. The bottom line is to align interests with the licensing office – they need to understand that you’re a start-up and the goal isn’t to squeeze every penny before the business is even launched.

Cash or equity – the age-old debate

There are two sides here – pre-financing equity is cheap in that it will likely be heavily diluted. In the short run, cash is the company’s air supply. On the other hand, cash can be raised but equity maxes out at 100%. I’ve tended to prefer cash deals because I’ve often found that licensing offices seek unrealistic amounts of equity. However, if your cost of capital is high and the office is asking for a reasonable equity %, you may want to consider an equity deal.

The key is to make the licensor trade off cash for equity, and vice versa. I’ve seen too many deals where entrepreneurs pay exorbitant cash, equity and royalty payments that will only hinder the company long-term, which is bad both for the university and entrepreneur.

University research is often the catalyst, but not the basis of a business. Pay accordingly.

2010 final observations from an itinerant entrepreneur

As I wrap up 2010, my first year on an entrepreneurial walkabout, I’ve learned a ton about entrepreneurship and myself. I must admit I’ve enjoyed the journey much more than expected (despite the negative income stream). In addition to meeting fascinating entrepreneurs for Founder Collective, I’ve also been fortunate to become Chairman of one company (Novophage) and an active advisor to a couple of exciting projects.

Here are some thoughts following nine months as an “itinerant entrepreneur” …

1 – Personal brands matter

When I finally left Brontes, I probably had a few thousand contacts in my CSV file. 80% or so were related to the dental industry (yup, pretty geeky) in which I had spent the past 8 years. I practically had to rebuild my brand and network from scratch. It’s been a great exercise but I’ve learned that the next time around I’ll work hard to remain visible to VCs, attend technology conferences, meet with other entrepreneurs, etc. It’s possible to stay relevant even while running a business, and in fact, in some ways it’s an even more powerful platform from which to brand oneself.

 2 – The marathon before the marathon

Going from a napkin concept to a funded, focused enterprise with a handful of good people developing a 1.0 is not a quick exercise. Every business is different but I think a year of “incubation” is commonplace – time is needed to build the team, talk to prospective customers, sketch out a product and raise money. Given the time it takes to launch a business, one needs to think hard about joining an early-stage venture with some pre-existing inertia (I certainly do). The power of some existing IP, a few people rallied around a goal, etc. can help shorten the incubation period and reduce the entrepreneur’s risk.

3 – Breaking up is hard to do

I’ve come very close to going “all in” on a couple of projects – in fact, I’ve killed three projects that I had spent months working on. Once you spend months validating and building out a concept, it’s hard to say “this one just isn’t there.” Still, I’ve learned over and over again, if you have doubts about a venture even after a significant investment of time, it’s best to walk away. It’s emotionally draining and at times can strain relationships. Still, it’s much better to cut it off before taking other people’s money.

4 – It’s true about Serendipity (Reference to my blog title, not the Cusack flick)

Some of the most powerful connections I’ve made, and the most interesting people I’ve met in 2010 were totally random. Paradoxically, the meetings I was least excited about or the informal cocktail party chats have led me down some of the most interesting paths. This element of randomness gets me excited to wake up each morning knowing that the next big thing could come in from anywhere at anytime.

Happy 2011 everyone – may it be full of serendipity!