The Evolution of the OTC

The Evolution of the OTCUniversity Led Startups

The Texas A&M University System

Define Your Mission and Measurements

How do you want the university to define your mission?

How do you want to be measured?

What Tools Can Be Applied In Your Model?

Portfolio management?Involvement in developing industrial relationships/research programs?Involvement in strategic research initiatives?Economic development mission?University led startups?International startup partnerships?

TAMUS Approach

Inventor led spin-out vs. university led spin-out• Small equity stake vs large equity stake• No investment vs cash investment• No university business involvement vs university

board seats• Part time professor CEO vs full time CEO• Small university upside vs large university upside

Create spinouts because we have to, not because we want to

What Are Spin-Out Opportunities?

Goldilocks technologies• Not developed enough to attract licensees• Developed enough to attract angels

Disruptive technologiesNext steps usually involve further research at the university• Early payback to the university

Value add step is relatively inexpensiveOpportunity is fundable

Types of Innovation

Sustaining Innovation• Better products • Sold to existing, attractive customers• Incumbents have the advantage

Disruptive Innovation• Simpler, more convenient product• Sells for less money• Goes after new or unattractive customers• New entrants have an advantage

Reasons Disruption Works for New Entrant

Target market is unattractive customers or non-consumption• Incumbents likely will not fight for the market

share

Allows focus on serving a set of customer’s needs• Low end customers get “good enough” products

at low cost• New customers get simplicity and convenience

Two types of Disruption

New-market Disruption • New customers enabled by simplicity, portability or

product cost• After a foothold is gained, sustaining

improvements increase market share• Examples – pocket radio, PC, cellphone

Low-end Disruption• Addresses least profitable, over served existing

customers• After a foothold is gained, go up market• Examples – minimills, Wal-Mart, Kia

New Market Disruption Litmus Test

Large population, previously not able to purchase due to lack of money, equipment or skill

Previously, customers had to go to an inconvenient centralized location

Low-end Disruption Litmus Test

Are there over served customers looking for “good enough” products

Can the business model make profit at lower end discounted prices

Is the innovation disruptive to all significant incumbents

What Is Disruptive

Disruption is not just about technology• Business models can be disruptive with no significant

technology advances• Very innovative technologies may not be disruptive

at all

Disruption is ultimately about how you make money• Who are the customers• What problems are you solving

What is Fundable?Large marketCompetitive advantageExperienced managementMarket pullIdentifiable value inflection pointExit strategyProfit potential for the investor

Where are your opportunities strong or weak?

Strengthening the Weak Points

Large market weakness• Most challenging to overcome• Minimize the investment needed• May think about partners more than pure investors

Competitive advantage weakness• Understand the market pain clearly• Focus on competitive advantage in the next steps of

research• Focus on competitive advantage in the business

model

Strengthen the Weaknesses

Management weakness• Rarely have identified management early• Cast a wide net• Build a bench of possible CEOs

Market pull weakness• Get the voice of the market through market

research• Talk to potential customers• Reach out to potential partners

Strengthen the Weaknesses

No clear exit strategy• Think about partners rather than pure investors• Look for comparable companies and exits• Understand comparable exit values

Investor profit potential is not clear• Shorten development timeline• Lessen investment needed• Get to market faster

NewCo Opportunity Review Process

Opportunities identified by licensing staff• Internal review of opportunities• Internal pitches of the vision of a company• Internal analysis of “why a spin-out”?

Analyze the technology, market, intellectual property, and internal support for a spin-out

Potential Blind Spots

Intellectual property• Have an attorney review your intellectual

property positiono Freedom to operate, not just patentability

Internal support• Make sure the inventor still cares• Does the plan fit with the inventor goals?

Start-up Development

Phase I – Project Screening

Work done by Licensing Staff

Invention DisclosureTechnology AssessmentIdentification of Products and Services enabled by the technologyEngagement as Potential Start-Up Project• Determination of inventor interest• Determination of Member interest

Phase I – Project ScreeningWork completed by New Ventures Team

Market Analysis • Size of market(s)• Size of market segment(s)

Competitive Analysis (per market segment)• Competitors (sales of products/services)• Research competitors• Freedom to operate

Integrate information to create Assessment Report on Start-Up Potential• Inventor and Member interest• Market Analysis• Competitive Analysis

Go/No Go Decision

Phase II – Company FormationBusiness Plan Development• Rationale• Milestones• Funding needed• Licensing Terms• Exit Strategy

Internal Fundraising (cash for equity)• OTC• Members• External parties

Team Formation• Scientific Advisory Board• Research Team (e.g. TAMUS researchers who will develop research proposals and

conduct the research)• Management (external)

Phase II – Company Formation

Creation of Start-Up Proposal• Business plan• Risk profile• Expected research and equity upside potential

Submission of start-up proposal for approval (must be approved by Chancellor)Drafting corporate documentsFiling for incorporation of the new companyFounding investment madeCEO contract signedExecution of license

Phase III – Business Plan Execution

Fundraising by management• Assistance from OTC• Short time line with specific goals

o $1,000,000 within 12 months

• Fundraising success leads to success fee for CEO

After funding

R&D as neededCompletion of milestonesAchievement of objectives of exit strategy / termination of license

Typical Deal Breakdown

Caveat is that all deals are differentStarting point is a total investment of $75,000• OTC invests $25,000• TAMUS member invests $25,000• Research Valley Angel Fund invests $25,000

Starting point for equity break down is:• OTC 5% set aside for commercialization services• Inventors 10% set aside to keep their interest• Each of the 3 investors receives 28.33%• CEO is compensated 5-20% equity upon funding

Tools Needed to do Spinouts

Ability and resources to develop business plans and market researchAccess to angel capital or venture capitalA bench of CEOsA source of internal capital or affinity fundsLegal advice on freedom to operate and corporate formation