The Problem: The Talent Gap
University startups are typically built around a technology or discovery from faculty research. As the startup forms, it needs a number of critical elements to in increase the likelihood for success. While a significant amount of attention is focused on gap funding for the early-stage startup, of equal and perhaps more importance is bringing talent into the company. The talent required for university startup falls into to domains: technical and business. Technical talent is needed to plan and execute experiments and build prototypes which will de-risk the technology. Technical talent can come from the founding faculty member. They can help with planning of experiments or designing prototypes but their bandwidth is often limited, given their responsibilities with the university. Rarely are they willing to take the risk to leave the university and join the startup. Technically-trained scientists are available in the local market but finding the right technical fit can be a challenge and few are willing to leave their full time position for a high-risk endeavor. On the business side, talent is needed to shape the business strategy, identity markets and customers, and develop the financial underpinnings of the company. Business talent usually comes from the pool of local entrepreneurs. This can be challenging since a) few can work for equity alone for an extended period of time and b) many of the entrepreneurs who have been successful do not want to take on a university startup given its tremendous risk. Some help can be found in the form of mentors or a university entrepreneur-in-residence program. These people can be useful but their bandwidth limited.
The bottom line is that university startups at inception are too risky and undercapitalized to attract the talent needed. Like the funding gap these companies experience, there exists a “talent gap” that needs to be filled.
Filling the Talent Gap
As mentioned, the faculty founder can partially fill the technical talent gap but they have limited time to devote to the project and, for some faculty, they work on multiple technologies which means they may not be close to the nitty-gritty details of the science. An alternative to the faculty founder are graduating Ph.D students and post-doctoral students. These students are ideal for a number of reasons:
Skills. These students have the developed the laboratory skill necessary to execute experiments, skills directly relevant to the technology.
Direction. Having lived and breathed the science and technology for many years, they know what works, but more importantly, what does not work.
Competition. In writing publications and thesis, they know other groups working in this same space.
Risk. Being young in their careers, many are willing to take a risk with a startup.
Affordability. Since they’ve been students, their wages have been low. A few more years working at these wages may seem worth it if they can see some upside (experience, ownership).
Taking a similar tack as filling the technical gap, filling the business talent gap could involve student talent equipped with basic business tools willing to take a risk with a startup. Most major universities have MBA programs with concentrations in entrepreneurship. These programs offer experience in evaluating business ideas, researching market feasibility, developing financial plans, and wrapping these elements into a business plan. However, as they graduate, many fail to find a startup opportunity since they don’t have experience.
Innovation Fellowship Program
The Innovation Fellowship program attempts to fill the talent gap for inception-stage university startups. The program provides fellowship funding for recently-graduated students to join these startups. The program has two objectives: 1) provide early technical and business leadership for these early companies, advancing product development and business strategy and 2) provide training and experience for the fellow through a mentoring program. The program has two types of fellows, corresponding to the different talent gaps: Technology Fellow and Business Fellow.
The Technology Fellow is a recently graduated Ph.D. or post-doctoral student who either worked in the lab where the technology was developed or worked in the lab of a close collaborator. The fellowship provides a stipend for two years as well as an assigned a mentor.
Graduate students and post-docs represent an untapped resource for commercializing technology in startup companies. Leveraging their talent provides a number of advantages:
- Because the graduate student or post-doc comes from the lab of the inventor, a well-established technical relationship will exist between the startup company and the faculty. This relationship would work two ways:
- The company will have a built-in channel of communication with the faculty inventor and
- the faculty inventor will have a unique window into the startup, giving them insight into the startup process and increasing the likelihood of future engagement.
- Working with the mentor, the Fellow will provide the much needed technical perspective (competitive technologies, strengths, weaknesses) for developing the business plan.
- The Fellow will get “hands-on” experiential training on the process of technology commercialization, learning the commercial hurdles to be overcome in bringing a technology to market.
- The Fellowship will help retain talented, technically-trained entrepreneur in the region.
Technology Fellow: Case Study
A Technology Fellowship was made possible through a pilot grant from the Kauffman Foundation. To initiate the program, a competitive application process was announced which yielded five inquiries and three formal applications. An ad-hoc committee was convened to review the applicants. The criteria for evaluation included skills of the applicant for making an impact on company milestones and demonstrated entrepreneurial initiative of the applicant. In addition, the company was evaluated in terms of funding, advisors to provide mentoring, and stage of development of the technology.
R.S. was selected as the technology fellow, which began January 2011, to work with a technology that had been the subject of his dissertation and core technology around which he and his advisor were launching a company. An interim progress report yielded the following activities and accomplishments:
Application focus. Since the technology was platform in nature, it had multiple applications. One application was as a cancer diagnostics and RS researched the market opportunity and came to focus on bladder cancer. As he states:
I worked with my co‐founder to understand this opportunity. We learned that companies like Genomic Health have redefined the landscape of diagnostics over last decade, by delivering high‐value information that could dramatically affect the course and reduce the cost of treatment. Our publications suggest we could provide information that is equally valuable, but at a development cost—possibly as little as 1/10th of the competing genomic approaches.
For technical and operational reasons we decided that the best beachhead was in bladder cancer. There are 500,000 patients, each being tested 3‐4 times per year for bladder cancer recurrence. The cost of this monitoring is $2.9 million per year, and is one of the reasons bladder cancer is the most expensive cancer treat. Per capita, the cost is about four times prostate cancer. By identifying high‐risk patients earlier, our diagnostic test would reduce patient monitoring; this test represents a $150 million opportunity.
Negotiating the License. The startup did not have a license to the technology but one of the stipulations of the fellowship was that the company negotiate a license within six months of being awarded. Since RS’s father was a venture capitalist, RS leveraged his expertise to negotiate the license, an excellent learning experience. As RS states:
The Carolina Express License allows university inventors to rapidly establish spinouts. However, the terms involving the payback of universities past expenses involved a sudden payback that is not tied to the funding situation of the company. While this is not a concern for companies that launch with substantial funding, we were concerned that these terms would make it more difficult to attract small seed‐stage investments. I renegotiated those terms to make the license more conducive to today’s funding environment. The new terms automatically manage our payments to the University for royalties, and for past and future filings, regardless of the company’s cash position. We signed this license amicably in July.
Funding. Although the company was going to focus on a cancer diagnostic, given the funding environment, a short-term strategy was developed to use their technology and instrumentation as service business. As RS states:
We have a new technology in a young market, so we knew that we needed to reduce the risk associated with the company before we could attract institutional investment. Reducing risk falls into three areas. First, we can refine our assay to be more streamlined and less expensive. Second, we can generate early revenue and demonstrate market interest. Third, we can raise the visibility of our technology and start explaining why we believe mechanical phenotyping is the “next big thing” in biotech.
Originally, we believed that the best way to accomplish these goals was to productize our prototype system and start selling instruments. I was scared off of this plan by the long development roadmap, sales cycle, and service commitments it implied. Instead, I laid out a service‐based strategy: we will receive specimens from customers and run our assay in‐house. Under this plan the timeline is shorter (12, not 24 months) and the capital requirements smaller ($50k, not $500k) because the sales cycle is shorter, there is no long‐term obligation to our clients, and we can begin selling services to clients using our existing prototype.
As a result of this short term strategy, the company was awarded an internal proof-of-concept award to build an instrument as part of the service business strategy. As of June 2012, the company received an NSF SBIR Shift Award for $400k over two years.
The Innovation Fellowship program also supports a Business Fellow, funded internally. The Business Fellow is analogous to the Technology Fellow in that it taps into young, risk-tolerant individuals with skills necessary to spin a company out of the university. This program is modeled on “entrepreneur-in-residence” programs seen in many venture capital firms. An entrepreneur resides in the firm for six to twelve months looking at deals that come to the firm. If the entrepreneur sees an opportunity, he then leaves to focus full-time on the startup.
Often times, it can be a challenge to successfully recruit an entrepreneur to such a risky, early-stage venture. This program is a necessary step not only educating the next generation of life science entrepreneurs, but also to provide bright young minds an opportunity to create real value and impact.
Business Fellow: Case Study
A UNC alumni and local native, J.S. received his BA in Business Administration from UNC-Chapel Hill and soon thereafter joined Johnson & Johnson. He quickly moved into new positions, speaking to his competency and thirst for knowledge. After gaining this crucial experience, J.S. went on to finish his MBA at Harvard Business School and returned to North Carolina, immediately joined a medical device startup.
Opportunity Assessment. Often the difficulty of spinning technology out of a University is recognizing the product opportunity made possible through the application of the technology. Much research and analysis was needed up front to determine where the opportunity was on campus. J.S. spent months meeting with faculty members in all departments, roaming the halls for the next big idea. As J.S. states:
From the time that I began the Innovation Fellowship, I screened potential opportunities much like most venture capitalists do. I looked for opportunities with significant markets, solid intellectual property, favorable regulatory and reimbursement situations, strong teams, reasonable financing pathways, and attractive opportunities for exit. However, recognizing that I didn’t have an extremely long runway of salary support, I also added an additional screening requirement that technologies needed to be close to actual commercialization.
Venture Formation and Funding. After surveying many technologies, J.S. initially focused on a diagnostics technology which was fairly close to commercialization. In addition, a second technology identified as a backup, for which non-dilutive funding was received for further technology development. As J.S. states:
From that point forward, I evaluated a number of additional technologies, and eventually decided to form a medical diagnostics company around a technology from the Department of Biochemistry and Biophysics. My major accomplishments to date include forming a spinout company around that technology that received an exclusive Carolina Express License from UNC, raising $78,000 of non-dilutive capital, and initiating the company’s first validation studies at Duke University.
Challenges. Many lessons were learned about the approach, communication skills and tact needed to commercialize technology in a university setting. J.S. met with over 100 faculty, staff and students on campus.
Three of the most important things that I have learned during the fellowship are related to how a university setting is different from a company setting. First, I learned that most tasks tend to take longer in a university setting. Second, I learned that there are usually more hurdles to get over and more approvals needed to complete a task at a university. Third, I learned that many university professors are quite cautious when it comes to the subject of commercializing a technology, so it is of utmost importance to have a clear understanding and strong personality fit with all of the professor shareholders before pursuing a commercialization opportunity.
Although I had a basic understanding of these concepts before I accepted this role, I have gained new insight into how important they all are in this process.
Although the science and MBA students represent a resource for talent in launching university startups, many don’t have the real-world experience to be fully effective. Thus, mentoring played a major role in the program. The fellows met on a regular basis with mentors to provide updates on the projects. In addition, they were connected with a number of external business leaders, entrepreneurs, and investors.
There is a paucity of these types of experiential learning opportunities for budding, young entrepreneurs. The university startup space is dominated by technical risk and network-leveraged deals, making it difficult for inexperienced students. The truth is that entrepreneurship is learned by failing, and trying again…and again. Behind every entrepreneurial success story, there is a trail of lessons learned. The Innovation Fellowship program is a great example of how educating and equipping entrepreneurs with a unique skill set can directly impact healthcare and economic development in the Triangle and across North Carolina.