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Venture Capital Considerations for University Tech Transfer Offices

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Strategic/Corporate Investors -- looking for technology that fits into their strategic plan ... Investor due diligence will reward diligence and best practices WRT ... – PowerPoint PPT presentation

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Title: Venture Capital Considerations for University Tech Transfer Offices


1
Venture CapitalConsiderations for University
Tech Transfer Offices
  • Presented by
  • Gene Schleppenbach and Mark Catan
  • Miles Stockbridge P.C.
  • and
  • Mark Frantz
  • RedShift Ventures, Inc.

2
Understand the Sources of Funding
  • Many different sources of financing
  • Venture capital
  • Angels professional and friends family
  • Federal government (various grant programs SBIR
    and STTR)
  • State and local government economic development
    programs
  • Strategic investors (established companies in the
    industry)
  • Important to understand the investment objectives
    of each

3
Who has the and at What Stage?
  • Stages of Venture Capital
  • Know when and under what circumstances venture
    capital is a realistic possibility.
  • Seed (100K-1 million) -- typically used for
    product (alpha and earlier) and BPlan development
  • Early Stage -- Series A (1 - 5 million) --
    product needs to be developed (beta or beyond),
    solid BPlan, core management team, and some
    significant interest from a player in the target
    industry
  • Expansion Capital (5 - 15 million) -- need to
    have the product fully developed, proof of market
    (meaningful sale to a player in the market),
    solid management team and B Plan

4
  • Venture Economics
  • Most venture funds have a 10-12 year target life
    cycle, which shapes its receptivity to new
    investment opportunities
  • Early stage venture funds strive to find 1-2
    investment homeruns on each deal, given the
    high betas on outcomes which is different from
    investment objectives of Angels and corporate
    investors/licensees
  • Most funds look to earn at least gross annual
    returns in excess of thirty percent (30) over
    their term (approximately 22.5 annual net
    return)
  • Most funds are almost fully committed within
    three - five years
  • The evaluation analysis is keyed off of expected
    investment return (multiples on amount invested
    in the range of at least 5x to 20x)

5
  • Valuation Considerations
  • The valuation that a company receives includes
    many considerations
  • Whats been accomplished to date
  • The long-term potential of the business
  • The amount of money in this round, which is
    typically determined based on the funding needed
    to achieve targeted milestones
  • The anticipated pre-money valuation of the
    company at the next round assuming increased
    valuation based upon application of proceeds
    invested in current round of financing
  • The number of subsequent rounds required until
    liquidity event (IPO or sale, including the
    likely amount of each round)
  • Because each deal is hopefully unique,
    comparables are of limited utility

6
  • What do VCs Look For?
  • A compelling product or service (preferably
    paradigm shifting) in a new, high-growth market
  • A clear path to commercialization go to market
    strategy
  • Product at beta stage or beyond, with initial
    customer testing or, better, customer purchase
  • Compelling unmet need that product or service
    meets
  • Significant advantage to market or barriers to
    entry a strong IP position (both freedom to
    operate and power to exclude) is very helpful and
    a big differentiator

7
  • Financing Pre-VC
  • Self finance as much as possible -- not even
    friends and family, much less professional
    angels, will invest if you do
  • not have a well conceive idea and plan
  • Fiends/Family/Casual Angels make sure they
  • understand the risk, properly document and dont
    over
  • Value
  • Professional Angels harder to find professional
    angels
  • they understand they are a bridge to early stage
    VC, so
  • need to conclude VC fundable. Rarely take
    common.

8
  • Financing Pre-VC (contd)
  • Federal Sources
  • Government sponsored VCs (In-Q-Tel OnPoint)
    similar to strategic partners
  • SBIR/STTR
  • Phase I (100K 6 months basic RD/feasibility)
  • Phase II (up to 750K (sometimes higher at NIH
    for drug dev.) 12-18 months (3 years for drug
    dev) proof of concept/prototype)
  • Phase III (commercialization previously no
    money and not much help changing landscape)

9
  • Financing Pre-VC (contd)
  • State/Local many states have seed-level
    financing
  • through economic development programs
  • Strategic/Corporate Investors -- looking for
    technology that fits into their strategic plan

10
  • Do Your Own Diligence on VCs
  • Differing stages of investment focus
  • Different industry focuses
  • Geographic considerations
  • Management style -- active or passive management
  • Competing companies in their portfolio?
  • Personalities compatible?
  • Strong syndicate to help with follow-on rounds?
  • Help with distribution channels/sales and
    executive recruitment?

11
Avoid Start-Up Pitfalls
  • Do Not Create Hurdles to Investment
  • Appropriately document equity commitments to
    co-founders or promoters involved in company
    formation and/or financing
  • Avoid unconventional corporate or capital
    structures or insure convertible to standard
    structures
  • Build management team with appropriate critical
    skill sets understand/acknowledge areas where
    there are holes and evolving needs as the company
    grows
  • Avoid over/under valuing at seed round
    convertible debt can help
  • Bottom lineget good people in and around the
    business and keep bad/not good enough people away
    from the business dont accept half solutions

12
IP Essential Basics
  • Investor due diligence will reward diligence and
    best practices WRT
  • Title to IP (all required assignments in-hand)
  • Patenting and defensive publishing directed to
    product ecosystem
  • Freedom to operate including access to essential
    technology and materiel, particularly in view of
    rights of prior sponsors
  • Practical knowledge of prior art and where the
    most important patent opportunities exist (the
    white space)
  • An IP strategy Processes for using IP
    effectively
  • IP clauses and other contractual restrictions on
    principal personnel
  • Access to and ability to transfer non-IP
    intangible assets such as know-how, consulting
    agreements, relationships, special knowledge and
    business processes.
  • Effective IP position reduces risk. Particularly
    important in view of fact that Universities will
    not permit strong representations and warranties
    or indemnification.

13
Patent early. Patent often.
14
IP Tendency to focus on research
15
Product Ecosystem
16
Its the value proposition (stupid)
17
Its the value proposition (stupid)
18
Values patents have
19
Venture Terms
  • The Term Sheet
  • Obviously a key hurdle
  • What does it take to get there?
  • Diligence on the technology, the potential
    market, the team, the business plan, projections,
    etc.
  • Partnership meetings/presentations
  • Building a syndicate

20
Investment Terms
  • Valuation/Price per Share/Percentage of the
    Company
  • Type of Security
  • Preferred Stock
  • Why Delaware?
  • Anti-dilution
  • Liquidation Preference
  • Dividends
  • Conversion

21
Investment Terms
  • Preemptive Rights - Pay to Play
  • Voting Rights
  • amends to charter or bylaws
  • liquidation, dissolution
  • increase in authorized existing preferred
  • creating any new class of preferred on parity
    with or senior to existing preferred
  • merger, consolidation, reorganization, sale of
    all or substantially all of assets
  • redemptions
  • declaring or paying dividends

22
Investment Terms
  • Redemption
  • Registration Rights
  • - demand, piggy-back, short-form
  • Stockholders Voting Agreement

23
Investment Terms
  • Investor Rights Agreement
  • Stockholder Restrictions/Obligations
  • restriction on transfer of common
  • right of first refusal/co-sale
  • drag rights
  • Affirmative Covenants/Protective Provisions
  • Information Rights financials (budget,
    quarterly, annual) material filings (e.g., with
    regulatory agencies) law suits notices of
    defaults, etc.
  • Board seats observer rights
    compensation/reimbursement/DO committees
    (comp/audit/exec.)
  • Employees IP Assignment, non-compete and
    non-disclosure agreements standard terms of
    options (unless Preferred Director approval)

24
Investment Terms
  • Negative Covenants/Protective Provisions
  • Expenditures/commitments re same
  • Indebtedness
  • Loans
  • Hiring/firing key executives or key employees
  • Compensation levels
  • Changing business
  • Changing locations

25
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