Commercialization Case Study: StArtUp Inc.

By: Jose A. Garcia, President

GarCan Technologies

This is a retrospective look at the challenges of commercialization of university-developed technology. The purpose of this blog is that other innovators and innovation stakeholders may benefit from the story. The analysis is based on a real start up company that will be named StArtUp Inc. for publication purpose. The company was launched to commercialize a platform technology developed at a Canadian University. Our research group generated innovative photonic based technologies, many publications and several patents. The company was born few years back with some private investment and  government grants.  It faced some of the struggles of growing up and then died as many other young companies.

Stage I-Research and Technology Development

The university research group where the company came from was very active and had an excellent reputation in photonic technologies . Through the years, the profile of the group has been very international, researchers, scholars, and students from several parts of the world have come to contribute to the development of these technologies. This was a typical University research group with emphasis on the advancement of knowledge and its dissemination. The group published hundreds of papers in scientific journals and international conferences.  The basic research for the commercialized technology was supported mainly by a provincial granting agency  member of the Ontario Centers of Excellence (OCE).

The Ontario Centers of Excellence mission is to support Ontario University research and its commercialization. Once OCE felt that the technology developed from the research was mature enough they stopped funding basic research and encouraged the commercialization of the technology. Further funding was in the form of technology transfer and market readiness programs. I have to say that this organization has done great work through the years in supporting applied research and its commercialization. I will write more about the innovation support system in Ontario in my next blog. At the time we all were  researcher bussy with experiments, publicationas and proposals. There was little time to get a company going. Fortunately, I had the privilege to get a technology transfer fellowship to dedicate 100 % of my time to work on the initial market assesment and business plan. Looking back, the quantum physics, differential equations and theoretical modelling up to this point was the easy part, the interesting challenges started when trying to go from the lab to the market place.

Stage II-Technology Transfer

Due to the commercialization emphasis at the research stage, the group was encouraged to patent the university-developed technologies. The challenge here was twofold. Patenting is an expensive process and traditional research grants do not always provide for these expenses. Fortunately, some of the OCE grants had provisions for IP protection since they encourage commercialization. The second challenge was more of a culture clash issue. Academics are measured by the number of students they graduate and by the number of refereed number of papers they publish. Often scientists want to let the world know about their novel results as soon as they are found. This, however, put the information and intellectual property in the public domain impeding the IP protection.  Fortunately, the US patent laws allow one year of grace after any publication. This is important since this country is one of the largest markets for commercialization of any product. However, this is not the case in other countries such as Europe or Japan..

With the patents in place, the next step was to transfer the IP to the start up company so that the technology can be productized and commercialized. This was not a light task. There were several stakeholders at this point. The University, the granting agency (OCE), the inventors, the founders, and potential investors (a conditional term sheet was in place at this time). The negotiations to get the investment and satisfy the term sheet were long and cumbersome.  Talks broke down with the VC company. The twin towers fell down in the middle of the process. However when a deal is agood and solid deal, it happens sooner or later. On one side, the University and OCE were trying to maximize the rent for themselves and the inventors. On the other side the start up and its investor trying to maximize the value (for their shareholders) of the IP by not giving up too much equity or royalties. The founders had a leg in both camps.

As previously explained, in Canada there are different rules for IP ownership. In our case the institution had  the 50-50 ownership policy, 50% ownership by University and 50% ownership by the inventors. In addition, the inventors can have the option of getting assignment of the IP for commercialization. The inventors in turn can license or assign to a third party, in this case the start up (StArtUp Inc.). However, the University exerts a significant influence since this licensing or assignment needs the blessing from University Council. After few months, we managed to successfully complete this process and get a vnture capital investment. With over a million in hand and a business plan we were ready to move on and take over the world.

Stage III- New Product Development

Once the company got the IP in place, its assignment, and  investment, it moved out of the university to a university Start up  incubatorwhich is also defunct.

The technology transferred to the company was a platform technology. This means that it had several potential applications.   Others see this as a technology solution looking for a problem to solve. This is a more challenging situation than  adressing a known market need. An environmental scan was performed to select the application with best business potential. Several applications of the technology had been tested at the lab bench level during the research stage. A process similar to the  a selection matrix with criteria such as market size, market pain, technology readiness, potential ROI, was used to select the application and new product to be developed. The company decided that the non-contact and non-destructive testing of semiconductors had the best business prospects. The idea was to establish a beachhead and then expand to the other applications (Products). The product design, prototyping and testing of  the selected application followed.

Once the Company embarked in the product development and commercialization process some challenges in the organization, technology, and financial fronts became apparent. In terms of organization, the talent triangle (business acumen, domain knowledge, and operations) was weak. The executive team (as well as the investors) had limited insight knowledge of the chosen industry. The project managers were accidental (Pinto and Kharbanda, 1995), they came from an R&D background and lacked productizing experience. Academics often lack business skills and do not want to give up their academic’s life (Adkins, Dinah, 2002). The sales and marketing expertise was limited. The company’s team strength was on technology. The team worked for many years developing the technology and were world leaders in the field.

In addition, there were some challenges with productizing the technology. This was the case of research transfer as opposed to technology transfer. Additional R&D had to be done before producing an industry compatible prototype. The product development was done in-house. There were functionality issues, software delays and industry performance that delayed the product development and delivery. There was high uncertainty and it was difficult to apply standard project management techniques (Loch et al., 2006).

Moreover, there were underestimations in terms of financial requirements to bring the product to market. The areas with significant cost overruns were in marketing, prototype development, labour costs, specially subcontractor and consultant costs.  One of the mistakes was to hire a freelance consultant to develop critical aspects of the product as oppossed to an established company with excellent technical support. Moreover, the barriers of entry were higher than anticipated. The team estimated $1.5 million and 2 years would be enough to go to market. In practice, the industry average for this type of product was about 5 years and ~$20 million! As indicated by industry insiders.

After spending the money and not having the product ready for market, the investors got disillusioned and the company abandoned the development of the initial application. With investors already in place and not willing to continue their support, the chances to get additional investment were nil. Attempts to grow organically in other directions were done with limited success. However, once the resources to support a real business operation (IP maintenance, human resources, admin expenses) were depleted the decision was made to fold down StArtUp Inc.

Conclusions

The impact of transferring university-developed technologies to the market place can bring significant benefits the local and national economies. The commercialization process of University developed technologies is a complex and challenging process. Some of the challenges of the commercialization process include the clash of cultures between academic (publishing, academic freedom of expression) and business goals (protection of IP, confidentiality). More often than not, academics often do not wish to give up life in the university to become entrepreneurs.

One way to manage these challenges is to bring outside professional management (complete the talent triangle, innovation consultant) to improve the chances of success of the start-up company. Flexibility in licensing or assignment agreements by the University and granting agencies can significantly improve the chances for commercialization success. University and founders should let go the temptation for biased agreements. A successful start-up company can generate revenue for all the partners, including the university. Close attention should be paid to the research stage, technology transfer, and new product development stage. An honest assessment of the technology development stage should be done to properly mitigate the product development risks. The whole process should be driven from start with the commercialization goal in mind. The research should address a real customer’s pain, maintain IP protection, provide technology transfer support, and keep solid fundamentals (talent, technology, financials) in place for the start up. Most importantly, innovators must recognize as early as possible when to fold it and move on to the next opportunity.

References

Adkins, Dinah. (2002). Winning strategies: Technology commercialization and business incubation. AUTM Manual. Vol. 4, Part 12, Chap. 2, pp. 1.

Loch, C. H., DeMeyer, A., and Pich, M.T. (2006). Managing the unknown. John Wiley & Sons. Hoboken, New Jersey.

Pinto, J. K. and Kharbanda, O. P. (1995, March-April). Lessons for an Accidental

Profession. Business Horizons, Indiana University Kelly School of Business.

June 14th, 2010  in innovation Comments Off on Commercialization Case Study: StArtUp Inc.