Is the Venture Capital model broken?

There is (sometimes) a love-hate relationship between entrepreneurs and investors. In fact there is a recurring message that Venture Capital (VC) does not provide an answer to the needs of many young start-ups. I will not enter that debate here as I do not have the answer. But as I recently read four different articles / reports where the current situation of venture capital is analyzed, I hope this post will be helpful to understand why VC is debated so much. These reports are:
Lessons from Twenty Years of the Kauffman Foundation’s Investments in Venture Capital Funds (published in May 2012)
Emergent models of financial intermediation for innovative companies : from venture capital to crowdinvesting platforms (publised in 2014)
Venture Capital Disrupts Itself: Breaking the Concentration Curse (published in November 2015)
Why the Unicorn Financing Market Just Became Dangerous…For All Involved, published in April 2016.

The Kauffman report

The Kauffman foundation explained in 2012 that the returns of venture capital have not been as good in the last 10 years as they were in the 80s and 90s. The reports also shows something which is quite well-known I think: the VC “industry” is much bigger than in the 90s, but with fewer funds. The explanation is simple: individual funds have grown from $100M to $1B+… The conclusion of the Kauffman foundation is that funds of funds, pension funds, limited partners (LPs) should be careful about where and how they invest in venture capital. Here are some graphs provided in the study.

VC2016-2-VCsize
The VC industry according to the Kauffman foundation

VC2016-1-IRRs
The VC performance according to the Kauffman foundation

In particular, you may see that IRR is a tricky measure as it changes over time (from peak value to final value) during the fund life. The Kauffamn suggests the following:
– Invest in VC funds of less than $400 million with a history of consistently high public market equivalent (PME) performance, and in which GPs commit at least 5 percent of capital;
– Invest directly in a small portfolio of new companies, without being saddled by high fees and carry;
– Co-invest in later-round deals side-by-side with seasoned investors;
– Move a portion of capital invested in VC into the public markets. There are not enough strong VC investors with above-market returns to absorb even our limited investment capital.

The Cambridge Associates report

Cambridge Associates (CA) does not show a very different situation, i.e. there are indeed more bigger funds and a slightly global degraded performance. But CA also claims that the VC performance is not concentrated in a small number of high profile winners. Some elements of information first:

VC2016-3-VCgainsThe VC gains according to Cambridge Associates

VC2016-4-VCfund sizeThe VC gains vs. fund size according to Cambridge Associates

Cambridge Associates is not saying the VC world is doing OK, but that the increase in fund size has an impact on the investment dynamics. On the performance, the next figure (from another report) illustrates again the fact that performance may indeed be an issue…

VC2016-5-IRRsThe VC performance according to Cambridge Associates

Bill Curley about unicorns

Bill Gurley is one of the top Silicon Valley VCs. So if he has something to say about the VC crisis, we should listen! No graph in his analysis, but a scary conclusion:

The reason we are all in this mess is because of the excessive amounts of capital that have poured into the VC-backed startup market. This glut of capital has led to (1) record high burn rates, likely 5-10x those of the 1999 timeframe, (2) most companies operating far, far away from profitability, (3) excessively intense competition driven by access to said capital, (4) delayed or non-existent liquidity for employees and investors, and (5) the aforementioned solicitous fundraising practices. More money will not solve any of these problems — it will only contribute to them. The healthiest thing that could possibly happen is a dramatic increase in the real cost of capital and a return to an appreciation for sound business execution.

The crowdinvesting report

So when I read Victoriya Salomon’s report about new financing platforms, I was intrigued. What does she say? “The global venture capital market suffers from unfavourable exit conditions reflected in a drop in the number of VC-backed IPOs and M&As. This trend affects all markets across all regions. In Europe, VC funds have shown less risk appetite by realigning their investment choices on later-stage companies and those already generating revenue. Furthermore, because of the poor performance of many VC funds during the six last years, they struggle to raise new funds, as institutional investors, disappointed by low returns, show a preference for the most successful large funds with a perfect track record. This slowdown particularly affects traditional venture capital investments, while, at the same time, the share of corporate venture capital has significantly increased, exceeding 15% of all venture capital investments by the end of 2012. In Switzerland, the venture capital market has also entered into a phase of decline and is losing ground in the financing of innovation. In fact, Swiss VC companies are suffering from a lack of investment capital and struggle to raise new funds. According to the Swiss Commission for Technology and Innovation, the amount of venture capital invested in Switzerland has shown a disturbing decline of about 40% during the last five years. [Also] venture capital investments in early stage start-ups fell by more than 50% from €161 billion in 2011 to €73 billion in 2012. In contrast, “later stage” participations grew by more than 50% in 2012 reaching €77 billion compared with €34 billion in 2011. While the number of early stage transactions is falling, investment periods are tending to become longer (7 years instead of 4-5) and the capital gain smaller.”

So the analysis is very similar. The VC world has experienced major transformations. The author believes that one solution might be the emergence of new platforms, such as crowdinvesting, which can be described as equity crowdfunding for start-ups. This is indeed an interesting argument. It is a way to scale and extend geographically the business angel activity. Now it could be also that we just need to go back to basics, i.e. less money with smaller funds, investing again like in the 80s and early 90s in less cash spending companies… Whatever the answer, the analysis seems consistent: the VC world has moved in a direction (fewer but bigger funds, in the USA mostly) which may not be good for a world where many more start-ups appear all over the world, not only in Silicon Valley, with relatively modest needs…

So what?

Firsz is all this looked elliptic, not to day cryptic, you should read the reports and articles. They are excellent. Then, in a recent interview; I explained that money is needed, but (too much) money can be dangerous. That is I think the main message… you may read below if you want to have my views…

ER-Fin-Int

“A Good but Potentially Dangerous Idea”
Former venture capitalist, Hervé Lebret is now responsible for Innogrants (seed money) at EPFL.
What do you think of the proposal to create a future Swiss Fund?
This may be a good idea, but only under certain conditions. It must be able to hire talented managers because it is an extremely complex business. This is what Israel did when it established its venture capital funds, it brought in experienced American managers. Without the right people, it’s a recipe for disaster. And the fund must have the freedom to invest anywhere, not only in Switzerland. If you want a fund that only invests in Swiss start-ups, we may only create mediocrity.
Why?
Because no European fund can prosper by investing only in its own country. It’s a matter of scale. Only Silicon Valley has sufficient critical mass. The Californian model of venture capital is to lose money in most investments and make a few homeruns such as Google or Airbnb. So you need to have ten thousand ideas to create a thousand companies, then one hundred will grow, ten will be successful and one become Google or Airbnb. You must be able to create such a success every five years, and Switzerland just does not have the critical mass. And it is dangerous to focus too much on money.
Really?
Yes. Money is a necessary, but not sufficient for success. It requires funds, but also talent, a market, a product and ambition. It is not because we make money available to start-ups that success will come – the other ingredients should also be present. It is true that Switzerland lacks venture capital, but this is not what explains that Google, Apple and Amazon were not born here. This is in my opinion rather a cultural question. We lack ambition and rebellion. And this is the only factor that cannot be decreed by the authorities. Entrepreneurs are satisfied to aim at the creation of a viable firm of modest size, in which they retain control. In Switzerland, the start-ups create fewer jobs than McDonalds. Neil Rimer (note: co-founder of venture capital firm Index Ventures) wrote two years ago: “We and other European investors constantly are looking for world-class projects from Switzerland. I think there are too many projects lacking in ambition and supported artificially by organs – which also lack ambition – that give the feeling that there is sufficient entrepreneurial activity in Switzerland.” I have to agree with him.

CRISPR Start-ups

There are not many weeks, not to say days when you cannot read something new about CRISPR. I have to admit I do not know much about it given my total incompetence in health related matters. But when I heard there was a battle around intellectual property between universities (see Bitter fight over CRISPR patent heats up for example) and that start-ups were already entering the field, to the point that one was already public and another one filing to be, my interest was aroused… So I had a look at 3 of the more visible companies, and you know what… I could build their cap. tables… here they are:

– Editas Medicine
Crisper-Editas

– Intellia Therapeutics
Crisper-Intellia

– Crispr Therapeutics
Crisper-Crispr

What is worth noticing, at least for me? They are young companies (less than 3 years old. they have raised a lot of money, at least $50M. They have very reputable investors: Polaris, Third Rock & Flagship for Editas; Atlas & Orbimed for Intellia; and Versant, NEA, Abingworth & SROne for Crispr Therapeutics. the founders are alreday quite diluted as they all less own than 15% as a group in each. Additional comments welcome!

How to become a hub for startups?

This is the subject that “génialissime” Paul Graham addresses in the speech How to Make Pittsburgh a Startup Hub, a speech he has just published on his blog. I say “génialissime” because every time I read him, I am excited by the simplicity of his messages even if often counter-intuitive. Thus in How to be Silicon Valley?, he said “Few startups happen in Miami, for example, because although it’s full of rich people, it has few nerds. It’s not the kind of place nerds like. Whereas Pittsburgh has the opposite problem: plenty of nerds, but no rich people.” Yet he returned to Pittsburgh to give his recipe, at least paths to become a hub for start-ups.

0*STindQ5-Serw7lGW.
Image borrowed from Zak Slayback

Here are some excerpts that show that everything is cultural so that a city or a university should have above all a friendly and liberal, not to say laissez-faire attitude. “And it’s not as if you have to make painful sacrifices in the meantime. Think about what I’ve suggested you should do. Encourage local restaurants, save old buildings, take advantage of density, make CMU the best, promote tolerance. These are the things that make Pittsburgh good to live in now. All I’m saying is that you should do even more of them.”

And about universities, he adds: “What can CMU do to help Pittsburgh become a startup hub? Be an even better research university. […] Being that kind of talent magnet is the most important contribution universities can make toward making their city a startup hub. In fact it is practically the only contribution they can make. But wait, shouldn’t universities be setting up programs with words like “innovation” and “entrepreneurship” in their names? No, they should not. These kind of things almost always turn out to be disappointments. They’re pursuing the wrong targets. […] And the way to learn about entrepreneurship is to do it, which you can’t in school. I know it may disappoint some administrators to hear that the best thing a university can do to encourage startups is to be a great university. It’s like telling people who want to lose weight that the way to do it is to eat less. […] Universities are great at bringing together founders, but beyond that the best thing they can do is get out of the way. For example, by not claiming ownership of “intellectual property” that students and faculty develop, and by having liberal rules about deferred admission and leaves of absence. […] But if a university really wanted to help its students start startups, the empirical evidence […] suggests the best thing they can do is literally nothing.”

And now a diggression. This article reminded me of the text of another genius of Silicon Valley, Steve Jobs. “[There are] two or three reasons. You have to go back a little in history. I mean this is where the beatnik happened in San Francisco. It is a pretty interesting thing. This is where the hippy movement happened. This is the only place in America where Rock‘n’roll really happened. Right? Most of the bands in this country, Bob Dylan in the 60’s, I mean they all came out of here. I think of Joan Baez to Jefferson Airplane to the Grateful Dead. Everything came out of here, Janis Joplin, Jimmy Hendrix, everybody. Why is that? You’ve also had Stanford and Berkeley, two awesome universities drawing smart people from all over the world and depositing them in this clean, sunny, nice place where there’s a whole bunch of other smart people and pretty good food. And at times a lot of drugs and all of that. So they stayed. There’s a lot of human capital pouring in. Really smart people. People seem pretty bright here relative to the rest of the country. People seem pretty open-minded here relative to the rest of the country. I think it’s just a very unique place and it’s got a track record to prove it and that tends to attract more people. I give a lot of credit to the universities, probably the most credit of anything to Stanford and Berkeley.”

Paul Graham’s latest contribution is a must read. As usual, it is long, provocative, disturbing and totally convincing…

Alexander Grothendieck, 1928 – 2014

What link is there between Andrew Grove (the previous article) and Alexandre Grothendieck? Beyond their common initials, a similar youth – both were born in the communist Eastern Europe they left for a career in the West) and the fact they have become icons of their world, they just represent my two professional passions: startups and mathematics. The comparison stops there, no doubt, but I’ll get back to it.

Two books (both in French) were published in January 2016 about the life of this genius: Alexander Grothendieck – in the footsteps of the last mathematical genius by Philippe Douroux and Algebra – elements of the life of Alexander Grothendieck by Yan Pradeau. If you like mathematics (I should say the mathematical science) or even if you do not like it, read these biographies.

livres_alexandre_grothendieck

I knew as many others about the atypical route of this stateless citizen who became a great figure of mathematics – he received the Fields Medal in 1966 – and then decided to live in seclusion from the world for over 25 years in a small village close to the Pyrenees until his death in 2014. I also have to confess that I knew nothing of his work. Reading these two books shows me that I was not the only one, as Grothendieck had explored lands that few mathematicians could follow. I also found the following stories:
– At age 11, he calculated the circumference of the circle and deduced that π is equal to 3.
– Later, he reconstructed the theory of Lebesgue measure. He was not 20 years old.
– A prime number has his name, 57, who nevertheless is 3 x 19.
Yes, it is worth discovering the life of this illustrious mathematician.

tableau_alexandre_grothendieck

The reason for the connection I made between Grove and Grothendieck is actually quite tenuous. It comes from this quote: “There are only two true visionaries in the history of Silicon Valley. Jobs and Noyce. Their vision was to build great companies … Steve was twenty, un-degreed, some people said unwashed, and he looked like Ho Chi Minh. But he was a bright person then, and is a brighter man now … Phenomenal achievement done by somebody in his very early twenties … Bob was one of those people who could maintain perspective because he was inordinately bright. Steve could not. He was very, very passionate, highly competitive.” Grove was close Noyce in more ways than one, and extremely rational and according to Grove, Noyce was too lax! Grothendieck would be closer to Jobs. A hippie, a passionate individual and also somehow self-taught. Success can come from so diverse personalities.

648x415_uvre-banksy-pres-jungle-calais

Last point in common or perhaps a difference. The migration. Grove became a pure American. Grothendieck was an eternal stateless, despite his French passport. But both show its importance. Silicon Valley is full of migrants. I often talk about this here. We know less that what is called “the French school of mathematics” also has its migrants. If you go to the French wikipedia page of the Fields Medal, you can read:

Ten “Fields medalists’ are former students of the Ecole Normale Superieure: Laurent Schwartz (1950), Jean-Pierre Serre (1954), René Thom (1958), Alain Connes (1982), Pierre-Louis Lions (1994) Jean-Christophe Yoccoz (1994), Laurent Lafforgue (2002), Wendelin Werner (2006), Cédric Villani (2010) and Ngo Bao Chau (2010). This would make “Ulm” the second institution after the ‘Princeton’ winners, if the ranking was the university of origin of the medal and not the place of production. Regarding the country of origin, we arrive at a total of fifteen Fields medalists from French laboratories, which could put France ahead as the formative nations of these eminent mathematicians.

But in addition to Grothendieck, the stateless, Pierre Deligne, Belgian, had his thesis with him, Wendelin Werner was naturalized at the age of 9 years, Ngo Bao Châu the year he received the Fields Medal, after doing all his graduate studies in France, and Artur Avila is Brazilian and French … One could speak of the International of Mathematics, which might not have displeased Alexander Grothendieck.

Andrew S. Grove 1936 – 2016

Andrew Grove died a few days ago. I remember reading is “Only The Paranoid Survive”. I remember that he had an amazing life, at least his first years from his native Hungary until he reached New York.

andrew-grove_2-225x300
Andrew S. Grove was chairman of the board of Intel Corporation from May 1997 to May 2005. He was the company’s chief executive officer from 1987 to 1998 and its president from 1979 to 1997. Ref: Andrew S. Grove 1936 – 2016 (Intel web site)

I also remember he wrote in 1010 an analysis about start-ups which is very profound. So I will quote him again.

It’s our own misplaced faith in the power of startups to create U.S. jobs. Americans love the idea of the guys in the garage inventing something that changes the world. New York Times columnist Thomas L. Friedman recently encapsulated this view in a piece called Start-Ups, Not Bailouts. His argument: Let tired old companies that do commodity manufacturing die if they have to. If Washington really wants to create jobs, he wrote, it should back startups.

Mythical Moment.

Friedman is wrong. Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter. The scaling process is no longer happening in the U.S. And as long as that’s the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs. Scaling used to work well in Silicon Valley. Entrepreneurs came up with an invention. Investors gave them money to build their business. If the founders and their investors were lucky, the company grew and had an initial public offering, which brought in money that financed further growth.

Intel Startup

I am fortunate to have lived through one such example. In 1968, two well-known technologists and their investor friends anted up $3 million to start Intel Corp., making memory chips for the computer industry. From the beginning, we had to figure out how to make our chips in volume. We had to build factories; hire, train and retain employees; establish relationships with suppliers; and sort out a million other things before Intel could become a billion-dollar company. Three years later, it went public and grew to be one of the biggest technology companies in the world. By 1980, which was 10 years after our IPO, about 13,000 people worked for Intel in the U.S. Not far from Intel’s headquarters in Santa Clara, California, other companies developed. Tandem Computers Inc. went through a similar process, then Sun Microsystems Inc., Cisco Systems Inc., Netscape Communications Corp., and on and on. Some companies died along the way or were absorbed by others, but each survivor added to the complex technological ecosystem that came to be called Silicon Valley. As time passed, wages and health-care costs rose in the U.S., and China opened up. American companies discovered they could have their manufacturing and even their engineering done cheaper overseas. When they did so, margins improved. Management was happy, and so were stockholders. Growth continued, even more profitably. But the job machine began sputtering.

U.S. Versus China

Today, manufacturing employment in the U.S. computer industry is about 166,000 — lower than it was before the first personal computer, the MITS Altair 2800, was assembled in 1975. Meanwhile, a very effective computer-manufacturing industry has emerged in Asia, employing about 1.5 million workers — factory employees, engineers and managers. The largest of these companies is Hon Hai Precision Industry Co., also known as Foxconn. The company has grown at an astounding rate, first in Taiwan and later in China. Its revenue last year was $62 billion, larger than Apple Inc., Microsoft Corp., Dell Inc. or Intel. Foxconn employs more than 800,000 people, more than the combined worldwide head count of Apple, Dell, Microsoft, Hewlett-Packard Co., Intel and Sony Corp.

10-to-1 Ratio

Until a recent spate of suicides at Foxconn’s giant factory complex in Shenzhen, China, few Americans had heard of the company. But most know the products it makes: computers for Dell and HP, Nokia Oyj cell phones, Microsoft Xbox 360 consoles, Intel motherboards, and countless other familiar gadgets. Some 250,000 Foxconn employees in southern China produce Apple’s products. Apple, meanwhile, has about 25,000 employees in the U.S. — that means for every Apple worker in the U.S. there are 10 people in China working on iMacs, iPods and iPhones. The same roughly 10-to-1 relationship holds for Dell, disk-drive maker Seagate Technology, and other U.S. tech companies… (more on the Bloomberg article)

A great man has just disappeared.

Start-Up, a culture of innovation

I just published a very short essay. A summary of my activity in the start-up world: “Almost 10 years ago, I wrote a book entitled Start-up, what we may still learn from Silicon Valley. If I had to do a second edition, I don’t think I’d change much despite all the flaws and blunders of the exercise. Yet one morning in February 2016, I had a look at ten years of supporting start-up entrepreneurs and decided to send again old and also new messages to those that the world of innovation and high-tech entrepreneurship puzzles or interests.”

It is also available in French. If you wish to obtain a pdf copy of the books, just send me an email!

Startup-A_culture_of_innovation_Amazon Startup-A_culture_of_innovation_Kindle
Startup-Une_culture_de_l_innovation_Amazon Startup-Une_culture_de_l_innovation_Kindle

Immigrants and Unicorns

Thanks to the a16z weekly newsletter, I just discovered another interesting study about the importance of migrants in the US innovation landscape: Immigrants and the Billion Dollar Startups (in pdf). Here are some key findings:
– 51 percent, or 44 out of 87, of the country’s $1 billion startup companies had at least one immigrant founder.
– 62 of the 87 companies, or 71 percent, had at least one immigrant helping the company grow and innovate.
– immigrant founders have created an average of approximately 760 jobs per company in the United States.
Of course this is limited to the Unicorns, private companies with a rather young history, but these are impressive data.

Immigrants and Billion Dollar Startups

If you have never read anything about the importance of migrants in Silicon Valley, you might also be interested in the work of AnnaLee Saxenian. Now, I copied the data from the study, to add my own comments:

Unicorns_and_migrants

In terms of geography, out of the 44 start-ups, 14 are based in Silicon Valley and 12 in close-by San Francisco.
In terms of education, out of the 60 immigrant founders, 23 have studied in the US universities, including 5 at Stanford and 1 at Berkeley vs. 4 at Harvard and 2 at MIT.
In terms of origin, the study gives the individual countries and I was interested at Europe: 15 come from the European Union vs. 14 from India and 7 from Israel.
Interesting, right?

Two Challenges of Technology Transfer – Part 2, Get to Know Your TTO.

My second post about Technology Transfer (following the one about National Systems) is about the micro-economics of the activity. This is motivated by the very good Keys to the kingdom – subtitled What you need to know about your technology transfer office.

Before summarizing its content, let me remind you about the posts which already cover the topic so you will agree it’s not a new topic for me and I consider it as important:
– University licensing to start-ups in May 2010 (www.startup-book.com/2010/05/04/university-licensing-to-start-ups) followed by
– University licensing to start-ups (Part 2) in June 2010 (www.startup-book.com/2010/06/15/university-licensing-to-start-ups-part-2)
– How much Equity Universities take in Start-ups from IP Licensing? in November 2013 (www.startup-book.com/2013/11/05/how-much-equity-universities-take-in-start-ups-from-ip-licensing)
– Should universities get rich with their spin-offs? in June 205 (www.startup-book.com/2015/06/09/should-universities-get-rich-with-their-spin-offs)

bioe2015

Co-authored by 18 people from Stanford, Oxford, Harvard, the University of California in San Francisco and the University College London, the article describes what should know people interested in getting a license on intellectual property to create a start-up. The paper begins with “As an academic […]entrepreneur, you will face many challenges” and the second paragraph follows with “In addition, you will most likely have to negotiate with your university’s technology transfer office (TTO) to license the intellectual property (IP) related to your research”.

What are these challenges related to TTO? they are written in the article in bold fonts as follows: Overcoming information asymmetries – Long negotiations – Inexperience – Lack of funding – Conflict of interest rules – Experienced legal counsel. This means that as a future entrepreneur, you should be prepared and ideally be knowledgeable about these.

The challenges

The main challenge seems to be the administrative complexity and opacity (page 1), including confidentiality of contracts, which makes it difficult for outside observers to understand fair market terms (page 1 again). In the end, they nearly conclude with: “Indeed, even for the universities for whom we have data regarding equity policies, it was often hidden deep within a jumble of legalese. To that end we encourage universities and research institutes receiving public monies to be fully transparent in their equity and royalty policies, and not use these information asymmetries as a bargaining advantage against fledgling […]entrepreneurs.”

On page 2, I note:
– A negotiation may be long (6-12 months, even 18 months) and one way to make it short is to take the proposed terms.
– A way to mitigate inexperience is by “preparing an adequate business plan or strategy for your IP before approaching your TTO” or by “bringing aboard team members with prior experience in […] commercialization to improve your team’s credibility”.
Lack of funding can be partially solved by signing “license option agreements”.
Conflict of interest rules “exist to prevent academics from playing both sides of a technology licensing deal or devoting too much time to nonacademic obligations”. Furthermore, “TTOs represent the interests of the university (not the academic), yet the academic is technically an employee of the university. “Our policy is to never negotiate directly with the faculty,” says a US-based TTO representative”.
– Experienced legal counsel is advised for assessing the quality of the IP but also because “[…]entrepreneurs often fail to appreciate the opportunity cost to the TTO in outlicensing. If a technology is licensed to an ineffective team (particularly with an exclusive license), the university forgoes any success or revenue it may have received from licensing the technology to a better organized industry partner. Moreover, universities have limited resources and manpower to protect IP, and, for this reason, prefer to license technology to teams they believe are well prepared to commercialize it.”

The equity deal terms

“Perhaps the most striking difference between the United States and United Kingdom is seen with equity deal terms. In the United Kingdom, a typical licensing deal is a rarely negotiable 50:50 split between the university and the academic […]entrepreneur, whereas US interviewees often reported universities taking a 5–10% negotiable equity share.”

You now understand why I said I was not convinced in my previous post about taking the UK as a reference. The US practice shows space for debate. You may check again my article from November 2013, where you will see that a typical deal is either 10% at creation or 5% after significant funding. Very rarely more.

Again the authors mention “US founders often do not realize that some deal terms are negotiable, including upfront fees, option payments, equity, royalty payments, milestone payments, territories covered, field of use and exclusivity versus nonexclusivity” and “In the UK, licensing deal equity terms are often perceived as being non-negotiable, though this is not always the case. In fact, many institute policies explicitly state that equity terms are negotiable.” This may however make the process lengthier.

On page 4, the authors add: “It is difficult to understand the justification of UK TTOs, such as Oxford’s Isis Innovation, taking 50% of a company’s equity at formation — which after investment can leave the academic entrepreneur with an extremely low stake from the get-go, for what was likely years of work, and will require many years and millions more to develop.” and indeed “The data would suggest that TTOs taking less upfront and leaving more to the academic and investors who will actually carry the idea forward pays off in the long term. Simply put: holding a smaller piece of something is still more valuable than a large piece of nothing.”

The mystery of royalties

“It is also worth noting that while a discussion on royalties was outside the scope of this study, it was clear from our research that many university TTOs “double dip” and take significant equity and royalty.” but again “Perhaps more disquieting than the out-sized equity and royalty stakes that universities are claiming is the lack of transparency from many universities on this critical issue.”

My conclusion: any wannabe entrepreneur should read this short 5-page paper and be prepared to negotiate. I would love as much as the authors that universities and research institutes be fully transparent in their equity and royalty policies, though I am also aware of the possibly weakened position of universities which would do so.

Two Challenges of Technology Transfer – Part 1, the National Systems.

Two documents have led me to describe two types of challenges facing the technology transfer of academic institutions.
– First, at a macro-economic level, the challenge comes from the various possible administrative structures, but also the complexity of the operations. The report Transfert et Valorisation dans le PIA (in French) by Bruno Rostand compares the national policies of Germany and the United Kingdom to that of France.
– Secondly, at the micro-economic level, the journal Nature published the article Keys to the kingdom with the subtitle, What you should know about your technology transfer office. I will come back to this in my next post.

Mise en page 1

The report of Bruno Rostand addresses the challenges that France meets after having established regional structures for technology transfer, the “SATT”. He notes that Germany has built a similar system with its “PVA” in the Länder. In both cases, there is a goal of financial independence which seems difficult to achieve if not unrealistic, despite the existence of public subsidies. In Germany, two of these companies have even filed for bankruptcy in Lower Saxony in 2006 and Berlin in 2013.

Why such difficulties? Because the returns on investment have not been up to the expectations. For example, approximately €10M euros have been invested each year in the form of public funds in Germany, but revenues remained much lower. In addition the regional structure has its limitations, as it is difficult to gain expertise in all areas of technology.

The United Kingdom has a different situation. The state has been a marginal actor and technology transfer was organized either by universities (Cambridge, Oxford, Imperial College) or by private structures close to venture capital (IP group) which organically helped in structuring technology transfer. Through externalization, these organizations have become private organizations, which have become rich in financial and human resources. At Oxford, ISIS employs 80 people for £14.5m in revenue in 2014. Imperial innovation has been publicly traded since 2006, employs 45 people and generated a profit of £27M in 2014. Imperial innovation has expanded its initial base in collaborating with other universities. Finally, the IP Group has agreements with over 15 universities for a profit of £9.5M in 2014. The report shows very different philosophies, whether public or private, with profitability as an end or not, with an obvious entrepreneurial dimension in the UK. if the focus on start-ups is important, this will lead to different structures, including maturation funds and incubators.

The report also shows that a licensing policy and a policy to support the creation of start-ups are very different. Finally, the new TT structures often have the sole responsibility of the development and maturation of IP, while research collaborations with industry remain the responsibility of universities. This separation could be a weakness when the two topics are linked.

A sensitive issue is that of exclusivity that can create tension when TT management is pooled over many universities. Some universities want to maintain some autonomy, especially in areas where the technical competence of the TT structure seems weak to them. Another sensitive issue is that of the structure by region while a transregional structure by field of expertise might be more appropriate. (The report also addresses research partnerships and international cooperation that I will not discuss here.)

In the final part, Rostand shows the complexity of the challenges. One must first define the mission of technology transfer which can be for profit or not. Externalization seems to be a trend in the three countries, but it has its advantages and disadvantages. It also seems that there is a lot of instability and fluctuations in funding cycles, which does not help to make an analysis of the transfer tools. The report also addresses the issue of human resources (types of skills and experience), another subject which may be related to the available resources of these organizations.

The only personal comment I make here is about my slight frustration at not having found in the report (which is extremely informative) an analysis of the US situation. The country of liberalism and private universities have very few external technology transfer structures, let alone for-profit. I have in mind WARF at University of Wisconsin-Madison – www.warf.org) while revenues of TT in the USA are significantly higher than in Europe. The explanation could simply come from a far more dynamic private innovation, regardless of all the systems in place.

Street Art in Florence

There is probably no city in the world without some Street Art. After my discoveries of Banksy, Space Invader all over the world and the Mirror Mosaic in Pully, here are some pictures from Florence.

Florence_.K_1

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Florence_.K_4

Florence_.K_2

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Florence_.K_6

This artist seems to be known via his signature, .K and a couple of other web pages describe his or her work: Exit/Enter and The Elusive “.K”. The next pictures include him again but also famous Clet Abraham who is acting all over the world.

Florence_.K_clet

Here is a little more.

Florence_.K_more

Here is another link of his work in Florence: Florence street sign art by Clet. Finally what about this poetic work?

Florence_Blub