Startup incubation goes in-house with UPenn’s UPStart program

The economic downturn had a significant impact on the US economy, and the technology transfer industry was no exception.  With licensing revenues declining and VCs largely sitting on the sidelines, many tech transfer offices decided to take action.  This shift in practice, what I would refer to as the transition from tech transfer version 1.0 to version 2.0, could have a significant impact on how universities view their role in the incubation of university technologies and formation of startup companies. 

Becoming a facilitator of early stage company formation and incubation is a departure from the core competency of tech transfer offices, which had traditionally been to license technologies.  While some universities have historically been very active in startup formation and mentoring, such as Yale University’s New Venture program, other universities, including Columbia University’s Venture Lab, Georgia Tech’s VentureLab, USC’s Stevens Institute for Innovation, and the University of Utah’s Venture Bench program, are just starting to ramp up their efforts.  A common thread among the startup-oriented tech offices is that they have dedicated venture teams focused on taking ideas from the bench and making them “investment ready”. 

One of the more innovative programs I have been introduced to is the UPStart program at the University of Pennsylvania’s Center for Technology Transfer (CTT). 

With an aggregate research budget just south of a billion dollars, Penn creates a lot of great early stage technologies.  However, Penn has not previously had a method for assisting in the commercialization of these technologies through entrepreneurial ventures.  As early stage investing, particularly on the life science side, has decreased over the last couple of years, there is now an increased need for proof of concept programs to support commercial validation studies of these early stage technologies.  To address this fundamental issue, Penn’s Center for Technology Transfer created the UPStart program.

Being a non-profit institution, there are many challenges associated with having a program that essentially facilitates the formation of private startup companies.  The CTT staff, spearheaded by the UPStart group, has done a fantastic job to create a structure that enables CTT to fully support the creation of startup companies while playing within the rules and regulations that typically govern a large academic research institution.

The main thrust of UPStart is to mature technologies to a point where they can attract private investment or be licensed to a corporate partner.  To do that, UPStart offers a robust service offering to aspiring entrepreneurial faculty members and their co-founders.  

1. Company Formation Agreement:  Outlines the rules and responsibilities for both parties – scientific founder and UPStart – relating to the development and commercialization of a technology.  UPStart does take board seats at the time of company formation but upon venture or corporate investment, UPStart will roll off the board at the request of the investors.
2. Clawback: UPStart reserves the right to pull the plug on the startup project should the founders fail to abide by the Company Formation Agreement.  This is an important clause as it keeps everyone honest and dissuades those who might improperly use or develop the technologies.
3. LLC Formation: UPStart forms a Delaware LLC through an agent.
4. File Registrations:  All companies need to file forms with multiple agencies in order to do business with the government.  UPStart will file various forms – EIN, DUNS #, CCR.gov, grants.gov – for the startups so that the founding team members can do what they do best, develop their technology.
5. Bank Account: Open no-fee company bank accounts with PNC Bank.
6. Marketing Materials: Help the founders develop an executive summary, science overview, and VC/corporate pitch deck.
7. IP Strategy: Work with outside counsel.
8. Entrepreneur Recruitment: UPStart maintains an active database of entrepreneurs that they match with the faculty inventor and his or her promising technologies.
9. Grant Writing: UPStart has partnered with a local incubator, the University City Science Center, to provide SBIR grant writing assistance as well as future incubation space for startups.
10. Value-added services: UPStart works with a consortium of accountants, attorneys, business advisors, regulatory consultants, etc…that are willing to forgo payment or accrue payment until the company is funded in return for the opportunity to build a relationship with the numerous UPstart companies.

In creating the UPStart program, there were several challenges that CTT needed to address.  Below is a quick summary of some of the challenges the program faced and the creative solutions that UPStart came up with:

• Private use: Universities are typically limited in the amount of private (i.e. for profit) work that can be performed in their labs.  To avoid being counted against the university’s private use quota, UPStart company meetings are held at the CTT office, which is in an off-campus building.
• Fiduciary duty: Being a Delaware LLC, UPStart is able to define the fiduciary duties of directors, which states that the UPStart directors are first loyal to the university, and then second to the company.  Penn obviously wants its startups to succeed, but at the end of the day the UPStart directors are university employees and are therefore university proxies during company negotiations. 

• SBIR Requirements: While the faculty inventor owns 51% of the equity at the time of filing an SBIR application (which satisfies the grant criteria), the inventor’s ownership will be diluted by the time the grant is awarded with the hiring of a company principal investigator/business manager. The technology can then be optioned or licensed to the company since the inventor is no longer a majority owner.   
• Conflict of interest: The university prefers to not have its faculty in a fiduciary role for the company. At the time of licensing, the company is not expected to have the inventor be a majority owner, be on the management team, or be on the board of the company.  Instead, the inventor acts as the scientific advisor to the company and assists in directing the commercial research toward product development. 

“Not a license, a partnership” 

It is too soon to tell if the UPStart program will be a success, but early signs point to the program having some traction with the VC and corporate investment communities (6 deals closed to date).  Success may ultimately be judged based upon the ability of the program to create successful startups that generate revenue for the university.  However, just like a venture fund, the program runs the risk that it could do everything right and still not provide the financial returns to justify the management costs. 

I would argue that critics should not gauge UPStart’s success, or any other startup creation group within tech transfer offices, by revenue alone.  In evaluating the success of such programs, I would encourage universities to employ a basket of metrics such as the increased number of invention disclosures by faculty members that would not have done so otherwise, the recruitment and retention of key faculty members, and the benefits to the local economy through the creation of high quality jobs.  Incorporating such metrics provides a better snapshot of the overall value that venture creation programs produce for universities.

In tech transfer version 2.0, UPStart and similar programs will help better facilitate technology transfer and promote the development and commercialization of technologies that can improve the lives of mankind.

Eli Lilly Acquires OUP Portfolio Company

Eli Lilly and Company today announced that it has signed a definitive merger agreement to acquire Avid Radiopharmaceuticals, Inc., a privately held company developing novel molecular imaging compounds intended for the detection and monitoring of chronic human diseases. Avid’s lead program in development is florbetapir F 18 (18F-AV-45), a molecular imaging agent under investigation for detecting the presence of amyloid plaque in the brain. Beta-amyloid plaque is a defining pathology of Alzheimer’s disease. A marketing application for florbetapir has recently been submitted to the U.S. Food and Drug Administration (FDA). The acquisition of Avid also provides Lilly with a diagnostics development platform covering several disease areas, including Parkinson’s disease and diabetes.