Assessing Start-Up Potential What criteria does the Venture Center use to evaluate start-up ideas?
First, the technology being commercialized should have certain characteristics. It is best if there is a radical versus an incremental difference between this technology and predecessor technologies. The customer value should be very significant, the technology should be in an early stage of development, and the intellectual property protection should be strong.
Certain industries are more friendly to start-ups than others. The industry in which this technology competes should have ‘spin-off friendly’ characteristics that are favorable to new companies: a low level of non-technology assets, a young technology base, and segmented markets with many small firms.
If the industry and technology characteristics are favorable, there are three other major requirements for a successful startup company: world-class technology, experienced management, and cash. The Venture Center assists in bringing together these three requirements for success.
The importance of the team in University start-up companies
The University of Minnesota’s Venture Center focuses primarily on bringing together great University technology with a start-up team that can successfully bring the technology to market. University start-ups founded by a team that involves both the inventor and people with significant industry experience tend to perform better than other university start-ups (Doutriaux and Barker, 1995; Chrisman et al., 1995). Shane (2004) further makes the point by stating University start-ups require people with three types of knowledge:
• Knowledge of how to develop and manage a new company
• Knowledge of the process of product development and production
• Knowledge of the particular market in which the new company will operate.
The Venture Center facilitates the creation of these teams.
University-developed technology is typically in a very early stage of development and needs significant market-based input and improvements before it can be commercialized via a start-up. The role of the University inventor is paramount to the success of any University start-up, but companies need people who have managed new company start-ups, who have close relationships with early stage investors, and have brought similar products to market. University researchers often do not have these experiences or relationships. That’s where the Venture Center comes in.
The Venture Center maintains ongoing knowledge and relationships with sources of early stage capital, venture capital for growth, and proven entrepreneurs who have the capability of successfully forming new companies and taking them to commercial success. We maintain a working knowledge of current terms and conditions in the early-stage capital markets so that the start-up company can obtain the most favorable financing structure and pricing. Our CEO-in-Residence program is designed to allow proven new company CEOs to work with faculty and early-stage technology opportunities for several months prior to actually forming a start-up company. This program is designed to allow faculty to get to know the CEO prior to the need to commit to the start-up, and to allow the CEO in residence to obtain a deep knowledge of the technology and the research team. All of the Venture Center associates are bound by non-disclosure agreements.
10 Must-Answer Questions for Start-Ups Before an invention can be converted into a start-up, these questions must be answered:
1. What is the problem?
2. What is the solution?
3. What are the solution’s features and benefits?
4. What is the value of the benefits and how would you reflect it in your pricing?
5. What are the barriers to entry for this approach?
6. What are the initial markets and size of market?
7. Who are the competitors and what is the Company’s competitive advantage?
8. What are the technology milestones and costs to make the solution work?
9. What are the company milestones and the cost of getting through each one?
10. What are the comparable companies valued at in the market?
Outcome Scenarios This analysis concludes with one of 5 possible outcomes or recommendations, which are:
Start-up Ready: The technology is deemed appropriate for a start-up and we believe that the next step is to start a new company and raise funds to begin the commercialization effort. The Venture Center is ready to begin the effort necessary to refine the business model and business plan, to locate management, and to assist in fundraising.
License Ready: The technology is deemed most appropriately commercialized through a license to a larger firm. The Venture Center will turn this effort over to the Licensing Center, which should start marketing the technology to established companies.
Wait: The University feels the technology can be a commercial success, but substantial additional work needs to be done before it is either start-up ready or license ready.
Waive: The commercial benefits for the technology preclude the University from spending additional time and resources in the commercialization effort. In this case, the University is willing to waive the technology to the inventor to pursue on their own.
License to Existing Start-up: If the Professor has their own connections, has located a CEO with significant business experience and has formed a business plan already, the University can license the technology to the start-up as a joint effort between the Venture Center and the Licensing Center. There must be a sound business plan and funding plan in place. The license goes to the established License Ready (above).
Process for Forming a Start-Up Based on University Innovation If you already have a full formed business plan drafted skip to #3.
1. Submit Start-Up idea to initiate discussion with Venture Center The Idea Sheet is a list of questions that will help determine if your university innovation could be considered for a Venture Center start-up. After you submit a brief summary of the start-up idea and technology it is based on, the Venture Center will arrange an initial meeting to informally discuss your idea. Through these discussions, the Venture Center will help define some of the basic questions that will need to be answered before proceeding with the process. The Venture Center will also discuss what resources they can offer in start-up development. The Idea Sheet is located in Appendix A.
2. Create a presentation on the technology and start-up opportunity During this phase, background information on the real-world market problem that the innovation solves, potential revenue opportunities, and competing technologies is researched and documented. The Venture Center, researcher, potential management team and/or party interested in creating a start-up may all be involved in developing PowerPoint that the succinctly describes the start-up opportunity. A template presentation is located in Appendix B. The Venture Center will review this presentation with the team and may bring in outside experts in order to further develop the business idea.
3. Submit summary of start-up opportunity During this phase, a formal business plan for the start-up company is drafted. If the business opportunity is determined to be of sufficient value to the University of Minnesota, the Venture Center will construct a term sheet to be negotiated during Phase 4. Complete Appendix C and use it as a cover sheet to the business plan for the Venture Center. Appendix D is a sample outline of a business plan.
4. Venture Center will present term sheet During Phase 4, the Venture Center will work with the Licensing Center to determine mutually agreeable licensing terms that provide a sufficient equity return to the University, while ensuring the maximum opportunity for a successful start-up. The Venture Center will then present a term sheet to the start-up company. This term sheet will contain a capitalization table outlining the equity distribution, the licensing terms, royalty payments and performance milestones. The goal of the Venture Center’s term sheet will be to provide an equitable framework for a financial return to the University, but will be designed to not stifle the Company’s opportunity to raise capital or expand the business.
5. Negotiations of licensing terms During this phase the Venture Center will work with your company to finalize the terms of the agreement. The next section provides an example equity structure for a start-up company.
6. Completion of Deal At the completion of the deal the start-up company is formed. The Venture Center may or may not take a seat on the start-up company’s board of directors. The Venture Center will monitor the post-license issues and equity issues for the University of Minnesota.