The Role of Business Angels, Venture Capital and Financial Institutions in Empowering Micro, Small and Medium Enterprises

1
The Role of Business Angels, Venture Capital and
Financial Institutions in Empowering Micro,
Small and Medium Enterprises
Dr. Guriqbal Singh Jaiya Director Small and
Medium-Sized Enterprises Division World
Intellectual Property Organization
www.wipo.int/sme
2
Stages of Technology Transfer From Research
Support to Economic Growth
More in Tax Revenues
Startups
Federal
State
Research Support
Inventions Disclosure
Patents
New Products Higher Standard of living
Economic Growth
Licenses
Corporate
Endowment
New Jobs
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3 Ms of ENTREPRENEURSHIP
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IS A COMPANY READY?

• Business plan?
• Stage of development of the company
• Type of investment?
• Valuation?
• Management team ready?
• Has the management team enough time and energy
  to raise funds?
• Is the team shaped to talk to investors?
• Does the company know where to go?

5
Positioning for a Capital Injection
PEOPLE

• Strategy
• Business model
• Resourcing
• Target investors

TECHNOLOGY
MARKET
Valuation / Building value
Capital Injection
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Add value before raising capital

• Documentation and Presentation
• Government grants
• Intellectual Property Protection
• RD Partners
• In principle agreements
• Licences
• Customers

7
The Ask and Offer

• Financial Projections
• Business and IP valuation
• Critical negotiating tools
• Justifies assumptions
• Forces in depth research
• Forces decision making
• Makes you strong and confident

8
SOURCES OF START-UP CAPITAL (USA)
OTHERS (3,9)
GOVERNMENT LOANS (1,1)
MORTGAGED PROPERTY (4,0)
VENTURE CAPITALISTS (6,3)
FRIENDS (9,0)
EMPLOYEES / PARTNERS (12,45)
FAMILY MEMBERS (12,9)
BANK LOANS (14,4)
PERSONAL SAVINGS (78,5)
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START-UP CAPITAL

• 25 start with less than 5,000
• 50 start with less than 25,000
• 75 start with less than 75,000
• Less than 5 with 1,000,000 or more

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The Paradox of Access to Finance

• Banks
• Venture Capitalists have money
• Stock Exchange
• But argue that there arent enough good
• projects
• What is a good project?

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A Good Project!

• A good project is a project presenting in the
• eyes of an investor
• acceptable risk profile
• a good perspective of return
• this means
• access to market innovation
• profits

12
Source of High Risks Money

• Which are today these sources ? we may regroup
  these in 3 major groups
• Business Angels we are basically talking here
  about rich private individuals who are ready to
  invest much needed seed capital at a very early
  stage of development of a company, i.e. for new
  and speculative projects. Their role is extremely
  important, when we talk about raising money
  between USD 0.5 and 2 million.
• Venture capital investors these are usually
  private equity funds managed by professionals.
  They seek to identify and finance the rapid
  growth of high potential young firms that embrace
  innovative products, processes or technologies.
  This way, they generate substantial rewards from
  successfully overtaking existing business
  paradigms. Note that very often, traditional
  finance institutions do invest a small part of
  their funds into alternative investments such as
  these V.C. funds.
• Last but not least, Governments The first
  computers, the first commercial jet planes were
  built in the U.S.A. as funded by DoD contracts.
  The U.S.A and Europe have set up specific
  programs to promote new science and technology
  businesses. These are key tools in helping
  scientists to engage into new business ventures.
• N.B A business environment laws, taxes, etc
  which encourages private and commercial investors
  to invest into risk taking ventures is an
  absolute prerequisite.

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Government First U.S.A.

• The U.S. example the Small Business Innovation
  Research program
• SBIR awards take the form of contracts for the
  development of technologies required by agencies
  of the US Government. They provide 100 of the
  funding needed plus a small profit element. The
  norm is USD 850 K for each project. Small
  business can win and run multiple projects in
  parallel. The SBIR analysis below is done for the
  UK Government in an attempt to copy and adapt it
  

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Government First U.S.A.

• The U.S. example the Small Business Innovation
  Research program
• Established in 1982, it is the Worlds largest
  seed capital program for science and technology
  business.
• The law stipulates that 2.5 of all federal
  agencies external RD research must be done
  through SBIR. Furthermore, the US has established
  a very large set of policies to favor small US
  businesses in government procurement.

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Government First The European Union

• The first program in Europe COST an
  international framework for European Co-operation
  in the field of Basic Scientific and Technical
  Research ( www.cost.esf.org )
• Established in 1971, COST allows the
  co-ordination of nationally funded research by
  maximising European synergy and raising the level
  of scientific interaction at the scale of Europe.
  Its budget for the period of 2002-2006 was of 1.5
  Billion Euro.

• COST Actions cover basic and pre-competitive
  research. Ukraine as a Non-COST country took part
  in 15 actions.
• From March 2006, Ukraine initiated consultation
  to discuss potential full membership.

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Government First The European Union
EUREKA an international framework for European
Co-operation in the field of Marketable
Scientific and Technical Research ( www.eureka.be
)

• The primary goal of EUREKA has always been to
  raise the productivity and competitiveness of
  European industry and national economies through
  its bottom-up approach to technological
  innovation. Since its inception in 1985,
  substantial public and private funding has been
  mobilized to support the research and development
  carried out within the EUREKA framework.
• Through its flexible and decentralized Network,
  EUREKA offers project partners rapid access to a
  wealth of knowledge, skills and expertise across
  Europe and facilitates access to national public
  and private funding schemes.
• The internationally recognized EUREKA label adds
  value to a project and gives participants a
  competitive edge in their dealings with
  financial, technical and commercial partners.
• Through a EUREKA project, partners develop new
  technologies for which they agree the
  Intellectual Property Rights and build
  partnerships to penetrate new markets.
• Ukraine was granted full membership on 9 June
  2006. Currently a total of 15 projects have been
  developed with Ukrainian participants for a total
  of 1.1 M. Euro.

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Public Interventions

• Mix of non-financial and financial support
  services

This means that intermediaries have to (1)
provide value-added services and (2) become more
professional
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Finding Innovation Funding Innovation25 April
2007

• Access to finance for West Midlands SMEs
• Patrick Palmer Head of Access to Finance at
  Advantage West Midlands

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What sort of initiatives are there?

• Demand side initiatives
• Provision of better information of what is
  available
• Investment Readiness programmes.
• Supply side initiatives
• Grants to support Research and Development and
  certain Proof of Concept activity
• The Research and Development Tax Credit
• Grants for capital investment in certain areas
• A range of venture capital funds
• Encouragement of Business Angel activity
• Small Firms Loan Guarantee Scheme
• Community Development Finance Institutions.

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Demand Side Actions

• Better information
• www.westmidlandsfinance.com
• Investment Readiness programmes
• Route to Investment (R2i)
• CONNECT / InvoRed.

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R2i

• Provided through the Business Link network and
  funded by Advantage West Midlands and the ERDF
• Comprising four stages
• Increasing Awareness of funding sources
• Education of businesses in funders
  requirements
• Developing applications and businesses to ensure
  they are investment ready (Complex
  Development)
• Post Investment Support.
• Access through Business Link West Midlands
• Telephone [phone]
• website www.businesslinkwm.co.uk

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InvoRed

• A tailored programme delivered across the West
  Midlands that helps technology based businesses
  from pre-incorporation to 2nd or 3rd stage
  funding
• Get Investor-ready
• Understand finance options
• Make the pitch
• Find investment
• Flexible programme with 2 streams

Amber Stream for early stage companies
Green Stream - Fast-track grooming for later
stage companies
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Supply Side Actions - Grants

• DTI Grants operated by AWM Selective Finance for
  Investment in England and Grant for Research and
  Development
• Grants available through Business Link
  Diversification, Accelerate
• Mercia Spinner, Technology Transfer Fund

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Grant for Research and Development

• Grant is available under four categories
• Micro projects
• Research projects
• Development projects
• Exceptional development projects.
• Grant is only available to SMEs
• Available throughout the West Midlands
• AWM have secured ERDF money to support this grant
  scheme.

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Grant for Research and Development
Type of grant Employee numbers Grant as of eligible expenditure Grant range
Micro (small development projects) lt 10 50 2,500 - 20,000
Research lt 50 60 - 65 20,000 - 75,000
Development lt 250 35 - 40 20,000 - 200,000
Exceptional development lt 250 Up to 35 200,000 - 500,000
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Grant for Research and Development

• Key criteria are
• Technologically innovative
• Technical risks and R D challenge
• Commercial potential and market need
• Exploitation prospects
• Management and project team abilities
• Commercial and financial viability
• Intellectual property secure
• Additionality
• Wider aspects sustainability and design
  considerations.

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Technology Transfer Fund

• Available in the Central Technology Belt, but
  extending its area of activity
• Provides proof of concept funding (ranging from
  5k - 25k) for new start-ups and existing SMEs
• Currently confined to medical technologies and
  advanced materials technologies
• Delivered by Birmingham Research and Development
  Ltd with AWM and ERDF funding

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• Objective
• To raise the number of spin-out companies from
  the eight West Midlands Universities.
• Resources
• 16 Business Development Managers
• Provides small grants (up to 50k) to the
  Universities to support patenting, market
  research, business plans, prototyping and interim
  management for designated projects
• Consultancy from Warwick Ventures and Birmingham
  Research and Development Limited (BRDL)
• Related Technology Transfer fund in the Central
  Technology Belt.

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The R D Tax Credit

• An enhanced tax deduction for eligible R D
  costs 125 for large companies, 150 for SMEs
• Claimed through annual Corporation Tax Return
• For SMEs, if no taxable profit after R D Tax
  Credit, can receive a cash payment from HMRC of
  24p for every of eligible cost
• R D for these purposes is Work to resolve
  scientific or technological uncertainty aimed at
  achieving an advance in science or technology
• 1.8 billion of benefit since April 2000, 1
  billion for SMEs and .8 billion for larger
  companies.

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The R D Tax Credit
R D can include R D does not include
Planning the technical aspects of a project Social Science
Work to improve or adapt existing technology Non-technical work (market research, financing, etc)
Work similar to that done in other companies where details of the other work are unknown Work with no real technical challenge (eg copying)
Creating new processes (as well as new products or services) Developing content (eg ringtones, economic models) to be delivered by technology
Failed projects Patenting / PR activity
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Selective Finance for Investment in England

• A grant of 10,000 or more (very exceptionally a
  loan) to a business to help fund new investment
  projects that lead to long term improvements in
  productivity, skills and employment
• Grant is minimum required to enable the project
  to go ahead, but cannot exceed specified of
  capital expenditure
• SFIE is only available in specified areas (but
  throughout the West Midlands for SMEs)
• SFIE projects have to meet a number of specific
  criteria.

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SFI Criteria

• Available in specified areas (Tier 2 for non-SMEs
  and Tier 3 for SMEs)
• Supports capital expenditure (grant can range
  from 10 to 35 of eligible capex depending on
  size and location)
• Must make a difference (Additionality)
• Project must create or safeguard jobs (ave grant
  7,000 per job, but excellent productivity and
  skills scores can justify much more)
• Project and applicant must be viable
• Project should improve productivity
• Project should contribute to improved workforce
  skills
• Project should yield regional and national
  benefits
• Sustainability

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SFIE where can you get it?
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SFIE how much?

• Non-SMEs only in Red (Tier 2) areas.
• SFIE in Tier 3 areas (everywhere except red
  areas) is only available to Small and Medium
  Sized Enterprises
• SFIE in Tier 3 is a maximum of 100,000 (No
  maximum in Tier 2)
• How much see table on right
• In Tier 3 areas project capital expenditure
  should be less than 1,500,000
• SME limits are less than 50 / 250 employees
  turnover less than 10m / 50m or balance sheet
  totals less than 10m / 43m independent.

Large Med Small
Tier 2 excl Coventry 15 25 35
Tier 2 -Coventry 10 20 30
Tier 3 N/a 7.5 15
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Supply side actions an escalator of venture
capital funds and other risk capital
Source Range
Advantage Early Growth Fund (SBS and AWM co-invest 20k - 100k (and potentially to 200k)
Advantage Growth Fund (SBS and EIF private) operated by Midven 20k - 250k (and potentially to 500k)
Advantage Creative Fund (AWM and ERDF) 0 - 250k
Mercia Technology Seed Fund (AWM universities private) 50k - 500k
Advantage Enterprise and Innovation Fund (AWM and ERDF co invest) 500k - 2 million
Advantage Business Angels (costs supported by AWM and ERDF) 10k - 500k
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Supply side actions

• Small Firms Loan Guarantee Scheme
• Provides Government guarantees on loans from
  private sector providers to small firms under 5
  years old with viable business proposals but
  insufficient security for conventional finance
• Loans may range from 5,000 to 250,000 and for
  periods from 2 to 10 years
• Guarantee is for 75 of the loan
• Operated through commercial banks and
  administered by the Small Business Service
• Small less than 200 employees, turnover less
  than 5 million (non-manufacturing 3 million)

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Supply side actions - Loan Funds/Community
Development Finance Institutions (CDFIs)
Source Range Location
Princes Trust -18-30yrs 250-5k Region
Halal Fund non interest based 7.5k -35k Region
Arrow Fund 1k -7.5k Bham Solihull
Aston Reinvestment Trust 2k-50k BhamNSolihull
3b Up to 20k Bham Black Country
Black Country Enterprise Loan Fund Up to 5k Black Country
Black Country Reinvestment Society Up to 50k Black Country
Impetus Marches Rural Reinvestment Trust Up to 50k Rural Marches
North Staffordshire Risk Capital Fund 10-50k North Staffs
Michelin Development Fund 5k Stoke-on-Trent
CoventryWarwickshire Reinvestment Trust Up to 50k Coventry Warks
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Regional Financial and Equity Value Chain

• - Grants - Loans
• - Micro-credits - Loans on trust
• Guarantees - Reimbursable advance
• Proof of concept

Public funding
Entrepreneurs own resources and reinvestment
capacities
Equity
VC
FFF Pre-seed University spin off
IPO
Business Angels
Corporate Venturing, Seed capital
Mezzanine
- Banks - Factoring - Guarantees -
Micro-credits - Leasing - Export credits
Private funding
Prerequisites
Human capital professional fund managers, state
aids experts
Infrastructure business angels networks,
incubators, etc.
Intermediaries advice, investment readiness,
tutorship
Risk taking investors private, public
FFF Family, Friends, Founders BA Business
angels VC Venture capital IPO Initial
Public Offering
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Regions and Access to Finance Case Study of
the Rhône-Alpes (France)
Source RHONE-ALPES CREATION
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Case Study Wales (United Kingdom)

• The region of Wales (UK) re-organised all its
  financial services around
• a single organisation called Finance Wales
  (www.financewales.co.uk)
• to provide the following financial services and
  products
• Community loans amounting to US 10.000 to US
  100.000 for the social economy
• Xenos its business angels network
• Spinout unsecured loans without interest of up
  to US 50.000 for university spinouts
• Venture capital up to US 1.500.000 per
  financial pool and US 3.000.000 in total
• Mezzanine US 20.000 to US 800.000
• Loans from micro-credit of US 2000 to US
  20.000 to loans of up to US 1.200.000

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Roadmap to Financing Options
Founders
Sweat equity
On Spec
Licensing Partnerships IP sale
Federal
Science for Hire
Corporations
Debt
Family, friends
Personal credit banks
Business angels
Equity
Fed,State loans
Venture Capital
Profit
Corporations
Referral network Accountants Attorneys Successful
entrepreneurs, etc
Investment banker
42
Financing Options as a Function ofApplication
Resources Required
A lot

• Spin-off
• Joint venture
• Equity investment

• Joint RD
• Licensing
• Strategic alliance
• Equity investment

REQUIRED

• Bootstrap
• Angel investment
• Debt financing

• Partnerships
• Licensing
• Angel investment

A little
Few
Many
APPLICATIONS
43
THE ENTERPRISE FINANCING PROCESS
44
THE ENTERPRISE FINANCING PROCESS
Efforts made by financiers
Cash flow
Risk
Time
Innovation Seed Capital Funds and Public funding
Private Investors and Business Angels
Transfer
Idea
Start-Up
Market introduction
Growth
Maturity
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THE ENTERPRISE FINANCING PROCESS
RD
Start-up
Early growth
Accelerating growth
Sustaining growth
Maturity growth
Stage in Cycle
Proof of Concept Funding
Seed Corn
First Round
Second Round
Development Capital
Replacement Capital MBO / MBI Development Capital
Type of Funding
Public Sector
Founders, family and friends
Business angels
Source of Funding
Venture capital funds
Corporate venturing
Public listing / IPO
46
Investment Continuum
Founder, friends and family
High
Business Angels
Level of Investment Risk Assumed by Investor
Venture Capitalists
Corporate VC
Equity Markets
Commercial banks
Low
Seed
Start-Up
Early Growth
Established

• Angel market addresses the 500K investment gap
  between love money and serious money

Angel Investing Osnabrugge Robinson
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VENTURE CAPITAL (Formal Informal)

• Institutional operators (formal venture capital)
• Private subjects
• Banks
• Insurance
• Corporate venture capital
• Non-institutional operators
• (informal venture capital)
• Business Angels

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FORMAL AND INFORMAL EQUITY PROVIDERS
Source van Osnabrugge, 1998, p.2
49
FORMAL AND INFORMAL EQUITY PROVIDERS

• VC
• Easy to find via directories
• Your request is only one among many hundred a VC
  receives
• Can often via syndication provide large
  investment
• Thorough and formal due diligence and investment
  process
• Exit route very important

• BA
• Difficult to find
• Request often strong personal involvement
• Limited amount to invest
• Investment decisions often quick and less formal
• Syndication more and more usual
• Exit route less in focus

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BUSINESS ANGEL (BA) - Definition
A Business Angel is a middle aged male with
reasonable net income, personal net worth,
previous start up experience, who makes one
investment a year, usually close to home or
office, prefers to invest in high technology and
manufacturing ventures with an expectation to
sell out in three to five years time. (Kelly and
Hay, 1996) Business angels (informal investors,
independent investors) are investors who provide
risk capital directly to new and growing
businesses in which they have no prior
connection.(Harrison and Mason, 1996)
51
BUSINESS ANGEL (BA)
Attitudes, behaviour and characteristics

• male, rarely female
• successful experience as an entrepreneur or
  manager
• high net worth individual and / or sophisticated
  investor
• have a declared propensity to invest and to risk
  in a start-up firm
• invest their own money (around 50K 250K euro)
  (part of their cash capital 20 - 30 )
• Seeking profit, but also fun (seeking minimum
  20 return)
• are willing to share their managerial skills and
  their enterprise background
• often invest in their region of residence
• make one investment a year
• prefer high-technology and manufacturing
• take a minor participation medium term
  investment
• are willing to wait for an exit for 3-5 years

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ANGELS Success Stories
53
ANGEL STRATEGY
High-growth start-ups new businesses that are
likely to see sales grow to around 1M and
employment to between 10 and 20 people in early
years and export oriented. Key selection criteria
of risk capital investors (generally)

• New products or technological improved products
  in an existing market
• A product or service that can be taken to market
  without further development (i.e., past the
  initial concept stage)
• Creation of new markets
• Companys growth should be expected to be higher
  than market growth
• Increase of market share against competitors
• Superiority regarding competitors

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ANGEL DUE DILIGENCE PROCESS

Technology Technology development Product development Process development Product supply Deliveries Market Marketing Sales PR Competitors IPR
Organization Recruitment Board Network of service suppliers Office Economy / Finance Cash forecast Finance activities Cost estimate Budget
55
Angel Motivations

• Altruistic - willing to provide
• Advice - financial and management
• Contacts - broad range to assist in development
  of venture
• Hands-on Involvement - at basic level, if
  required
• Governance - Board of Directors / Advisors
• Credibility - sends good signals to customers,
  partners investors
• Pragmatic
• Will hand off involvement to next level of
  investors
• Therefore will use same criteria as VC to
  evaluate opportunity
• 57 of companies with angel investment achieve VC
  funding
• 10 of companies with no angels achieve VC funding

Dr. Allan Riding, Carleton University research on
Ottawa angels
56
Types of Business Angels

• Professional
• Doctors, lawyers, accountants
• Micromanagement
• Very hands on with lots of experience, but may be
  toxic
• Enthusiast
• Usually retired, investing is a hobby, little
  value add
• Corporate
• Retired senior managers looking to support their
  investments or create a new senior job for
  themselves
• Entrepreneurial
• Most active, successful entrepreneurs looking to
  diversify portfolio or expand current business

Millions of years of evolution, and thats the
latest model?!?
57
Investing Approaches

• Sprinkle and Sprout Approach
• Investors make many smaller investments
• Bet on management
• Follow-on investment in successful sprouts
• Fewer than 25 of the sprinkled seeds sprout
  successfully

• Heavy Lifting Approach
• Investors make fewer, larger investments
• Understand market
• Active involvement, Advisory Board
• 75 of investees succeed

ONSET Ventures research
58
THE U.S. ENTREPRENEURSHIPSUCCESS STORIES

• FIRST COMPANY WHICH ACHIEVED 100 MILLION SALES
  IN THE FIRST YEAR
• COMPAQ INC.
• PRODUCT PORTABLE PCS
• HEADQUARTERS HOUSTON, TEXAS
• FIRST COMPANY WHICH ACHIEVED 1 BILLION SALES IN
  THREE YEARS
• SUN MICROSYSTEMS INC.
• PRODUCT WORKSTATIONS SOFTWARE
• HEADQUARTERS MOUNTAIN VIEW, CALIFORNIA
• FIRST COMPANY WHICH ACHIEVED 4 BILLION SALES AT
  INITIAL PUBLIC OFFERING
• NETSCAPE COMM. CORP. (BOUGHT BY AOL IN 1999)
• HEADQUARTERS MOUNTAIN VIEW, CA
  www.home.netscape.com

59
A Financial Chronology of Google.com

• Price/share
• (in US )
• 1995 Larry
  Page Sergey Brin_at_Stanford University
• 1997 15 000 US creditcards
• 100 000 US B.A. Andy
  Bechtolstein (Sun Microsystems)
• Patent OTL
• 0.06 fin 1998 960 000 US 3 B.A.
• OTL receives2 of the shares
• 0.50 mai 1999 25 000 000 US
  2 V.C.
• Kleiner Perkins (Sequoia)
• 2.34 2001
  15 000 000 US of which Yahoo
• 85 août 2004
  2 718 281 828
  US I.P.O.
• 295 2005
  4 000 000 000 US Capital increase

NB turnover. 200 000 US 1999
8 000 000 000 US 2006
Source Hervé Lebert
60
Amgen A Capital Venture

• Worlds largest biotech company
• Founded 1980
• 19 million venture capital investment
• 2007 Financial Year
• 14.8 billion revenues
• 4.8 billion profit (before tax)
• Market capitalisation 51 billion

60
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Venture Capital

• Invest in
• Private companies with high growth potential
• Launch, early development, or expansion
• Management buy-outs and buy-ins
• Raise funds for investment from
• Private and public pension funds
• Endowment funds
• Foundations, corporations, wealthy individuals
• Looking for gt5-fold return on investment within 5
  years

61
62
Venture Capital

• Profit and risk sharing (high risk high return)
• 10 to 15 of portfolio will give very high
  returns
• Detailed due diligence
• High level of hand holding
• Ownership and control of business shared
• Patient, flexible financing (5-7 years to exit)
• Highly selective financing importance of deal
  flow

62
63
Exit Strategy

• Exit through the stock exchanges (IPO)
• Sell to another VC company/strategic investor
• Strategic mergers and acquisitions
• Issues in Exit -
• Minimum return expected by VC fund.
• Minimum equity size for public issue

63
64
Venture Capital Drivers
Fund Providers
Venture Capital Firms
Portfolio Companies
Money Limited Partners Pension
Funds Individuals Corporations Ins
Companies Foreign Sources Endowments 80 of
capital gains principal
2.5 Annual Fee General Partners 20 capital
gains IPOs and Mergers Equity
Money Entrepreneurs
Supplier (Cost of Goods Sold)
Customer (Revenue to VC firms)
Management (SGA)
Venture Capital is a money distribution business
where entrepreneurs compete for shelf space and
where only 1 in 100 companies get funded!
65
What VCs are Looking forProducts

• A novel biological or chemical hypothesis
• A well understood mechanism of action
• Proof of principle
• Significant unmet need
• A strong IP position (both freedom to operate and
  power to exclude)
• A strategy for partnering so that the risks
  associated with the timing of FDA approval can be
  passed on to someone else (although clear
  clinical endpoints are a plus)

66
Start-Up PitfallsVenture Capital Nightmares

• Undocumented commitments to co-founders or
  promoters who assist in arranging the initial
  round of financing
• Unconventional corporate or capital structures
• Equity arrangements that are not tied to future
  performance of services everyone must have skin
  in the game
• A management team lacking a critical skill set
• An unwieldy or dysfunctional board of directors

67
Intellectual Property Pitfalls

• All of the investors/institutions have not
  assigned their rights to the university
• The university has not made patent filings on a
  timely basis in relevant markets for the
  technology
• The technologys inventors published their ideas
  prior to the filing of patent applications
• The claims of the filed patent applications are
  not broad enough to cover the intended
  application of the technology
• A non-infringement analysis (freedom to operate)
  has not been done

68
Intellectual Property PitfallsWhy is this so
important?

• Because universities typically provide
• No representations or warranties
• No indemnification
• An as is transfer of rights to the underlying
  intellectual property
• This translates to increased RISK for the venture
  investor

69
Other IP Diligence Traps

• The original sponsor of the research retains
  strings restricting its commercialization
• The new company requires access to biological
  materials, information, or other technologies not
  covered by the license
• Only patents and tangible property can be
  licensed, not know how
• The inventors activities are limited by
  pre-existing, third party consulting agreements

70
Licensing Pitfalls

• Technology licensing arrangements that fail to
  contemplate the most likely business model and
  liquidity event
• Failure to study the universitys income-sharing
  and conflict of interest policies
• Failure to adequately and appropriately
  incentivize the inventors/scientific founders
• Inability to have input on patent prosecution and
  intellectual property strategy for licensed
  technology