By Margot Carmichael Lester

In the fifth of a series of articles on technology transfer, Larta VOX looks at the ways universities are leveraging their intellectual property to create companies, products and profits.

Thirty years ago in a University of California at San Francisco laboratory, biochemist Herbert Boyer and geneticist Stanley Cohen undertook groundbreaking work in the field of recombinant DNA (rDNA), which involves creating a new DNA molecule by joining DNA segments from different sources. The commercial applications of this innovative technology were huge; rDNA could be used in disease diagnosis, gene therapy, vaccines/drug creation and crop development.

Venture capitalist Robert Swanson saw the promise and joined Boyer in founding Genentech in 1976, the first company to clone human insulin and human growth hormone. From that UCSF lab grew a company with a current market capitalization of $45 billion.

That remarkable success set the stage for university-based technology transfer, a burgeoning field that takes innovations in information and biological technology from the campus to the commercial sector.

"Good technology potentially leads to good products," says Dana Warren, a partner with Bingham McCutchen LLP who specializes in corporate and securities law. "Taking technology out of the university environment and into the commercial one is crucial to keeping the product pipeline producing."

But, he admits, not every university technology transfer office has the vision to commercialize the next killer app or revolutionary biological.

Beating the Bureaucracy

"There is a remarkably different approach to the process from different institutions," says Warren, who has advised several clients on technology transfer deals. "There are places where they are really trying, but a lot of time the technology transfer office is very protective and has issues about letting any intellectual property go."

This results in some sponsoring organizations demanding outrageous equity stakes in ventures or putting exceedingly high royalty fees on licensing.

"I've had experiences with certain public universities where our advice has been 'it's very important we never have to get a license from this state,'" Warren says. "If the approach is not very flexible, it can be a deal breaker."

In other cases, the officers overseeing the commercialization process don't have the business acumen or experience to deal with all the legal and financial challenges.

"These offices are seldom staffed with experienced entrepreneurs or individuals with private-sector commercialization experience; they instead employ university administrative personnel who receive mere on-the-job training," notes Carl Schramm, president and chief executive officer of the Ewing Marion Kauffman Foundation. "Tech transfer officers perceive their role as a service to the university, but there also are increasing expectations that these offices become not only profit centers for the university, but also sources for local economic development."

Still, most big-name universities and university systems realize that to play in the business world, they have to think more like denizens of the corner office than the ivory tower.

"Now leading universities, like those in the Research Triangle, have heads of tech transfer and vice chancellors over economic development that are taking it to the next level and building company-creating machines, leveraging the intellectual property and the brainpower of the universities to create new ventures and jobs," says Michael Zapata III, interim chief executive officer and chairman of ArrayXpress.

The company licensed its technology from North Carolina State University and provides design to analysis for the genomic, proteomic and chemical analysis tools on microchips. The company already has customers.

"The last several years have been about flushing out the bureaucracy," says Zapata, who was a technology transfer officer for North Carolina State University before founding ArrayXpress. "Now it is about growing entrepreneurs. The time is right for aspiring technologists."

Especially for those in the life sciences. "The promise of tech transfer in the life sciences arena is huge," says Malcolm Kendall, a former biotech venture capitalist based in Chapel Hill, North Carolina. "It is one of the primary sources for new technology in the life science industry."

Kendall says two key factors are driving the popularity of life science tech transfer: a significant number of NIH grants over the last 10 to 15 years and pharmaceutical companies focused more on development than research. "This is not going to change," he asserts.

Creating a New Company

"The entrepreneurial formula is: good ideas plus good people plus capital equals the potential for real companies," Kendall says. "Tech transfer is a key part of this process."

Universities can license their technology to existing companies or to a start-up. Consider Cal Tech, which executes 40 to 50 license and option agreements a year with partners ranging from Fortune 500 companies to unknown emerging ventures.

"If given the choice between a start-up or a large company, we believe start-ups are always better," says Rich Wolf, assistant director of Cal Tech's Technology Transfer Office. He likes smaller companies because they're more likely to actually use the technology to develop new products and solutions. "Large companies typically have a variety of technology they're exploring at any time. Small companies are focused on one."

Cal Tech takes equity in every start-up. Wolf believes this makes the most sense because:

· It relieves the burden of cash on the company. "We take no upfront fees, though we might take a small royalty," he says. "That makes it easier for the company."

· It provides better liquidity. The university can cash out of equity - sometimes it will never see a royalty payment. "Maybe they develop products beyond the license or never develop a product at all," Wolf notes.
· It helps management. Taking a small equity stake from the start takes the pressure off management to make an immediate hit. "They know that success in this particular venture is not important," he explains. "We all know the technology will eventually hit and our support early will pay off later."
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The Founding Team

Investors agree that one of the biggest challenges to starting a new company is what to do with the scientific founders. Should they join the company or remain in the lab?

"My bias, in most cases, is that they stay in the lab with a sponsored research agreement that provides support for the current technology and access to new technology," Kendall says. "A research-focused academic does not always make the transition to a product development and commercialization mindset If they do join the company, or are already ensconced before you invest, you have to make sure that roles are clearly defined."

That's how it worked at WaveStream, a spinout from CalTech that designs and manufactures high-power solid-state amplifiers for military and commercial broadband communications, radar and imaging. One of the West Covina, California-based company's scientific founders, Michael DeLisio, had never worked in private enterprise.

"Wavestream was an opportunity to commercialize technology that I had been researching for 10 years, and to work with a group of people that I knew, liked and respected," says DeLisio, who serves as the company's chief technical officer. "To that point I'd spent all of my adult life in school of one form or another."

The other founder, Chad Deckman, has worked in research for companies such as Hewlett Packard and IBM as well as in university research labs. Yet even he found the transition a bit challenging.

"The most salient change was the usual difference between a purely research environment that has relatively high tolerance for risk, and a very cost-sensitive industrial environment that hence has relatively low tolerance for risk," Deckman explains. "In practice, all that did was constrain my design approaches to somewhat better known technologies rather than completely new approaches."

To leverage the expertise of the founders, investors recruited Chris Branscum as CEO and director of the two-year-old company. Branscum was president and CEO of Repeater Technologies, a manufacturer of cellular and PCS infrastructure equipment, and served as managing partner of Arthur Young & Company's (now Ernst & Young) Tax and Entrepreneurial Services Group.

"CEOs are along for the ride," he said. WaveStream has 12 employees - nine of them engineers. Yet Branscum says the concern over academics in start-ups is overplayed, as least in his experience. "In any venture you might have the random eccentric that's hard to handle, but I haven't experienced that. My team has a great work ethic, so I just do my level best to put people in a position to be successful and to give them the resources and freedom to do that."

Read Government Funding Spurs Private Innovation from the November 3, 2003 issue of Larta VOX.
Read Money Talks, Education Walks? from the October 27, 2003 issue of Larta VOX.
Read The Promise of Technology Transfer from the October 20, 2003 issue of Larta VOX.
Read Tech Transfer Q&A with Brian Atwood from the October 13, 2003 issue of Larta VOX.
Read Making Knowledge Accessible to All from the September 8, 2003 issue of Larta VOX.
Read The Commercialization of Higher Education from the September 1, 2003 issue of Larta VOX.
Read Technology Treasure If You Know Where to Dig from the August 4th issue of Larta VOX.
Go to the Technology Transfer Section of Larta's Research Archive

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