3.1 Start-ups

3.1.1 Introduction to Start-ups

Business school theory says that an entrepreneur identifies an unmet consumer need and then sets out to find the way to best fit that need. That is not the sort of entrepreneurship done in Tech Transfer. Instead, scientists’ discoveries almost always drive the search for an unmet consumer (or business) need that can be met by the new discovery. The challenge in this case is ensuring that the size of the opportunity is large enough to justify the investment necessary to turn the technology into market-ready products.

Occasionally, however, an unmet need does drive Tech Transfer entrepreneurship. At Boston University, a biomedical engineer named Ed Damiano wanted to create a better artificial pancreas—essentially a glucose sensor implanted in a Type 1 diabetic patient to sense blood glucose levels and then tell a glucose pump to administer insulin when those levels were elevated. This was not the researcher’s area of expertise—he was motivated because his four-year-old son had just been diagnosed with Type 1 diabetes, and current diabetes management methods were inadequate.

An artificial pancreas had been a major goal of diabetes treatment for many years and billions of dollars had been invested in trying to develop them by sophisticated medical device companies over the years. However, Damiano was undeterred, and developed a promising technology that slowly garnered more and more research funds. Eventually, Damiano was able to collaborate with Dr. Steven Russell, a leading pediatric endocrinologist at Massachusetts General Hospital, who helped test the device in children. The result was the best artificial pancreas so far developed. Along the way, they found that the available formulations of glucagon were too unstable for commercial use, and a glucagon analogue, Zealand Pharma’s dasiglucagon, needed to be developed. The company is carrying out pivotal trials and has received Breakthrough Device designation from the FDA. 

Together, Damiano and Russell founded Beta Bionics, Inc. to develop and get FDA approval for their new device. The Company raised $137 million through June 2021, including $5 million from each of Eli Lilly and Novo Nordisk. It received 510(k) approval in May 2023.

3.1.2 Start-up Triage and Venture Assessment

If it is critical to review the commercial prospects for a new invention before committing to patent it and seek Licensees, then it is exponentially more critical to review the commercial prospects for a new start-up company before committing to go down that path, because the resource demands on the institution and the time demands on the professor to pursue a start-up will be much higher than those for a new invention disclosure. 

For example, at Boston University (BU), a course run by the author had students examine a five-year-old technology to see if they devised the same business idea that the inventors decided to pursue. One of the technologies students examined was a tunable fluorescent dye with an adjustable wavelength. BU’s Photonics Center had started a company to develop the technology into a counterfeit goods detection system—the idea was that a fashion company would print a design on a garment’s label in the invisible fluorescent dye and a retailer getting a shipment would pass garments’ labels under a light tuned to that particular wavelength and see if the design was there. The students’ assessment was not to proceed, noting that the tech was only a partial solution to the counterfeiting problem and that the market wouldn’t pay much for a partial solution. Upon hearing this assessment, the inventing professor stated, “I wish someone had told me this five years ago.”

To avoid such regrets, the author has developed the First Look Venture Assessment (FLVA), essentially a first look at the start-up’s business plan. That business plan will undergo major updates and revisions each time the company seeks to raise a new round of financing or do a corporate partnership, and the company’s board will probably want to see minor updates each new budget year even if additional outside financing is not being raised that year.

The FLVA is similar in concept to (and builds on) the Ten Point Technology Scoring Template discussed in Track I (Entry-level TTP), Topic 6 and the First Look Technology Assessment (FLTA) discussed in Track II (Mid-level TTP), Topic 1: Technology Evaluation (Part 2). It looks at the critical success factors for a start-up and gives a rating to each of them, as is done in the FLTA. The highest weighting is given to the Exit—the prospects for the company to either list its shares on a stock exchange (low probability) or to be bought by another company (much more usual exit mechanism). In other words, the most important consideration before starting a company is to determine how one gets out of it, because only when you can sell the company’s stock to someone else—the public or another company—can the founders, management and investors get a return on their investment of time and funds in the start-up.

3.1.3 Venture Vision Summaries

The Venture Vision Summary (VVS) is like the tech brief in Section 1.9.2 of Track I (Entry-level TTP), Topic 9: Tech Marketing and Finding, Contacting, Securing Potential Licensees, but with a key difference. While both focus on a single invention/IP, the tech brief highlights the licensing opportunity of that IP, whereas the VVS describes the technology as the basis for a company start. It is useful in recruiting entrepreneurs for start-up opportunities, showcasing potential ventures at economic development events, showing to angel investors, and presenting to companies looking to invest in a start-up related to their business. Like the tech brief, the VVS is relatively short, although typically longer than the tech brief, and has a brief description of the invention and the IP. Unlike the tech brief, the VVS also has emphasis on the value proposition (in Section 1.5.7 of Track I (Entry-level TTP), Topic 5: Basic Tech Triage: Assessing and Selecting Disclosures), potential business models, and can include thoughts on a business development plan.

3.1.4 Business Models

A company’s business model identifies how the company will be paid for the services it provides and the expenses it will incur in doing so, thus identifying the company’s pathway to profitability and sustainability. It identifies its sustainable advantage, its competitive standing, and the exit by which everyone will, hopefully, become rich. A company’s sustainable advantage is the collection of unique advantages it has over competitors that will ensure that the company will be able to attract the resources it needs and to survive in the marketplace. This is sometimes referred to as the “secret sauce.”

Business models describe:

• How will we charge for our product / service?
• Who will we charge?
• How will we sell?
• What processes will be managed internally?
  • What will be outsourced?
• What critical factors will define our success?

The most common source of revenues is product sales, but several other revenue models are possible:

• Subscription / membership fee
• Advertising-based
• Licensing and syndication
• Transaction fee
• Knowledge

A very popular tool for developing a business model and testing the viability of ideas for new businesses is the Business Model Canvas created by Alexander Osterwalder in Switzerland in the late 2000s. It has become linked with the “lean start-up model,” in which business ideas and models are tested in the marketplace via swift launch of a “Minimally Viable Product” (MVP) to test market acceptability (see Section 3.1.5 below), as opposed to the traditional approach of analyzing a business concept and researching its market potential as a concept. An MVP is an implementation of the company’s product vision that is far enough advanced that it can be given to potential end-users for them to use and provide feedback on its benefits but doesn’t contain all the features that the company plans to eventually incorporate.

Doing this requires a quick identification of the critical success factors and issues. The Business Model Canvas does this by providing a one-page document that forces the management team to identify the nine key considerations for a new business.

The Business Model Canvas can be a very useful tool for the TTP to develop commercialization scenarios for their IP/technology. The Canvas asks what will be sold, how it will be sold, and to whom. These basic commercialization questions help the TTPs thinking on potential licensing strategy and the promising companies to target with marketing.

3.1.5 The Lean Start-up Model

In the late 1960s, the popular soft drink, Seven Up, started branding itself as the “Uncola,” to distinguish itself from the dominant U.S. soft drink, then and now, Coca-cola. The lean start-up model could be termed the “unbusiness plan model.” Or, to borrow another U.S. company corporate tagline, “Just do it.”

The model’s approach says, essentially, “Don’t waste your time asking people if they would buy what you want to make, make a very basic model and offer it to them and find out if they do actually buy it.” As Nike said, “Just do it.”

The justification for this approach is that it can be very difficult to get people to understand or react to something that doesn’t yet exist. As Henry Ford famously said:

“If I’d asked my customers what they wanted, they’d have said, ‘Faster horses.’”

More recently, Steve Jobs said something very similar:

“It’s very difficult to design products by focus groups. A lot of time people don’t know what they want until you show it to them.”

The model was popularized and implemented very successfully in the mid-2000s wave of accelerators, such as YCombinator (2005) and TechStars (2006). 

The model for these and all the imitators that have followed is two competitive selection programs per year in which entrepreneurs pitch their idea. For the leading programs, the acceptance rate can be as low as 1%. The winners receive a modest investment—YCombinator (YC) originally invested $50k for a 7% stake in 2005, valuing each start-up at $714k ($50,000 ÷ 0.07). By 2020, the initial investment had increased to $125k. Over a four-month period, the founders work to create their MVP. There are talks and dinners with successful entrepreneurs, lawyers, accountants, etc. There is a demo day, attended by VCs, at which the companies pitch their idea and their company to seek their first round of funding (called either their “Seed Round” or their “Series A Round”, depending on the amount raised.)

YC claims to have invested in over 2,000 companies, which had a combined market capitalization of $155 billion in 2019. YC alumni include Door Dash, Dropbox and AirBnB. TechStars claims to have invested in over 1,300 companies, with a combined market cap of $16.6 billion in 2019. Clearly, the model works!

Later, Eric Ries’ 2011 book titled, not surprisingly, “The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses,” formalized the model and gave it a “brand name.” 

Now, using the lean start-up model may allow the entrepreneur to raise Seed or even Series A round of financing without going through a formal business plan. However, they will certainly have to write a business plan and go through the analytical rigor involved for subsequent rounds.

If the MVP doesn’t get market traction, the company may need to pivot to a new product.

3.1.6 Communicating by the Start-up

An entrepreneur starting a company will spend a lot of time talking to a lot of different people:

• Prospective employees
• Prospective investors
• Prospective corporate partners
• Prospective customers
• Prospective suppliers
• Prospective consultants, advisors and board members

There are four vehicles the entrepreneur will use in these conversations and presentations:

• Elevator pitch
• Pitch deck
• Executive summary
• Business plan

3.1.6.1 The Elevator Pitch

The elevator pitch is a canned, two-minute speech that every entrepreneur must have ready anytime, anywhere (including on an elevator—thus the name) to tell anyone who can conceivably help their new venture.

An excellent example of an elevator pitch is the introductory video for Dollar Shave Club made and published in 2012 by the company’s founder, Michael Dubin. Aimed at customers, it describes the new business: buying razors on subscriptions. This is actually an old business with a new business model—subscriptions—so it provides a dependable revenue stream. 

This brash young man was taking on the established might of Gillette which had dominated the razor market for over 110 years and was bought by the even mightier Procter & Gamble (P&G) for $57 billion in 2005. It may sound crazy to take on P&G / Gillette, but ultimately, Dubin sold Dollar Shave Club to P&G’s biggest rival, Unilever, for $1 billion in 2016, just four years after the company’s creation and after an investment of only $130 million in four rounds. By 2019, Dollar Shave Club had 11.4% of the U.S. razor market, just behind Schick, the longtime number-two seller. Now that’s an elevator pitch.

3.1.6.2 The Pitch Deck

Whether it’s a result of an elevator pitch or an introduction, if someone is sufficiently interested in investing in the start-up, they will want to see a pitch deck. This is where the entrepreneur presents the company and makes “the ask”—their request for what they want from this potentially interested party.

Generally, a single slide will take between one and two minutes to present, and in a one-hour meeting (the typical length of an initial-stage meeting) the entrepreneur should plan for 20 minutes of presentation and 40 minutes of questions and answers (Q&A), so the pitch deck should contain no more than 10-12 slides.

3.1.6.3 The Executive Summary and Business Plan

The executive summary is the only part of the business plan that an external audience will read. The executive summary captures the highlights of this process and is used as both a “teaser” to get people to want to learn more about the company, and as a follow-up to give people a summary of the pitch deck.

While most people will not read the full business plan, that doesn’t mean it’s unnecessary. It’s important for the company to go through the process of writing a business plan as it requires the company founders to think through the nitty gritty details of creating the business.

A company’s business plan is its operating plan, a detailed account of how the company will attract the resources (both human and financial) it needs to grow and launch its products and make a profit.

The business plan will go through major updates and revisions each time the company goes out to raise a new round of financing, and the board will probably insist that management update the business plan each new fiscal year even if it doesn’t need to raise money in that fiscal year.

3.1.7 Using the Start-up Business Plan to Guide the Process 

As the steward responsible for the initial commercialization success of an invention/IP, the TTP must consider the best path to success. This path may or may not involve a new start-up Licensee.

In many cases, the invention/IP is not a good candidate to build a start-up around, even if the inventor wants to do so. When deciding between licensing to an existing company with plenty of resources and infrastructure versus a start-up, the TTP must lean against licensing to a start-up since the risks are so much higher.

This choice is difficult if the inventor is a senior faculty set on a start-up. One way the TTP/TTO can handle this situation is to require a business plan before licensing to a start-up. Developing this plan with the aspiring entrepreneur and the TTP allows the TTP/TTO to guide the inventor to a logical conclusion. That conclusion could be to start a company, or the process will reveal that a start-up is not viable and /or the entrepreneur will realize they really don’t want to be an entrepreneur.

In general, requiring a business plan for a start-up to sign a license is sound TTO policy. It pushes the start-up to address all the vital aspects of the start-up, and to increase the chances of success, reduce the risk and make the start-up license a reasonable proposition.

3.1.8 TTO and University Role in Start-up Management

The minimum start-up team is two people: a technical expert and a businessperson.

These are the two, core skill sets that the company needs, and are rarely found in the same person. Having two people also enables better brainstorming.

In the case of a university start-up, the professor/inventor is usually the technical expert. If the professor is lucky, they will have connected with an entrepreneur, or, if they are really lucky, a VC who wants to start a company based on the professor’s technology. Many universities have entrepreneurship groups in their TTOs to help professors who haven’t yet connected with an entrepreneur or VC. This group can fill the “businessperson” role. If the TTO doesn’t have an entrepreneurship group, the Public Sector Research Institution (PSRI) may have a business school or industrial engineering department with such a group.

Early on, the inventor will likely need to serve as the company’s CEO. In the United States and Europe, faculty are allowed to spend a day a week on outside activities, like entrepreneurship. Eventually, the needs of the company will exceed this amount of time, and the professor will have to either relinquish the role or take a sabbatical leave or a leave of absence.

There is plenty of potential for conflicts of interest and conflicts of commitment in these relationships. Directors of companies have a fiduciary responsibility to maximize shareholder value, and this can conflict with the university’s interests. For example, if the license requires that the company must raise a certain amount of funding by a certain time, and the company fails to do so, it may be in the university’s best interest to terminate the license and find another Licensee. Clearly, this has a very negative consequence for shareholder value, so any university employee—the professor or a member of the TTO—who is a director of the company would be in a very conflicted position.

Even though the university will frequently be a shareholder in the company, receiving shares as part of the license between the university and the company, it is generally best practice for the TTO not to be a director of the company for the long term, though it may be advantageous for the TTO to initially have a board seat until the company has investors, who will undoubtedly demand a board seat.

Thereafter, the TTO should insist on board observer rights, which gives them the right to attend board meetings and receive all materials prepared for the board but doesn’t have the potential for a fiduciary conflict of interest.

3.1.9 Team Building

A start-up must build its management team largely from scratch, usually starting with the founders and growing from there. 

The management team is incredibly important. VCs will tell you that they would sooner invest in a company with a mediocre technology and an excellent management team than a company with an excellent technology and a mediocre management team.

Over its lifetime, a company will likely need at least three management teams:

• The founding team, which gets the resources together—technology, facilities, financing, people—and gets the ball rolling;
• The product launch team, which starts to make and sell the company’s first products; and
• The scale-up team, which scales the company globally and prepare for the exit.

It’s important for people to realize that their role may be time limited, particularly the founders. The number of Mark Zuckerberg’s, Jeff Bezos’ and Elon Musk’s who have an enormous vision and can take their company all the way to global scale is very, very small. Most founders will need to give way to more experienced management. Sometimes this transition is a disaster, the company’s vision gets lost and the founder needs to come back and reinvigorate the company. Think Steve Jobs / John Sculley / Apple, or Howard Schulz / Jim Donald / Starbucks.

Start-ups have enormous growth opportunities—needs arise suddenly and employees will have the opportunity to fill those needs first, as it takes several months to recruit someone new.

3.1.10 Product Costing and Product Pricing

3.1.10.1 Product Pricing

A start-up must project both how much it can sell its products for and how much it will cost to manufacture them.

A technology-based company prices its products very differently from a traditional company. The assumption is that the new technology a company is developing will both make its products uniquely attractive and that they will have IP protection to protect them from competition, giving the company unique pricing freedom.

In these circumstances, the company should determine the value that its customers get from buying and using its products (called the “use value” of the product) and then price the product to capture as much of the use value as possible while still leaving the customer with an incentive to buy the product. Depending on the circumstances, pricing the product to capture 80% of the use value, and still leaving the customer with 20% of the use value as an incentive to switch, should be a viable strategy.

3.1.10.2 Product Costing

Product costing for start-up companies is much more straightforward and traditional than the issues involved in product pricing. The challenge for the start-up is that it has no history of product costing.

3.1.11 Entrepreneurial Finance

Start-up companies must present an income statement, a balance sheet and a cash-flow statement like all other companies, but they also have a number of unique financial challenges. Whereas established companies finance their new product development using cash flow from their current product lines, a start-up must finance its technology and product development efforts by other ways.

Unique key financial metrics for start-ups are their cash burn rate and when they will get to breakeven. 

• Cash burn rate is the amount of money consumed each month. When divided into the company’s available cash, it shows how long the company can survive until it will need to close on its next round of financing.
• Breakeven means when the company’s revenues from sales are equal to or more than their cost of sales. At that point, the company will not have to raise more financing just to survive, though it most likely will raise additional financing to expand its operations.

Important concepts in start-up accounting are those of fixed and variable costs. Fixed costs are those that a company incurs whether it sells just one unit of product in each time period or a million, whereas the variable costs are those that go up in direct proportion to the number of units sold.

In the early days of the company’s sales, it probably won’t be possible to recover the proportionate share of the fixed costs when distributed over a small number of unit sales, so those initial sales will make a loss. As the volume of sales rises, the fixed cost allocated to each unit of sales decreases till eventually breakeven is reached. As sales continue to increase, fixed costs per unit continue to decrease and each new unit of sales starts to return a profit to the company.

One of the reasons IT companies—software, e-commerce, etc.—have had success is that the Cloud has allowed them to turn a heavy fixed capital cost of computing infrastructure into a variable cost.

There are various ways that companies fund their need for capital. For traditional, operating companies that have assets, revenues and profits, they are:

• Equity
• Debt

Start-up companies typically won’t have revenues for some time, will be unprofitable for even longer, and also tend to be asset poor. Debt is therefore typically not an option—start-ups will fail the credit analysis processes of banks, so they are generally limited to equity financing. However, there are two additional vehicles available to small companies, including start-ups:

• Grants
• Corporate Partnerships

These are often referred to as “non-dilutive funding” because the providers typically don’t receive shares in return for providing the funding.

Another way of looking at sources of financing is the type of provider:

• Individuals
• Institutions

In the start-up world, individuals are an important source of funding. 

If the entrepreneur knows the individuals, that is termed a “Friends and Family Round,” sometimes jokingly referred to as a “Friends, Family and Fools Round,” since they are generally not professional investors and so are making an uniformed investment decision, based solely on their trust of the entrepreneurs. A Friends and Family round is often the first round of financing a company raises. More than one professor who had gone this route said to this author: “It can make for some uncomfortable Christmas dinners!”

The other types of individual investors are rich (“high net worth”) individuals, termed angel investors. They frequently invest in companies in the industry where they made their money and so can provide industry advice to the company’s management.

3.1.12 Shareholders Agreements

There are two types of shareholder agreements that entrepreneurs will encounter as they navigate the start-up world.

3.1.12.1 Stock Purchase Agreement

A Stock Purchase Agreement is an agreement between the shareholder and the company that specifies the rights of each, the number of shares to be sold and the price per share. There will always be a stock purchase agreement, even if it is between the founders and the company or the university receiving shares in return for licensing the foundational IP to the company. Founders and IP providers will likely buy stock at the nominal price per share printed on the share certificate. (This is usually termed “founders’ stock”). They will need to write a check to the company for that amount, even if it is small—it is a principle of contract law that there must be an exchange of value for a contract to be valid.

3.1.12.2 Shareholders’ Agreement

A Shareholders’ Agreement is an agreement between all the shareholders of an agreement and specifies their obligations to each other, in particular, the circumstances under which they can sell those shares.

In the early days of a company, the founders round and perhaps even for a Friends and Family round—when it is very important that costs, including legal costs, be kept as low as possible, there may not need to be a shareholders’ agreement.

3.1.13 Cap Tables and Exits

A company’s capitalization table is simply a record of who owns how many shares of which classes of stock. The total number of shares multiplied by the current share price gives the market capitalization of the company, the value ascribed to it on that particular day by the stock market (if the company is publicly traded) or by private investors (if it is privately held, also referred to as closely held).

When the company is founded, it will probably only have a single class of stock, common stock, which is received by founders, employee, consultants, suppliers of technology—the “sweat equity.” Sometimes companies raise an initial relatively small round of financing called a Seed Round to get ready for serious fund raising. The proceeds of this round may be used to make prototypes, do beta testing, do market research, etc. —reducing risk for subsequent, larger rounds of financing. As it raises money, investors will want special rights to protect their interests. They buy preferred shares in successive rounds of investment that are named alphabetically—Series A, where the investors purchase Series A Preferred stock, Series B where the investors purchase Series B Preferred stock, Series C, etc.

If the company is privately held, it’s very difficult (and in many cases illegal) to sell the stock to anyone else. So, even though the company’s value may have increased, possibly substantially, the shareholders only have a profit on paper. For the paper profit to become a real profit, one of two things must happen:

• The company must get bought by another company, preferably for cash, or at a minimum for shares that are themselves publicly traded; or
• The company files to list its shares on a stock exchange through an Initial Public Offering (IPO), in which new shares are sold to the public to raise new funding for the company’s expansion and the shares are then listed on that stock exchange and can be freely bought and sold by members of the public. Holders of pre-IPO shares will generally be required by the investment bankers who take the company public to agree not to sell their shares for some period after the offering, typically six months. This period is called the “lock-up.”

These two outcomes are called exits—they are the routes by which founders, employee, consultants and investors can “exit” their investment. As we saw in the FLVA in Section 3.1.2 above, the exit is the single most important thing to plan for when starting a company. Unless there is a clear route to an exit, nobody will want to work for, consult for, or invest in the company.

Between the seed round and the exit, there will be a series of investment rounds. How these are managed and how the company progresses between successive investment rounds will determine how much of the reward from a successful exit goes to which group of stakeholders—which founders, employee, consultants, investors, etc.

As you’ll see from these resources, this is a very technical and sophisticated area. This model Term Sheet from the Angel Capital Association provides annotations that explain the meaning and implications of the various technical terms.

For even more depth, check out a book about these topics: “Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist.”

3.1.14 Social Entrepreneurship

Entrepreneurship doesn’t have just to create large companies and create enormous wealth. Social entrepreneurship—creating a new entity to improve people’s lives on a not-for-profit basis—can impact and improve people’s lives just as much, particularly in emerging economies.