If you have a hot idea that you think has some commercial potential, but you find the prospect of starting up a company scary, take heart. "The fundamental steps in laying a solid foundation for a business are by no means rocket science," says Roger Bernier.
Bernier speaks from experience: He's a vice-president at Foragen Technologies Management, a Canadian biotechnology business development firm. Venture capital firms like Foragen partner with scientists, providing both seed money and business know-how to help create start-up companies. The keys to success are not hard to understand. But it involves taking take the time to answer some essential questions.
The process of commercializing discoveries may not be rocket science, but to many scientists the idea of creating a company is downright scary. Bernier thinks this is why many commercializable products and technologies end up staying in the lab and never see the commercial light of day.
Bernier, who holds a PhD in microbiology and immunology from the University of Montreal, is responsible for sourcing, evaluating, and managing investments in new technologies. He is an inventor himself, with six biotechnology-related patents, and he was published extensively in agricultural and forestry biotechnology before joining Foragen.
Founded in 2000, Foragen manages a portfolio of more than $42 million and has offices in Quebec, Ontario and Saskatchewan. The company's mandate is to foster the commercialization of early-stage life science technologies by providing seed capital, business and technology management expertise, and networking opportunities. Foragen's technology focus is on forestry, agriculture, and aquaculture technologies, but Bernier is quick to point out that their business practices can be applied to any sector.
Idea to IPO
The first hurdle in commercializing an invention is to acquire sufficient capital to take an idea to the point that it will be attractive to big investors or large corporations. "You need to move from the start-up [stage] to the growth [stage] so you can be of interest to the large corporations." says Bernier. That's where companies like Foragen come in. They provide the seed money and management expertise to get a fledgling company off the ground.
The first question Bernier asks any inventor approaching his company is whether they have freedom to operate. Who holds the patent: the researcher, university, or institute? Have there been any previous licensing agreements? "Just because you have a patent on your technology doesn't mean you have freedom to operate," warns Bernier.
In some cases, if the market is too limited, it may be advantageous to license the technology to an existing company, rather than create a new company around it. Bernier insists that venture capital firms like his can help determine the best route to take. "The most important concept you have to remember is that technology doesn't mean you have a company."
At this early stage, Foragen also wants to see some evidence that a would-be entrepreneur has given some thought to strategies for maintaining competitive advantage and understands how the technology might fit into the global market and lead to significant sales. It's vital to consider how a process can be scaled up, and what will be required in field-testing and prototype evaluations. "If you have answers to these points it's a great start and is exactly what I am looking for when in a preliminary meeting." adds Bernier. "This is really a snapshot of all the hot buttons of what we are looking for."
Bernier says that a common mistake of scientists is to think that their technology is worth much more than it really is. Biochemists or microbiologists may excel at the bench and know what colleagues are doing in their field across the world; however, questions inevitably arise about the size of the market for an invention and its commercial value.
While it is possible at times to look at publicly owned companies and study their annual reports to learn their commercializing strategies, private firms are not required to divulge theirs. Sometimes there are no comparables to go by. Your technology may be one of a kind, making it impossible to compare.
As an example, Bernier refers to a recent patented gene discovery that helps increase yield of canola oil by 10%. An increase of this size was seen as a company-creation opportunity, so the first step was to bring the technology up to the point where it could be put in the field and tested. But what's the value of the company?
With limited comparisons available, Bernier looked at calculating possible volume of sales for the upcoming years, along with pricing and other financial aspects. This is known as "discounted cash flow." "Because the risks are so high the rate tends to be fairly high in this business," he adds. So even though the North American canola business is valued at over $2 billion and the calculated economic benefit of the new technology is over $200 million, the company value before investment may be less than $500,000.
Looking at commercialization of science from the other side of the table is Hugh Jones, Vice-President of University Technologies International (UTI), the University of Calgary's (U of C) own technology transfer enterprise. Working in the business of helping U of C researchers get their inventions to market for over 15 years has taught him one thing: be cautious.
"I highly recommend that researchers get some professional advice and know a little more about the value of their technology before they start talking to venture capitalists." says Jones. He believes university technology transfer offices can offer the entrepreneurial expertise and objectivity that faculty need so that they can fully understand the best business route to take.
"There are lots of things that venture firms can protect the inventor against, but there is an inherent conflict of interest in what they are doing, which doesn't happen at a technology transfer office." warns Jones. "They are on your side and there is nothing adversarial about their position, whereas venture capitalists can benefit greatly the more they push your position down and increase theirs."
Jones agrees with Bernier that starting a company can be daunting. The corporate world is very different from science, with a whole different language and a way of thinking that can be quite foreign to scientists. "The funny thing is that it tends to be daunting to the smart guys and unnoticed by the not so wary individuals, and this is where it can become a problem." says Jones.
He believes that people's greed spoils more deals than anything else. Some researchers think that they will hit a financial windfall if only they go head-long into making their business venture work. This greed gets translated into not getting the right advice and letting the capital firms drive the boat instead of protecting their own interests. "I know of instances where the inventor traded away their intellectual properties for stocks in their company and the stocks plummeted and they had nothing left."
Very few technologies invented at universities qualify for venture capitalist investments. Most are better placed in an existing company, Jones believes, through a licensing agreement that may have equity and royalties attached to product sales. "Mistakes happen when working in a vacuum." explains Jones. "Venture capitalist may leave the wrong impression about the possibilities for commercializing an invention, simply because it may not fit their business portfolio." he adds.
The university technology transfer offices will try to properly set the range of expectations so that these kinds of problems never arise. They can help set realistic values and take the time to explain all the potential risk factors before inking a deal. Company creation tends to be very attractive to researchers, but as Jones sees it, "while starting a company may fit your personality you have to be careful because not every opportunity fits that strategy."
Meanwhile, Bernier reminds anyone who is interested in starting a joint venture with a firm like his that they are part owners and only stand to profit as long as the company succeeds as a whole. Therefore, he recommends that scientists consider his advice and tips carefully right from the start so that they have a clear understanding of what a venture capital firm's point of view is and appreciate the risk that they are taking along with the inventor himself.
"It's important to remember that we are there with you no matter what, right from the start." says Bernier.
Andrew Fazekas is Canadian Editor at Next Wave and may be reached at firstname.lastname@example.org