We find ourselves in the middle of one of the greatest wealth transfer periods of all time. Those with wealth must decide whether they want to make transfers, and if they do, they must decide how much, to whom, when and in what structure?
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All but 27 of the 132 companies formed around CU technology since the school’s 1994 fiscal year are still operating or have been acquired by companies still operating. That’s not counting nine more that have been formed in fiscal year 2014, which runs through June 30. The latest CU figures cover only companies formed through fiscal year 2013.
Impressive as the numbers are on their face, a closer look shows that – of the 83 companies old enough – 68 survived at least five years. That 82 percent five-year survival rate holds true for companies formed from fiscal year 1996 to 2006, the period analyzed by the Colorado Innovation Network for its 2013 Innovation Report. That study showed that just 48 percent of small businesses nationally and slightly more than 46 percent in Colorado made it to their fifth anniversaries.
For entrepreneurs who have had success growing a company from CU-based technology, the main advantage is clear: In most cases, the technology you’re licensing from a university already has been in research and development for several years. Thus, much of the cost and risk of developing new technology from scratch already has been abated.
“If you have researchers inside the university that have done the research, you have a huge head start,” said Steve Georgis, former LineRate Systems Inc. chief executive.
LineRate, founded in 2008, licensed technology from CU that helped large companies such as Facebook and Google streamline the flow of massive amounts of traffic in and out of their data centers. Seattle-based F5 Networks Inc. bought LineRate last year for about $131 million. “At the point we licensed it, we were pretty sure there was something there,” Georgis said.
Georgis, who had been CEO of two previous startups that were not spun out of university technology, said there’s little downside to licensing technology from universities to form companies. The main drawback is that you automatically have a partner in the university that will get a share of the profits. That is largely offset, however, by the fact that companies started privately from scratch often have large amounts of investment capital involved by the time they’re generating revenue or have a successful exit.
Doug Campbell, co-founder of Louisville-based Solid Power LLC, another CU spinoff, said there can be some increased risk in licensing university technology if you’re not knowledgeable about what you’re licensing. Much of the science done at universities is for the sake of science and not necessarily with commercialization in mind. However, if the technology being licensed is viable, Campbell echoed Georgis in noting the benefits.
“In business, you don’t want to be in the business of inventing,” Campbell said. “You want to be in the business of reducing inventions to practice. If you’re a spinout of the university, hopefully the inventing is done.”
All of those successful companies have meant a huge boon to CU financially in the form of equity and licensing agreements. When a company like LineRate is sold or Myogen goes public for $70 million in proceeds, CU gets a cut. But the school also receives upfront licensing fees and ongoing annual royalties on revenue for as long as the company is utilizing the CU technology.
Those fees and royalties can vary based on the type and value of intellectual property being licensed. Some therapeutic products, for instance, can have six- or seven-figure upfront fees. For a startup with no cash, that’s where the equity stake can come into play.
In a typical year, said Kate Tallman, CU’s interim associate vice president for technology transfer, the school sees revenue from spinouts of about $4 million from royalties and equity liquidations. It can vary widely, however. The school expects about $6 million for fiscal year 2014. Last year, the figure was $16.5 million. In fiscal year 2012, it was $32.8 million, and in fiscal year 2010, it was just $2.4 million.
Twenty-five percent of that revenue goes to the inventor group, and another fourth goes to the inventor’s lab account for further research. The other half is split between the president’s office and CU campuses to fund various needs, including tech transfer.
CU currently holds equity in 60 companies that have yet to be acquired or go public.
“Now that the economy is improving, we’re starting to get some liquidity events, which is great,” Tallman said.
CU’s technology transfer office tracks the school’s spinoffs in a couple of ways. One is with a database that organizes all of the inventions, patents and intellectual property agreements the school has signed. Another is simply by setting up Google alerts and tracking companies on the Internet when they receive follow-on funding or other investments. CU spinouts in fiscal year 2013 raised more than $200 million in follow-on funding, including federal and state grants, venture financing and acquisitions. Since 1994, the figure is $6.1 billion.
CU keeps close tabs on the companies because of the revenue involved and the marketing potential. The importance of that lasting success is three-fold, Tallman said.
For one thing, there is economic benefit for the state. Eighty-nine of the 105 CU startups still operating have operations in Colorado. The strong stats also help attract entrepreneurial faculty and graduate students.
Perhaps most importantly, the numbers demonstrate to federal research funders that CU is adept at turning technology into commercially viable products. Faculty can reference those stats when seeking grants and other research dollars, particularly as the federal government makes a shift toward handing out few large awards rather than several smaller ones, Tallman said.
CU was an early participant in the technology transfer arena, Tallman said, but other states and universities have rapidly ramped up their own efforts in recent years, making a positive track record even more important in the competition for research dollars.
“Colorado is a very rich environment for early-stage product development and early-stage commercialization,” Tallman said. “That’s very important for the university, to be able to show we can complete that cycle in an effective way. And that’s important for the federal funders to see.”
Joshua Lindenstein can be reached at 303-630-1943, 970-416-7343 or firstname.lastname@example.org. Follow him on Twitter at @joshlindenstein.