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The Evolution of the OTC

The Evolution of the OTC. University Led Startups. The Texas A&M University System. Define Your Mission and Measurements. How do you want the university to define your mission? How do you want to be measured?. What Tools Can Be Applied In Your Model?. Portfolio management?

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The Evolution of the OTC

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  1. The Evolution of the OTC University Led Startups The Texas A&M University System

  2. Define Your Mission and Measurements • How do you want the university to define your mission? • How do you want to be measured?

  3. What Tools Can Be Applied In Your Model? • Portfolio management? • Involvement in developing industrial relationships/research programs? • Involvement in strategic research initiatives? • Economic development mission? • University led startups? • International startup partnerships?

  4. TAMUS Approach • Inventor led spin-out vs. university led spin-out • Small equity stake vs large equity stake • No investment vs cash investment • No university business involvement vs university board seats • Part time professor CEO vs full time CEO • Small university upside vs large university upside • Create spinouts because we have to, not because we want to

  5. What Are Spin-Out Opportunities? • Goldilocks technologies • Not developed enough to attract licensees • Developed enough to attract angels • Disruptive technologies • Next steps usually involve further research at the university • Early payback to the university • Value add step is relatively inexpensive • Opportunity is fundable

  6. Types of Innovation • Sustaining Innovation • Better products • Sold to existing, attractive customers • Incumbents have the advantage • Disruptive Innovation • Simpler, more convenient product • Sells for less money • Goes after new or unattractive customers • New entrants have an advantage

  7. Reasons Disruption Works for New Entrant • Target market is unattractive customers or non-consumption • Incumbents likely will not fight for the market share • Allows focus on serving a set of customer’s needs • Low end customers get “good enough” products at low cost • New customers get simplicity and convenience

  8. Two types of Disruption • New-market Disruption • New customers enabled by simplicity, portability or product cost • After a foothold is gained, sustaining improvements increase market share • Examples – pocket radio, PC, cellphone • Low-end Disruption • Addresses least profitable, over served existing customers • After a foothold is gained, go up market • Examples – minimills, Wal-Mart, Kia

  9. New Market Disruption Litmus Test • Large population, previously not able to purchase due to lack of money, equipment or skill • Previously, customers had to go to an inconvenient centralized location

  10. Low-end Disruption Litmus Test • Are there over served customers looking for “good enough” products • Can the business model make profit at lower end discounted prices • Is the innovation disruptive to all significant incumbents

  11. What Is Disruptive • Disruption is not just about technology • Business models can be disruptive with no significant technology advances • Very innovative technologies may not be disruptive at all • Disruption is ultimately about how you make money • Who are the customers • What problems are you solving

  12. What is Fundable? • Large market • Competitive advantage • Experienced management • Market pull • Identifiable value inflection point • Exit strategy • Profit potential for the investor • Where are your opportunities strong or weak?

  13. Strengthening the Weak Points • Large market weakness • Most challenging to overcome • Minimize the investment needed • May think about partners more than pure investors • Competitive advantage weakness • Understand the market pain clearly • Focus on competitive advantage in the next steps of research • Focus on competitive advantage in the business model

  14. Strengthen the Weaknesses • Management weakness • Rarely have identified management early • Cast a wide net • Build a bench of possible CEOs • Market pull weakness • Get the voice of the market through market research • Talk to potential customers • Reach out to potential partners

  15. Strengthen the Weaknesses • No clear exit strategy • Think about partners rather than pure investors • Look for comparable companies and exits • Understand comparable exit values • Investor profit potential is not clear • Shorten development timeline • Lessen investment needed • Get to market faster

  16. NewCo Opportunity Review Process • Opportunities identified by licensing staff • Internal review of opportunities • Internal pitches of the vision of a company • Internal analysis of “why a spin-out”? • Analyze the technology, market, intellectual property, and internal support for a spin-out

  17. Potential Blind Spots • Intellectual property • Have an attorney review your intellectual property position • Freedom to operate, not just patentability • Internal support • Make sure the inventor still cares • Does the plan fit with the inventor goals?

  18. Start-up Development

  19. Phase I – Project Screening Work done by Licensing Staff • Invention Disclosure • Technology Assessment • Identification of Products and Services enabled by the technology • Engagement as Potential Start-Up Project • Determination of inventor interest • Determination of Member interest

  20. Phase I – Project Screening Work completed by New Ventures Team • Market Analysis • Size of market(s) • Size of market segment(s) • Competitive Analysis (per market segment) • Competitors (sales of products/services) • Research competitors • Freedom to operate • Integrate information to create Assessment Report on Start-Up Potential • Inventor and Member interest • Market Analysis • Competitive Analysis • Go/No Go Decision

  21. Phase II – Company Formation • Business Plan Development • Rationale • Milestones • Funding needed • Licensing Terms • Exit Strategy • Internal Fundraising (cash for equity) • OTC • Members • External parties • Team Formation • Scientific Advisory Board • Research Team (e.g. TAMUS researchers who will develop research proposals and conduct the research) • Management (external)

  22. Phase II – Company Formation • Creation of Start-Up Proposal • Business plan • Risk profile • Expected research and equity upside potential • Submission of start-up proposal for approval (must be approved by Chancellor) • Drafting corporate documents • Filing for incorporation of the new company • Founding investment made • CEO contract signed • Execution of license

  23. Phase III – Business Plan Execution • Fundraising by management • Assistance from OTC • Short time line with specific goals • $1,000,000 within 12 months • Fundraising success leads to success fee for CEO After funding • R&D as needed • Completion of milestones • Achievement of objectives of exit strategy / termination of license

  24. Typical Deal Breakdown • Caveat is that all deals are different • Starting point is a total investment of $75,000 • OTC invests $25,000 • TAMUS member invests $25,000 • Research Valley Angel Fund invests $25,000 • Starting point for equity break down is: • OTC 5% set aside for commercialization services • Inventors 10% set aside to keep their interest • Each of the 3 investors receives 28.33% • CEO is compensated 5-20% equity upon funding

  25. Tools Needed to do Spinouts • Ability and resources to develop business plans and market research • Access to angel capital or venture capital • A bench of CEOs • A source of internal capital or affinity funds • Legal advice on freedom to operate and corporate formation

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