Should You Start a Biotechnology Company?

(John S. Swartley, University of Pennsylvania)

Startups are an important mechanism of technology transfer from academia.

  • Licensing to startups can help bridge the “valley of death” – the funding/expense gap between basic research and product development (see FIG. 2).
  • Startups fill this proof-of-concept gap and develop technology that is too early/risky for bigger companies.
  • Cumulatively from 1991 to 2009, approximately 7,500 startups and 53,000 licensing agreements arose from 255,000 invention disclosures(see FIG. 3)

Components of a startup company:

  • Founders – possess the vision and objectives
  • Management – manage the day-to-day tasks of running the company
  • Technology – IP core
  • Investors – many types of funding

Critical questions before starting a company:

  • Can you explain the idea on an elevator ride (well-formed idea)?
  • Is the technology ready to leave the lab?
  • Is there a market for the eventual product?
  • How many opportunities will you have (multiple product candidates)?
  • Can you defend the idea against competitors?
  • Does everyone have the same interests in mind?
  • Are there any obvious fatal flaws that need to be disclosed?
  • Have you asked the really hard questions yet?

Critical factors for IP:

  • Patents/applications, U.S and/or foreign filings
  • Lifespan remaining for IP
  • Patent extension possibility
  • Prior art or freedom to operate analysis on IP
  • Potential for proprietary know-how, materials or trade secrets
  • Rights to IP
  • Other IP in the field
  • IP obligations (e.g. conflict from previous agreements)

Management is a key factor to a company’s success.

  • Choosing good management and investors is probably the most critical decision you will make.
  • Look for experienced managers that have made money for investors before.
  • Keep in mind that investors are focused on the (ROI) as the primary goal. To minimize risk, investors are more likely to invest if personnel have proven track records.

Sources of new venture support:

  • Local economic development resources
  • Local investment funds
  • Local management talent pools
  • Serial entrepreneurs
  • City, state and federal grants
  • National venture firms
  • Corporate partnerships
  • Foundation and institutional resources
  • Friends and family

When negotiating investment deals, consider what your goals are:

  • Founders equity
  • Consulting or advisory income
  • Sponsored research support
  • License revenues
  • Do not place all your bets on getting rich – founders equity can become highly diluted with increasing investments.
    • Typical situation: Founders equity diluted from 33% in the beginning to less than 5% after a few rounds of venture capital investment).
    • Founders can retain value only if the company’s value goes up in proportion to the decrease in equity.
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