De-risking' the university spinoff

BRICE WALLACE

The Enterprise

The University of Utah has made a name for itself by licensing university-developed technology and creating startups based on those technologies, but one UofU official says that “de-risking” can help speed the process and improve the commercialization success rate.

Bryan Ritchie, executive director of technology and venture commercialization and associate vice president for research commercialization at the University of Utah, recently told a Utah audience that value can be added to new ideas by bringing potential stakeholders into the evaluation process earlier, alleviating risk that makes venture capitalists hesitant to invest in them.

“What I’m suggesting is public-private partnerships and a [university’s] long history of understanding the company might provide the type of information and access to VCs where they could scale,” Ritchie said at a joint meeting of the Utah Technology Council, MountainWest Capital Network and the Wayne Brown Institute. “Now, I don’t know how that works exactly, but my gut tells me it’s there and it’s a new opportunity to think about how money works with people in ways that have never happened before.”

A quandary in developing ideas to the commercialization stage is finding quality management and leadership to advance those ideas, he said. Those managers want ideas de-risked before wanting to get involved, but those managers are needed in the de-risking process, he said.

“That’s what we’re working on right now. That’s where I think an opportunity resides both for people and money to come together in the right place to make new and different things happen than have happened before,” Ritchie said.

Bringing quality management aboard when risk is still high can curb the risk sooner, and then the money follows, he said. The university’s role is to invest in ideas and vet them to find out which ones can survive, allowing investors to enter the process with more confidence that an idea can be commercialized. In essence, public money — from retained earnings from prior commercialization — is being spent on the vetting, and then private dollars can be added to the process and value can be captured.

“We’re making these small, $5,000 to $25,000 bets to try to kill it, really,” Ritchie said of vetting an idea. “At the end of the day, we’re really just trying to kill it. We try to think of ourselves as a fast executioner. The faster we can kill it, the better. If it survives our chops on the neck, we keep it going; it deserves to keep going. And we keep adding stuff in an iterative fashion.

“Why wouldn’t you [venture capitalists] look at something that somebody else was spending money to de-risk and to drive value? Why wouldn’t you want to be a part of that? … I think we’re missing a key investment opportunity early. I think it requires a public-private partnership. I don’t think the VCs can get there on their own. But I think that our state is one of a handful that has all the parts. We have an ecosystem that’s willing to think about it, it has a university that’s trying to pull it off, it has public-private enterprise and organizations that are trying to fill the gaps. If we can figure out how to pull that together, we could do something that no one else has ever done.”

Ritchie — who has experience in entrepreneurial startups, large corporate management, consulting and academic teaching — said many VCs are moving away from the early formation period of startups, preferring instead to invest in companies that already have produced $1 million to $5 million in EBITDA (earnings before interest, taxes, depreciation and amortization). But the investment money really is needed before reaching that stage, he said.

The university, which has been involved in tech commercialization since 1968, has evolved over the years from a focus on intellectual property protection to one stressing company startups — it spins off about 20 per year. But when Ritchie arrived in 2011, he said, he realized the university needed to do more than start companies.

“We’ve need to drive value in these companies and create deals that come from these companies that interest the likes of you guys,” he told the audience, “that you would look and say, ‘You know what, there’s quality deal flow coming out of the University of Utah that’s been de-risked to a point that I’m willing to invest either my time, or my money, or my contributions, champions, entrepreneurs — whatever the case may be.’ So we started thinking about systems and processes that would take those companies from just startup, to moving them along that de-risking path to a point to which they were viable, value-wise.

“Anybody who’s been involved in this knows it’s hard, hard work, and we’re trying to do this right now with 154 companies, which is a big portfolio.”

While the UofU has had several major commercialization success stories, it can do better by having more startups that develop into companies within a certain revenue range, he said.

“If we get enough at-bats, we’ll crank a few out of the park, and we have. Myriad Genetics is a U. startup; BioFire is a U. startup, NPS Pharmaceuticals was a U. startup — you can go down the list. There are five or six big home runs.

“But that’s really not where the game gets won. The game gets won getting on base over and over and over again in the $10 million company, $20 million company, $50 million company. … What we’re really saying is, how do we work with the community and the ecosystem to replicate the output that really turns into value for this community? And I think we all know that those $10 million companies, those $20 million companies, is the backbone of this tech industry, isn’t it? So that’s what we’re looking to accomplish.”

Ideas, Ritchie said, are plentiful, but the difficulty lies in getting ideas to market. From “disclosure” to license, the UofU has a 22.1 percent success rate. But from license to revenue (through royalties or equity), the figure shrinks to 15 percent, and to royalty or equity over $1 million it dwindles to 1.2 percent.

“So if we could just get better — from a 98.8 percent failure rate to 96 percent or 95 percent — you have a game-changing environment,” Ritchie said. “You would double or triple the output of what you currently have, by just failing 3 percent less. That’s amazing.”

Ritchie described the university’s commercialization efforts as a balancing act, keeping in mind the interests of many stakeholders. But he encouraged the VC representatives in the audience to be part of the process as ideas are analyzed and assessed and some are nurtured to full growth.

“We are a little bit of a gardener, but we have a sharp hoe, and I’m beating the crap out of the radish plant, because if it survives, that means it deserves to survive. If it doesn’t survive, I want to kill it because I don’t want to spend scarce resources on stuff that isn’t going to make it,” he said.

“We need to know what to kill or what to move forward, and you guys are in the best position to help us with that.”