When Labs Meet Markets, Science Isn't Everything
October 10, 2005

Published in partnership with Red Herring's Innovation Pipeline newsletter
By Chris Greendale

University labs and the venture community are a winning combination, but market application is as important as technical innovation in VC funding decisions.

It's no secret that many of the great technology advances of our time originated in university research labs and served as the foundation for some very big companies. Labs foster the risk-taking, entrepreneurial spirit and vision necessary to develop breakthrough innovations.

But these days, labs hoping to launch startups to transfer their technologies to the marketplace have to do more than dazzle investors with their scientific genius. To succeed, entrepreneurs must capably demonstrate that their technologies have real-world applications.

Technologies that spring from university labs typically have a number of advantages over those developed in business settings. Labs furnish high levels of investment, often offer the support of researchers who are luminaries in their fields, and enable years of research free from the rush-to-market pressures that businesses face, and thus typically yield technologies that are sound and unique. As a result, startups built on lab technologies have a high degree of credibility and are well-equipped to defend their unique market segments.

But VCs also know that lab technologies are often anchored in pure research rather than applied research, and unfortunately, pure research is rarely marketable. Because it's not aimed at businesses and customers, pure research can be a solution looking for a problem, a technology-driven rather than a market-driven innovation.

Before today's more cautious VCs are convinced that a technology has market applicability, they usually want several things. First and foremost, VCs want access to the lab - generally through an ombudsman from the lab - so they can take an early look at the technology and have a sense for what's being researched.

How do they decide which technologies are worth a firsthand look? There are a number of ways VCs monitor university labs and stay apprised of the latest developments. They go to lab seminars and conferences, they subscribe to lab newsletters, they read analysis from industry pundits, and work their personal and business contacts. By maintaining close connections this way, VCs not only stay aware of the latest advances at labs, they guarantee themselves an "in" should a technology be of interest.

If they're interested in a technology, VCs will usually ask associates from their firms to investigate further or ask a graduate assistant from the lab to provide them with more information on the technology. With access to the lab early on, VCs can evaluate the potential market viability of the technology and decide whether to fund the venture.

Due diligence is the next step. VCs assess the viability of a potential deal by answering the following questions, among others:

• What's the market for the technology?
• What's the value proposition for the startup?
• What's the competitive advantage?
• How will the technology be applied?

Intellectual property issues play a key role in the funding process as well. VCs need to know the nature of the intellectual property and how the lab intends to build a company around it. But most importantly, VCs must know the terms under which the intellectual property will be released. Some universities want to keep an equity percentage, some want royalty deals, others have no preference.

Once VCs make the decision to fund a lab-based company, it is important that they immediately begin networking for the right people to form a management team. VCs will need to determine the type of involvement the lab research team will have in the startup moving forward. In general, the professor involved in the project will join the startup's board of advisers. A graduate student instrumental in the technology will often play a significant role in the new company, perhaps as chief technology officer or as an adviser with equity in the startup.

Because CEOs with prior business experience are preferable, VCs usually bring in outside executives for this position. While lab researchers who develop technologies tend to be a bit more entrepreneurial and visionary than others, their vision generally is highly influenced by technology. For this reason, VCs often augment the lab team with business-oriented managers who have relevant domain expertise and industry backgrounds. Finally, VCs will want to work with entrepreneurs to understand the level of financial investment the startup will need.

Once VCs decide to back a new startup, the funding and growth prospects do not differ widely from other types of investments. University research labs will continue to be the source of technology breakthroughs that attract investor interest. There is every good reason for VCs to reach into labs and for labs to look for relationships with the investing community. Working together, university labs and the venture community form the winning combination for effectively transferring the benefits of technology advancement to the marketplace.

Chris Greendale is a general partner at Kodiak Venture Partners, a Waltham, Massachusetts-based firm providing seed and early-stage funding for communications/IT, semiconductor and software companies. He focuses on software and services investments.

Innovation Pipeline goes inside campuses and corporate labs to cover technologies on the move from lab to market. The monthly e-newsletter, published in cooperation with Red Herring magazine, features innovations in seven sectors: biomedicine, communications, defense and security, electronics, energy, nanotechnology and software. It profiles a promising startup in each sector and provides analysis of its market opportunity, financing and competitive edge.

For more coverage of technology transfer, read the latest issue of Innovation Pipeline.

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