The University Is Your First Investor

Every university spinout has an investor before it has a company. The university owns the IP, so the tech transfer office negotiates the first deal on the cap table, and every check that comes after it gets priced against whatever that office decided was fair.

I learned this the slow way. In 2009 and 2010 I was a design team leader in my senior year at Hopkins, and we spent a lot of that year on business plan competitions. We made it to the semifinals at Berkeley, the finals at Yale, and the finals of the Hopkins business plan competition, which I also happened to be organizing. It was a great experience and a nice line on a resume. It was also my first real encounter with tech transfer. My read at the time was that the university wanted the prestige of being associated with student startups, and on top of that it wanted high royalties and a large equity stake… terms that gave those startups very little chance of surviving long enough to pay either one.

The Landlord Problem

Nobody in a tech transfer office is trying to kill companies, but it happens more often than you’d think. Historically, those offices got measured on licensing revenue and on how much of their patent spend they recovered. If that’s your scorecard, you behave like a landlord. You want the highest rent the tenant will sign for, and you want it soon, since a royalty shows up in this year’s report and an equity stake in a company that might exit in a decade does not.

The trouble is what those terms do downstream. Say a university asks for a 5% royalty on net sales of a medical device (the numbers here are illustrative). That sounds modest until you remember it comes off the top line. A company running 25% operating margins at maturity hands over a fifth of its operating profit every year, before it pays a dollar of tax or returns a dollar to anyone. Add a large equity stake, especially one protected from dilution through the early rounds, and the founders and seed investors absorb all of the dilution while the university sits still. A VC looking at that cap table does the math and passes. The landlord signed a great lease on a building nobody ever moves into.

To Hopkins’ credit, it figured this out. In 2014 the university created Johns Hopkins Technology Ventures to support turning its research into companies, and a few years later its own tech transfer director described the old disclosure process as a black box with slow response times. It’s nice when the institution’s own reporting agrees with your memory of being twenty-two and annoyed, haha.

Texas Is Catching Up

That’s the elite version of the story, and Stanford and MIT got there well before Hopkins did. What’s newer is the same shift reaching regional research universities, and I got a good look at it last week.

BioNTX held its iC³ Life Science & Healthcare Innovation Summit at the Loews Arlington Convention Center on September 24 and 25, and I sat on the judging panel for the Technology Transfer Showcase. The eligibility rules are worth a look. A project can’t apply unless its university’s tech transfer office recommends it, each institution gets at most two entries, and applicants can’t have raised more than $5 million in dilutive funding. So the showcase is ostensibly about technology, but it’s also a public record of which offices are willing to put their name behind a startup. This year we had 19 applications from universities across Texas and the surrounding states, and we cut that to 3 finalists who pitched live at the summit.

I should disclose that I also mentored one of those finalists, and he won. I’d like to think the rest of the panel would have gotten there without me, and I’m sticking to that story lol. Dr. Aniruddha Bora at Texas State built NOEMA, a laser system for removing skin lesions that measures the edge and depth of the lesion as it works and adjusts each pulse, where most lasers today fire a fixed dose and rely on the operator’s judgment. It’s early… most of the work so far is simulation, with bench and ex vivo testing next. He’s starting with benign mole removal, which is mostly cash-pay and a simpler regulatory path, before moving into skin cancer, where the need and the market are much bigger. That’s a sensible sequence.

The part that matters for this memo is that Texas State’s Innovation, Commercialization & Engagement office backed him the whole way through. Texas State isn’t the first school most people name when they think about research commercialization in Texas, and that’s exactly why it’s encouraging. When the second tier of research universities starts acting like partners, the supply of fundable spinouts across the state goes up.

Who Writes the First Check

There’s a second-order effect worth thinking through. Friendlier tech transfer offices fix the first bottleneck, and in doing so they push the problem one step down the line.

A few memos ago I wrote about DFW’s missing pre-seed lead. We have plenty of angel groups and accelerators, and very few people willing to price and lead a round before there’s meaningful traction. University spinouts are close to the definition of pre-traction. NOEMA needs bench and ex vivo data before it looks like what most local angel groups want to see, and a lot of showcase entries are further from the clinic than that. If the university says yes and nobody local writes the first check, the company either raises from the coasts and moves there, or it stalls in the lab with a very nice license agreement.

So the thing I’ll be watching over the next couple of years is whether these finalists close rounds, and where. If showcase winners keep raising in Texas, the ecosystem is absorbing what the universities are sending it. If they keep winning trophies and then going quiet, the universities did their part and the capital side didn’t, which is a more uncomfortable conclusion for people like me than for the tech transfer offices.

The university is still the first investor in every spinout. More of them now seem to understand that their stake is only worth something if a second investor shows up, and whether Texas has enough of those second investors is a question the universities can’t answer for us.