Appendix B
Presentation by Teri Willey Vice-President, ARCH Development Corporation1 at the Workshop on Overcoming Barriers to Collaborative Research March 23–24, 1998

I am going to talk a bit about ARCH Development Corporation as an example of how the University of Chicago is encouraging the use of research results. I will also talk about the Association of University Technology Managers (AUTM) and the things that I think are important in this area of industry-university relationships. And I will discuss some approaches and tools that I think work and some evidence as to why I think they work (Slide 1).

ARCH Development Corporation is a wholly owned not-for-profit affiliate of the University of Chicago (Slide 2). It was formed in 1986 to commercialize certain research results from the University and Argonne National Laboratory (Slide 3). ARCH originally had a $9 million venture fund and formed and invested in 18 companies from the time it was formed until 1995. In 1995, ARCH split into two organizations, ARCH Venture Partners (AVP) and ARCH Development Corporation (ARCH). ARCH Venture Partners is now a stand-alone venture capital organization with over $140 million under management. ARCH Development Corporation continues as the licensing and new business development arm of the University of Chicago.

At ARCH we work with innovations from the University's divisions of

1  

This is an edited transcript of a slide presentation. Slides from Teri Willey's presentation are included at the end of the text, with callouts to the slides appearing in the text.



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Overcoming Barriers to Collaborative Research: Report of a Workshop Appendix B Presentation by Teri Willey Vice-President, ARCH Development Corporation1 at the Workshop on Overcoming Barriers to Collaborative Research March 23–24, 1998 I am going to talk a bit about ARCH Development Corporation as an example of how the University of Chicago is encouraging the use of research results. I will also talk about the Association of University Technology Managers (AUTM) and the things that I think are important in this area of industry-university relationships. And I will discuss some approaches and tools that I think work and some evidence as to why I think they work (Slide 1). ARCH Development Corporation is a wholly owned not-for-profit affiliate of the University of Chicago (Slide 2). It was formed in 1986 to commercialize certain research results from the University and Argonne National Laboratory (Slide 3). ARCH originally had a $9 million venture fund and formed and invested in 18 companies from the time it was formed until 1995. In 1995, ARCH split into two organizations, ARCH Venture Partners (AVP) and ARCH Development Corporation (ARCH). ARCH Venture Partners is now a stand-alone venture capital organization with over $140 million under management. ARCH Development Corporation continues as the licensing and new business development arm of the University of Chicago. At ARCH we work with innovations from the University's divisions of 1   This is an edited transcript of a slide presentation. Slides from Teri Willey's presentation are included at the end of the text, with callouts to the slides appearing in the text.

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Overcoming Barriers to Collaborative Research: Report of a Workshop Biological Sciences as well as Physical and Social Sciences. We are working more and more in the "copyrightable" works area and with "content." When ARCH was formed, Argonne did not have an office for technology licensing. Now Argonne has a group of competent licensing professionals. Accordingly, we work with them on a case-by-case basis, primarily when forming a company seems to be the best means to advance an innovation. From 1986 until 1995, ARCH formed 18 companies, signed several licenses, and generated in excess of $20 million from licensing and equity returns (Slide 4). In 1994 and 1995, ARCH achieved two concurrent and critical milestones of breaking even and becoming cash flow positive. This allowed us to pay back the university the funds they provided in support of ARCH and to move forward as a self-sustaining organization. Much of this milestone was due to a "spike" in equity returns as a result of one company sale and one company initial public offering (IPO). The sale was that of a company called Everyday Learning. Everyday Learning is a company based on the copyrightable works for teaching K-12 math. In the recent AUTM report, because of this spike we ranked in the top five for universities and even ranked ahead of MIT in terms of revenue from royalties and equity (Slide 5). It is fun to show this table for this reason, but important to point out that the next year or two will probably not be as spectacular, as we are not expecting any significant equity sales (spikes) again until 1999. Note that both these "exiting" companies were formed in 1988. If you look at our returns and where they come from, in addition to the rare but celebrated equity spikes, we have very predictable and steady growth in our royalty returns from licensing agreements. These royalty returns are based on a portfolio of about 100 active license agreements. These license agreements are most often based on inventions disclosed six to eight years ago. Interestingly, about 50% of these royalty returns come from companies that ARCH started. I think this is very important. It is not unusual for the returns from equity to come prior to sales of product; hence, if we are successful in setting up robust companies, we will see a good royalty stream, in addition to a spike from equity. ARCH has been a laboratory of sorts and, while it is easy to talk about the successes and where we are with regards to metrics, we continue to iterate and improve and hopefully learn from our mistakes (Slide 6). In 1986, when our board enthusiastically put forward this program for starting companies around University of Chicago technology, ARCH was very focused on start-ups. I believe this focused effort was carried out at the expense of

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Overcoming Barriers to Collaborative Research: Report of a Workshop licensing programs and perhaps industry-sponsored research collaborations. We have some nice cash-from-equity successes as a result, but also some missed opportunities and, hence, a need to restructure to balance licensing to existing companies, as well as creating our own licensees. More and more research universities are licensing inventions to start-up companies and taking some equity as a consideration for the license. ARCH is unusual in that we take it one step further and sometimes create our own licensees (Slide 7). In doing this we provide what we call a "walk-around-round" to launch company projects, as well as provide part of the first seed round of funding. We have a strong relationship with our graduate school of business at the University of Chicago. This relationship has resulted in ARCH providing entrepreneurial experience to a number of business students (and physical and life science students as well). We encourage an entrepreneurial culture. We have a Board of Directors, separate from the University of Chicago, which is very focused on entrepreneurial activities. ARCH is self-supporting. That is, it doesn't cost the University of Chicago any money to have a technology transfer program. We cover all the patent expenses, the salaries, rent, and so forth, and when we have money in excess of expenses, as we do now, we return it to the university. At any one time in our start-up company portfolio, we will have about a dozen projects (Slide 8). Usually, we have three new ones coming in and the rest at different stages of development and financing. The idea is to graduate about two projects a year. "Graduation" means they have support from an investor other than ARCH and have moved beyond the seed round. As we receive invention ideas we evaluate them to determine whether or not we should invest in them (Slide 9). Then we decide whether to license to an existing company, license to a start-up company that somebody else forms, or form our own licensee. We find start-up projects through our licensing activities (Slide 10). We also find them through our own start-up company activities. That is, a start-up company may need more than just the University of Chicago innovation to provide the necessary technology platform. Accordingly, our companies are often licensees of other universities or small companies. However, in order for us to use our investment funds it is necessary for us to have in the core, technology that originated at the University of Chicago or Argonne. We encourage the use of Small Business Innovative Research (SBIR) funding (Slide 11). We find these funds useful in demonstrating proof of

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Overcoming Barriers to Collaborative Research: Report of a Workshop concept. Importantly, these funds are non-dilutive. At early stages of company formation we try to stay very lean. In addition to SBIR funds we may provide the walk-around-round I mentioned earlier. The walk-around-round is primarily out-of-pocket expenses for our "sweat equity" or "at-risk" CEOs (Slide 12). Usually our start-up managers are not paid a salary. They do the work for equity. That's one of the acid tests to decide whether or not a project is worthy of a start-up effort. If we can find a CEO who has started a company in the field before and who is willing to stick his or her neck out again, that is a good indicator. We may also provide some funds to pay consulting fees. Sometimes we will hire experts to assist us with managing complex deals and move projects. We carry patent and other legal costs during the stage; however the start-up is obligated to eventually reimburse us for these costs. In addition to our licensing and start-up divisions we have a small "virtual venture fund." This is a fund we use to buy preferred stock when we invest in the first seed round of financing (Slide 13). We often find it helpful to use these funds to provide matching funds to our state venture fund. Returns from the preferred shares acquired by ARCH (on behalf of the university) are used to replenish the fund, and anything in excess of $1 million dollars in the fund any calendar year is returned directly to the university. Likewise, returns from licensing are used to support the licensing program, and returns from equity taken as a result of formation are used to support the start-up division. We like to keep the exit strategy flexible. We expect very few of our deals to go public. We plan for most of them to result in acquisition. If we have a successful exit (IPO or acquisition) we sell our stock. In the companies we form we will have stock from three sources: (1) equity as a result of formation (we start with 50% for ARCH/university, 25% reserved for management, and 25% held for the University scientists); (2) equity as a result of licensing (that is we may take 5% equity in consideration of the license instead of an up-front fee); and (3) equity as a result of investing in the seed round (Slide 14). Another important point is that, when we form a company, we are creating a licensee (Slide 15). Hence, we enter into a license agreement with the company. The licensing agreement has standard terms for reimbursement of patent expenses, payment of royalties, milestone payments, and so forth. Being the owner of the company (the licensee) as well as the licensor does create a conflict. However, we believe it is a manageable one. One of

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Overcoming Barriers to Collaborative Research: Report of a Workshop the ways we manage it is to "live in a glass house." That is, as we do these transactions, we know that at the end of the day we have to be able to show that they are comparable to other transactions in which we license to a company that we do not hold equity in or that some other entity forms. It is an interesting situation to be in. It makes one very empathetic being on both sides of the table. Furthermore, we have to remember that we enjoy tax-exempt status, and we have these assets in intellectual property because of federal funding and, accordingly, we have to always act in the best interest of our constituents, the U.S. taxpayers. The scientists stay involved as scientific advisors, sometimes chairing a scientific advisory board. This is formalized through consulting agreements and other standard transactions. They usually are not directors or employees of the company. One last note on the start-up company activities is that our most critical resources are our sweat equity CEOs (Slide 16). They provide an acid test on whether or not this is a good project to get involved in. They also allow us to be in a situation where the scientist is not heavily involved in the management of the company. Where do we find the sweat equity CEOs? First, we constantly churn our network. One of the things that we do not have at our disposal in Chicago is a pool of entrepreneurs of the sort one finds in Boston or San Francisco. In fact, one of the reasons that ARCH was formed was that there wasn't the infrastructure to do start-ups. So we churn our networks in the business community, the alumni, the business school, the entrepreneurial groups, the seed funds in the area, other venture capitalists, outsourcing groups that are placing executives leaving large companies, and other places. It's hard work. One of the tools we use for finding entrepreneurial management is our Monday morning meeting. Every Monday morning from 9:00 to 11:00, we review our start-up projects and certain individuals are invited to attend. Many attending are potential CEOs or people that we would like to introduce to a project. Now, I am going to talk a bit about the Association of University Technology Managers (AUTM) (Slide 17). Their activities are very much based on the Bayh-Dole Act, an excellent piece of legislation (Slide 18). AUTM is an organization of individual professionals. AUTM sponsors programs on licensing principles, marketing, and contract law, with a focus on public benefit (Slides 19 and 20).

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Overcoming Barriers to Collaborative Research: Report of a Workshop The emerging issues that I think are most relevant right now are related to our continuing to improve our industry-university relationships (Slide 21). The longer that I am in this business, the more I realize that it comes down to people and it comes down to managing relationships and managing expectations. When my kids ask me what I do for a living, I tell them that my job is to make sure that certain smart people play nice together. We all have divergent interests, and my job is to help everybody stay focused on where we have a common interest, so we can reach agreements and get this work done if it's worth doing (Slide 22). We are working in a very complex playing field (Slide 23). The amount of litigation is increasing between universities and between university and industry partners regarding patent issues and contract issues. We are subject to more and more public scrutiny. There is a higher demand for our services. Yet the resources available to provide those services are not increasing in kind. We constantly receive conflicting directives from the different constituencies that we serve, and the complexity of deals is increasing. And our situation is going to become more and more complex. This deal complexity issue is important to talk about, if for no other reason than to acknowledge and perhaps to accept it (Slide 24). I don't think we should try to fool ourselves into thinking that things are going to get simpler and more streamlined. They are not. They are going to get more and more complex. The sooner we accept that and not just tolerate it, but embrace it, the faster and better we can move forward. I worked on a project a couple of years ago in which a broad platform technology was originally licensed before its breadth was known to a large pharmaceutical company. The company had decided not to develop it because of organizational changes. Our due diligence terms were not strong enough to take the technology back and terminate the agreement. So we had to appeal to the company to give us the rights back so that we could ensure that the technology would be commercialized. After a long process, the company did the right thing and granted the rights back to us. By this point, we had over 30 inventors from 4 different institutions, including one for-profit company and a hospital new to patents and licensing. We chose to sort out the rights among these individuals and organizations. None of them fell under a single patent policy regarding return of income. The result was that the technology was licensed to three different for-profit companies for specific fields of use for development. One of them

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Overcoming Barriers to Collaborative Research: Report of a Workshop just embarked on its first clinical trials for the product this month. Most fields were licensed to a core technology company, a start-up company that would develop the material and distribute it and manage the licensing of the remaining rights. The technology is the basis of over a million dollars a year in sponsored research, some of which supports graduate and post-doc positions. The barriers seemed insurmountable, but the deal happened, and the reason that it happened is that we accepted the complexity and put our efforts into helping the divergent groups to focus on where they had a common interest. There are issues on which industry and universities have different views (Slides 25, 26, and 27). At the same time we have some of the most creative minds around. Accordingly, we know what we need to focus on what we need to do and close deals. While others are posturing and complaining, lets' go out and close some deals. One of the things that I worry about is that most university programs are not well funded to carry out this work as the demand for it continues to increase (Slide 28). One of the reasons that they do not have the funds may be due to how revenues are shared with the technology transfer program. Programs probably need to keep a larger share of returns to support, grow, and improve their efforts. One important means to manage this type of work is outsourcing. That is, to bring people in on retainer and give them a piece of the action in order to have additional deal help in some very specific fields. This can be very effective, with the right people. It allows the program to grow when needed, without committing to the full burdened price of staff. Another ongoing experiment is performance-based compensation. A unique aspect of ARCH is that all the professionals in the ARCH organization participate in a bonus pool where a share of the returns from licensing and cash from equity go into a bonus pool. This is distributed based on the overall performance of the organization, which includes financial performance and also incorporates goals that the university wants us to focus on, such as faculty service, and facilitating and bringing in industry-sponsored research. Those are difficult things to measure, but including them sends the message that even though we are a stand-alone organization, we have to act in a way that is consistent with the needs and the mission of the university. One of the interesting things we are working on with our compensation

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Overcoming Barriers to Collaborative Research: Report of a Workshop program is the question of ''what happens if an employee follows an incentive program blindly?" If making the wrong deal will benefit them, should they go ahead and do it anyway? A good incentive program does not take the place of having the right people who do things for the right reasons. Clearly, no one needs an employee who is going to blindly follow an incentive program, even though he or she knows it will result in a wrong decision. My employees know that they make their decisions based on much more than the incentive plan or they don't stay in our organization. One of the main things that makes this work manageable is concentrating on end points and what is to be accomplished, remembering that we are trying to commercialize these research results and that we are trying to get a fair return in the process. One of the other issues that we all grapple with is this: if our mission is public benefit, then why are we so focused on financial returns? I think the simple reason is that it takes returns to carry out this work. So, if you have a chance to obtain a fair return, one that reflects your contribution to a profit margin somewhere down the road, then obtain it and use it to perpetuate the process (Slide 29). As long as it is a fair return, it would be irresponsible to forgo it. Another critical factor in the field is how to attract and keep good people engaged in this work (Slide 30). One reason that academic organizations have liability in areas such as commingling of funds or licensing technology to more than one company is that we do not have enough continuity with the professionals in this area. We have to come up with ways to attract and keep the good people. We have to have flexibility with staffing. We have to be able to take more of our returns and invest them into making sure the office is staffed and stays staffed. It has been reported that sponsored research at universities yields four times as many patent applications per dollar as corporate research funds spent internally (Slides 31 and 32). This is an interesting figure. This does not mean that those patents all turn out to be good or result in products or public benefit, but it does provide a metric. We can probably imagine why that happens. It is because the work in the university laboratories is not done with just those dollars. Those sponsored research funds are very highly leveraged. It may also be the case, because faculty members have incentives to participate in the patenting and licensing process. When we look at what appears to be terrific performance in university technology transfer operations, does it mean we can be complacent? Does

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Overcoming Barriers to Collaborative Research: Report of a Workshop it mean that we are doing okay, and that we can continue to work with our current models? Of course, the answer is no, because there is a lot of room for improvement. A lot of the success is in the life science area. The models that work in life science probably do not work in some of the other fields. So we have to continue to examine these things in a way that is focused on the principle of ensuring that the research results are commercialized. We have to continue to think creatively about solutions (Slide 33). I think it is very important to listen to criticisms and concerns, regardless of where they come from, and to constantly reexamine our approaches (Slide 34). The paradox in the university world is that we are not-for-profits living in a for-profit world (Slide 35). If we are good at what we do, we will understand the university well enough to assist the companies and the companies well enough to assist the university. We act at a critical interface. This is not just a field of law, science, and business, but maybe it is a field of human endeavor (and success is based on understanding human behavior) (Slide 36). One asset that we have is our ability to work together. Through my 10-plus years in AUTM one of the robust aspects of the group is that it is 60% "affiliates." When I started, there were about 100 members, and now there are 1,800 members, and almost 900 of them are industry members. So, as we come up with ways to put together industry-sponsored research agreements and licenses, we are doing it together. Also, we have people from universities who are moving to industry and people from industry who are taking university jobs. So we have more and more professionals with experience on both sides of the fence. They understand each other. They can empathize, and it helps us all do a better job.

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Overcoming Barriers to Collaborative Research: Report of a Workshop

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Overcoming Barriers to Collaborative Research: Report of a Workshop

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Overcoming Barriers to Collaborative Research: Report of a Workshop

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Overcoming Barriers to Collaborative Research: Report of a Workshop

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Overcoming Barriers to Collaborative Research: Report of a Workshop

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Overcoming Barriers to Collaborative Research: Report of a Workshop