The virtual reality and hard data of successful university start-ups that may succeed….or not! August 2020

By MADELEIN KLEYN, Published in Intellectual Property

University technology start-up companies have the advantage of kick-starting business with valuable intellectual property (IP) assets, a privilege very few start-ups have. Other than this, University start-ups are faced with the same challenges any start-up would have, and probably have the additional disadvantage that very few professors are born businessmen.

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Technology transfer is the process whereby innovation and research from an organisation are developed into potentially patentable and licensable products or services for the marketplace, either through licensing to an industry partner, or through a start-up company. The scope of this article is the technology transfer out of universities. Here the aim of technology transfer is dual, in assisting with funding next generation research and innovation, and/or spinning out and growing a start-up into a successful business.

As most university inventions are very early stage and require further research and development, the university technology transfer model is based on identifying a willing, and often not the most suitable, commercial partner as licensee or as an investor equity partner in the start-up.

The licensing model is based on the requirement that the licensee must make significant investments in time, effort and money to commercialise the technology, product or service. Licensees are often required to carry cost for prosecuting and maintaining the underlying patent portfolio whilst ownership often remains with the university licensor. A license would typically include certain milestones that are to be met over a defined period which could entail investment support such as further research product development funding, manpower and funding for technical trials required for regulatory approvals or sales and marketing support.

Generally, universities attract high achieving students with multi-disciplinary backgrounds, providing a well-rounded team of individuals for early stage start-ups. The challenge for a university start-up, despite entrepreneurship programmes and ample government grant funding, is that most university researchers do not understand what running a business entails and consequently their ideas fail to make a sustainable impact in the market. Mobilising start-up initiatives that achieve measurable success is not always easy. Business and IP strategy as well as related development plans evolve and change over time as the company grows. Challenges facing start-ups include lack of manpower, lack of skills, high technology development requirements, lack of adequate IP protection, market potential (or lack thereof) and funding needs.

What remains unique and special about university technologies, is that innovation ranges from life-saving medical devices to new ground-breaking AI-powered analysers and sensors which provides attractive opportunities for venture capitalists who seek to invest in new sources of value and profit.

The IP strategy model

A university start-up is formed when the researcher-founders spin out a company with the intent to commercialise their IP in a business venture.

IP rights are valuable assets and, in the case of a university start-up, often the only assets it has access to. Patents are the most expensive registered IP right to obtain, but they provide the broadest scope of protection. Having an IP portfolio can drive consumer demand and distinguish one's product or service from that of competitors. An IP portfolio can become very valuable, especially in attracting investors, as IP rights serve as barrier to entry by competitors. IP rights can also help the finances of a business by providing an opportunity to generate revenue from licensing. As such, it makes sense for a start-up to have a defined IP strategy that clearly supports the business model and can be communicated to the team and stakeholders.

IP strategy for a start-up is not limited to protection of its technology and brand through registrable rights. There are many red herrings. As the business grows and projects are outsourced to consultants, and with fluctuation of staff, the challenges increase. In early stages, obtaining own IP, as a result of improvements on the university licensed IP, or through new developments or brand building, is essential.

Proper mechanisms must be ensured. These include:

  • Appropriate agreements for IP assignment from employees and consultants. Where work products are requested from external contractors or consultants, written assignment of ownership to IP must be obtained. Often start-ups are unaware that the mere receiving of a deliverable work product is not an assignment and transfer of IP ownership underlying such deliverable.
  • Confidentiality undertakings from staff, contractors, consultants and potential investors – which set out the confidentiality terms applicable to the scope of disclosure, specific rights to the limited use of information. Specific care should be taken to avoid any implied license for IP under the confidentiality agreements;
  • The duration of confidentiality,
  • Trademark availability searches should be conducted before use of any trademark or branding. This is to avoid potential risk where a third party may already own the trademark.
  • Registering trademark and domain names early.

Legal pitfalls

Two of the most important legal documents for a start-up are the founding shareholders' agreement and the Memorandum of Incorporation.

Beware the DIY approach on any form of agreement. This is a problem that plagues most start-ups. All too often, start-up companies are so busy with starting up the business and chasing funds that any standard proforma agreement will do, and very little, or no, consideration is given to the potential legal consequences. Sometimes, with good intent, negotiations of contracts start but, as the business continues, without a contract actually being signed, conduct and behaviour may be different from the provisions intended to be agreed in the contract. Master agreements templates rarely work, and this is an area where qualified legal counsel initially, and at least for final checking, is absolutely necessary.

Beware the "contracting by email" it creates a completely legally binding contract (see the Forcelli vs Gelco case (New York, USA).)

The last thing a start-up company needs is costly and long lasting litigation that could have been avoided by implementing (and enforcing) reasonable legal controls.

Why do some start-ups fail, and others not?

A Google search "why do start-ups fail" finds 300 million stories in 52 seconds. Yet new start-ups arise every day.

Forbes statistics in 2019 (See https://www.forbes.com/sites/abdoriani/2019/10/24/11-surprising-and-insightful-statistics-about-startups/#1e0e30c26120) show that mentored start-ups grow much faster and raise more money than those that don't have access to mentorship programmes. The statistics also show that technical based (which is where university start-ups qualify) are less likely to be successful than non-technical start-ups. Interestingly, according to Forbes, "over 70% of start-up founders eventually realise that their IP is not a competitive advantage, mostly as most innovations (42%) fail due to a long development time. Selecting the wrong idea to innovate represents 32% of innovation failures. "

Based on the experience at Stellenbosch University, which reflects these results, in the university environment, technology transfer offices with incubators such as Stellenbosch University's LaunchLab and accelerators that incorporate mentorship programmes are likely to "produce" successful start-up business that are sustainable and grow over time. Frequently, it is not the technology transfer model as such that fails, but rather the challenge of getting the right people teaming up.

According to a 2019 OECD report on public research and innovative entrepreneurship, "start-ups founded by researchers introduce innovations that are more radical compared to other start-ups. While start-ups founded by undergraduate students receive less VC funding and are less likely to exit via IPO or acquisition, those created by researchers are as successful as their non-academic counterparts."

As such the challenge doesn't seem to be the university professor's lack of skills or knowledge, but rather whether those involved in the start-up business know how to prioritise and guide improved performance, value, and sustainable growth, and most importantly, have the right networks.

It is essential for a start-up business to have the ability to immediately recognise opportunities and challenges and to design the strategic imperatives necessary to maximise chances, while overcoming difficult times and thriving despite them. From literature and practical experience, the top reasons for failure include inability to reach the market (no demand, time to market too slow), no funds, not the right people.

Neil Patel comments in Forbes that a successful start-up has a product or service that meets a burning need, that pays attention to all the finer details of implementation (including IPRs), that serves its customers, has the right balance between quality and quantity, complementarity of work force, has the potential, ability and motivation to grow fast to acquire relevant market shares and sustain growth, and the ability to recover from the hard-knock of start-up life.

Two case studies considered in this article, illustrate some of these aspects. The start-ups are at different levels of maturity and both operate in fast growing industries.

Custos

Custos Media Technologies was spun out as a university technology start-up by an experienced cross-disciplinary team specialising in signal processing, distribution systems, cryptocurrency, machine learning, and media and behavioural economics. Since then the team has grown to include various experts in the fields of watermarking technology.

The founders developed a system for monitoring third party access to restricted items such as a document, a film, music, or similar electronic media. In simple terms, the technology is based on cryptocurrency, like bitcoin. The system embeds a unique code into each media file, which unlocks a cryptocurrency deposit. Any user who illegally shares a file to which they have been granted access, enable the code to be found and the copy tracked. The innovation was protected by patent.

The most important asset of Custos is its IP. Their strategy is to exploit intellectual capital through the skills and know how the multidisciplinary team provides, register patents and trademarks for the business and the products it developed and building a strong brand. The business model included to form a separate IP holding company wherein the IP is housed to safeguard it from risk in the event that the operating entity experiences financial difficulty, or fails completely, to enable the university to regain control over the IP assets.

Custos is a great example of how the SA start-up ecosystem can be leveraged to advance SME growth. The R&D spin-out received seed funding from the South African Technology Innovation Agency with support from Innovus Technology Transfer Office, and was elected winner of select start-up competitions at the Stellenbosch University Incubator LaunchLab, participated in the Grindstone Accelerator programme, and received local angel investment and international VC funding. Custos raised US$265k in their second round of the seed funding, part of which came from a local angel investor and the rest from New York-based Digital Currency Group. Custos partnered with other leading experts who complimented their service offering. In 2017 Ventureburn, in referring to start-ups, said of Custos "With Hollywood always looking to fight movie piracy, this is one start up you're bound to hear more of."

The business grew fast and attracted more investors. However, a dispute arose with a VC and the parties could not come to agreement which resulted in litigation. As a consequence, Custos was forced to lay off most its staff.

Amazing technology, successful business, strong valid IP rights, funding, right blend of skilful people, big contracts, what could possibly go wrong?

This is the classic story of a disgruntled (potential) investor versus inexperienced management of the start-up. Was that the end of Custos? Hopefully not. It has all the ingredients to enable it to regroup. The technology is in high demand, and in the short time of operation, it safeguarded films from piracy and successfully protected about 600 film titles.

AxioVR

Virtual Reality (VR) is defined by Miriam Webster as the computer-generated representation of a three-dimensional image or environment usually in combination with hardware such as a headset that gives the user a fully immersive "real" experience.

What makes VR powerful is that users can be fully immersed in a paradigm and experience a close resemblance to a real-world scenario

Stellenbosch University's spin-out company, AxioVR, was formed in 2019. It focuses on designing unique tailormade optimal paradigms for various industries. The company slogan is "We can really change the world, your world! One Virtual experience at a time. "

One of the founders is a medical doctor and clinical researcher based at the Department of Psychiatry. The business aim, initially, was to assist patients with mental illness, such as schizophrenia, through an experience true to real life, but yet safe for them to step out of at any time. At the heart of AxioVR is the dream of "science meeting art".

AxioVR's latest venture is to address a need in the research and education sector. 3D VR teaching allows visualisation of concepts which makes it easier to understand. While using VR as a training or research tool, another key metric is biofeedback and data generated from user experiences. With AxioVR's scientific approach, customers can get unbiased feedback on user experience, including data records generated during the VR experience. The next generation product is interactive learning, training and marketing platforms that are scalable and applicable to real world problems

The AxioVR team is an interesting combination: a businessman, with experience in the selling of cutting edge scientific and medical equipment, a researcher in the rapidly growing field of neuropsychiatry and a 3D designer.

The various challenges and lessons learnt were similar to those experienced by most early start-ups: lack of funding and sufficiently experienced staff to facilitate high-growth. AxioVR realised that investors want a polished product that is scientifically sophisticated, but user friendly, elegant and artistic at the same time. In response their business strategy focused on strengths and minimised weaknesses. The products of AxioVR are mostly copyright works and the sustainability of the business entails the appointment of specialised consultants, rather than permanent staff. This entails good contract management, confidentiality and data privacy undertakings (many of the clients are patients), copyright assignment of the various works required as deliverables on each stage.

The refined scientific products used in the study of fear and the treatment of anxiety of patients resulted in the flagship product, "AxioAcademy". AxioAcademy is a new VR software platform in development phase that enables the presentation of complex study material to undergraduate students in an immersive environment. These includes the study of neurophysiology, anatomy and clinical training.

A fully developed AxioAcademy will allow students to experience education in 3D. Students will be able to physically interact with the red blood cells in the body; they will see exactly how cancer cells divide relentlessly forming tumours; they will be able to operate in a virtual operating theatre to test their ability under the stress of such an environment to ensure they can save lives while still in a controlled environment.

An inspirational future and a start-up with much potential! There are many lessons to be learnt from start-ups failures and successes. There is no "one-shoe-fits-all". You may fall! Chances are that you will. What matters is that you fail fast, get up and try again, you will succeed!

Some key reminders for any start-up: choose founding members wisely both in number and quality; people are the most crucial but least predictable element of any business. The right combination of skills, experience, networks, and temperament among the founding members can vastly increase the odds of success, however, consider overheads and the value of money, don't employ too many people too soon.

Split-ups happen all the time. Do not work on a handshake, have an "ante-nuptial contract" for an inevitable breakup; it is crucial business protection. Find mentors to coach the team, participate in praxis proven accelerator programmes if accessible and possible. Choose investors who participate not only in seed funding phases, but also in additional funding rounds. Manage funds properly – keep your burn rate under control, it is necessary to show investors value for their money.

Have an adaptable, agile business strategy supported by a corresponding IP strategy. Have a proper marketing plan, accept that there are substitutes – know who your competitors are and how to outsmart them.

Ensure that your business has a risk management plan and strategy, this entails understanding what the risks are, quantify their impact and qualify management to minimise the consequences. Consider risk management strategies for cybercrime, reputational damage and potential litigation, and economic crisis that can lead to loss of business or even bankruptcy. Always safeguard your reputation, not just by building a brand for your business that will attract investors, but also with regard to governance, compliance with legal and regulatory obligations. This will protect you from unnecessary and costly litigation.

A final word of caution, when concrete expert advice is advisable, seek it. Don't do it yourself!

Kleyn is Director, Technology Transfer at Innovus and Research Fellow of Chair of Intellectual Property, Stellenbosch University.