ABSTRACT

An organization engaging in technology transfer is often faced with the obstacle of funding the cost of technology transfer activities when internal funding is not available or has been exhausted.

The structure of a transfer deal can be designed to attract outside investment by presenting the deal as a transactional opportunity with an acceptable tradeoff between assumption of risk and potential reward.

A deal structured in the form of an intermediary entity that is dedicated to the transfer of a specific technology application was designed and tested with favorable response from the investment community.

INTRODUCTION

There are certain inherent costs in the completion of technology transfer activities. At a minimum there is a certain amount of labor and expense just in returning calls. In a more proactive transfer approach, additional costs will be incurred in the form of searching out buyers of technology, gathering and analyzing information for due diligence, and meeting prospects.

Many small businesses elect to transfer technology only after exhausting all available funds in pursuit of other forms of commercialization.

The budgets of large businesses, universities and federal laboratories are often subject to severe limitations that do not permit extensive proactive transfer activities.

A problem arises when there is no (or inadequate) funding to cover these costs. Costs can be contained only so far before the lack of funding substantially reduces the probability of success that the technology will be transferred.

External sources of investment must be sought to cover the cost of transfer activities. Efforts in this direction have largely met with failure. Although the problem is obvious, the shortage of external investment in technology transfer activities continues.

Analysis of past efforts to gain external investment reflects different concerns which might be addressed by structuring the transfer deal in certain ways. This paper presents the testing of one approach to solve the problem that is presented.

ATTRACTING INVESTMENT

An incentive for investment in technology transfer activities must be established. The incentive must take into consideration the objective or mission of the investor.

Most investors have a single objective. This objective is to generate maximum earnings from the investment of the money that they control (Lindsey, 1989). This is the focus of this paper.

Other investors may have alternative objectives; for example, economic development organizations interest in creating new jobs, but these objectives are not addressed within this paper.

RISK/REWARD TRADEOFF

From an investment standpoint, there is a direct correlation between the degree of risk and the desired reward or return on investment. A good example of this relationship is demonstrated by the difference between bankers and venture capitalists. A bank certificate of deposit is considered to be a low risk. In turn, the interest rate is correspondingly low. However, a venture capitalist is considered to be a major risk taker. Accordingly, the desired rate of return for a venture investment is much higher.

The risk of investment in technology transfers covers a broad range; from those situations of low risk suitable for bank financing up to those of high risk, which may prove too risky even for venture capitalists.

Likewise, the payoff from technology transfer activities may be so low as to not justify any investment. On the other hand, return on investment from a particular situation may far exceed the minimum objectives of venture financing sources.

OBSTACLES TO TRANSFER

The key to attracting investor interest is the reduction or avoidance of obstacles to transfer. Set forth below are several common risks or obstacles to transfer.

Innovator

The creator or innovator of the technology may be the single greatest obstacle to transfer and may make the transfer of technology an unacceptably high risk.

Many innovators lack any substantial experience in the different skills necessary to complete transfer activities. Active participation by the innovator may cause a prospective buyer to credit the viability of the technology on the same plane or level as the skills of the innovator. Investors will avoid investing in situations where efforts are led by unskilled people who have not surrounded themselves with other team members.

Many innovators have difficulty pricing their technology. The innovators have no real appreciation of the marketplace, nor of the costs necessary to present the technology to the market. In addition, innovators may have over-invested in the technology and seek to recapture what is now clearly a poor investment. This translates into a price for the technology that is too high. Investors will avoid

unrealistic assessments.

The obstacle of the innovator suggests a transfer structure that is designed to work without the active participation of the innovator.

Lack of Essential Personnel

Often, neither the innovator nor the prospective buyer has personnel who are experienced in the transfer of technology. As a result, transfer activities often consume more time and expense than necessary. In certain instances, this lack of essential personnel may completely defeat any transfer attempts. Investors will avoid situations without complete management teams.

The obstacle presented by missing skills suggests a transfer structure that readily allows the use of different skilled individuals as necessary to carry out all transfer activities.

Focus

Almost every technology has multiple possible applications. Each application represents a new challenge in defining the potential benefit that the technology may represent in that market. As a result, the transfer of even a single technology may overwhelm available resources to pay all transfer costs. Therefore, a lack of funding is compounded by an attempt to complete transfer of all possible applications.

This obstacle is central to the problem that faces universities, federal laboratories and technology brokers who hold many different technologies.  An investor will seek a well defined situation with a fixed budget for use of the funding. This obstacle suggests a structure that is limited to transfer of a technology to a single market or application.

Prioritization

Technology transfer by the innovator commonly suffers from competing agendas. The time and attention required to improve the probability of successful transfer is lacking when prioritized with more compelling issues facing these organizations. The innovator may be more concerned with making payroll than preparing for a presentation to prospective buyers. In the case of federal laboratories and universities, technology transfer is clearly secondary to their primary missions of creating and disseminating knowledge.

An investor will want full attention to the use of the money that it is investing. The obstacle of prioritization suggests a transfer structure that is separate and independent from all unrelated activities.

Flexibility

Change is constant during transfer activities. This is in part due to the ever changing status of the technology and the marketplace. It is also due to the different perspective of the technology that is gained as information is gathered and analyzed. Finally, the desires of the prospective buyer may vary radically from one to the next as to the form in which the transfer is completed.

Investors will avoid situations where it is perceived that there will be only a single possible transfer situation. The obstacle of flexibility suggests a transfer structure that will be suitable for several different variations of transfer and which may be easily modified.

REWARD

The success of an investment is measured by the rate of return. This represents the amount of money received over and above the amount of the original investment. It is typically stated as an interest rate. For example, a four (4%) percent interest rate, or rate of return, represents an investor return of $1.04 for each dollar invested.

Rates of return are commonly measured in terms of one year. This reflects the value of money over time. An investment that pays back $1.04 on an investment of one dollar over a period of five years is a clearly less desirable choice than an equal payback over a single year.

In order to attract investors, the reward for investment in transfer activities must be equal to or better than that which might be received from other investments with a similar degree of risk.

Desired Rate of Return

The desired rate of return on an investment will vary with the investor. Some investors will be quite content with lower rates of return, being more concerned with the degree of risk than with the amount of payback. Other investors will seek astronomical rates of return, even willing to take risks which are more of an gamble than a true investment.

Professional investors, often in the institutional form of venture capitalists, will state a desire to obtain a rate of return on their investments equal to 30%. However, many venture capitalists have failed to attain this objective, deriving returns of less than 10%, and may be open to less promising opportunities.

This reward suggests a transfer structure that presents a high probability of investment recapture along with rates of return comparable to the perceived risk.

Exit

An integral question of most investors is how to cash out. This is an event where the value of the investment is converted to cash and paid to the investor. In a normal venture investment, this is accomplished through a sale of the company, sale of stock in the company after public registration of its stock, or a stock swap with an already registered company. Any transfer activity must also have an exit point if it is to be considered by investors.

Ordinarily, completion of a transfer results in cash payments up front or over time in the form of a royalty. As such, an exit point is naturally created upon successful transfer of the technology if the payments are made directly to the investor. If, however, the payments are made to the innovator, then no exit point has been established.

This reward suggests a transfer structure that is designed to allow the investor to directly participate in revenue from sale of the technology.

Superior Investment Opportunity

Most importantly, a technology transfer situation should represent a superior investment relative to that of other investment opportunities under consideration by the investor. This superiority may derive from a potential for a higher rate of return on investment, shorter payback of the investment, or the elimination or reduction of standard risks.

Many opportunities exist to create a rate of return from technology transfer activities that is higher than standard venture capital situations. The basis for these opportunities lies in the fact that the technology is undervalued (Goldscheider, 1993). The misperception as to value is typically caused by presentation of the technology only in a technical context without regard to its potential market impact.

Application of the proper transfer techniques will serve to raise the perceived value to a point equivalent with the actual value. This change may be dramatic and may be accomplished with a relatively small investment in the cost of completing a transfer. Therefore, a properly timed investment in the right technology will yield a tremendous payback on the transfer investment.

Unlike a standard venture capital investment over a period of 7-10 years, the time between investment in transfer and the payback may be only a few months. Successful transfers should payback the original investment in 6-18 months. This shortening of the investment period significantly reduces risk in today's rapidly changing technology markets.

The reward of a superior investment suggests a transfer structure designed to emphasize the possibility of a higher payback in a shorter period of time.

DESIGN OF A STRUCTURE

The concepts stated previously were taken into consideration in the design of a technology transfer management process and structure by The Denver Technology Exchange Corporation. This process is referred to herein as a dedicated transfer intermediary or "Intermediary".

The model for the Intermediary is currently being field tested in the transfer of a bicycle seatpost shock absorber technology. This technology provides the rider of a bicycle a higher degree of comfort and a reduction in fatigue. Set forth below are details as to the development of the structure.

Organization of Structure

The Intermediary was established as a new organization which is separate and distinct from the sole proprietorship of the innovator. The innovator holds no ownership or management position in the Intermediary. Its sole mission will be to accomplish the transfer of the bicycle seatpost shock absorber to the bicycle market.

The Intermediary might have been established as a department or division of the innovator or of the buyer, so long as its operations were sufficiently independent as to permit separate control.

A limited liability company was selected as the type of business for the Intermediary structure. This structure was chosen over the other alternatives due to its perceived flexibility and direct distribution of transfer revenue to the investors. A limited liability company represents a hybrid between a corporation and a partnership, creating a corporate liability shield and a pass through of profits to shareholders.

Other forms of business organizations may have been chosen: joint venture, partnership, corporation (C or S), or a limited liability company. Each type of business form has its own advantages and disadvantages with regard to completing a transfer in a given situation. Actual selection of a business form should be deferred until sufficient information has been gathered so that a determination can be made as to the best alternative

Costs of Transfer

A budget was established for completing the transfer of the bicycle technology. Total project costs were placed at approximately $50,000, with the majority of the costs in the form of labor.

To reduce the size of the investment needed and make the deal more attractive, members of the transfer team agreed to take stock in the intermediary as partial payment for services provided.

Investment towards the costs of transfer activities may have come from the innovator, the buyer, a third party investor, the individuals comprising the transfer team, or any combination thereof. The contribution of services by members of the transfer team is viewed as a favorable declaration of their interest in achieving a successful transfer.

Grant of Authority

The Intermediary was granted the right to sell the technology by the innovator. The Intermediary is acting as an exclusive technology agent, with limited authority to accept offers which met or exceeded parameters set by the innovator. This enables the Intermediary to conclude a deal without further review by the innovator.

The range of authority granted by an innovator may range from the equivalent of a sales representative, who must gain the approval of the innovator, to that of a completely autonomous distributor who has full authority to make any deal. The grant of authority may be either non­exclusive or exclusive, allowing an intermediary the authority to represent the technology to a prospective purchaser.

Management

On the bicycle project, the transfer activities were initiated prior to any investment. This directly impacted the formation of the team, in that certain individuals were unable or unwilling to participate without fixed compensation. The team is presently comprised of a bicycling industry specialist, an entrepreneur, and a transactional specialist on a part-time basis. 

Within the Intermediary, a specialized team was assembled to carry out the transfer activities. The optimum selection of personnel would have significant prior experience within the industry into which the technology would be transferred and in the field of science out of which the technology originated. This would enable the transfer team to move rapidly and to leverage off of personal contacts.

Personnel may be retained on a full time or part time basis, as needed, so as to limit costs of personnel to actual operations.

Payback

As compensation for completing a transfer, the Intermediary will participate in any revenues derived from a successful transfer. A commission rate of twenty (20%) percent was established for the bicycle technology. This commission rate would apply to any up front fee, royalties or stock.

Prospective investors in the Intermediary were asked to invest $25,000 in exchange for a 25% percent equity position in the Intermediary. As shareholders in a limited liability company, investors would received a direct distribution of their proportionate share of commissions after all expenses had been paid. This creates an exit point.

The percentage of participation and the handling of revenues may vary from situation to situation. At present, within the technology transfer industry, percentage participation for technology brokers ranges up to fifty (50%) with commissions between twenty (20%) and forty (40%) percent being widely accepted.

The difference between the operating expenses and commissions would be considered the profits of the intermediary. The ratio of profits to the investment would represent the return on investment. Providing that the transfer is successful, the transfer is well managed, and the sales prices is a fair reflection of the value of the technology, then the profits should be sufficient to pay back all investment and meet the objectives of an investor.

INVESTOR REACTION

Information regarding the bicycle technology and the Intermediary was produced in the form of an investor information packet and distributed to known individual investors and venture capital organizations. Following review, prospective investors were interviewed to obtain their reactions.

The single most common reaction was one of cautious acceptance. The concept of investing in technology transfer as a transaction was new. Newness implied unknown risks. Many investors were willing to consider the Intermediary as an investment vehicle, but took extensive time in evaluating the opportunity.

The concept of segregating the transfer activities from the innovator was well received, but did not appear to be essential. There was mixed appreciation for the simplicity of valuing the opportunity and segregating it from the other activities of the innovator.

The assembly of a custom set of personnel to carry out transfer activities was considered critical to acceptance. Following the emphasis of investors on management, investors reviewing the information packet commented on the approach of customizing the management team.

Venture capital organizations typically rejected the opportunity presented by the Intermediary because the amount of the investment was too small. Left open for future discussion was the possibility of serious consideration if an opportunity was presented with an investment requirement of $250,000 to $500,000.

This situation seemed to best fit individual investors who are also referred to as 'angels'. However, this seemed to present a greater problem in matching the opportunity to the personal interests of these investors. Those investors with an interest in sports or health, more particularly with bicycling, have the greatest attraction to this opportunity.

Several inquiries were received with regard to the establishment of a fund to invest in several opportunities. The individuals making these inquiries expressed concern over the risk of the possible failure of a single intermediary. However, investing in several intermediaries presented a hedge against the single failure.