Shelley: In some ways, starting young was a good thing because, as we talked about in the webinar, being young made me more willing to take the leap. If I had had a lot of industry experience, would I have been brave enough to jump in and do it?  I would like to think so, but honestly maybe not. The naiveté was good because I think if any of us really knew how hard it would be, we wouldn't do it. My husband and I had been married for a while; we had a mortgage at the time, but he was working, and we didn't have kids. It was a reasonable time to take big financial and career risks. If I had waited to start my first company until we had kids and I was the sole breadwinner, would I have done it? Maybe, maybe not. I will say that being young and female, it was not easy to be taken seriously. My business partner and I were fortunate that our first company was in the research tools space, and we didn't have to raise much money. All in we raised less than $5,000,000. Because the dollar amount at risk wasn’t huge, the investors were willing to let two 29-year-olds learn how to build and run a company on their dime, whereas if we had gone straight into therapeutics and we were raising $50M to $60M, I do not think anybody would have given us a chance to stay at the helm.

During the webinar we had a lot of questions about how you initially contacted investors. One main struggle of new startups founders is how to get the attention of investors. Can you tell us about your experience of approaching them?

Shelley: I’ve done this four times, and I don't recall having to do cold calls when raising capital because you don't need many seed conversations to build a big tree of warm introductions. I always tell people to just talk to anyone who will talk to you. In my first startup, my business partner and I went around our department at Stanford and asked if anybody knew of any former students or postdocs who had started a company and would they connect us with them. With a few of those conversations, you get to know those people, then you ask them, “Hey, are there any other people that you know that it would be useful for us to talk to?” Each one of those becomes two or three more, and then two or three more, etc. It’s exponential like that. Each warm conversation you have, you should, over time, be able to convert to another series of warm introductions.

Many people are obsessed with getting the perfect pitch deck and getting their big pitch with venture group X. In my experience, that is not the right path. That big final pitch with the investment committee should be almost a formality. It often starts with a series of coffee chats with no slides; then maybe half of those turn into a longer conversation of 30 minutes or with you sending your non-confidential deck; then half of those invite you to present your deck to a few people from their team; and maybe half of those go to CDA and you give them the full confidential pitch. Finally, half of those go to diligence and a formal pitch to the VC investment committee.  So that big formal pitch is often the last thing step because it's all about the relationships you have built on the way down the funnel. If you drop out of the sky with an hour-long pitch and they've never heard of you and they haven't gotten to know you, why should they care enough to really pay attention?

Once you do get the investment in your company, how often do you talk with the investors and what else have they done for your startups besides provide financial investment?

Shelley: Across the board, almost all of them brought something besides financial support. With most of my companies, I have started with Angel investors (friends and family), but once you start getting venture capital investors, they should be bringing more than just money to the table. What I've had to learn is to figure out from each investor what they can bring besides money because they do not always identify it well themselves. Some are really networked in finance, others are great operators, and you have to zoom in to figure this out. Once the VCs are invested in the company, I try to check-in with each board member for about 30 minutes once a month. For each of the other investors who are not board members, it depends. I have a couple of venture groups where I present to their leadership team once a quarter because it is not just the board member that wants to hear the update. There are other venture groups where we present to their larger teams once a year. For investors who do not have information rights, it is largely a non-confidential update once or twice a year, often in the form of a letter.

Besides potential investor contacts, who else in your network introduced you to someone who was helpful in your first startup as a grad student? Was there a Stanford alumni network that was useful to you?

Shelley: At the time, I wasn't aware of any official Stanford medical school alumni network, but the informal alumni network was what got us off the ground. I'm now on the Stanford Medicine Alumni Association Board of Governors and a huge amount of what I do is talking with grad students, medical students, and postdocs, providing informal advice and connecting them to relevant people, encouraging them to reach out. People are so generous with their time. The worst thing they can do is say no. You don't really know how a relationship might be helpful down the road, so do not disqualify having coffee with somebody because you are not sure how they can benefit you in the next 6 months. Look at it as: knowing this person may be useful five years from now in ways I cannot even imagine now.

When first founding a biotech startup, what are some of the technical challenges you experienced that you perhaps were not aware of because of your academic experience?

I do not think there was too much on the science front that I was unaware of because starting a lab at a company, scientifically, is a lot like setting up an academic lab. However, I was somewhat surprised at how much it costs and how much work it takes to set up a lab from nothing. I am sure most academic people understand how much work it is, but they receive startup grants and other support to build their labs. When founding a biotech startup, you have to do things like get to know used equipment brokers. We figured out the hard way what kind of equipment we were and were not willing to buy used. For example, we do not buy used tissue culture hoods, whereas centrifuges that are 30 years old can still be great. Our autoclave is 50 years old. These are small things, but you would be surprised how much an ice maker and ice buckets cost. It is really expensive to build a lab.

What were the primary challenges in the context of product-market fit? Scientists sometimes fall in love with their solutions, so how was your experience of focusing on answering your research questions versus answering customer problems?

Shelley: The tough reality for spinning out of academia is that you are generally limited to whatever you are working on in academia, so you have to make the best business model out of what you have been working on. It can be a bit of a narrow scope. At SwitchGear, the company we spun out of Stanford, we were pretty clued in to the kinds of products that people would want because we were going to try to sell back into our own research community. We had a general sense of what would work, but our business model was wrong. We thought we would be making a small number of big sales each quarter, but once we were a year in, we realized we hit the limit on those pretty quickly. Our real long-term customers were the ones who wanted to spend $1,000 rather than $10,000 per quarter, so we had to completely change how we approached sales and marketing. You cannot personally touch everybody who wants to spend a thousand dollars. We built an e-commerce portal listing 70,000 potential products, which really changed how we were selling. Our first customers were human genome project consortium colleagues, so those first 10 were pretty easy, everything after that was difficult. That is when we had to figure out where to advertise, and we hired a marketing person.

How do you find help with other non-scientific aspects of running the startups such as accounting, legal, and HR?

Stanford OTL, at the time, set us up with contacts in law firms to form a company. We also relied on recommendations from some of our early investors and entrepreneur peers for advice on other aspects, for example HR. There is a remarkably large ecosystem of this kind of support for small companies that you do not know is out there until you start asking. When you start asking you will be pleasantly surprised.

How did you determine your initial founders’ equity split and how did dilution and options work for you?

Shelley: I will speak in general terms since I have done it a few times. I now think about early equity in a company in two buckets. The first bucket is founders’ shares - shares divided up among founders according to what people did to get the company to the point where it was ready to spin out. Be generous here. These shares tend to get continually diluted over time and are not usually topped up in subsequent financings, so they will represent a very small percentage of all the outstanding shares in the end, even though they are very big at the beginning. That is your one time “Here's what we all did contribute” calculation; be generous because it is not going to matter that much in the long run. What really matters over time is the second bucket - your compensation as an employee or an advisor. Focus your energy on your compensation package. Those numbers are just bigger in general. Investors are not going to tolerate a massive founder pool. They want to have a bigger option pool for people who are actually going to be doing the work, and that is what you want to get your hands on. You are taking the risk, you are leaving your job, while your PI, who stays at the university, does not get as much because they are advising and are not coming on full time. Often when a big round of investment happens, existing employees are issued extra stock options as a “top up” so the dilution is less dramatic for them, encouraging them to stay at the company. Also, the longer you stay at the company with stock options vesting every year, you may eventually get more option grants to keep you incentivized for a longer period of time.  These are a few reasons why employment-based options often become more important than founder shares over time.

Besides founders’ equity agreements, what were other agreements you needed to contend with in your startup that were new to you? For example, for your SAB members?

Shelley: The good thing is that big law firms have a standard startup package that gives you templates for a lot of the key things - employment agreements, consulting agreements (which SAB members generally fall under), a stock purchase agreement, etc. You should not be homebrewing your legal documents. As much as I am a bootstrapper, you just have to spend the money on legal and get it right from the start.

You’ve now founded 4 startups. How did you filter up ideas that you thought would be successful for a startup?

Shelley: Nathan, my business partner, and I joke that he tends to be the crazy idea guy, and I tend to be the pragmatist. In any brainstorming process, we eventually find ideas that meet both of our criteria. My response to some of his ideas is, “But there are many people that could pursue the idea, it wouldn’t have to be us.” So, ask yourself, what are you uniquely qualified to do? Maybe not unique in the world, but on which topics are you in the top 1% of people on the planet in terms of expertise? You have to stay somewhat in your lane, especially early on, to get investors interested.  Ask yourself: Why does it need to be you and why now? In addition, on paper it looks really appealing to be the “first company to do X”, but this can be particularly challenging in biotech, where spending tends to be much higher than spending for a software company, for example.  At SwitchGear, I learned that while it’s appealing to think you'll be out in front and you'll be the first to do something, what you actually find yourself doing is spending most of your time evangelizing and trying to convince people they have a problem that you can solve. If you're so far out in front they don't even see the problem in their own work, it is a major uphill battle to convince them to spend money on the solution you are providing.  On the other hand, if you are helping solve a problem they have today, it is easier to convince someone to buy from you.  Don’t get me wrong, we always need entrepreneurs to push the boundaries in their fields, but you have to be realistic about how much money you will need to support the time and person-energy required to evangelize to your people.  That can be hard to do when bootstrapping. Because of this, being a “fast follower” behind another company is not necessarily a bad thing. You get to capitalize on the work they have done educating potential buyers, learn from mistakes they made in v1.0 of the technology, and then come in right behind them with an even better solution to the problem.

I am often asked how to figure out whether an idea “has legs” as a potential startup.  My advice is to find 5 or 6 venture firms that invest in that area, then go have coffee with the junior members of those firms. You can say “Hey, here's a problem I see in my field, and I think I can solve it.” It is their job to understand what problems exist in their field of expertise and whether people will be willing to pay to solve them. If six in a row come back and say that is a problem that is being solved 3 other ways, then you know that unless you can show you are tenfold better than those other solutions, you are not going to get investors. No advice from a single VC should be taken as gospel, but listen for themes that are consistent across multiple conversations.  Significant VC skepticism does not mean you should kill your idea, but it will influence how you tell your story and how you decide what your business model is going to be. You could also walk away from those conversations deciding that your idea does not currently have legs, and you can keep it cooking in academia until it is further along.

I’m going to ask this because it was asked in the questions by the audience, but I am also going to caveat this with noting that I don’t think a male founder is ever asked this question. How did you plan and manage starting/raising a family amidst the chaos of starting a company?

Shelley: I appreciated that you present the caveat because this question bothers me immensely when it is directed primarily or exclusively at women. I was raised mostly by a single dad who was also building a company when I was growing up, and I know he faced many of the same challenges I do. In addition, my husband is the full-time caregiver in our household, and my business partner, who is male, is as deeply involved with his family as I am. So, I feel like it is also offensive to them to not ask men that question. Let’s talk about working parents in general. The short answer is you just figure it out. There is never, ever a good, easy time to have kids in any form. My kids are adopted, but you know what? Adoption is really hard, just like having a baby is really hard, and infertility is really hard. Family stuff rarely happens the way you want it to. If you are going to sit around and think that you will wait for the perfect time to do this, it is just never going happen. I go with the philosophy of happy parents, happy children. The best way for me to show up for my kids is to be generally content with what I have chosen to do with my life. My husband has been the full-time parent since the beginning which I think is a lot of why I have the freedom to do what I do. At the drop of a hat, I can get on a plane.  And if a kid is sick, there is no question as to who is getting called. That being said, there are lots of families with two working parents and even two entrepreneurial parents, and they figure it out their own ways. I think running your own company might actually be the best time to have small kids because you have the most flexibility for when and how the work gets done.

Do you have any other advice you would provide graduate students who are potential company founders that we didn't talk about in the webinar itself?

Shelley: Three pieces of advice that speak to my own philosophy are: be brave, be kind, be fierce. Be brave - getting a new company off the ground is not for the faint of heart. You just have to jump. You have to ask yourself, “What's the worst that's going to happen? Is it uncomfortable or is it life shattering?” Usually, if you are being honest with yourself, the worst outcome would just be really uncomfortable. Be kind - this is a small community, so the positive energy you put out by being generous, respectful, and supportive of others comes back to you threefold. Be fierce - you have to continue to believe in yourself and maintain that fire in your belly after 50 consecutive “no’s.” My co-founder always says that to do what we do, you have to be an eternal optimist. You have to believe so firmly in yourself and your idea that when somebody tells you no, you believe it is their loss. I am not going to pretend long strings of rejections do not hurt and they do not bring you down, but when you circle back and recharge, do you still believe in this? There has to be a fire underneath. And you can do hard things!

CEO & CO-FOUNDER OF THRUWAVE

Before ThruWave, Claire was a postdoctoral scientist in the laboratory of Matt Reynolds at University of Washington (UW). Her research focus was implementing novel imaging systems in frequency regions ranging from the X-band into the millimeter wave regime. Before being CEO, Claire was the Vice President of Operations at ThruWave. Claire co-founded ThruWave in 2017.

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In early 2022, OUP hosted a webinar on Pitching 101: How to Present Your Startups and Technology Innovation to Potential Funders. Due to the overwhelming interest in the topic, we wanted to gain additional insight from the OUP investment team on best practices for a crucial step before the pitch – how to approach VCs. We spoke with our Tech Associate, Ajay Rayasam, and our Life Science Associate, Margalit Haber, for their perspectives on how best to initially interact with VCs. While some of their insights were similar, as with all individuals in the venture capital space, they did have differing opinions. The interviewees’ statements below have been edited for clarity and length.

 

Startup compensation is often an opaque and awkward topic for first-time academic founders. How much equity do I receive? My CEO? The PI(s)? Other co-founders? How will my choices affect future compensation? The truth is, equity allotment is not a one-size-fits-all proposition. And as the data shows, there are a few roles that have an outsized impact on an academic spinout’s cap table. Considering the following strategies and investigating all compensation tools at your disposal can help create a productive balance of incentives and cost. 

The following observations are based on collective insights from a decade of working with hundreds of founders and an analysis of the equity structures of over 90 university spinouts.

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CO-FOUNDER AND CSO OF WEREWOOL

Professor Schiros is an Associate Professor at the Fashion Institute of Technology (FIT) and a Research Scientist at Columbia University. She is engaged in transdisciplinary research developing wearable technology, nanomaterials for low power electronics and clean energy technology, green chemistry recycling of textile waste, and biofabrication of performance textiles, including microbial bioleather. Professor Schiros co-founded Werewool in 2020 and AlgiKnit in 2017.

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FOUNDER AND CEO OF STREETLIGHT DATA

Dr. Schewel, an environmental engineer, is the founder and CEO of StreetLight Data, the first company that made it easy, affordable, and efficient to access real-world transportation data. Before founding StreetLight in 2011 as a graduate student at UC Berkeley, Dr. Schewel worked on transportation sustainability issues at the Federal Energy Regulatory Commission and Rocky Mountain Institute.

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COFOUNDER OF CODEON

Professor Medard, an information theorist and electrical engineer, is the Cecil H. Green Professor of Electrical Engineering and Computer Science at MIT. She leads the Network Coding and Reliable Communications Group at the Research Laboratory for Electronics at MIT. Professor Medard cofounded Steinwurf in 2011, Chocolate Cloud in 2014, and CodeOn in 2014.

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Daria Mochly-Rosen

Professor Mochly-Rosen, a protein chemist, is the George D. Smith Professor in Translational Medicine and Professor of Chemical and Systems Biology at Stanford University. Her lab develops pharmacological agents and applies them to understand molecular and cellular events under basal and disease conditions using in vitro, in culture and in vivo models. Professor Mochly-Rosen cofounded two companies, KAI Pharmaceuticals in 2003 (acquired by Amgen in 2012) and ALDEA Pharmaceuticals in 2011.

Dr. Linke, a biomedical engineer and infectious disease epidemiologist, was a research scientist at Colorado State University before cofounding and heading SiVEC as the CEO. Her scientific experience relates to the R&D of novel therapeutics, antivirals, and diagnostic tests. Dr. Linke cofounded SiVEC in 2016.

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A conversation with Stephanie Carlson, Co-founder of Reflection Sciences and Reflective Performances and a developmental psychologist in the Institute of Child Development at the University of Minnesota.

Stephanie Carlson, Co-founder of Reflection Sciences and Reflective Performance. Professor Carlson is a developmental psychologist in the Institute of Child Development at the University of Minnesota. Her research interest is in the development of children’s executive function skills, including psychometrics and the key roles of imagination and the caregiving environment. Professor Carlson co-founded Reflection Sciences in 2014 and Reflective Performance in 2021.

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Many academic institutions want to enlist alumni to optimize their research commercialization efforts – whether it is to judge a pitch competition, discuss licensing opportunities, share entrepreneurial journeys with students, or even donate to a new venture or proof-of-concept fund. But what are the best practices in this area? We interviewed 7 universities and academic programs about their interactions in engaging alumni for research commercialization.  The individuals we interviewed at each organization had different roles within the research commercialization process – some were consultants, directors of incubators, or in new ventures, licensing, and corporate engagement offices.

Through these great conversations, a common thread emerged. Most universities initially interacted with their alumni by leveraging existing programs or resources while simultaneously learning best practices and pain points. They would then utilize these lessons to optimize these initiatives to the benefit of all. Luckily for us, these universities were more than happy to share some of the lessons they learned.

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But, using march-In rights to control drug prices is the wrong solution and would be catastrophic public policy.

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While investors have directed more attention to universities for deal flow in recent years (see bar graph below), most VCs don’t have a singular focus on startups commercializing university research and settle for letting the startups come in via normal channels, e.g. introductions from other VCs, investor conferences, pitching events, and the news. And for institutions that aren’t in the Boston biotech hub, or the Bay area, or New York City, or even other major coastal cities — rising above the noise level of their peers to attract attention from top-tier venture capital, angel, and strategic investors can be a challenge.

So what can TTOs do to attract investors to their university’s startup opportunities? Here are some tips from OUP, with help from Mike Psarouthakis, Venture Center Director at the University of Michigan and Rob Hallford, Director of New Ventures at Duke University, both of whom recently participated in our webinar in May 2020 entitled ‘Cultivating Relationships with Investors at Your University.’

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While their origins are investing in businesses based on innovations from the University of Illinois, they have also expanded to explore other regional opportunities. Illinois Ventures offer three types of funding: proof of concept grants, seed funding, and venture capital.

Most universities I know are now employing some sort of internal proof-of-concept grants — but to combine those with seed funding and venture capital under one roof is a fairly unique concept. The proof-of-concept funding is Illinois Ventures’ newest area of funding, with $50,000 for a first phase and possibly a larger amount in a second phase if the first phase goes well.

For their seed stage funding, Illinois Ventures typically invests around $150,000 in a $500,000 round, usually through a convertible note. Illinois Ventures recently announced the raise of their third venture fund and have already started investing out of it.

Nancy and I explored a range of topics during the interview, from the work done at Illinois Ventures, to attracting talent to Illinois startups, to her work at the Women’s Entrepreneurial Life Sciences Initiative. Excerpts of the interview are below, but you can find the full interview on SoundCloud or iTunes.

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