I just had four days of jury duty.  It was a civil case, a real estate deal turned sour.

One thing I always enjoy about jury duty is the jury itself, how a diverse cross section of the population looks at an issue and how they often all come to the same logical conclusion.  Gratifyingly, that happened here.

In this trial, I also received the benefit of some continuing business education about mistakes that can come back to haunt you in a deal.  Specifically, it reminded me that, in any agreement, partnership, or other legal relationship, you should:

Work for the best relationship but plan for disaster. Just because you trust someone now does not mean that you won’t be at war in the future (even the bitterest divorce was preceded by a happy wedding).  All those things your lawyer does “just in case things go south” are really necessary.  When the relationship sours, emotion takes over; one or both sides want to destroy the other, often at the risk of mutual destruction.  Good business “partners” should recognize that they need thoughtful agreements in place in the pre-nuptual stage of their relationship.  If paying the attorney fees now seems like a lot of money, just wait until you have to deal with the cost in time and money of a bitter lawsuit.  Also, that huge stack of documents your lawyer drafts really is necessary but, if the dispute gets in front of a jury, nothing beats also having clear, easy to understand language in letters and correspondence.

Only sign important documents after having someone else, with an attention to detail, read them. For instance, in this case, there was a document providing for a 3-year, $500K plus, consulting agreement described in 3 sentences. Nothing about expected performance, termination clauses, etc.  A good lawyer or CFO would have caught this.

Let the other party know when they deviate from an agreement and you expect performance. Even though a contract might say that failure to demand your rights does not mean you waive right, a jury expects reasonable behavior.  In this trial, both parties complained about actions not performed or payments not made 5 years ago.  Neither side sent a single letter or email to the other side saying “hey, you are not doing what you said you would do.”

Worry about perception and err on the side of more (documented) disclosure. In this case, the plaintiff tried to make hay with the fact that he signed an agreement with an entity that the defendant dissolved a few weeks later.  It looks bad but the defense argued that it didn’t change any of the rights of the plaintiff and was done for tax purposes, something that the defendant, IMHO, was within his rights to do.  What the defendant should have done is also to have sent the plaintiff a plainly worded letter, telling him about the entity change and assigning the old agreement to the new entity.

Avoid using the term “partner” incorrectly. I’ve seen this in three different disputes …where one party claims, retroactively, that he was in a legal partnership (and therefore due a higher fiduciary duty from the other party).  We all often say things like “this is my partner” when what we really mean is that we are working closely with this person on a company or project.  A Partnership is a legal concept where, among other things, a higher fiduciary duty is required than what would exist between two companies or individuals with a contractual agreement to work together.  When you come to the bitter divorce, one party will find it advantageous to cast the relationship as a partnership.  So, be careful about using the term partner when it is incorrect.

In the pursuit of government spending reductions, questions have been raised about whether university research should be economically justified.  For the specifics about the questions raised in Texas, Eric Berger of the Houston Chronicle does a very nice job on his blog here and here.

It is safe to say that the fundamental objective of the proponents of the “economic justification” idea is to reduce government funded research by eliminating “waste” rather than to optimize current spending on economically valuable problems.  Nobody can reasonably argue with the idea that a portion of a nation’s or a state’s research budget should be relevant to solving real problems (like disease or energy costs) or creating new products and thus competitive advantage.  However, economically justifying the research projects individually is a bad idea. There are just too many ways to destroy what already works and too many impossible questions:  Who is qualified to judge the economic value of early stage research?  How to they factor in the creative process of innovation? How do you gauge risk vs. reward in an area where most approaches fail?  How do you measure the benefit of basis research to create the foundation for more applied research?  A state or university that tries to change research this way will likely lose its top researchers, both basic and applied, in no time flat.

I would argue that university research is already justified by the number of companies and jobs created around the science or around the people involved in university research.  Secondary benefits include exposing undergraduates to more than just book-learning.  The experience of working with a team at the cutting edge of science and engineering creates better, and probably more, engineers and scientists – both an economic benefit.  Some research, like clinical trials around drugs or environmental studies, can have a very positive impact on societal problems, like disease, without an economic benefit.

That being said, I believe that we could, as a nation, get more economic benefit out of our fundamental research budget without changing the things that work well.  People outside the university environment would probably be surprised at how focused many researchers in the hard sciences and engineering are on providing an economic and societal benefit from their research.  To be sure, not all think this way.  A professor in my graduate told me that production of graduate students is the real objective of research…of course he is now retired and the new generation of scientists and engineers is much more focused on making a difference.  In fact, I very often hear about universities competing for scientists where a key factor is what the university can do to support commercialization of the scientist’s research. So, the big question is not “How do we eliminate research that has an unclear economic objective?” or “How do we force all researchers to justify their grants?” but rather we need to be asking “What can we do to encourage and enable researchers to be more effective in having an economic/societal impact?”

If you believe, like I do, that having strong university research contributes to a national advantage, we should be doing everything to move it to the next level.  And we should be doing it rather quickly if you look at the competition coming from other countries, particularly China, that used to send their best and brightest students to the US where many stayed.  Our lead is not as great as it once was but our research universities are still a huge asset.  If you want to see the impact of just one good university, read the Kauffman report on MIT’s economic impact.

To me, the question is not “How do we chop unjustified research?” but rather “How can we take what we do well and improve it (or do it at more universities across the US)?”.  The answer is to give researchers, especially the next-generation “Young Guns”, better access to important problem statements and to provide better support for entrepreneurship in an around the university.  If we provide researchers a top academic environment AND enable them to change the world (and create wealth) the national economic payoff can be tremendous.

There is so much potential for improvement here, even at universities that think they are doing it right, that there is no reason to even worry about the costs of basic research (though I happen to think basic research is a necessary part of the productive academic ecosystem).  As I have mentioned before, I believe that improvement in these areas can be driven by fairly low cost initiatives by the federal funding agencies.

BTW, SBIR funding absolutely should have a strong economic justification. These programs are focused not on university research but on commercial companies with the objective of a national, economic benefit. In my opinion, these programs have not even come close to reaching their full potential.

Endangered Elements

March 28, 2011

The Royal Society for Chemicals released an interesting report on future problems, particularly materials shortages, that materials chemists may need to solve including “peak phosphorous.”  Phosphorus is a key and essential ingredient in plant fertilizers.  Other possible shortages, as most are aware, include some Rare Earths, Indium, maybe Lithium.  These shortages not only make for interesting problem statements for university research but also for startups – as supply/demand becomes tighter, prices go up.  Here is a great summary graphic from the report (click on it to pop up a larger view):

Our focus at DFJ Mercury is early stage innovation – a lot of it is University research commercialization but we also invest in clinician MD’s with new ideas, companies out of regional incubators, and inventors working outside of the university environment (like their garage) as long as they have a transformational technology that can be the basis for a big company.  We spend a lot of time in the university research environment working with researchers, students and technology transfer groups in universities primarily in the Midwest and Texas. So, as you might expect, we strongly believe that innovation drives economic growth and national wealth and are pleased that the current administration and Department of Commerce is so fired up about Innovation and Entrepreneurship.

My prior post about Startup America was mixed review.  Some of the initiatives will have a positive impact on high value innovation but some (like the SBIC program or America Invents) are, we think, less likely to do so in their current form, at least for university research based innovation.  Rather than just give my opinion on what will work, I wanted to suggest initiatives that the Federal government could lead that would really impact innovation (and job creation in this country).  So, here’s my list of ideas for increasing university research related innovation and commercialization:

  • Tie performance of university offices of technology transfer (OTT’s) to Federal Grants. Push universities to continually improve and benchmark OTT performance by having an OTT adjustment (bonus points) to any federal grant going to the university.  My take is that the OTT often has to fight for resources in the University because it is secondary to the “academic mission”.  Lets elevate getting innovation out to improve our economy and our lives an important feature of the academic mission.  Doing this would require centrally grading the university OTT’s performance.  Cost to implement: Low.
  • Drive useful market and entrepreneurial knowledge into the University in order to get University researchers to think 5 years out. I know that many researchers are hungry for research problem statements that have market relevance.  Most engineering and applied science researchers absolutely WANT TO HAVE THEIR INVENTIONS IMPACT PEOPLE’S LIVES and, 95% of the time, the way to do that is commercialization.  Pushing more market awareness into the university could double or triple the amount of comercializable research. I have witnessed the funding agencies attempt to do this over the years but they’ve only created checkbox committees that does not proactively affect the path of the research.    Cost to implement: Low.
  • Increase the efficacy of SBIRs. If it were a VC fund, the SBIR program would be the largest hard sciences venture fund on the planet but the awards are largely done by academics, based on academic merit.  I would like to see a central SBIR administration that sets up conditions or pre-screens companies for commercial viability. There are lots of ways to do this.  Cost to implement: Low.
  • Create theme-based commercialization centers with professional, entrepreneurial management. We go from university to university and there are categories of technologies that we see over and over.  How does the OTT know that there are 50 competitors at the same stage out there?  They just don’t have the resources.  Maybe a national center for, say, personalized medicine in cancer, could be a nexus for all of the investors interested in that area and all of the university researchers looking to commercialize.  Maybe it could be staffed with management experienced in both the domain and in early stage commercialization with some funds to do not only proof-of-concept experiments but experiments that show superiority of a particular approach.  Such a center could also look for combinations of technologies from different sources and work closely with all the investors interested in that space in a way that multiple university OTTs never could.  Operations for this kind of center could be mostly virtual (put all the management in one place but the university researchers and startups would remain local to the originating university, or not, as the market dictates).  Cost to implement: moderate, maybe $10-20 million to operate each center for ten years.

I plan to post more detailed discussion of each of these ideas in later blogs.

More on Patent Reform

March 16, 2011

It is spring break here so I had a little more time to poke around on the issues surrounding patent reform, particularly the First-to-File/Weakened-Grace-Period (FTF/WGP) issue that I wrote about yesterday  I was surprised that both the Kauffman Foundation and AUTM are in favor of the reform so am wondering what I am missing.  I still believe that it is a mistake and agree with this letter from Senator Feinstein.

Let me describe the situation that concerns me under the new law.

First, lets set up a scenario where a startup or university invents something.  Remember that invention in this case is often not a eureka! moment but rather an observation followed by improvement followed by more improvements and applications.  All of those might be patentable.  My key point is that invention of a new polymer, a new drug, a new type of solar cell, etc. is not like invention of a new paperclip.  Instead, the invention value improves as the scientist works on it.  For purposes of this example, consider a scientist that discovers a new polymer but is still working on how to better manufacture it, optimal formulation, and new applications that were never possible before.

Under the new laws, as I understand them, you would either have to be FTF or, to get a grace period to file, you can get a grace period of a year if (AND ONLY IF) you publicly disclose the invention.  So, the startup or university is faced with a choice – (1) file good provisional patents for every possible invention right away, (2) disclose the invention to the public to retain the grace period or (3) keep it secret, file a patent application later, hope that nobody beats you to the patent office.  Lets walk through each one:

(1) File good provisional patents on everything. Universities cannot possibly do this (if you disagree with me on this, you have never worked with university technology transfer to see how busy they are already).  A startup might be able to do it but it would have a cost.  I think that best practices for a VC funded startup might be to file provisional patents on EVERYTHING once a month, probably requiring 0.5 to 1.0 FTE plus increased legal expenses.

The Problem with (1) is that you can still be scooped. You invented the polymer, talked to half a dozen venture capital funds about it before getting funded.  VC funds don’t generally sign NDAs but you are going to have to tell them something.  Those funds sent your general, non-confidential description out to a number of really smart polymer scientists, some at large companies, to see what they think.  What are the odds that some of those scientists either connect the dots to figure out what you are keeping secret or, now that they know that your miracle polymer is possible, start to think about how to create one? Or what if they just start filing patent applications on the applications.  This can result is a much more limited business model (for instance, you own the idea on the polymer but someone else has patented applications).  As a VC, I can probably live with this but it does raise the risk that a large company positions its patent applications to limit the startup.

(2) Publicly disclose all inventions. First, though it is not explicit, I assume that while this preserves rights in the USA, the public disclosure is a bar to foreign patent filings.  That is a deal killer for VC funded deals.  You need to have rights into the rest of the world, not just the US.  Also, it has the same problem of letting the other guys know what you are doing, but worse – now you are showing the competition how to make your new, perhaps unoptimized polymer and letting them invent improvements before you have had a chance to do so.

A university may have other issues with this one – scientific journals usually require no-pre publication of research AND research funding is very competitive so, I doubt that the researchers will want to disclose exciting new work publicly before putting in more grant proposals in the area AND good researchers want to confirm and re-confirm before publishing, that can take months after the initial “invention”.

(3) Keep it Secret. That might be doable for a startup but I’ve always had my companies keep good lab notebooks and records because first-to-invent allows you to keep it secret without the risk of someone figuring out what you are doing and patenting it first.  In that case you can at least argue that you invented it first.  Why would a VC put money into a company when any researcher, anywhere in the world, could come behind you and take all the intellectual property rights? This is a particularly large risk with a transformative technology – the risk of leakage of information (at least hints that the other guys can follow) is high.  Universities have an even more difficult time with this one.  What happens when your graduate student goes for a job interview? They have to present their work.  What happens when you file for an NSF/NIH grant that 20 or so colleagues will read?

So, in my opinion, we are left with only one viable option for startups- continually file provisional applications (unless those get reformed away).  I can see this working (however with some expense to the company) for startups that have VC funding but for those startups that have yet to get funding, with limited budgets, there is a catch-22.  If they don’t spend the money, that they may not have, VC and other investors will be less likely to fund the startup because risk is increased.

I don’t see how universities win in this situation given the difficulty in continual provisional filing which is why AUTM’s support is puzzling to me.

Patent reform is finally coming.  While I hope and agree that shortening the process will be good for innovators (see this hopeful presentation from the whitehouse), one change, from first-to-invent to first-to-file (FTF), GREATLY favors large companies over startups and universities.  The primary argument made by FTF proponents like the NY Times is that it costs a lot to litigate the first-to-invent issue and that large companies prevail anyway …give me a break.  With all due respect, the NYT is neither a small innovative company or a technology innovator.  In this thoughtful article from the web site “The Hill”, an experienced entrepreneur raises a great question (that I will paraphrase here): While harmonizing with the rest of the world is a nice idea, what if the nuances of the US patent system are what drive our historic innovation advantage versus the rest of the world?

An excellent, detailed explanation of why the new patent reform is misguided is found in Medical Innovations & Business.  In this article, the authors point out that the problem identified as FTF change is really the weakened grace period (WGP) that tags along with it. I agree, though it is part and parcel of the FTF so lets just call it FTF/WGP.  Under the new law, the US inventor would no longer be allowed a year to tinker with the invention in secret, figure out whether it is valuable or discuss it with investors before spending the money on a patent filing.  Instead, the inventor would need to run down to the patent office and file quickly on any new invention – whether valuable or not.

My biggest concern is what happens with universities. Sure, filing a provisional application is cheap but the fact is that universities struggle to keep up with the process:

  • First, secrecy is hard in a university.  The current US academic system rewards publications not invention disclosures to the technology transfer office.  Research in a university is not really very secret – graduate students come and go, faculty from other universities visit, proposals with confidential information are shared with “peers” through the NIH/NSF funding process (more on this one in a moment).
  • Second, technology transfer offices are drinking from a firehose when it comes to new intellectual property and cannot possibly pursue everything with their limited budgets.  It takes some time to shake out what IP is valuable and what is not.

FTF/WGP supporters argue that there have only been 500 or so interferences as proof that we are practically FTF now.  That’s kind of like saying that the 35 mph speed limit can be raised to 100 mph because there are so few accidents.  My opinion is that passage of the new law could dramatically change behavior.

Here’s how: currently a large corporation will not bother filing patent applications when it hears about a new technology now because some startup or university appears to have it locked up (the large company would not know whether the IP is in a grace period and not filed yet or a patent application or provisional application is filed).  Under the new law, the large company’s logical behavior would be to file more patent applications (or provisional applications) to try to beat the slower startup or university researcher to the patent office.   Don’t believe it? Well, Canada went to FTF/WGP in 1989 and patent applications went up 50% in two years.  It is hard to attribute that behavior to increased innovation.  In fact, studies have shown that FTF/WGP did not produce any increase in Canadian R&D but it did skew ownership of patents toward large businesses.

Bottom line – we should be very careful about changing a process that seems to work.  Making the patent office faster, letting it keep its own fees, and general modernization are are all good things but I am very concerned that the FTF/WGP that tags along with these changes favors large corporations to the detriment of universities and the smaller inventors.  And, as I have said in prior blogs, these are the exact entities that disproportionally contribute to job growth in this country.