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Seeking Angels

University inventors connect with experienced alumni to start new businesses

by Melody Voith
August 31, 2009 | APPEARED IN VOLUME 87, ISSUE 35

Credit: University of Alabama
The University of Alabama is helping chemists launch businesses based on their research.
Credit: University of Alabama
The University of Alabama is helping chemists launch businesses based on their research.

At the University of Alabama, as at other research universities, chemists work in an environment geared toward scientific inquiry and discovery. But for the chemist-turned-inventor, Alabama also offers the chance to start a business.

In an all-day symposium sponsored by the Division of Business Development & Management at the recent ACS national meeting in Washington, D.C., attendees learned how the Alabama Innovation & Mentoring of Entrepreneurs (AIME) program, and similar efforts at other universities, mines networks of successful alumni to help take inventions into the commercial realm.

Dan Daly, the organizer of the symposium, is a Ph.D. chemist and also the director of AIME. He described its role as “adding value to our intellectual property. We focus on looking at the inventions and seeing what we can build from them.” One of AIME’s motivations is to help Alabama compete in the global marketplace. To do that, Daly explained, requires training students in entrepreneurship, assisting them with securing intellectual property, and helping them raise money.

Starting a business is a notoriously risky endeavor. One of the most difficult steps on the way to getting a useful technology out of the lab and into the hands of customers is obtaining early-stage funding. The speakers made a case for taking advantage of a ready-made network—a university’s alumni—to build relationships with business-savvy graduates who might grow wings and turn into angel investors.

Angel investors are high-net-worth individuals, or groups of individuals, who are willing to take very high risks with their investments in order to get an early stake in new technology. They play a critical role in supporting a company while it develops a product and finds a market. A round of angel funding usually brings in $100,000 to $500,000; the money is supposed to carry the company for about two years.

After the angel’s seed money has been used to start doing business and generate revenues, the business owners may approach venture capital investors. These investors typically contribute larger amounts—usually a few million dollars—to expand the business in exchange for a significant ownership stake and an active decision-making role.

Jeremy L. Adelman, director of the Angel Innovation & Entrepreneurship Network at Illinois Institute of Technology, described the type of alum who would invest time and money in a university start-up: “Angels are sophisticated investors; they are smart people and tend to be about 40–60 years old. They are highly educated—many have postgraduate degrees—and they usually have strong entrepreneurial and investment experience.”

But the current economic climate has caused even normally adventurous angel investors to scale back their appetite for risk, Adelman warned. They have moved downstream where there is less risk-taking, he said. “They’re looking for later-stage companies and ideas and acting more like venture capitalists.”

The speakers stressed that inventors must take care to bring in strong, experienced leaders, communicate the relevance of their product, and show that it would find paying customers. Angel investors, Adelman said, “will be looking at your risk factors. Those include technology risk, management risk, and market risk.”

Even before the angel investors are called in, an inventor’s first round of support comes from what the speakers referred to as the three Fs: friends, fools, and family. They contribute the initial $50,000 to $100,000 that helps the entrepreneur transform a lab finding into a proof of concept, something that will someday become a product. An innovation program at a university can serve as a friend by contributing early financial support.

At AIME, Daly pays stipends to a small army of law students, masters of business administration students, and Ph.D. chemists to winnow business proposals on the basis of feasibility. “We place a large emphasis on selection up front,” he said, to ensure that inventors have a good chance of moving out of the university with the help of outside funding.

PDH Technologies, an early-stage medical products venture, is one of the companies being incubated at the University of Alabama. Its technology is a bandage material made from naturally derived composite fiber embedded with additives such as vitamins, minerals, and fatty acids.

Whitney L. Hough, a soon-to-be Ph.D. chemist and founder of PDH, spoke about her experiences in the AIME community and her fund-raising efforts so far. “We’ve been looking for potential sources of outside funding. It’s not easy—I’m not going to lie,” she said.

PDH is targeting the market for bandages used on diabetic ulcers and burn wounds. When placed on a wound, the PDH material forms a protective gel that prevents bleeding and infection. The additives stay in contact with the wound to promote healing.

Hough explained that the fibers for the material are spun out of a one-pot synthesis from chitin, calcium alginate, and nutrient additives that have been dissolved in an ionic liquid. The chitin comes from shrimp shells and the alginate from algae, both renewable resources.

In the session, Hough presented her concept in the same order that she would pitch it to potential investors: who, why, what, and how. Rather than begin with the technology, she started with details about the leadership team. Then she explained the market need and the potential size of the market that PDH is targeting. With that suspenseful buildup, she introduced the bandage material as the solution. Finally, she explained the synthesis involved in manufacturing it.

Given the economic climate, Hough is not relying only on private investors. The next step for PDH is to apply for grants, such as from the U.S. government’s Small Business Innovation Research program, or to enter seed-funding competitions. Hough is aiming for the business plan competition hosted by Alabama Launchpad, a statewide partnership of research universities and businesses.

Hough is increasing her business acumen with the support of her university. Daly’s colleague Richard P. Swatloski, a licensing associate at the University of Alabama, explained how the school has worked to transform researchers into innovators. The process starts when an investigator approaches the university’s Office for Technology Transfer to file an invention disclosure. “We triage the idea and do a high-level market assessment to get a feel for if there is a market and, if so, the initial size,” Swatloski said.

Credit: Melody Voith/C&EN
PDH Technologies founder Hough discusses the health care market with Conti of Quest Diagnostics
Credit: Melody Voith/C&EN
PDH Technologies founder Hough discusses the health care market with Conti of Quest Diagnostics

After a patent search, the inventor is asked to give a 10-minute presentation to an intellectual property committee. From there, promising ideas get a more detailed commercial evaluation and inventors get help developing a business model.

Swatloski then engages the university’s alumni network to help commercialize those ideas worthy of a new company. Starting in 2007, the technology transfer office has enlisted the help of Alabama’s development office, which is normally charged with seeking donations from alumni. “We asked them to give us the list of people who are not currently giving money so that we could get them engaged,” he explained.

Swatloski said he approaches alumni with a request for their time, not their money. “We want people to help with business plans and to develop markets.” He organizes road shows that discuss how to build an entrepreneurial culture. While on the road, he looks for experienced managers who could be temporary executives, advisers, and board members. More important, “they can help us identify sources of funding. They have Rolodexes full of people” who may already be investing in an industry, he said.

To succeed, Hough emphasized, PDH needs the input of experts in the health care market. “We are in the R&D and prototype stage now,” she said, but “we need exposure to real decisionmakers, like doctors and hospitals.”

One way for university inventors to find customers is to connect with alumni who work in businesses that serve their target markets. Some alums are even actively seeking new ideas. Nicholas Conti, vice president of business development at Quest Diagnostics and an AIME mentor, draws on the alumni networks of Quest employees to find new medical diagnostic technologies. “We use alumni in several roles as bridges between corporate and academic needs,” Conti said. Quest will even help inventors find additional funders to get a product ready for market.

Over time, the speakers said, some alumni mentors will go beyond lending their expertise to companies and become investors. Session speaker Tony Stanco saw this happen at a George Washington University program that has evolved into the National Council of Entrepreneurial Tech Transfer, where he is the director. “These alumni don’t like to waste their money; they feel that their money is for a purpose, to do something. If you go after that group, they will first do presentations, network with the students, and mentor them. Then they will later write the check.”

Adelman agreed, adding that angels with fond feelings toward their alma maters will appreciate the chance to “keep the value creation in the university family, help the next generation of entrepreneurs, and gain psychological rewards.”



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