Fundamentals of Academic-based Startups 1 November, 2016 Northwestern University Innovation and New Ventures Office (INVO) www.invo.northwestern.edu Copyright ©2011 2016 Northwestern University All rights reserved. All uses, in any form and any quantity, or by any means—electronic, mechanical, photocopying, recording or otherwise—must include the following attribution: From Northwestern’s Guide to Starting a Company: Fundamentals of Academic-based Startups No other copyright, byline, or appearance of mutual ownership may appear on the copyrighted materials. Under no circumstances can materials be distributed for commercial use without specific written permission. 2 November, 2016 Table of Contents Contents BASICS ON STARTUPS ..............................................................................................................................................4 Why start a company? ........................................................................................................................................... 4 Are all startups the same? ..................................................................................................................................... 6 Attributes of a successful startup .......................................................................................................................... 7 When is it time to start a company? ...................................................................................................................... 9 Steps towards a startup........................................................................................................................................ 10 Building the startup ............................................................................................................................................. 11 The role(s) of the founders in a startup company ............................................................................................... 12 Selecting the co-founders .................................................................................................................................... 13 Networking and finding the right mentors .......................................................................................................... 15 Identifying the right CEO ................................................................................................................................... 15 Defining the market ............................................................................................................................................ 16 Writing a business plan ....................................................................................................................................... 17 ESTABLISHING A COMPANY ......................................................................................................................... 20 For-profit or not-for-profit? ................................................................................................................................ 20 Virtual or bricks and mortar? .............................................................................................................................. 21 Incorporating the company ................................................................................................................................. 21 Choosing a corporate attorney ........................................................................................................................... 21 Executing a founders’ agreement ........................................................................................................................ 24 Other agreements ................................................................................................................................................ 27 Choosing the startup legal entity......................................................................................................................... 28 Fundraising ......................................................................................................................................................... 29 TIPS FOR NORTHWESTERN ENTREPRENEURS.......................................................................................... 32 Working with Northwestern and INVO .............................................................................................................. 32 Disclosing information........................................................................................................................................ 35 Can I do research in my academic laboratory for my startup? ........................................................................... 35 Do I need an option or license for the startup? ................................................................................................... 36 What to expect with the startup license .............................................................................................................. 36 Leading sources of frustration for the academic entrepreneur............................................................................ 38 NORTHWESTERN ENTREPRENEURIAL RESOURCES................................................................................................40 3 November, 2016 BASICS ON STARTUPS Northwestern’s innovations are flowing at an accelerated rate. Our faculty and students are transforming their inventions into startups that trigger and drive economic development. This guide attempts to provide a roadmap for faculty and students who are thinking about starting a technology company, highlighting the common pitfalls to be expected along the way. Starting a company is a life-changing event that brings together a breadth of experiences and extreme emotions: from the allure of anticipated wealth and societal impact to the frustrations of continuous set-backs and working with a tight budget. The best entrepreneurs are motivated by the challenges and thrive on the ups and downs. Instead of feeling defeated by a failed attempt, they are eager to get back in the game and start again. Whether you are a new academic entrepreneur or a serial entrepreneur, the Innovation and New Ventures Office (INVO) will help you navigate the process. Why start a company? While there are many motivations to start a company, from the commercial point of view there is only one reason: to make profits by selling products or services. In general, academic entrepreneurs are “technology-driven,” whereas investors are “market- driven.” With these differences, there exists a dichotomy between academic and corporate cultures, the former focused on cutting-edge technologies which drive the market versus the other focused on how technologies respond to existing market needs. This difference reflects an essential disconnect between the academic and corporate cultures. Perhaps the most important lesson to be learned from this guide is that entrepreneurs should ensure that their technology satisfies a need in the market. Investors would prefer to deal with researchers who espouse one of the five bold-faced motivations shown in Table 1. Such motivations indicate that the researcher is starting a company to satisfy a market need rather than to benefit their academic research. 4 November, 2016 TABLE 1: Why Academic Researchers Say They Want to Form New Companies Motivations Reasoning Expectations A friend’s suggestion He or she heard about my research and Forming a company must be suggested that I should look into starting a easy. company. Following others My research is every bit as good as that of If that person can do it, I a colleague who has been successful in should be able to do it too. starting and running a company. Additional grant funding I sit on a panel that reviews federal SBIR We’ll be able to do a lot more [Small Business Innovation Research] research by tapping into this grant applications, and my unfunded new source of grant money. regular proposals are better than those that get funded under SBIR. A company might be an easy source of money to support my research, so why not form one? Easy money Getting investors to pay for my research Investors are happy to fund may be a better prospect than writing good research. federal grants. The rest is easy All the hard work has already been done in People will want to invest in my laboratory, so now it’s time to turn the my company because the project over to a company for product remaining development. work is relatively trivial. The captive company A startup will be able to pursue the ideas I’ll have this outside company from my lab through to that does whatever I tell it to. commercialization. Alternatively: The company will augment my research by doing things that I don’t have the time or money for, such as running routine analyses and constructing prototypes. Becoming rich A startup is a relatively quick way to In five to ten years, I’ll be become rich. really wealthy. I’m the boss Starting a new company sounds better I can be chief executive of my than getting a job at an existing one. own company and not have to work for others. Persistence No existing company has wanted to We’ll do what it takes to form license my technology and I am a company to get this committed to getting it to the technology marketplace, so it’s time to start my own out there. company. Market demand I have been approached by people asking, There appears to be a market “How can I get