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Entrepreneurs discuss starting a business based on LANL technology

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By Arin McKenna

On Aug. 25, projectY hosted a panel discussion with three entrepreneurs who had started businesses based on Los Alamos National Laboratory (LANL) technology. John Elling of Phase One Ventures, Hunter McDaniel from UbiQD and Vladimir Matias from iBeam Materials discussed the benefits and challenges using lab technology as the foundation for their ventures.
Los Alamos Commerce and Development Corporation Executive Director Patrick Sullivan served as moderator for the panel.

Panelists look at exclusive, non-exclusive technology
licensing

One question moderator Patrick Sullivan asked his panelists during the discussion at projectY Aug. 25, was what issues the three had faced in the licensing process.
All three spoke positively about the experience. In fact, Vladimir Matias stated that of the four companies he had negotiated with for patents, LANL was the easiest.
“Yes, there are delays. It takes six months for bureaucracy to go through,” Matias said. “But in our case it was very simple, very easy, very good terms.”
Matias’ most difficult experience was with Stanford University.
“It was a very long, very hard negotiation. They were very hard-nosed about the money. I think they have unrealistic expectations of what a startup can pay,” Matias said.
“But Los Alamos was quite accommodating. I have nothing but best things to say about TT in Los Alamos. They were very good to us. They helped us with our whole bailment agreement and everything else and supported us since then.”
The group also discussed the pros and cons of exclusive versus nonexclusive licensing agreements.
John Elling spoke from experience with both, with two different startups. He stressed the importance of having the end goal in mind in deciding which option is the best fit.
Elling called the process in both cases “arduous,” but explained why he went different routes with each license.
With one company, Acoustics Biosystems, Elling negotiated hard for an exclusive license.
“Los Alamos had the fundamental patent on something that was completely new and different that had never been described in the patent or the academic literature before, and we needed it,” Elling said.
Elling also noted that his company would have been worth much less when it was acquired without the exclusive license, because at that point they had accomplished little more that demonstrating that the technology was valuable.
“The second time was easier, because we were only interested in getting the license to the technology so that we could invent around it. We knew that the intellectual property that had been applied for in Los Alamos would not be the final form of the go-to-market device, not by a long stretch,” Elling said.
“So we really didn’t care what the license looked like, whether it was exclusive or nonexclusive, because we knew that there were going to be many, many generations of additional IP built upon that, which we would own as a company.”
Hunter McDaniel spoke about the benefits of having a nonexclusive license.
“There’s more that you get out of a license with LANL than just the rights to the technology, which is the obvious thing. That’s the purpose of a license,” McDaniel said. “But you also get this affiliation with the brand. Los Alamos National Laboratory is one of the best – if not the best in certain areas – research institution in the world. It carries a lot of weight in certain circles. And having that affiliation, like you’re licensing technology from LANL, there’s something to be said about that story.”
McDaniel also pointed out that having that affiliation with the lab can boost PR, both from being able to mention the LANL license in press releases and sometimes having the lab pass on news the company puts out, as in retweeting one of the company’s tweets.
“So in my case, it was a lot more about being able to tell a story to investors and have this connection with the laboratory,” McDaniel said. “If we’re going to be issuing a press release ourselves about how we’ve made some advancement or gotten some grant, it wouldn’t look as good if you didn’t have the story about licensing this technology from LANL.”
McDaniel also pointed out that the process for obtaining a nonexclusive license is much more straightforward.
“The major negotiation points there, from my perspective, are around the financial terms, and I think nowadays it’s pretty refined, to where it’s kind of standard terms: license issue fee, royalties, some requirements on insurance for certain things,” McDaniel said.
Another point raised by all three panelists is that exclusive licensing agreements usually involve allowing the licensing entity to have equity in the company. McDaniel negotiated an exclusive license with the Massachusetts Institute of Technology (MIT) in which they first demanded not just equity but preferred equity. Only the fact that UbiQD was not an LLC allowed that demand to be dropped.
McDaniel agreed that with a nonexclusive contract, a company should be developing their own intellectual property (IP) based on the technology they are licensing.
“You should definitely be thinking about developing your own IP, refining the technology, because the final product is going to look a lot different than the proven concept demonstrated at the lab, whatever was developed at the lab,” McDaniel said.
McDaniel – who helped develop the technology he has licensed as a postdoc at LANL – explained why the licensing process takes so long.
“You have to understand that national laboratories are slow. There’s a lot of bureaucracy, there’s a lot of people that have to sign off on things and decisions are made as teams, in general,” McDaniel said.
“So your have to get those people together in a room and there has to be a decision, then it has to be moved through different stages of decision-making. And that just takes awhile, because of the nature of the bureaucracy.”
All three estimated a six-month timespan for executing a nonexclusive contract.
“If you’re in a situation like mine, where you’re going to have to leave the lab in order to start negotiating, you need to plan for that, because it’s not going to happen quickly,” McDaniel said.

Entrepreneurs evaluate LANL’s
leave policy

Patrick Sullivan asked the panelists about their experiences with LANL’s entrepreneurial leave system.
John Elling had a lot to say on that matter, noting that he was LANL’s first employee to take advantage of the entrepreneurial leave policy. He retired from LANL after the third year of leave.
“It was a great gig. It was very comforting in easing the transition from the lab to being an entrepreneur,” Elling said.
The problem came when LANL took a closer look at entrepreneurial leave and decided that LANL owned everything an employee worked on when they were on leave because they were still an employee of the lab.
According to Elling, that almost destroyed the company.
“We had a very bad couple of months when we were worried that the lab was going to assert that they owned everything we developed as a company,” Elling said. “Explaining that to our investors would have been very much like standing in front of a firing squad without a blindfold.”
Elling suggested that scientists should be able to work part time with a startup.
“What would really benefit lab spinoffs and entrepreneurships is if the scientists could have an ownership interest and consult with a company that was spinning up on their own technology,” Elling said.
Elling noted that Stanford and Massachusetts Institute of Technology (MIT) have successful policies to that effect.
“I don’t think there’s any chance in hell in that happening at Los Alamos, given the federal conflict of interest,” Elling said.
Vladimir Matias pointed out that entrepreneurialism and involving scientists in the technology are two separate issues.
“(The scientists) don’t have to be involved in the startup, they can just advise the company,” Matias said. “And I agree that it’s absolutely essential to have the scientists who know and understand the technology involved in the technology development.”
Matias believed that 90 percent of the startups that had no contact with the scientists that developed the technology fail.
“You really need to have the inventor involved,” Elling agreed. “Trying to read somebody’s patent and then start a company on it is a recipe for failure. The inventor’s got to be involved.”
Because of his own experience helping to develop the technology his company is using as a postdoc, Hunter McDaniel was able to launch without the inventor. However, that would not have been his preference.
“I wanted to have my advisor become a consultant for the company and have some type of equity in the company, but that was perceived to be too big of a wall to overcome,” McDaniel said.
“Having his name associated with the company and his involvement would be hugely valuable to us, but it was just perceived to not be possible.”
McDaniel pointed out another pitfall regarding entrepreneurial leave.
“I’ve heard that investors don’t like it, because it can look like a person who’s sort of half pregnant with the idea of a company. They’ve got a safety net there,” McDaniel said. “Investors want to see full commitment, 100 percent.”
The panelists were not sure there was a solution.
“From the lab’s point of view, there’s no upside. So you’re going to let the scientist spend part of his time working on the outside in the same field on the same invention outside the lab for this company,” Elling said. “So you’ve got less of your scientist’s time, absolutely ripe potential for abuse of the lab resources that are being appropriated by the company, lab intellectual property…I fully understand why the lab doesn’t do it.”
Sullivan disagreed.
“The ability to create an ecosystem in northern New Mexico that has a thriving startup or technology-based community here benefits the lab in several ways,” Sullivan said, citing one example.
“It would create more opportunities for trailing spouses that are equally as intelligent and experienced as their spouse who’s working at the laboratory. Additional options for them in the community helps the laboratory recruit and retain some of the best people in the world.
Sullivan added that he himself had seen many families leave because of that issue, “and that brainpower leaves with the spouse.”
“If you can do it, I would say the idea of a technology startup hub in northern New Mexico would be easily realized if you could find some way for lab scientists to consult in their field with their ideas, with an interest in the company outside of the lab. I think you would see an explosion of startups. Just an absolute proliferation,” Elling said.
“From the lab’s perspective, all they see is liability. They don’t get a lot of money from licensing. It’s good terms on licensing agreements, but there’s really no revenue there,” McDaniel said. “And they see the potential for lawsuits and liability – and I think they’ve had a couple high profile cases in the last 10 years where DOE or LANS has had to shell out quite a bit of money over a license that they probably made.”
Matias wants to see the government relax rules regarding conflict of interest. McDaniel suggested another option.
“There’s an opportunity now when the management contract is being renegotiated for that to be a component, and it absolutely should be,” McDaniel said.