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HOW TO INCORPORATE

Need a High-Tech Infusion?

Consider partnering with a university.
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Most entrepreneurs are nothing like college professors. Many of the skills required to build a business--quick decision making, organization, and a talent for glad-handing--are discouraged by the academic process, which at its worst is known for being ponderous and disconnected from reality.

Over the past few years, however, many universities have been working aggressively to build a bridge between these disparate groups in an effort to turn academic research into profitable companies. It's not entirely new: Colleges have been selling patents to companies--a process known as technology transfer--since the 1980s. But until recently they focused mostly on licensing agreements with large corporations, deeming smaller outfits too risky. Now deals between universities and early-stage companies are on the rise--and many are much more like partnerships than mere licensing agreements.

In 2004, 462 new businesses were launched based on academic research, a 24 percent increase from the previous year, according to the Association of University Technology Managers, a network of universities, companies, and government agencies. More than 150 universities, including MIT and Stanford, now have tech transfer offices focused on matching scientists with entrepreneurs, and many allow staff members to devote up to 20 percent of their time to consulting at businesses that license technology created by them. The trend is being driven in part by the recent success of high-profile tech transfers. The most notable example is Google, whose search engine is based on an algorithm created by Sergey Brin and Larry Page while they were Stanford Ph.D. students. Last year, Stanford sold its equity stake in Google for $336 million. "Everyone is now in the game," says Robert Lowe, an entrepreneurship professor at Carnegie Mellon University in Pittsburgh. Lowe himself is on a one-year sabbatical to run Pittsburgh Pattern Recognition, an imaging start-up born out of a licensing deal with a Carnegie Mellon scientist.

Many tech transfers involve hot industries such as biotechnology and software. That said, you don't have to own a high-tech start-up to get in on the action. Case in point: Dick Rennick, founder and CEO of American Leak Detection, a plumbing franchiser in Palm Springs, California, that specializes in fixing leaky pipes and pools--not a particularly sexy business. In 2003, Rennick received a phone call from Patrick DeSouza, CEO of Plain Sight, a Hamden, Connecticut, software company founded by a group of mathematicians, including Yale professors Ronald Coifman and Vladimir Rokhlin.

DeSouza explained that Plain Sight had licensed dozens of patents for a high-powered data-filtering algorithm from Yale and was using it to improve weapons for defense contractors such as Lockheed Martin. Two-year-old Plain Sight was already booking more than $10 million in annual sales, but DeSouza was eager to find a partner that could help the company find mass-market applications for the technology. After hearing about Rennick from Plain Sight's consultant, DeSouza decided that detecting water leaks seemed like a good place to start. Rennick, for his part, seemed like the perfect partner: His 32-year-old plumbing business boasted 175 franchises, mostly in the South. What's more, Rennick was a board member of the International Franchise Association, so he had plenty of contacts. A few months later, DeSouza suggested that the two companies merge. "You find leaks," he told Rennick, "and we've developed patented technology that will help you."

At first, Rennick was skeptical of forming a partnership with academics. Scientists are great at being scientists, but they aren't worth much as businesspeople, he thought. He also worried about merging with a start-up. But the more he learned about Plain Sight, the more he liked the idea. Using the company's sensors and software, an American Leak technician could detect a leak in less than an hour, instead of having to spend days measuring water levels with a bucket. The increased productivity alone could give a big boost to American Leak's sales, which were still hovering at $6 million after three decades.

After spending a year meeting with Plain Sight's scientists several times and researching its technology, Rennick agreed to the merger in early 2005. The deal became official last February after a year of negotiations. DeSouza, Rennick, Coifman, Rokhlin, and Yale now each hold minority stakes in the company, which kept the Plain Sight name. To cover his bases, Rennick included a buyback clause in the contract. If the merged company fails to meet certain financial benchmarks, he has an option to purchase American Leak, which is now a division of Plain Sight.

Rennick now devotes 85 percent of his time to serving as Plain Sight's chief development officer. He spends most of his days identifying new ventures for the business, including a potential merger with a sensor company. Rennick is still CEO of American Leak, but a new president handles daily operations.

Rennick flies to Yale at least once a month. He has to check with DeSouza before making big decisions, and he says that answering to a boss isn't easy. But it's worth it, he says. This summer, his franchises will use Plain Sight's sensors, along with software loaded onto hand-held devices, to pinpoint pool leaks. Next year, Plain Sight plans to sell leak and mold detectors through the franchises, which will install, maintain, and monitor them. Eventually, the partners plan to sell the sensors in hardware stores, which, Rennick hopes, will lead to more service calls.

Having a home base in Connecticut has been another plus for Rennick. Over the next four years, he plans to branch out to the Northeast, doubling the number of American Leak franchises to 370. Thanks to the expansion, in addition to improved efficiency and the new line of sensor products, Rennick expects sales at the division to double, to $12 million, by 2009. "This will change the face of American Leak Detection," he says. That, he adds, is no small feat after 30 years of doing the same thing.

Resources

To learn more about tech transfers, visit the Association of University Technology Managers' website, which contains sample licensing agreements and links to the sites of most university tech transfer offices in the U.S.
Last updated: Jul 1, 2006




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