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August 7,2000
Volume 78, Number 32
CENEAR 78 32 pp.17-29
ISSN 0009-2347
[Previous Story] [Next Story]

Encouraging Entrepreneurship

Lois R. Ember
C&EN Washington

Students with dreams of becoming millionaires before they're 30 are clamoring for courses that can teach them how to take their ideas from abstract concepts to concrete start-up companies. This explains why colleges and universities are accommodating them. But it doesn't explain why an esteemed emeritus professor of chemistry, former deputy director of the White House Office of Science & Technology Policy , adviser to federal national security agencies, and consultant to industry would choose to teach a course on entrepreneurship.

For John D. Baldeschwieler , former chemistry professor and chairman of California Institute of Technology's Division of Chemistry & Chemical Engineering, the answer is simple, if multifaceted. He is a successful entrepreneur himself, having started at least six companies, one of which was acquired by Incyte Pharmaceuticals , now renamed Incyte Genomics. He has been advising--albeit informally--nascent student and faculty entrepreneurs for years. He loves teaching and being around students, and though he has officially retired from Caltech, he chooses not to retire from teaching.

When Caltech alumnus J. Stanley Johnson gave Caltech's engineering department $2 million to create a chair in business economics, Baldeschwieler became a member of the committee charged with implementing the terms of the gift.

Johnson had once taken a course on entrepreneurship, so starting one at Caltech seemed natural. After months on the committee, "it occurred to me that maybeI could teach this course myself," Baldeschwieler tells C&EN. "It's really an extension of my role as an informal adviser."

Such a course offers tantalizing possibilities. It broadens the spectrum of career opportunities for students and, at the same time, positively impacts local economic development. And it fits neatly into current academic philosophy. Caltech--like most major research universities--is aggressively pursuing technology transfer and patents.

The city of Pasadena is also enthusiastically supporting high-tech industrial zones. And it is encouraging the establishment of incubators--places where spin-off companies can lease space at low cost and get a wealth of secretarial, accounting, legal, and administrative services in the bargain.

Despite this nurturing atmosphere, nothing would come to pass without money. Enter venture capitalists and venture-capital funds, which Pasadena has in abundance because of Caltech.

Counted among these venture capitalists is Baldeschwieler who, with two colleagues, is leading a fund called the Athenaeum Fund. The fund is named after Caltech's faculty club where the three often meet. "I have a vision that Caltech can play a major leadership role in high-tech development," he says.

[Photos by Lois Ember]
The course Baldeschwieler has developed and began teaching in 1997, "Entrepreneurial Development," reflects his own experience. "I outlined in chronological order all the things that happened to me as I was trying to start companies, and that became the course," he explains. The course was then approved by a curriculum committee.

Baldeschwieler never intended to teach the course alone. Instead, he "has pulled from my network of friends and colleagues people who could provide the essence of techniques needed in each of the areas." Those areas include early-stage patents; organizational, human resources, legal, and financing issues; taking a company public; mergers and acquisitions; and working with Wall Street analysts.

Waning research prospects for talented students have been the driving force for the course, Baldeschwieler says. With academic, industry, and government research budgets shrinking--although this year's federal budget shows an upward tick--students and junior faculty are turning from traditional research pathways to starting up their own high-tech companies.

Baldeschwieler believes the long-term trend will be away from support of academic research, though he admits that good people will continue to be funded. "But it will be difficult for a young person to find an academic position in a top research university and then put together the follow-on funding needed to support postdocs and buy equipment," he explains.

Course stats

Though he perceived a demand for a course on entrepreneurship, Baldeschwieler admits to being overwhelmed by attendance on the first night the course was offered. "More than 150 people came," although only about 50 stayed the course.

This year's course, the fourth, ended in March and had 54 students, of whom a third are women, an adequate reflection of Caltech's makeup. Half were undergraduates, half graduate students. Not surprising given the prominence of dot-com start-up companies, a predominance of students were studying electrical engineering and computer science, although six were chemistry and biochemistry majors. "They are a diverse group of bright, creative, ambitious people," Baldeschwieler says.

Baldeschwieler: teaching entrepreneurialism
Students earned credit by working in groups of two or three to write business plans. As might be expected, nine of the 24 plans that were submitted were Internet related and seven involved electronic devices or computer hardware. The remaining were scattered among software, biotechnology, medical/biological instrumentation, and other topics.

More than 200 students have now taken this course. Over the four years, the course content has remained essentially the same, although Baldeschwieler admits it was weak on marketing the first year it was taught. That was corrected in the second year.

The course has also been structured to reflect and correct weaknesses in Caltech students' backgrounds. "They have superb technical backgrounds," Baldeschwieler says, "but they are clueless when it comes to finance, regulatory issues, etcetera, to make the system work." And, he adds, "they also enter the course without a lot of respect for these elements."

In fact, the course could be titled "Business Appreciation 101." Students learn "all the pieces critical to building a high-tech business and to understanding enough of the language so as not to be mystified. And when they have to negotiate their own positions, they are able to do so," Baldeschwieler explains.

Some taking the course have no intention of starting their own companies. But by taking the course, they may find alternatives to academic research--like patent law and business administration.

Often, Baldeschwieler says, students take the course out of sheer curiosity. "They witness the visible successes of entrepreneurs over the past several years, and they want to know what's going on."

Students also learn something they might not have expected: Having an idea or invention is only a small part of starting and remaining an integral part of a company. Baldeschwieler calls it the "inventor problem."

"The invention is essential to starting an enterprise. But often the inventor becomes discouraged by the pace of development of his or her ideas, so he or she offers other ideas--the next-generation idea," Baldeschwieler explains. Eventually a point of conflict is reached between the inventor and management, and a falling-out occurs. The inventor may be forced out of the company.

The students also gain a better understanding of why people are currently willing to pay so much for early-stage companies--companies often without products or profits. Baldeschwieler calls this rationalization of market valuation (the price of the stock times the number of shares). Billionaire Warren Buffett has a more colorful, if less technical, way of explaining how the market works. It moves, he says, in response to greed, fear, and folly.

Enterprise forum

Businesses in the new economy also move swiftly. "If you blink, you're roadkill," is how Jeff Lawrence , cofounder of Trillium , a telecommunications company, describes the pace of innovation in his market. Lawrence was moderator of a Caltech/Massachusetts Institute of Technology Enterprise Forum on telecommunications held while this reporter was visiting Caltech.

The forum is sponsored by Caltech's Industrial Relations Center , whose director is Gaylord E. (Nick) Nichols. Originally sponsored by both MIT and Caltech but now only by Caltech, the forum serves the community as well as the campus. In fact, it's sort of a networking opportunity primarily for people outside of the university. For one night, it offers a chance for fledgling entrepreneurs to sell themselves and their ideas to venture capitalists.

Most forum presenters are young and inexperienced at the entrepreneurial game, but the presenter this reporter heard last February was an exception. A former academic, Denny Miu, whose company, Integrated Micromachines, makes optical switches--nanomachines out of silicon--for all kinds of optical routing, has 11 years' experience. His company has already gone through two rounds of funding, the first from individuals, so-called angels, and the second from Asian investors. Miu calls the latter "the old-fashioned support system, the Asian Bank."

Miu's presentation was highly entertaining and fully engaged his audience of about 200. But judging by comments made and questions asked, Miu didn't appear to impress the panel of commentators--successful entrepreneurs--nor those venture capitalists in the audience listening to his presentation.

$10K competition

In addition to sponsoring the enterprise forum, the Industrial Relations Center also supports the Business Plan Competition, now in its third year, which awards $10,000 to each of two winning teams. The competition is not an intellectual exercise, but a means of motivating people with ideas to write business plans that can attract investor support. The $10,000 prize money serves as start-up capital for the winning entries.

One award is underwritten by 1972 Caltech graduate and software entrepreneur Glenn Hightower, Nichols explains. Hightower, who takes a small equity share in the winning venture, negotiates with the winning team the amount of equity his $10,000 investment will buy him. Dickering with Hightower is useful experience for the budding entrepreneurs.

The Caltech Center for Neuromorphic Systems Engineering, a National Science Foundation-sponsored center, underwrites the other $10,000 award. This award singles out businesses dealing with devices that link brain responses to commercial products or technologies, Nichols says.

The Business Plan Competition is open to the Caltech community--students, faculty, staff, Jet Propulsion Lab (JPL) personnel, and alumni--and to all types of ventures. Typically, faculty members are associated with a winning team and may have a stake in the company. They can remain as scientific advisers or serve on the company's board of directors, but Caltech rules forbid them from being part of the company's management.

The winning teams and all semifinalists for this year's competition were announced at the enterprise forum held on May 16. The Hightower award went to Duragen, a company whose proprietary technology improves the chemical and thermal stability of existing proteins. The Center for Neuromorphic Systems Engineering gave an award to Simulant, a company whose innovative software tools allow inexpensive home computers to function as supercomputers. Both start-up companies are located in Pasadena.

Even semifinalists, who receive no money, may benefit from the competition. As Nichols explains, the competition's publicity "may help them attract investors."

Nichols: helping attract investors
Baldeschwieler's students who write business plans for course credit may, of course, enter the competition. But some of them intentionally bypass the contest because their ideas are too proprietary, too fragile for such exposure, or the $10,000 prizes are too small to capitalize their venture initially.

Nichols' center usually gets about seven to 10 business plans for eight judges to evaluate. Baldeschwieler and the head of Caltech's Office of Technology Transfer always sit on the judging panel.

There is more to the symbiotic relationship between Nichols' center and Baldeschwieler's course than the Business Plan Competition, however.

The Industrial Relations Center is a self-supporting Caltech entity that gets most of its $4.25 million operating budget from the 30 marketing and management short courses it offers to students and businesspeople worldwide, and from the more than 70 customized courses it offers executives in technology-based companies.

About 30 instructors, drawn from business schools or from technology-based businesses around the country, teach the center's short courses. Baldeschwieler has culled from the center's list of instructors and from enterprise forum moderators and commentators to acquire some of the guest speakers for his course.

Thorpe: writing winning business plans [Photo by Robert J. Paz]
And the interrelationship goes even further than the sharing of instructors. Both Baldeschwieler and Industrial Relations Center personnel serve as advisers to the student-run Caltech Entrepreneurs Club, a group of about 100 students.

Business plans

The two $10,000 competitions have one thing in common: They judge submissions based on business plans. These fundamental documents--the entrepreneurs' road map for future growth--can serve to focus and/or finance a business.

Used internally, business plans can help the management team of a start-up company anticipate problems before they occur and thus improve profits. Or the plans can be used externally to raise capital. "It's like a résumé," Molly J. Thorpe says. "It can get you in the door." Thorpe is a consultant to entrepreneurs and a guest speaker in Baldeschwieler's course.

Thorpe offers students tips on developing effective business plans. She stresses that these documents "are not a writing exercise but a thinking process."

Thorpe has helped facilitate people through this thinking process since 1988 when she formed Thorpe Associates in Canoga Park, Calif. She says it has often been more an exercise in what words to take out than what buzzwords to put in.

The complexity of the plan depends on the size of the business. "If it's a one-person start-up, the plan needs to contain only such information as the target customer, the competitors and how the person plans to compete against them, and where the person wants to go in two to four years," Thorpe explains. "The more people and revenue involved, the more a complex plan is needed," she adds.

All plans must contain an executive summary no longer than two pages that emphasizes the salient points about the company. It includes an overview of the business, the company's strengths and competitive position, highlights of the management team, and a financial summary.

The executive summary is "the most critical part of the plan [especially if it is to be used to raise capital], and it should be written at the end," Thorpe says.

Baldeschwieler agrees that the executive summary is crucial to success. As a teacher and as an investor, he has read hundreds of business plans. He says he "looks at the executive summary and then at the list of personnel to evaluate them."

A one-page introduction usually follows the executive summary, and it includes information about the history of the company, its management team, and current products or services. It should not, Thorpe emphasizes, focus only on the products or services, which people involved in a technical enterprise are wont to do.

A vision statement may or may not follow the introduction. It is not a required feature, but if it's included it should contain a one-sentence mission statement as well as guiding principles and company objectives.

The largest section of the plan--on the marketing environment--follows. It contains information on industry characteristics, target markets, the competition, and sales strategy, for example.

A section on the products or services offered comes next. This section emphasizes the value of the products or services and ties them to market need. A section on operations then follows and explains whether the company will supply or outsource the product or service, for instance. Neither of these two sections exceeds three pages.

The section on financial data then follows. It includes financing requirements and a summary of past performance, if applicable, or projections for future performance.

Another key section of the business plan--on management issues--comes next. It summarizes the management team, devoting a paragraph to each person. The person's title and accomplishments are listed, but a complete résumé is included only in the final section: exhibits. This last section also includes financial spreadsheets and more detailed descriptions of the products, services, or technology, and any other information too complicated to put in the body of the business plan.

Dahiyat: designing genes computationally
After listing and explaining the parts of a business plan, Thorpe enumerates items she calls "the kisses of death." The first is failing to include a short executive summary or including a too-lengthy one that rambles on about the product. Another is failure to mention why customers might want to buy the product, technology, or service. A third is excessive use of what Thorpe calls "techy talk"--technical jargon and undefined acronyms with no explanatory glossary.

Other mistakes are wowing potential investors with financial forecasts indicating rapid growth rates not backed up by solid market information and then "presenting all financials in a creative, nonstandard format. This is not the time to be creative or unrealistic," she points out.

Hyping the plan by including excessive adjectives--underlined and bold-faced--and dismissing the competition in a sentence or two, are two additional mistakes. And the final kiss of death: Misspelling the name of the person to whom the plan is being sent. That has happened, Thorpe insists.

Business plans that Baldeschwieler's students have written for course credit have often morphed into actual companies, now in various stages of funding. Baldeschwieler estimates that about 10 companies have been formed since the course began, and all but one are still in the Pasadena area. A few of these companies--Xencor, for example--are already contributing to the local economy.

Xencor , which makes tailored proteins by customizing genes, was formed in 1997, the year Bassil I. Dahiyat, the company's chief executive officer and president received a Ph.D. degree in chemistry. Also in 1997, Dahiyat took Baldeschwieler's course--the first year it was offered--to "learn the elements to start up a company."

Dahiyat plans to stay with the company until it becomes valuable, possibly in the next few years, and then he'll move on to new challenges.

But other entrepreneurs with the scientific/technical know-how to start a company choose to remain with it. They do so by becoming important parts of the scientific management, and they do so by learning how to function as part of a larger team. To become an effective spoke in the wheel, entrepreneurs need to gain some cursory financial and management skills, and they may also need to understand and appreciate the regulatory environment.

Baldeschwieler's course gave Dahiyat the practical education he needed to develop his idea and build his growth company. "John's course was a window into the culture of entrepreneurship" and was especially useful in explaining the basic language used, Dahiyat says. But, he continues, "John should add to the course the art of negotiation--which is a do-or-die skill for anyone developing a science into a business."

As it stands today, the course "lays out the sequence of topics in roughly the order they happen chronologically in the development of a company," Baldeschwieler explains. And the first order of business is to explain disclosure pitfalls, patent policies, technology transfers, and intellectual property.

As Baldeschwieler explains, entrepreneurs often are so enthusiastic about letting people know about their ideas that they mention them at professional meetings, post them on the Web, include them in an abstract of a paper, or publish a thesis. All these venues constitute a public disclosure. After such public disclosure, entrepreneurs have one year to file for U.S. patent rights, but they automatically lose patent rights for foreign filings--and that's a major loss.

"So we handle disclosures and patents first in the spirit that if they--the entrepreneurs--don't handle this properly there is no further opportunity," Baldeschwieler says. Also covered is "the strategic use of patents and how one builds a portfolio of patents to protect the business franchise. Particularly in biotechnology, this is a huge issue because the intellectual property rights are very contentious, and it is extremely expensive to litigate."

The business of entrepreneurship

For Caltech students and faculty, the idea or invention--the intellectual property--is owned by the university if it was conceived as part of sponsored research. If any Caltech funds or facilities have been used to develop the concept, students and faculty are obliged to tell Caltech's Office of Technology Transfer (OTT) of the invention in advance of any public disclosure and to assign rights to Caltech. This disclosure to the university is witnessed and secures the date of conception in the U.S.

In other countries, the first to file for a patent receives priority for it, so as an interim step, OTT files a provisional patent with the U.S. Patent & Trademark Office, which secures the filing date in the U.S. and worldwide. Caltech then has one year to file a full patent in the U.S. and worldwide. Typically, it costs anywhere from $5,000 to $20,000 to file a full U.S. patent, and considerably more to file worldwide, given the cost of translations and the different rules in each country.

Caltech's OTT pays for the patent filings. "We spend a lot of money on filing a lot of patents--over 200 provisional patent applications last year for Caltech and its associated institution, JPL," says Richmond A. Wolf, now associate director of OTT, but formerly intellectual property manager in OTT and the Office of the Intellectual Property Counsel. These two offices work together to drive technology toward commercialization.

The latter office--a general counsel's office--deals with intellectual property matters, including disclosures and patent prosecutions. "OTT is in the business of entrepreneurialism for Caltech and JPL, which means it deals with business start-ups, deciding what to file, and determining the terms and conditions of licensing agreements," Wolf explains.

Last year, OTT received 143 invention disclosures and filed 132 provisional patents for Caltech alone. The corresponding numbers for JPL were 282 invention disclosures and 74 provisional patent filings.

"That's a lot for a small school. Caltech only has 2,000 students," says Christopher T. Moulding, former OTT assistant director and now science administrator for intellectual property at Howard Hughes Medical Institute in Chevy Chase, Md. "It's not as high as MIT, but it is in line with the Texas system, and it is similar to Stanford University," he adds. It certainly far exceeds what happened up until 1995, the year OTT was formed, when there were just 30 to 40 invention disclosures per year.

In short, "Caltech is centered around the entrepreneur. Entrepreneurialism drives a lot of what is done at Caltech," Moulding says. The legal office and OTT "really have the responsibility for putting a face on the commercialization of technology, and the philosophy is to be very aggressive in the filing of patents," he explains. Caltech "files a lot of patents primarily so that it doesn't miss anything."

Caltech spends between $1.5 million and $2 million a year on filing patents domestically and worldwide. Much of this money is reimbursed to the university through licensing.

Once an invention is secured, the student or faculty inventor receives "25% of any consideration Caltech gets for licensing the technology," Wolf explains. "If we license back to someone who has left Caltech to start up a company--which happens somewhat frequently--the inventor is still entitled to 25% of what we get from licenses to other companies. But there is no limit on what type of ownership the inventor may have in their own company," he adds. Dahiyat, for example, is president and CEO of his company and owns a hefty share of it, but he had to license from Caltech the technology he developed as a graduate student

As part of the licensing agreement, Dahiyat had to give Caltech about 5% equity share in his company. That's common practice. "As a consideration for a license, Caltech takes an equity share and/or a royalty in the company," Wolf explains. The equity share is usually 3 to 6% of initial capitalization of a company, he adds.

Last year, OTT estimated the total value of stock in the 43 companies in which the university has equity at $15 million. Most of these companies are making electronic devices. But more than a quarter are chemical, chemistry-related pharmaceuticals, and biotechnology companies.

After the patent

After Baldeschwieler's students learn how to protect their ideas or inventions, they learn about marketing. "Technical people often have wonderful ideas and think that it's obvious that the market will be there," Baldeschwieler says. "They think if they have a good idea or product, people will buy it, and that's not true." So the rudiments of marketing are taught.

Once the intellectual property is protected and a potential market exists, a company can be set up. Baldeschwieler brings in a corporate lawyer to explain the different types of corporations that can be formed.

Then students are exposed to the rudiments of running a business. They learn how to read balance sheets and to comprehend sales and revenues, earnings, and cash flow. "This part is easy for the students because they are so quantitative," he says.

What follows next is the part of the course that students like best: venture capital. For about an hour, Baldeschwieler, with hat in hand, plays the role of an entrepreneur seeking funding from a venture capitalist, played by a real venture capitalist invited to instruct the students.

Wolf: in the business of entrepreneurialism
After this come the more mundane, if necessary, topics: initial public offerings, human resources, business plans, mergers and acquisitions, corporate financing, partnerships and joint ventures, and how to deal with Wall Street. To wrap up the course, Baldeschwieler offers Caltech-based case studies.

Case studies

The following two cases are not the ones Baldeschwieler highlights in his course, "although they both would be interesting examples," he says. Both of the entrepreneurs, however, have been involved with Baldeschwieler in one way or another.

One took Caltech's entrepreneurial development course; the other didn't but has consulted with Baldeschwieler. Both have set up companies that are contributing to Pasadena's economy.

Dahiyat, a 29-year-old Ph.D. chemist who did his thesis work in structural biology under Stephen Mayo at Caltech, took Baldeschwieler's course in the winter quarter of 1997. As luck would have it, while Dahiyat was taking the course, proof of principle of his and Mayo's idea came to fruition in the laboratory. By late spring 1997, he had an exclusive option to license back the technology from Caltech, and by that summer he was lining up financing. By October, he had $3.6 million in hand and was able to set up his company, Xencor, with himself as president and CEO.

"We have computer software which we developed at Caltech that designs new gene sequences to improve a gene's properties," Dahiyat explains. "We then make them and license them" to companies making drugs, industrial enzymes, or agricultural biotechnology products, he adds.

Unlike some very successful companies that modify genes by using what Dahiyat characterizes as "traditional brute force laboratory methods, Xencor's computer-driven design of a new product is faster and cheaper." He says his "is the only company designing genes computationally."

Because Dahiyat and Mayo developed the software while Dahiyat was a graduate student at Caltech, the university owns the patent, which Xencor then licenses. The designer genes are another matter, however.

"We are creating new intellectual property, we are creating new patents with every gene we modify and improve. The genes are ours," not Caltech's, Dahiyat says. Since Caltech holds a small equity stake in Xencor and receives royalties for the use of the software, it, too, shares the economic benefits.

Moulding: Caltech is entrepreneur-friendly
"We took the technology out of Caltech; we licensed it. And now we are licensing to our customers the fruits of that technology--the proteins created by our computer algorithms," Dahiyat explains. The relationship with his customers--two pharmaceutical companies, an industrial enzyme company, and an agricultural biotechnology company--will be long term.

Xencor has been in existence for nearly 34 months but operational for only 25. For the first seven months, Dahiyat was the only employee; now he has 33 employees.

His company also has a scientific advisory board, which includes his thesis adviser, Mayo. Dahiyat can also seek advice from two former mentors: Peter B. Dervan and Melvin I. Simon , Caltech professors of chemistry and biochemistry, respectively. And of course, Xencor has a board of directors: Dahiyat, his lead investor, and two experienced biotechnology CEOs.

When Dahiyat could show that Xencor could apply his licensed technology to commercially important biotechnology problems, he was ready for a second round of financing. And in June 1999, when his company was valued at about $28 million, Dahiyat was able to raise $12.3 million from private investors. He has now closed on a third round of financing, raising $50 million based on his company's valuation of $120 million.

For his first financing round, Dahiyat supplied the investors with a very short technical plan--not a full-fledged business plan. This abbreviated plan outlined the company's goals, how much it was going to cost to reach them, and who the people were who would manage the company. He, of course, already had the option for an exclusive worldwide patent license.

"We had very strong science, a very strong patent position, and the pedigree of Caltech," to help sell the company to investors, Dahiyat says. But his business team was less strong. Fortunately, his investors were interested in helping him with the business end.

However, for the second round of financing, potential investors were interested in seeing a fully fleshed out business plan, which Dahiyat supplied. Most recently, he was able to secure additional financing with a less elaborate business plan, which, nevertheless, was more formal than his first one.

Prado: leading a high-tech incubator
Dahiyat met his vice president for finance, Rudy J. Emmelot, while taking Baldeschwieler's course. Emmelot, who was working for another company at the time, sat in on the course to learn what Caltech was teaching about starting and running a business. As serendipity would have it, he sat next to Dahiyat one evening. Emmelot says he quickly knew that scientist Dahiyat could "wrap his mind around financial concepts and understand what it takes to move a scientific concept forward."

At the moment, Dahiyat is struggling to get his company into "full bloom," which may take another two years. He works long hours, sees little of his wife and daughter, and has few people he can share his business problems with.

Like all successful entrepreneurs, he's in it for the money, not "to do cool science." Dahiyat explains: "If you don't go into starting a biotech company for the money, you're in it for the wrong reason, because investors are in it for the money." He wants to stay with the company "until it's valuable; that is, until it has given major value back to the investors and to me."

Then he'll reintroduce himself to his wife and daughter and think about starting up another business.

Thirty-year-old Stephen D. O'Connor is not yet married. He's too busy forming companies.

O'Connor: making microfluidic Legos
This Ph.D. physical chemist received his degree from Caltech in May 1995, two years before Baldeschwieler offered his course. But O'Connor has called on Baldeschwieler, his thesis adviser, often for advice.

O'Connor is a prime example of what Baldeschwieler calls a "serial entrepreneur," someone "who has a new idea and leaves to assemble a new team around himself." Baldeschwieler also falls into this category.

O'Connor was involved in his first start-up, Ultrafast Sensors, when he was 23. Two years later, after selling his share in Ultrafast, he helped form Clinical Microsensors (CMS), a company making electronic DNA sensors. While at CMS, he was a principal investigator on a large Defense Advanced Research Projects Agency contract on microfluidics.

"I sensed a problem with microfluidics, and I formed a company--Nanostream--in February 1999 to correct it," O'Connor says. He was 29.

He financed the start-up himself and worked out of his garage until that June, when he found lab space and started doing experiments and hiring people. The company just completed its first round of financing and is valued at $8 million.

O'Connor owns all patent rights to his invention--"a way to make microfluidic Legos," he explains.

"We make tiny plumbing," O'Connor says. "Others have made it out of silicon; we make it out of polymers. We make automated systems for doing chemical and biological reactions on a microfluidic chip."

Other companies typically etch tiny channels on a silicon chip and then place a cover over the chip to form tiny tubes. By using polymers, Nanostream can "make tubes, valves, tees, and branches--a set of building blocks--and click them together like Lego pieces to make a final product to a customer's specifications," O'Connor explains.

Nanostream is focusing on a few applications: DNA, RNA, and protein purification and concentration systems--simple reactions--and on metering devices. As O'Connor explains, "We can take a small sample and split it into three, five, or 100 different parts to improve the standard deviation."

The company has three paying customers--a biomedical research firm, a medical diagnostics company, and a hardware supplier for an Internet company--"and that's incredibly rare," O'Connor says. Ever the salesman, he says, "We have a technology that people want."

The early business development was a solo effort for O'Connor, the company's CEO. But now with a board of directors in place, he can tap into their business acumen for advice.

O'Connor believes high-tech companies can make great technological leaps only if they take an interdisciplinary approach, and his company's employees--now numbering seven--reflect that philosophy. There are two chemists--one of whom is O'Connor--a chemical engineer, another engineer with an M.B.A. degree, another with a degree in business development, a physicist, and an industrial designer/artist.

The artist is crucial because Nanostream makes complicated three-dimensional tubing systems, and being able to think in three dimensions allows the artist to design customized layouts on the typical 1-cm x 1-cm plates Nanostream manufactures. Each plate handles from 10 to 500 nL of liquid, which is similar to the handling capacity of typical etched silicon plates.

But in contrast to the three to six months and $200,000 needed to design and produce a prototype out of silicon, O'Connor says Nanostream's devices can be designed and produced in an afternoon at very low cost. For example, he estimates that a simple device used by a genomics company in a quality-control procedure can be designed to allow reactions to be done in triplicate with exquisite control and at significantly lower standard deviations at a cost of only a few dollars per device.

"We think our devices, when produced in bulk, will cost a few dollars rather than tens of dollars" to manufacture, O'Connor says. Nanostream has validated its manufacturing process with four production runs ranging from 5,000 to 75,000 units.

A sample is introduced to Nanostream's microfluidic biological sample preparation device at A, and flows through two pre-filters (B) that remove nonspecific biomass. The material of interest, such as a nucleic acid, is then bound to a selective filter region (C). Wash buffer enters through a clean channel (D) and flows through the filter into a waste channel (E). Finally, a small volume of elution buffer is introduced (also through D) and diverted into a collection channel (F). The sample can then be analyzed or further manipulated.
O'Connor cites some common problems every small high-tech start-up has: raising money, recruiting the necessary talent, and establishing the right corporate culture. About the corporate culture, he says having up to 15 employees is completely different from having more than 15, "and making that transition can kill you." Human resources is often overlooked in high-tech companies because most scientists don't think it's that important, he adds. But the hardest thing, he believes, "is knowing what you don't know."

Baldeschwieler was "a strong mentor," O'Connor says, and one he continually calls on for advice. O'Connor's Caltech education has also left him the legacy of an impressive Rolodex--a contact base he frequently taps.

O'Connor is thoroughly enjoying himself, although he admits that starting high-tech businesses is a humbling affair. Entrepreneurship, he cautions, "is not the easiest or best way to get rich."

Nurturing environment

There are ways to help fledgling entrepreneurs, however. Just as hospital incubators provide a nurturing environment for premature infants, business incubators provide space and legal and administrative services at low cost for cash-strapped emerging growth companies. Susan J. Prado, director of the Business Technology Center (BTC) , an incubator in Altadena, Calif., a city neighboring Pasadena, offers this startling statistic: "Ninety percent of businesses starting in incubators are still in existence five years later."

Incubators "benefit Caltech because they provide places for high-tech start-ups to go," explains OTT's Wolf. And BTC is the place some Caltech and JPL spin-off companies go. Prado says BTC is fairly unique for an incubator because "it is focused just on high technology and also because we are particularly aiming at transferring technology out of Caltech and JPL."

The 40,000-sq-ft building offers a plastic interior that can be configured and reconfigured to meet the needs of the occupants, currently numbering 16, so long as they don't require wet labs. So far, however, the companies--half of which are Caltech spin-offs--have not needed to make modifications to the original construction.

Because BTC is not zoned for wet labs, no biotech companies can be housed there. However, Pasadena is developing what it calls a "biotech corridor," and Prado says BTC is supporting that initiative.

BTC was formed in October 1998 and received about $5 million in federal grants passed through the Los Angeles County Community Development Commission. "We are now seeking outside funding to become independent of the L.A. County government," Prado says. Her goal is to make BTC a legally independent nonprofit organization by 2001. "Splitting off from the county will allow us to take a small equity position in a company, which will generate a revenue stream that eventually will support our operations," she explains.

Prado also wants to link BTC more tightly to Caltech. As she explains, "Baldeschwieler is taking entrepreneurial students and trying to give them the basics in business. BTC is trying to be the next step--the place that helps businesses get off the ground."

Nanostream's multidisciplinary team includes lead scientist Gene Dantsker (left), O'Connor, chemical engineer Marci Pezzuto, and artist Laird Maresch
Incubators are especially important for high-tech start-ups. "The rapid pace of technology means that you have really got to conserve your resources, and an incubator is an ideal way to do that," Prado says. "It allows you to focus on developing your company and keeps you from having to worry about such things as facilities' management and Internet hookups."

For an incubator fee of about $1.40 per sq ft, a start-up company at BTC not only gets lab and office space but cleaning, utilities, a receptionist, a phone system handled by management, and other support systems such as postal services, a resource library and conference room--and free coffee. Prado says the fee is under market for the area.

The ideal role for an incubator is to stimulate technological growth and keep high-tech companies in the local economy when they become financially strong enough to leave the incubator's safe haven. BTC is achieving this with an Internet company scheduled to leave the incubator in September and move to space in Pasadena.

David Baltimore , Caltech's president, "has acknowledged support for this incubator and has recognized its role in supporting the growth of Caltech-based companies," Prado says. "And we are working with Baldeschwieler to seek private funding for operational funds for the incubator so that we can become independent of the county," she adds.

Thanks in part to Baldeschwieler's efforts, BTC is now attracting angels and venture-capital investors, Prado says. "Venture capitalists recognize that companies in incubators have a better chance for success and therefore their money is better invested" in these companies.

It's evident that the tentacles of the course Baldeschwieler conceived and developed are reaching far and wide. "It is not an overstatement to say that Baldeschwieler's course has been a touchstone for changing the culture here at Caltech," OTT's Wolf says. The course may not have been the sole factor, he cautions, but before it began, "the culture at Caltech had really not been one of applying the great science done here toward commercial ventures."

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Other schools, other programs

The University of Wisconsin , Madison, is in the midst of what it calls cluster hiring in the area of entrepreneurship. The plans are to add faculty to the College of Engineering and the College of Agricultural & Life Sciences as well as to the schools of business and, possibly, law. The new hires--who will further develop curriculum and conduct research--will complement the efforts of the campuswide organization, the UW-Technology Enterprise Cooperative.

UW-TEC, set up in 1992, is sponsored by the engineering and agricultural colleges and business school to integrate entrepreneurship across the campus. UW Madison has more than 40,000 students and the third largest research budget among U.S. universities. For the moment, however, entrepreneurship courses are taught mainly in the business school, which has a top-ranked entrepreneurial program. Among its offerings are basic courses dealing with small-business management and entrepreneurship and more advanced courses dealing with such things as venture-capital funds.

This fall, the School of Engineering will offer a new course called "Entrepreneurship & Innovation in Engineering," and the School of Business will teach business plan writing, with a section devoted to technology-based companies, says Assistant Dean Lawrence Casper . Casper, a chemist, also is a codirector of UW-TEC, along with professor of business Anne Miner.

Guest speakers for these courses as well as judges for various competitions are drawn from UW-TEC's advisory council and the local entrepreneurial community.

In addition to the various courses offered, UW-TEC supports students and faculty hoping to turn their concepts into businesses in other ways. This support can take the form of advice and referrals to legal or financial experts. UW-TEC also forms cooperative ventures with students, faculty, and private-sector entrepreneurs to commercialize technologies.

Additionally, UW-TEC sponsors three competitions for students: the Schoofs Prize, for inventions; the Tong Prize, for developing a prototype; and the Burrill Award, for technology business planning. All are named for the alumni who underwrite the contests. The Tong Prize offers $4,000 to the winner, while the other two award $10,000 first prizes, $7,000 second prizes, and $4,000 third prizes.

Students can enter the same concept in all three competitions. None has "hit the jackpot yet, although some have won two separate prizes," Casper says. The winners usually invest their award money in obtaining a patent for their idea or starting a business.

The university has a patenting and licensing group called the Wisconsin Alumni Research Foundation, or WARF , which helps students with patent issues, Casper says. In existence since 1925, WARF patents and then licenses research discoveries. The hefty income from the commercial licenses--nearly $20 million last year--is distributed among the UW Madison Graduate School, the inventors, and their departments. The graduate school and the departments can use their share to support worthwhile research not funded by other sources.

"Our policy on intellectual property ownership is very unusual," Casper says. Unlike many universities, "an undergraduate working on a senior project, for example, or using our computer workstations to develop a software concept, does not necessarily have to assign the intellectual property to the university."

For the most part, UW Madison students "own their intellectual property--inventions, copyrighted software--regardless of when they invent something, unless they are performing the work as part of a research grant or contract," he adds. Students funded by corporations or the federal government may have to assign their intellectual property to WARF, however.

Many faculty start-up companies have been biotechnology related, although spin-offs in software and engineering devices are growing. Student spin-offs have mostly been software or dot-com related, or have involved mechanical devices or other ideas, Casper explains.

Other universities and colleges have programs similar to UW Madison's. Casper mentions Stanford University and Massachusetts Institute of Technology as among the largest private universities having such programs. And he names North Carolina State University; the University of Colorado, Boulder; and the University of Texas, Austin, among large public universities with strong entrepreneurship programs. Among small colleges, he mentions Hampshire College in Amherst, Mass., and Juniata College in Huntingdon, Pa. Juniata is distinguished for having an excellent chemistry undergraduate program, and has set up its own venture-capital fund for student entrepreneurs, he notes.

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Portrait of a budding entrepreneur

He's a young man with an idea who needs about $750,000 to prove his concept. And if his California Institute of Technology professor, John D. Baldeschwieler, is any gauge, he should get his start-up stake quickly.

His invention is simple enough that any qualified engineer can figure it out. So 26-year-old Lawrence Cary Gunn, a second-year Caltech graduate student in electrical engineering, chooses his words carefully when describing it. "It's an information provider service to untapped markets using the newly developed communications infrastructure," he explains.

Gunn pauses a moment and then elaborates. "With the enabling technology of today's ultrafast networks and with the proprietary data collection system we have developed, we have a way of providing real-time feedback in markets not currently or adequately served."

His idea to serve a niche market came to him while he was listening to a particularly irritating radio commercial. "I asked, How could that radio station allow that commercial on the air?" The answer, in part, is that the station and the advertiser had no immediate way of monitoring audience response. Arbitron, the widely used radio survey service, supplies stations only average quarter-hour statistics every three months.

Gunn claims he will be able to provide real-time audience shares data and demographic information to radio stations seeking revenue and to advertisers trying to reach specific markets. "I will have a website to collect information from data sources, and I'll sell the data to marketers and advertisers," he says. "Building data sources is the proprietary part," he adds.

Gunn took Baldeschwieler's entrepreneurial development class, and to earn credit for the course he had to write a business plan. During a discussion of his plan with Baldeschwieler, Gunn revealed that he holds rights to the proprietary design and could build a prototype in his garage, if he had to. But he would need about three-quarters of a million dollars to prove the worthiness of his concept.

About $250,000 of that amount would fund the development of a prototype system and its installation in a test market. And it would pay lawyers to form Gunn's start-up company and file the necessary patents. The larger chunk, about $500,000, would cover the cost of monitoring a market for six months to collect the data needed to prove the concept. It would also underwrite the development of the software packages each subscriber would get, and it would sustain a 10-computer support facility.

From his Air Force days, Gunn gained contract management experience and a host of Air Force buddies with management skills, although few have executive management expertise. He acknowledges a need for a business partner and lawyers to help him establish the business.

He's likely to get the help he needs. Baldeschwieler thinks Gunn's idea "is quite salable. It has a certain cleanliness to it."

Gunn is a fount of ideas, but this is his first business venture. Why does he want to do it?

"I work well with people as long as I have the ability to influence the direction we're taking," he says. "And I've always wanted to be at the cutting edge in a technological company. I'd love to start a company, get it to generate cash, and then use the cash to capitalize other ideas." But then he starts to squirm a bit as he voices his dilemma. "I want a Ph.D., but what if this idea really takes off? What do I do?"

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