SOMETHING YOU MAY NOT ALREADY KNOW
There are at least four programs at Georgia Tech that promote the growth of technology companies: the Venture Lab helps Georgia Tech students, faculty and staff start businesses based on research from Georgia Tech, the Advanced Technology Development Center helps new startups that may, or may not, have originated from Georgia Tech, Tech Partnerships, which can be hired by any entity or government agency to exploit technology on a contract basis, and a grant application assistance program described in the next sentence. There is a federal grant program called Small Business Innovation Research, or SBIR. Grants can be as high as $100,000 in the first phase and $750,000 in the second phase. A department at Georgia Tech, that is funded by the state, will help not just Georgia Tech, but any qualified Georgia related entrepreneur, to apply for SBIR awards.
ROB: This is Rob Hassett with btobmagazine.com. Today, I’m going to be interviewing Stephen Fleming who is in charge of commercialization activities at Georgia Tech. You know Stephen, you’re the only person I know that went to Georgia Tech and majored in a science or engineering field and had a 4.0. I don’t want to put you on the spot, but I’ve never known anyone else who did that.
STEPHEN: It was a lot of work. I enjoyed school. I had a lot of people, you know, complain about their time at Tech. You know, Ma Tech screws you and things like that. I actually had fun at Tech. I enjoyed it.
ROB: And after Tech you worked for Bell Labs, right?
STEPHEN: Right. I worked for Bell Laboratories and I usually describe that as back when that meant something, back before divestiture, when we still had, I think it was, seven. Nobel Peace Prize winners on payroll, and I think three of them were in my building.
ROB: And what were you doing for Bell Labs?
STEPHEN: Working in fiber optic lasers. My specialty is optical physics, and I was working on a new class of a conductor laser to be used for fiber optic telecommunications.
ROB: And then you went to Nortel?
STEPHEN: Nortel, in the early ‘80s, after the divestiture. This was back when Nortel was still a fabulous company to work for. Obviously, it’s fallen on hard times in the last year or two. I worked through the engineering ranks, system engineering, and got into product management, and then into general management. So I did a little of everything at Nortel.
ROB: And you worked at other companies and eventually ended up at a venture capital firm, didn’t you?
STEPHEN: Right. When I left Nortel, I did a venture-funded startup which went spectacularly broke, and of course, that qualifies me to give people advice on how to do it themselves. So I was recruited into the venture capital business here in Atlanta as really a spin out of the Georgia Research Alliance. And it’s ironic because fifteen years later, I’m now working closely with the Georgia Research Alliance; in fact, with some of the same people. We raised about $260 Million of venture capital, which in the southeast, made us a pretty substantial fund, focused entirely on early stage technology. We did a bunch of deals mostly here in the southeast, made a little bit of money, and were, I think, a part of the ecosystem that flourished here for a while in the late ‘90s and early 2000s.
ROB: That venture firm was Alliance Technology Ventures, right?
STEPHEN: That’s right.
ROB: How many of the companies that you worked on went public?
STEPHEN: I did four IPOs. I did 18 deals total and I think 7 or 8 of them got acquired at some sort of positive number and a couple of them went bankrupt. I mean, you know, that’s the nature of the game.
ROB: Can you name a few that listeners may be aware of?
STEPHEN: The only ones that they might have heard of is RF Micro Devices, which is a semiconductor company up in Greensboro and Highpoint, North Carolina, which makes semiconductors for cell phones. Now it’s for almost any wireless device, a big public company. And the other which you’d at least recognize the brand name of, at the time when I invested in it, it was Sportsline.com. It is now CBSSportsline.com. It belonged to Viacom, and it’s the website for CBS Sports.
ROB: Sounds good. And then, at some point, was it about four years ago, you became responsible for the commercialization of inventions at Georgia Tech?
STEPHEN: Right. When I was in the venture capital business, I had pulled about 5 deals out of Georgia Tech research, so I had some familiarity with the other side of the equation. As you mentioned, I’m a Georgia Tech alum. I love Georgia Tech. I’ve been involved with Georgia Tech ever since graduating. And when I got out of the venture capital business, I started doing some volunteer work there on campus. That volunteer work proved the axiom that if you set the price of your time at zero, the demand is, indeed infinite. I spent a lot of time here at Georgia Tech doing volunteer work and somehow wound up on payroll. I’ve been here full time for the last 4 years.
ROB: Stephen, about how many inventions are made at Georgia Tech that you guys become aware of each year?
STEPHEN: We don’t look at any of the classified research, and there is a little bit of classified research done at Georgia Tech, actually a lot. But we don’t see any of that. If you filter that out, we’re looking at probably about three hundred invention disclosures a year which, for a university without a medical school, is actually quite a lot.
ROB: How many make it into the venture lab program that you are in charge of?
STEPHEN: Usually between 10-20%. So I’d probably say 30-40 a year have at least some combination of strengths, which would include both what our folks and those who have private sector backgrounds, we’ve all worked in venture-funded start ups, and believe there’s potential for a start up, and that there’s somebody on the invention side who’s interested in a start up. You really need to have both — neither one is sufficient alone.
ROB: About how many make it out of your program per year?
STEPHEN: Well, we just had a graduation ceremony about a month ago where we graduated 7 for the year. And that’s probably about right, assuming there’s a time delay. So I wouldn’t say that, you know, 40 come in one year and 7 make it out, but it’s probably on that order with a couple of years’ time delay built in. I’d like to get to maybe 10 a year, but you know, that’ll happen.
ROB: And I know you can’t give specific figures but generally, what does Georgia Tech get out of the deal?
STEPHEN: Well, there’s a couple of things. The obvious one is the least important which is licensing revenue. We actually own the intellectual property; that’s the way that federal law works. We write a license, a contract, with the start up company, and Georgia Tech gets a mixture of equity in the start up company and some royalties on the sale of the products that are based on that technology. And that’s a nice thing to happen, it pays a couple of bills around here. The more important things we get are more difficult to quantify. For example, these companies that form, maybe they really want the next generation of the technology, and they sponsor research back at Georgia Tech. That will pay for graduate students to do their thesis work on building the next generation of technology. These companies will hire Georgia Tech graduates, so it’s a place for both undergraduates and graduates of Georgia Tech to go find careers here in Georgia without having to leave the state. If they’re successful, they’ll actually give money back. You look at the Klaus Advanced Computing Center at Georgia Tech; it’s a gorgeous, quarter million square foot building, and the core gift behind that was given by an entrepreneur who started his company as a sophomore here at Georgia Tech. So there’s a lot of benefits that flow back to campus other than just the licensing revenue.
ROB: And also sometimes you license the technology directly to a large corporation, right?
STEPHEN: Oh sure. You know there’s a lot of technologies that don’t belong at a start up, and it’s kind of the reverse of what I said a few minutes ago. Either we don’t think that the technology has stand alone potential, in other words, it really belongs as a feature or as a part of an industrial process for a bigger company, or it may be just that the inventors have absolutely no interest in being involved in a start up. And in that case, it’s kind of hard to build a start up if the creators of the intellectual property aren’t at least neutral to supportive, and if they’re hostile, the idea is very difficult. So we license things to Intel. We license things to IBM. We license things all over the map.
ROB: And when the inventor starts a small company, you help put together a team if necessary, right?
STEPHEN: Yeah. We really focus on three things when we’re trying to get a start up out the door here at Venture Lab. Those three things are: First, pulling together a business plan that makes sense where all the numbers add up, and we can believe that in the face of the competitive environment that there’s justification for creating a new company. The second is recruiting management as you said. We’re not really big fans of having our professors become CEOs of companies. We want them to be involved but we don’t want them to be the person in charge. So we recruit and we play matchmaker and find successful entrepreneurs here in the community. And the last thing we do is find some money. We’ve got several little pots of money around that we can dip into for small amounts and help get the company through that very, very early period. Some people call it the valley of death. I think that’s over dramatic, but you’ll find that phrase a lot in literature for getting a company started up and ready to talk to customers.
ROB: And many of the small companies, after they finish going through the Venture Lab program, they end up at the ATDC for awhile too, right?
STEPHEN: It’s not required; it certainly is encouraged. You know our graduation criteria out of Venture Lab happens to look a lot like the entrance criteria into ATDC; that’s not by coincidence. You know we’re corporate siblings so we’re both part of the same organization, the Enterprise Innovation Institute at Georgia Tech. And a lot of our companies do find that ATDC is the logical next step for all the benefits that it provides, both in terms of the bricks and mortar facility, but more importantly, in terms of the coaching and in terms of the connections they can develop while being part of the ATDC for a couple of years.
ROB: And just for the benefit of the listeners who may not have lived in Atlanta a long time, the ATDC is the Atlanta Technology Development Center which is located at Georgia Tech in the same building as Venture Labs, right?
STEPHEN: Except I’ll correct you on two things. It’s the Advanced Technology Development Center, not the Atlanta Technology Development Center.
ROB: I’m sorry.
STEPHEN: The reason that’s important is we do have a facility in Savannah.
ROB: Oh okay. And you also do something, you run something called Tech Partnerships?
STEPHEN: Technology Partnerships is another group here at Georgia Tech. We’ve developed a lot of hard earned knowledge on how to truly commercialize technology, taking it from the laboratory to the market, whether it’s through a start up or through it’s licensing. And that knowledge is worth something. So we have a group, as part of commercialization services, that does that on a contract basis, and we’ve had contracts . We currently have one with NASA; we’ve done it for the Navy; we’ve done it for a foreign government in partnership with a U.S. company. So we actually will help other people figure out what their technology is, which of their technologies could be suitable for start ups, and help do things much like we do for Venture Lab with the exception that we don’t actually put money into those. We only put money into the companies that have Georgia Tech intellectual property.
ROB: Understood. And then you also help small companies apply for research grants, right?
STEPHEN: There’s a federal program which has been around for a while called Small Business Innovation Research, or SBIR. This is a program where 11 agencies of the federal government essentially have to pay a tax of 2½% of their research budgets which has to go to qualified small businesses. These are usually on the order of about $100,000 to start with, and they grow to $750,000 in the second phase. This is wonderful money for start ups. Because it’s aimed at start up companies, you’re not competing with the big boys; you’re only competing with other start ups. There’s no equities; they’re not taking ownership, and there’s no debt component. You don’t have to pay it back. It’s a pure grant. Really, all you have to do is find an agency that wants something that you have, convince them that you can develop it, and go through the solicitation and the competitive process, and it is competitive. Once you win it, you have that money to work on developing the technology, giving back whatever deliverable the agency has asked for. It has helped create or strengthen the growth of your company. It’s a great federal program. We do have a department here at Georgia Tech that is funded by the state to help anybody in Georgia, not just Georgia Tech companies, but anybody in Georgia who is interested in exploring or in applying for this SBIR awards and we help with that. That’s a free service we provide.
ROB: Stephen, what is the Seraph Group?
STEPHEN: Seraph Group is a different hat that I wear. It’s an investment vehicle aimed at high net individuals. Mostly folks who have either looked at Angel Investing and decided that it takes more time and effort than they have because they have a day job, or they’ve tried Angel Investing and discovered that it’s a lot harder than it looks and they’ve lost a lot of money. So what Seraph Group does is provide them a vehicle by which they can invest a certain amount of money. Seraph Group is set up to make capital calls. Seraph Group charges management fees and carries interest. Seraph Group has full time due diligence staff. Seraph Group has all the capabilities of a venture firm. It simply does not take money from the large institutional investors so the individuals aren’t trying to compete with a pension fund to get into the mix. Seraph Group targets early stage deals, not solely technology. Although I’d say a preponderance of the 18 deals we’ve done have been technology related. And the sweet spot is that between a $250,000 and $1.5 Million into a serious A-round. That’s where Seraph Group is targeting, and that’s nationwide. So we have 130 investors scattered all around the country. And we’ve done deals in half a dozen states at this point.
ROB: And you were one of the founders?
STEPHEN: Well, I helped assemble it. The true founder is the one full time partner. I’m on the investment committee and helped to get it organized and helped to recruit some of the investors. Now I spend a little of my time looking at the deals that come through Seraph Group’s deal flow and help them make the decision about which ones to invest in.
ROB: What range of money does the Seraph Group generally invest?
STEPHEN: Like I said between $750,000 and $1.5 Million is kind of the sweet spot for early stage investment for us. And that’s an area in which a lot of funds have been kind of abandoned. It’s really up to the Angel market and to new intermediate vehicles like Seraph Group to fill that. So deal flow has not been a problem.
ROB: So does Seraph Group invest in start ups or do they have to go through a friend an family round first?
STEPHEN: They don’t have to. A lot of deals do go through friends and family rounds just because that’s kind of the natural progression, but Seraph Group absolutely has been first money into several of the deals we’ve done.
ROB: I believe you mentioned to me that sometimes, Seraph Group will invest in a deal, and then some of the Seraph Group investors that are particularly interested will buy the deal from Seraph Group, and take it over.
STEPHEN: Yeah. The way the model works, most of the investors that we have are involved in Seraph Group. To be blunt, they have a lot more money than they have time. So they don’t have a lot of time to look at individual deals. They don’t have a lot of time to manage individual deals, but they do have significant financial ability. So what we can do is we make the investment so that Seraph Group is the general partner and the investors are limited partners. The general partner makes the investment. Then it shows that through a showcase, that we do three times a year, to the limited partners. And the message is essentially that if you like this deal, if you’d like to put more of your financial wherewithal into that deal, we’ll transfer a portion of Seraph Group’s holdings to you at Seraph Group’s cost. We don’t make any money on that transaction. But we get our money back from the investment that we’ve made, and it essentially lets us recycle our money if we do it right, 4-1 leverage. To be accurate, we’ve got 130 investors at a $100,000 a piece. That means we have $13 Million under management. But since we’ll do this 4-1 leverage, we get to act like we’re a $65 Million fund because we’re making investments that would be appropriate for a $65 Million fund.
ROB: Also, you are involved with a group that’s trying to develop an airplane that can actually make it into orbit, right?
STEPHEN: Well, I’m involved in a spaceship company. I don’t know if I’d call it an airplane that makes it to orbit. That’s going to take a little longer and cost a little more than we’re working on right now. We are building a runway-launched vehicle, which takes off horizontally just like an airplane, then goes vertical and will go into space. It does not go into orbit. There’s a difference between being in space and being in orbit. Space is just a matter of altitude, whereas orbit is a matter if speed. You have to be going fast enough that when you fall you don’t hit the ground, which is essentially the definition of orbit. But we are building a suborbital; in other words, just a straight up and down vehicle which will be a really fun ride for passengers. And there’s also some scientific and industrial applications for the flight that we’re selling some seats for that as well. But the one that catches everyone’s attention is obviously passengers. The company’s called XCOR, X-C-O-R, and we have partnership with a company that is selling tickets for us. So far, we’ve taken deposits on 22 tickets for this very fun ride.
ROB: How much is a ticket?
STEPHEN: $95,000 which is a lot of money, but it’s not the $20 Million which is what people thought space tourism was going to cost which, of course, gets you to the international space station. We don’t go to the space station. You don’t get to hang out in orbit for a week. You are strapped into the seat of a small vehicle that looks a lot like a jet fighter except it’s powered by rockets. And you get a really fun ride going up, and you get a great view. You get a little bit of microgravity, which people call zero gravity. And you come down and land at the same runway you took off from. There seems to be a pretty significant category of individuals who believe that’s absolutely worth $95,000, and those willing and able to pay.
ROB: Has the aircraft, the rocket, been tested yet?
STEPHEN: The engines have flown in a winged vehicle that we built under contract to a private company. So the engine has been flown, I don’t know the right number, but probably on hundreds of flights. So it is a well-tested engine. The actual vehicle is still under construction so that hasn’t been tested yet. But I’ve gone out and sat in the cockpit of the vehicle being built, and I fit. So I’m excited about getting a chance to ride it one of these days.
ROB: Wow! Stephen, if anybody wanted to get in touch with you about any of these programs, is there one number they should call, or a website?
STEPHEN: I’m pretty easy to find on e-mail; just Google me. You have to put “Stephen Fleming Atlanta,” or “Stephen Fleming technology,” or “Stephen Fleming Georgia,” because if you just put “Stephen Fleming” you will find out a lot about New Zealand Cricket. There’s another Stephen Fleming out there who runs the Cricket team. But I’m pretty easy to find and all my contact information is on my blog, which is academicvc.com.
ROB: That’s all they need? They could get all your information at academicvc.com?
STEPHEN: That’s right.
ROB: Well, I really appreciate your being on the program, and it’s been a pleasure Stephen.
STEPHEN: I’m happy to do it anytime. Thanks for the call.
ROB: Thanks a lot.