In 1993, Dick Leazer overheard a heated conversation outside his office in the WARF building. Two members of the foundation’s licensing team were locked in a debate over how to handle a request from two UW-Madison professors. Instead of licensing their WARF patents to an established firm, Lloyd Smith and James Dahlberg wanted the technology for a new company they had started themselves.
Leazer had just arrived at WARF, where he would take over as managing director the following September. But after listening to the hallway exchange, he seized the initiative and set up a meeting with Smith and Dahlberg. That decision began a reorientation of WARF’s interactions with Madison startup companies, which in turn opened a new chapter in the foundation’s decadeslong effort to adapt to changing times.
In his prior career leading pharmaceutical and medical device companies, Leazer had sought out creative partnerships and business solutions. This made him a natural fit for the competitive technology transfer environment of the 1990s. Even before he took over as managing director, he began attending faculty meetings and reaching out to Wisconsin businesses looking to spark new collaborations.
That strategy paid immediate dividends with Smith and Dahlberg. As a postdoc at the California Institute of Technology in the 1980s, Smith had consulted with a biotech firm to commercialize one of his inventions, an automated method for analyzing DNA sequences.1 Dahlberg, a longtime professor of biomolecular chemistry in the UW Medical School, made a similar practical discovery in the early 1990s when he identified an enzyme that could detect genetic mutations in humans.
By chance, the two professors happened to sit next to each other on a plane not long after Dahlberg’s breakthrough. Smith, who had joined the UW-Madison chemistry department in 1987, suggested they draw on his experience with the biotech industry and their mutual interest in genetics to form a new company to develop Dahlberg’s technology.2 Together with Lance Fors, a molecular biologist and former classmate of Smith who became their CEO, the scientists incorporated Third Wave Technologies in 1993 with the goal of producing diagnostic tests to detect genetic markers for diseases.
Because WARF had filed for patents on Dahlberg’s technology, Third Wave needed the foundation’s support to become a success. The big question was how to collaborate. In previous decades, WARF had made a point of licensing to established companies with a proven track record, rather than untested startups. That policy increased the chances that a patented invention could have the greatest benefit for the largest number of people.
The difference between the established procedure and the needs of Third Wave sparked the debate within WARF’s licensing department. On the one hand, Smith and Dahlberg had mastered the science and no one would be better positioned to capitalize on their patents. Moreover, issuing a license to their company could establish a whole new pathway for advancing the practical applications of UW-Madison research.
On the other hand, getting involved with a brand new startup meant trusting an unproven company with the fate of valuable patents. Third Wave had yet to demonstrate that it could raise the needed capital and navigate the many pitfalls that face any new business. In addition, WARF would be licensing a patent to a private entity that had been co-founded by a professor at a public university who also had his name on the patent. Without due diligence, such a complex, circular arrangement could lead to conflicts of interest.
Leazer, much like his WARF predecessors in the 1920s, chose to view such complications not as obstacles but as a chance to experiment. WARF agreed to waive upfront fees and also refrain from licensing Dahlberg’s technology to other companies until Third Wave had a chance to find its footing. In exchange, WARF took an equity stake in the company, meaning it would earn a percentage of the proceeds if Third Wave was ever sold or began selling stock. The deal limited WARF’s short-term revenue from the patent but also lowered the risks and overhead costs for both sides.
The experiment paid off. The potential of Dahlberg’s technology attracted funding from, among others, Madison-based capital firm Venture Investors. That money enabled Third Wave to launch its first product in 1995. In the years that followed, the company advanced beyond the initial patents to produce tests for human papillomavirus (HPV) and cystic fibrosis. In February 2001, Third Wave made an Initial Public Offering (IPO), which turned WARF’s stake into stock shares worth an estimated $1.5 million.
In the meantime, WARF and the university drew on their collaboration with Dahlberg and Smith to formalize a conflict of interest policy. The resulting guidelines, now maintained by the Office of the Vice Chancellor for Research and Graduate Education, established rules intended to keep off-campus financial interests from interfering with on-campus commitments.3
The financial success of Third Wave piqued the interest of Madison entrepreneurs and enticed more UW-Madison professors to try a similar path to commercialize their research. By the end of the decade, with clear guidelines to avoid conflicts of interest, the foundation had entered into agreements with more than 20 new startups.
In one notable example, TomoTherapy Inc., founded in 1997 by UW-Madison medical physicist T. Rock Mackie, WARF not only filed patents on Mackie’s advanced cancer treatment therapy but also made direct capital investments to help the company get off the ground in Madison.
WARF’s evolving relationships with companies like TomoTherapy created an opportunity for faculty startups to combine the foundation’s three core purposes of investing, patenting and research support. As far back as the early 1980s, the foundation’s investment team had bought into venture capital companies, both local and national, as a way to diversify its portfolio and grow the endowment. But by directing those investments towards faculty startups, a sound financial strategy could also transfer technology into the Wisconsin economy and help advance the work of UW-Madison researchers.
In the years since the initial successes of Third Wave and TomoTherapy, WARF has licensed technology to more than 100 more startups, taking an equity stake in about half of them. In addition, under Managing Director Carl Gulbrandsen, who took over from Leazer in 2000, the foundation has set aside $30 million to invest in local companies and in 2013 partnered with the State of Wisconsin Investment Board (SWIB) to form 4490 Ventures, a fund dedicated to promoting information technology in Wisconsin.4
In some ways, arrangements with startup companies have more in common with the information age spawned by Silicon Valley than the milk jugs and oatmeal of the Steenbock patents. Indeed, the ability of professors to engage in outside projects reflects a marked shift in culture on campus and a burgeoning entrepreneurial climate in Madison that would have been difficult to imagine through much of the 20th century. But all in all, while the foundation and its partners continue to evolve, the new startup initiatives remain true to the founding aims of WARF: delivering scientific research to the marketplace and returning the proceeds to the university.
To find out more about WARF in the 21st century, stay tuned for the concluding installment of Decade by Decade.
Kevin Walters
Historian-in-Residence
2015