UNIVERSITY-AFFILIATED PROOF OF CONCEPT AND STARTUP GAP FUNDING

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Forbes: Allied Minds leading in IP commercialization in the US

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State Investing to Make Connecticut More Attractive to Tech Startups

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Two entrepreneur alumni donate $1 million each to UBC seed fund

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Our Partners are Our Users.

All of the information covered in this resource comes from close collaboration with active gap fund managers. We play a supportive roll by collecting and reporting up-to-date knowledge to assist the development of the technology and start-up gap funding community of practice

Who We Serve

  • Research Universities, Hospitals, and Institutions

  • Accelerators and Incubators

  • State and Federal Economic Development and Innovation Agencies

  • Angel Investors and Venture Capital

  • Corporate Innovation and Venture Groups

What We Cover

  • Translational Research Gap Funds

  • Proof of Concept Gap Funds

  • Start-up and Venture Gap Funds

  • Government-supported Innovation Initiatives and Funds

  • Angel Investors and Angel Networks

  • Corporate and Venture Capital

  • Crowdfunding

  • Student Venture Funds and Competitions

The Mind the Gap initiative has helped the technology transfer community focus on emerging practices in university-affiliated gap funding. The Mind the Gap initiative is the primary, comprehensive source for POC and early stage funding information and resources that the community, including my operations, turns to for understanding and insight.
David Allen, University of Arizona Tech Launch Arizona
As a Fund Manager, designing and implementing an organically grown technology development fund, these reports were invaluable in understanding metrics and what other institutions are accomplishing
Michael Rusnak, Medical University of Southern Carolina
Mind the Gap is the premier source for aggregated information regarding university-affiliated gap funding practices. It has been invaluable to us in our ongoing efforts to evaluate creative approaches for structuring seed and early-stage investment collaborations with universities and federal labs. Mind the Gap represents a valuable connection point to universities with leading edge commercialization programs, and as a result, a source of market-leading technology opportunities.
John Banta, Blue Cross Blue Shield Ventures

Why Gap Funding?

University Gap Funding: Mind the Gap

With all eyes on the economy, policymakers are quick to invoke the buzzwords of the day, such as “innovation”, “economic development”, and “job creation”, to describe the beneficial impact of commercializing early stage technology, often from research universities. Recently though, it seems that special interests, void of workable solutions, are grabbing headlines and helping to craft policy based on the suggestion that research universities are doing little to support this opportunity.

If you have accepted this information as fact, you would understandably think the system has neglected its duty, has failed, and is need of a revolutionary fix; however, with minimal investigation, you will see that universities have lead in the development of tactics and programs that address critical barriers to early stage commercialization, often ahead of other public and private entities.

One such example, is their development of gap funding programs to address the capital shortage that exists for early-stage technologies and start-ups.

So what is gap funding? How does gap funding relate to other forms of innovation capital?  And what is the impact of gap funding (why should you care)?

 

What is Gap Funding (A Better Definition)?

The “gap” in gap funding refers to a vast shortage in capital and other commercialization support to transition early-stage technology to the marketplace.  To address this need, many research universities either directly manage or partner with government agencies, early stage investors, or corporations to create translational research, proof of concept, and pre/seed-stage gap funds that assist in evaluating, de-risking, or commercializing technologies and start-ups.

Defining this “gap” too broadly (e.g. “Valley of Death” or “between basic research and the market”) oversimplifies the complexities of the situation and clouds the path to resolution. Frankly, it may be a reason why this sort of funding is less covered in mainstream press, and less understood by the general public. To relieve this tension, I propose and can demonstrate a more actionable, segmented system based on fund observations.

The approach to the larger “gap” can be broken down into a system of four gap fund types, each with individual characteristics, structures, and commercialization priorities:

 

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Translational Research
Translational Research gap funds enter after traditional sources of investment in basic research cease, and support the promising projects that require additional applied development. The ultimate goal is to get the technology to a point where it can be assessed for commercial potential, or aligned with the priorities of an external partner willing to develop the technology further

Proof of Concept
Proof of Concept (POC) gap funds evaluate commercial potential, demonstrate the value of the technology, and generally de-risk it (or perception of risk) for commercial partners or investors. By developing the commercial groundwork, including prototypes, IP/competitive landscaping, and application evaluation, these funds aim to identify and secure a route to commercialization (license to existing company or spin-out). POC gap funds also act as a process filter by identifying weakness in the technology for further development, or by deciding not to pursue the technology which saves often larger resource requirements later in the process (a common recommendation in most new product development literature). From my research, this is the most widely-utilized, and necessary gap fund type

Start-up Formation
This emerging gap fund type assists in the early formational steps of new company creation – often prior to it becoming a legal entity. Business Formation funds can be seen as a start-up-focused extension of proof of concept funding (post route-to-market decision) that develops the business application of the technology through market research, product development, business development, management, space, and equipment

Start-up Growth
As scalability and growth become major objectives, some research universities have created, spun out, or partnered with seed funds and accelerators, both public (government) and private (corporations, investors), to fill a void in early stage capital. The main goal of Business Growth funds is to scale an attractive business that creates jobs, produces a risk-worthy return on investment, and attracts capital by leveraging other external investors

In summary, adopting this segmented approach to gap funding creates a model that is actionable, relatable, and customizable in that it:

  • Aligns with well known technology product development processes
  • Allows for an individual approach that is based on the specific resource needs and existing culture of the funding institution
  • Creates a system that is identifiable by stakeholders of early-stage innovation (public and private), and provides them an opportunity to identify their role as a partner in the process

 

How does gap funding relate to other forms of innovation capital?

The common model of early stage technology and start-up funding — prevalent in business books and policy reports — depicts government-funded research magically transitioning to application through a license to an existing company or start-up. The start-ups are then supported in their early development by government grants, bootstrapping, and through angel or venture capital investment as they work towards profit, growth and liquidity.

This view is clean and places and emphasis on more traditional forms of early stage capital; however, it is also misleading and shifts the focus downstream. It ignores a major portion of the realities of early stage technology development—especially those which are realized by those involved in commercializing university research (longer to-market timelines, resource intensive).

In this view, gap funding and other emerging and disruptive sources of early stage capital are often overlooked and under resourced because they are literally not even in the picture; therefore, I offer an updated version of the early stage funding landscape—one that positions gap funding and also includes the current status of other forms of traditional, emerging, and disruptive sources of early stage capital and support

 

Innovation Capital Landscape

 

Each of these sources of early stage capital are vital to transitioning university and other early-stage technology to the marketplace; but, there are some inherent conflicts that inhibit their ability to provide reliable and well-positioned assistance in the early stages of technology and start-up development. Some of these weaknesses include:

  • Aversion or inability to fund translational research, proof of concept, and other early stages of start-up development
  • Structured to make larger investments in fewer deals
  • Focus on investment sectors that may not address technology with longer development timelines, resource intensity, and IP/regulatory hurdles
  • Motivations (incentives towards near term returns) and constraints that may limit their ability to accept the risk of early stage innovation

A good strategy to address this capital shortage is to either a) attract retreating forms of early stage capital and commercial partners back into the “gap”, or b) invest directly into models that are better positioned to fund the “gap”. The best strategy is to support a solution, like gap funding, that accomplishes both.

Research universities and partners have created gap funding as a capital and innovation support mechanism that is ideally positioned to address the critical elements of transitioning university technology and start-ups, while also attracting additional capital and third-party interest.

While it may not yet have the prestige of other forms of early stage capital, gap funding is emerging as a disruptive approach that is better aligned with and has the capability to support technology and start-up development in the early stages through:

  • Focus on translational research, proof of concept, and start-up development
  • Targeted smaller grants and investments per project, that enable to technology or start-up to be more adaptive to development “pivots”
  • Directed to fund university projects, often in many technology areas with varying to-market requirements
  • Positioned at a nexus of faculty, students, and business networks
  • Mission-driven to innovate, educate, and job create

 

What is the impact of gap funding (why should you care)?

The complexity of the answer lies in the fact that these funds do not just measure themselves in purely financial terms. The funding vehicle (often grants), the stage of technology (early), and the organizational missions inhibit this narrow focus. Instead, many refreshingly take a comprehensive approach and identify gap funding with its ability to catalyze the entire innovation ecosystem.

To capture these outcomes, I suggest four major groupings of impact measures, each with corresponding success metrics, and expected realization timelines, demonstrated below:

 

Impact Horizons

 

Process indicators: Measures to track and forecast the process of gap funding and eventual commercial outcomes. Some that I track include:

  • Yield rates, or projects proposed vs funded, were observed at up to 41% depending on fund type. This of course is much higher than the traditional investment sources typically 10% (angel) or .1% (VC)and demonstrates the ability of these funds to give more technologies an opportunity and capability to develop.
  • Commercialization rates, or those funded projects that were ultimately licensed to existing companies or start-ups, were observed at 76-81% depending on fund type

Building a Community of Innovation: An overlooked benefit of the funds is the associated gap support programs that engage members of the innovation community in the evaluation, commercialization, and funding process.  These tactics enlist thousands of faculty, students, and community members (business, investment, technical) in the entire process, which benefits the credibility and development of the projects, but also builds an expertise-, education-, and relationship-platform for future opportunities

Business Formation and Job Creation: Impact of these gap funds in tech-based economic development, including:

  • 395 new start-up companies (44 reporting funds)
  • 188 gap funded technologies licensed to existing companies
  • 7,732 confirmed jobs (27 funds), at an average gap investment of $16,300/job
  • 70% survival rate of reporting start-ups over five years old compared to 51% of SBA all new firms

Returns to the Gap Funding Organization and Capital Attraction: Direct repayment (repayments, royalty returns, equity payouts) and capital attraction (government grants, corporate, angel, venture)

  • Direct Repayment
    • While still early to capture complete outcomes, reporting funds experiences up to a 5x return of proof of concept type funding through, with an average of 2x for seven reporting funds
    • In addition to returns through direct repayment and equity, early results indicate that these funds (especially proof of concept) may increase the likelihood, speed, and negotiation position in licensing deals with existing commercial partners
    • Attracted Capital Leverage
      • $2.8B reported attracted third-party capital on $162M vested gap fund projects, 30 funds reporting
      • Up to $9:4:11:148 of attracted capital per $1 of gap funding in government, corporate, angel, and venture follow-on, respectively

 

In summary, gap funding is an effective approach, led by research universities, to address the capital shortage for early stage technology and start-ups. As a mechanism it is well positioned in the updated capital continuum, and is ideally structured to fund early stage innovation. Finally, it has demonstrated an ability to positively affect commercialization rates, support new businesses, develop communities of innovation, and attract capital to regions and new opportunities.

There is a story to be told, and this is just the beginning.

About the Effort:

Mind the Gap (www.gapfunding.org) is a conversation-building initiative of innovosource that 1)increases awareness of the early stage capital shortage and advocates for solutions, like gap funding, 2)expands knowledge and best-practices for current/aspiring gap fund managers and stakeholders, 3)connects university technology and startups to sources of early-stage capital (venture, angel, crowdfunding),talent, and other support.

This information is backed by over a decade of experience tracking gap funds, and specifically from the Mind the Gap Report  that now covers 82 translational research, proof of concept, and seed gap funds associated with 51 research institutions. The roadmap is constructed to assist current/aspiring fund managers and stakeholders in starting, developing, or measuring successes of their own gap funding programs.