Mind the gap 2015 sample

Mind the Gap The Technology and Start-up Gap Funding Report

THE TECHNOLOGY AND START-UP GAP FUNDING REPORT

presented by


innovosource launched the Mind the Gap initiative a decade ago to address a larger issue in innovation—a lack of early stage capital (and sup-port) to transition early stage technology from the lab to the marketplace. By partnering with research institutions and affiliates, we inform, connect, and advocate for one solution—technology and start-up gap funding. Since, its inception, Mind the Gap has directly supported thousands of gap funding programs around the world.

Today, we continue to see the retreat of many forms of early stage capital to later investment stages, the dramatic shifts in global economies, and the uncertainties in public policies that all threaten innovation. Yet, even while research institutions are balancing near-term budget constraints against the perspectives of longer-term, higher risk investments in technology development and commercialization, leading institutions are still making gap funding a priority.

Fundamental to our effort to support these gap funding programs is the Mind the Gap Report, a first-of-its-kind resource, now in its third iteration, that tracks the evolution of translational research, proof of concept and start-up gap funding programs. The Report now includes 82 gap funding programs affiliated with 51 research institutions and details their sources and sustainability plans, processes and management, focus and intent, and ultimately their impact on the innovation community and its capabilities.

Moving forward, we believe that our role is to provide information that current and aspiring gap fund managers and innovation stakeholders can use to develop their own programs, to connect programs with members of the technical, business, investment, and entrepreneurial communities, and to advocate for future policy that supports these funds and associated efforts.

So with that, we present Mind the Gap 2015 and look forward to working with you for the future!

Jacob Johnson Founder, innovosource

innovosource launched the

Mind the Gap initiative a decade

ago to address a larger issue in

innovation

—a lack of early stage

capital (and support) to transition

early stage technology

from the lab to the marketplace.

We partner with research

institutions and affiliates

to inform, connect, and advocate

for one solution

—technology and start-up

gap funding.

WELCOME


STRUCTURING THE GAP FUND 54 RAISING A GAP FUND 55

Fund Sources ..................................................................................................55

Projected Lifetime of Fund ...............................................................................63

Initial Size of Fund ...........................................................................................65

MANAGEMENT AND STRUCTURE 68

Fund Management ..........................................................................................69

Funding Cycle ..................................................................................................72

Funding Vehicle and Requirements ...............................................................73

Projects and Amounts Awarded ......................................................................75

SUSTAINING GAP FUNDS 77

MANAGING THE PROCESS 82 THE GAP FUND PROCESS 84

Promotion and Communication ......................................................................89

Intake ...............................................................................................................91

Evaluation and Decision-making .....................................................................93

Oversight ........................................................................................................101

FUND SUPPORT PROGRAMS .................................. 107

CONTENTS REPORT SUMMARY 15

OBJECTIVES AND METHOD 17

PARTICIPANT OVERVIEW 19

Participant List .................................................................................................21

IDENTIFYING THE GAP 24 INNOVATION CAPITAL LANDSCAPE 25

Venture Capital ................................................................................................27

Angel Capital ...................................................................................................34

Publicly-supported Technology and Start-up Funding Programs ..................37

Accelerators .....................................................................................................41

Crowdfunding ..................................................................................................42

DEFINING GAP FUNDING 44 THE ROLE OF GAP FUNDING 46

Emerging Innovation Capital Landscape ........................................................47

DEFINING GAP FUND TYPES 49


THE IMPACT OF GAP FUNDING 112 DEFINING IMPACT 113

Catalyzing the Commercialization Process ...................................................117

Growing a Community of Innovation .............................................................119

Building Businesses and Creating Jobs .......................................................120

Attracting Capital and Expertise ....................................................................122

Returning Capital to the Gap Fund ...............................................................125

GAP FUNDING SHOWCASES 128 GAP FUND SUCCESS STORIES ARCHIVE 130

Harvard University .........................................................................................131

IllinoisVENTURES ..........................................................................................133

Life Sciences Discovery Fund .......................................................................136

Massachusetts Technology Transfer Center/UMASS ...................................137

Michigan State University ..............................................................................139

North Carolina State University .....................................................................141

Oregon Best/Oregon State University ...........................................................143

Tech Launch Arizona/University of Arizona ...................................................145

University of Illinois-Urbana Champaign .......................................................147

Washington State University ..........................................................................149


FIGURES AND TABLESTable 1: Participant Overview..........................................................................20

IDENTIFYING THE GAP Figure 1: VC Investment Dollars by Stage and Year.......................................28

Table 2: VC Investment % by Stage and Year.................................................28

Table 3: First-Money Seed VC Activity by Firm...............................................29

Figure 2: Visualization of Most Active First-Money Seed VC Firms................30

Table 4: First-Money Seed VC Activity by State..............................................31

Figure 3: Map of First-Money Seed VC by State and City..............................31

Table 5: First-Money Seed VC by Industry Sector..........................................32

Figure 4: Angel Capital vs Venture Capital Seed Stage Activity....................34

Table 6: Angel Capital Seed Stage Activity and Active Investors...................34

Figure 5: Seed Angel Capital by Investment Tendencies...............................35

Table 7: Seed Angel Capital by Sector and Investor Age...............................36

Table 8: Examples of State and Regional Gap Funding Programs................37

Table 9: Examples of Non-US Government Gap Funding Programs.............40

DEFINING GAP FUNDING Figure 6: The Emerging Innovation Capital Landscape.................................47

Table 10: Comparison Between Traditional/Gap Funding..............................48

Figure 7: Defining Gap Fund Types.................................................................51

STRUCTURING THE GAP FUND Figure 8: Pre-raise Questions to Target Proper Sources.................................55

Figure 9: Sources of Gap Funds by % of Contribution...................................57

Table 11: Source Descriptions and Key Observations....................................58

Figure 10: Sources of Gap Fund by Region...................................................61

Table 12: Source of Funds by Research Institution Size................................61

Figure 11: Sources of Gap Fund by Vintage Year...........................................62

Figure 13: Projected Lifetime by Institution Size and Fund Type...................64

Figure 12: Projected Lifetime of Fund Defined by Fund Source....................64

Figure 14: Initial Fund Size Based on Fund Type...........................................65

Figure 15: Fund Management by Fund Type.................................................70

Figure 16: Funding Cycles by Type of Fund and Fund Management............72

Table 13: Funding Vehicle and Funding Requirements..........................,.......73

Figure 17: Amount Invested per Project or Start-up by Fund Type................75

Figure 18: Number of Projects Funded Per Cycle by Fund Type...................76

Figure 19: Source of Capital for Sustaining Fund by Fund Type...................77

Table 14: Strategies for Sustaining Fund by Fund Source.............................79


MANAGING THE PROCESS Figure 20: The Gap Fund Process..................................................................85

Table 15: Preliminary Assessment of Gap Funding Process..........................88

Figure 21: Fund Promotion Approach by Fund Type.....................................89

Table 16: Overview of Fund Promotion Strategies..........................................90

Table 17: Sample Format for Request for Funding Proposals........................92

Figure 22: Gap Funding A.C.E. Evaluation Technique...................................95

Figure 23: Advisory Board Structure by Fund Type.......................................99

Figure 24: Yield Rates by Fund Type ............................................................102

Table 18: Recommended Approach to Manage Oversight of Fund............102

Figure 25: Use of Funds by Fund Type.........................................................103

Figure 26: Gap Fund Program Assessment..................................................105

Figure 27: Positioning of Gap Fund Support Programs...............................108

Table 19: Descriptions of Gap Fund Support Programs...............................109

THE IMPACT OF GAP FUNDING Figure 28: Gap Fund Impact Time Horizon..................................................115

Figure 29: Tracking Impact through the Commercialization Process..........118

Figure 30: Gap Funding Dollars vs. Start-ups and Jobs Created................121

Figure 31: Capital Attraction Overview by Source........................................123

Figure 32: Capital Attraction Ratios by Source............................................124


Positioning Gap Funding and

Defining Its Purpose in Technology

and Start-up Development

DEFINING GAP FUNDING


This dearth of early

stage development capital must be

recognized and addressed as

a serious threat to future

innovation and associated societal

benefits.

Left without a solution, many

promising technologies and

start-ups

will struggle to develop on a

path of least resistance towards

a sub-optimal end.

Research institutions and partners

have created gap funding

programs as a capital and

innovation support mechanism to

address this challenge.

THE ROLE OF GAP FUNDING

The early-stage capital sources that were identified in the previous section are vital to ultimately transitioning university innovation to the marketplace; however, often exhibit inherent conflicts that inhibit their ability to invest and provide reliable and well-positioned assistance for university technology development and start-up formation. The outcome is a capital gap that forms from the misalignment between the expectations and funding capabilities of outside capital sources and commercialization partners and the needs of research institution technologies and start-ups.

This dearth of early stage development capital must be recognized and addressed as a serious threat to future innovation and associated societal benefits. Left without a solution, many promising technologies and start-ups will be stunted or will struggle to develop on a path of least resistance towards a sub-optimal end.

Moving forward, a good strategy to address this capital gap is either a) to incent the aforementioned private and public forms of early stage capital into this space, or b) to invest directly into models that are better structured, positioned, and motivated to fund these technologies and start-ups. However, the best strategy is to support a solution that accomplishes both, like university technology and start-up gap funding programs.

Research institutions and partners have created gap funding programs as a capital and innovation support mechanism that is uniquely positioned to address the critical elements of technology development and start-up formation from research institutions, while also attracting additional capital and participation from the technical, investment, and corporate communities.


A realistic look at the early stage capital landscape uncovers a large innovation capital and support gap between the transition of basic research through commercialization — an area that research institutions directly address through different gap fund types (Fig.6). Now in the picture, it becomes clear that research institution-affiliated gap funding programs are uniquely capable from a funding approach, operational positioning, and motivation standpoint to address this challenge. (Table 10)

Emerging Innovation Capital Landscape

Traditional Sources Gap Funding

Fund

ing

S

truc

ture

Larger investments in fewer deals in sectors that may not fully address technology with longer development timelines

Targeted, grants or relatively smaller investments per project, but fund more projects often in areas with longer development timelines typical in academic environments

Op

erat

iona

l P

osi

tioni

ng

Aversion to fund pre-revenue or early stages of business formation due to investment risk preferences, management restrictions, and uncertainty

Focus on translational research, proof of concept, and start-up development and are positioned in academia at the nexus of faculty, students, and business networking

Mo

tivat

ions

/ E

xpec

tatio

ns

Risk profile at this stage may make it difficult to justify investment. Also typical ownership vehicles like equity or collectible debt is less available in early stage technology development

Mission-driven to innovate, educate, and job create with the understanding of longer-term ROI and capital attraction objectives

Table 10: Comparison Between Traditional Funding and Gap Funding

Figure 6: The Emerging Innovation Capital Landscape

RESEARCH TECHNOLOGY START-UPBasic

ResearchTranslational

ResearchProof ofConcept

CommercialPositioning

Start-up Formation

Expand/Scale

PUBL

ICPR

IVAT

E

RESEARCH INSTITUTION GAP FUNDING PROGRAMS

INNOVATION CAPITAL AND SUPPORT GAP

FEDERAL RESEARCH

CAPITAL REQUIREMENTS PER PROJECT OR START-UP

$Ms$100Ks

$10Ks

$Ms$100Ks

$10Ks

FED/STATE PROGRAMS

ACCELERATORS

VENTURE

ANGEL CAPITAL

CORPORATE

TranslationalResearch

Gap Funds

FOUNDATION

Proof ofConcept

Gap Funds

Start-upFormationGap Funds

Start-upGrowth

Gap Funds

STAGES OF EARLY-STAGE INNOVATION


The “gap” in gap funding refers to a vast shortage of capital and other commercialization support to identify, to evaluate, and to deliver research institution technology and start-ups to the marketplace. 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. Using mixed terminology to describe the function and intent of gap funding programs just leads to confusion from the support community; therefore, we propose the adoption of a shared set of descriptors for gap funding programs that is based on the tracking of these funds over the past decade and the realities of the early stage capital landscape.

Gap funding approaches to the larger “gap” can be broken down into four primary gap fund types, each with individual characteristics, structures, and commercialization priorities that are functional as standalone funds or as contributors to a larger systematic approach depending on the needs of the operation1. This vantage leads to an actionable and segmented view of gap funding programs (Fig.7) with three main advantages for fund managers:

■ Scalable: Aligns with the existing university technology commercialization process, and other early-stage technology and product development processes

■ Customizable: Opens up the opportunity for universities to create an individual approach that is based on the specific needs and capabilities of their own institutions at each stage of the innovation process

■ Relatable: Establishes a system that is identifiable by the all stakeholders of early-stage innovation (public and private), and allows them an opportunity to identify their role as a partner in the process

This segmented approach to gap funding will play a prevalent role in the remainder of the report. We will detail the inner workings of each fund type and encourage you to view this as a necessary, interconnected university technology commercialization support system.

1 Over 30% (19) of the surveyed institutions managed more than one gap fund type, usually at least a proof of concept and star-tup formation type gap fund

The “gap” in gap funding

refers to a vast shortage of capital and

other commercialization support

to identify, to evaluate, and to deliver

university technology and start-ups to

the marketplace

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.

The larger “gap” can be broken down

into four primary gap fund types,

each with individual characteristics,

structures, and commercialization

priorities.

DEFINING GAP FUNDS


Focu

s

Translational Research gap funds support applied development of research to a point where it can be assessed for commercial potential. These gap funds further the development of promising research projects after more traditional public funding subsides. Research institutions often form or associate translational research gap funds with emerging technology priorities or historical scientific competencies

Proof of Concept (POC) gap funds evaluate commercial potential, demonstrate the value, and generally de-risk (or perception of risk) the project to commercial partners or investors. Achievements like proto-types and commercial assessment help to identify and secure a route to commercialization, if one exists. POC funds also identify weakness in the technology for further development, or help avoid costs by deciding not pursue the technology

Start-up Formation gap funds assist in the formational steps of spin-outs — even prior to becoming a legal entity. This gap fund type could be seen as a start-up-focused extension of proof of concept funding that further develops the business application of the technol-ogy through market research, product development, business development, management, space, and equipment to attract third party interest and capital

Start-up Growth gap funds invest in scaling and growing established spin-outs. Research institutions have creat-ed, spun out, or partnered with seed funds and accelerators, both public and private, to fill this void in early stage start-up capital and to directly invest in their own start-ups. Some institutions are even beginning to invest in non-institu-tion start-ups.

Man

agem

ent

College-level or research center in particular technology focus areas. Technology transfer or research administration may also support a campus-wide initiative. External partnerships through public or private translational research funding programs also exist

These funds are often administered centrally through the technology transfer office, research foundation, central research administration, or the equivalent at the college-level. Externally-partnered public funds, accelerators, and corporate funds run independently or in close collabora-tion with the research institution

These funds are primarily administered by the technology transfer office and associated venture centers. External public-private arrangements to support business creation are administered by sponsoring agency or through close collaboration with the research institution

Centrally managed Start-up Growth gap funds are limited based on the required capital.

To overcome this challenge and mitigate risk, research institutions may partner with existing early stage venture firms or investor groups

Cap

ital

Vehi

cle Grants; often directed and continued based on achieving technology development milestones

Grants; generally no direct repayment expectations; however, in some cases repayment schedules can be set-up to support fund sustainability

Grant or investment; Investment is often structured to entice third party in-vestment and limit financial constraints on company in the formative years

Investment; Equity, convertible debt, or repayment directed at maintaining stake in company and realizing a return

7 funds/9% of funds surveyed 51 funds/62% of funds surveyed 17 funds/21% of funds surveyed 7 funds/9% of funds surveyed

RESEARCH TECHNOLOGY START-UP

TranslationalResearch Gap Funds

Proof ofConcept

Gap Funds

Start-upFormation Gap Funds

Start-upGrowth

Gap Funds

Start-up

License to Existing CompanyWaive or Further Develop

Defining Gap Fund Types

Figure 7: Defining Gap Fund Types

Investor Relations

Mind the gap 2015 sample