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University Gap Funding: A Goal-Directed Process for Innovation
Jacob Johnson

Jacob Johnson
Office of Business Development
University of Minnesota
Minneapolis, MN

In the innovation process, where ideas are moved into the commercial marketplace, there is a marked contrast between the operating paradigms of the university and private business.  Energized by the 1980 Bayh-Dole Act, the nation’s leading universities have increasingly focused on innovation, utilizing in-house resources to commercialize technology.  Foremost is the goal to find effective ways to fill the “gap” between what basic science produces and the deals into which investors will put money.  

Universities face critical issues in addressing this gap.  On one side, seed and early stage funding sources such as venture capitalists and angel investors seek more developed products/services that have less risk. Then, on the other side, university research funds are often not available or not appropriate for prototype, proof-of-concept, and business/market development activities.  To address the gap, funding resources must be provided for critical, necessary development between the research lab and the potential marketplace.  

In 2005, the University of Minnesota, Office of Business Development (OBD) conducted a nationwide survey, collecting information from over 50 top university research institutions on about 80 university gap funds.  OBD’s working paper, Mind the Gap, summarizes survey results and provides information on policy, structure, repayment expectations, decision making processes, and overall goals of the funding.

A significant finding is that, under the university paradigm, gap funds are generally goal directed rather than focused on reaching investor oriented valuation milestones and achieving the next levels of funding.  In achieving university goals, questions are asked such as: What needs to be done to develop this technology and get it to the next level? Is this technology worth commercializing, and if so, by what route? What pieces are we missing to make this more attractive to the outside world?

A funding “gap” for innovation exists when funds are not readily available to fulfill development needs.  Universities in the OBD survey reported using a variety of resources to bridge a range of “gaps” that emerge at different development stages.   Most important resources include:

  • Funds from internal budgets and royalty/licensing streams
  • Grants supported by state funds and philanthropic organizations
  • Partnerships with private investment groups interested in dedicating capital towards projects at the research institution.

A significant survey finding is that the university arm for technology transfer and/or business commercialization plays a pivotal role in the innovation process.  It is the focal point for decisions about where funds will be allocated, and for what.  Most universities report that they use funds to develop science and technology to a stage where a decision can be made about the potential for commercializing a technology, and then to decide whether development is best accomplished through a license to an existing company, or creating a start-up company.

There is no standard gap fund.  Funds as bridging solutions vary according to university culture, location and funding community.  Each university utilizes different tools, support systems, and solutions to accomplish specific goals.   Further, any specific technology will travel an individual commercialization development route.  Because of this, the university gap funding finance model does not fit nicely into the well known private business investment model (seed, A, B and later rounds).

Nevertheless, across the universities surveyed, innovative technologies “grow up” in similar ways as they reach development milestones.  The growth stages and their goals are shown below in the “Gap Funding Process” model.  Goal orientations are organized into four sub-types of gap funds based on developmental position, needs, and goals according to individual needs of research institution.

The Gap Funding Process

Translational research
At the earliest development stage, translational research, the goal is to provide further lab development for technology.  Government and industry provide some funds for technology development, but not all developing technologies and basic research can be supported. Also, the research and IP may be outside current expertise, or have limited opportunity for licensing royalties. Universities provide funds to fill the gap with the goal of determining the technology’s future value, if any.

Proof of Concept (POC)/Prototype

At the POC/prototype stage, universities evaluate commercial potential of a technology to determine best routes, if any, to the marketplace. Funds help move the innovation to a decision point about business potential and possible options such as seeking license agreements or creating a start-up company.

Early Formation

The next stage, business formation, begins as technology progresses along the start-up path, rather than licensed out.  The goal orientation here is to meet needs for enterprise formation.  Resources are directed to drafting the business plan, validating markets and pulling together early management.  Because larger investments are needed to catalyze business formation, there is a decline in available grant funds and an increase in funding made as a form of investment with an expectation of returns.

Business Development

At the business development stage, the start-up is formed as a legal entity and the formative work begins to complete a working product, bring management in place, perfect a marketable business plan, and attract outside investors.

These stages characterize university gap funding as carried out by the nation’s leading research universities, and describe the goal directed efforts to bring ideas into the commercial marketplace. Since most funds have only been recently established, it is too early to judge now how well university gap funds are achieving their goals within the university paradigm.  But more importantly, it cannot be judged whether these gap funds are an effective bridge between the paradigms of the university and commercial marketplace.  Additional research is needed to evaluate performance of gap funds as a critical element in moving ideas to the commercial marketplace.


NOTE: to become a participant of OBD's Mind the Gap survey project or inquire about survey details, contact Jacob Johnson at joh01991@umn.edu.

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