Report on University-affiliated translational research, proof of concept, and seed gap funds

1. 2011
The University Gap Funding Report
a conversation-building initiative of:

2. Mind the Gap Report Overview
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Contents
WELCOME.............................................................................................................................................................................................. 8!
REPORT SUMMARY.............................................................................................................................................................................. 9!
IDENTIFYING THE GAP....................................................................................................................................................................... 12!
The Current Model .......................................................................................................................................................................... 12!
Venture Capital .............................................................................................................................................................................. 14!
Angel Capital ................................................................................................................................................................................. 18!
Federal Programs.......................................................................................................................................................................... 20!
Crowdfunding ................................................................................................................................................................................ 22!
A New Model of Early Stage Capital .............................................................................................................................................. 23!
DEFINING THE GAP: STUDY OF CURRENT GAP FUNDING PRACTICES...................................................................................... 26!
Report Overview, Methods, and Participation.............................................................................................................................. 26!
Method and Participant Summary ................................................................................................................................................. 26!
Report Participant Summary.......................................................................................................................................................... 27!
Data Collection and Analysis......................................................................................................................................................... 30!
Report Structure ............................................................................................................................................................................ 30!
Definition of Fund Types................................................................................................................................................................ 32!
By Region ...................................................................................................................................................................................... 36!
Source and Sustainability .............................................................................................................................................................. 38!
Source of Funds ............................................................................................................................................................................ 38!
Projected Lifetime of Fund............................................................................................................................................................. 44!
Initial Size of Fund ......................................................................................................................................................................... 45!
Sustainability of funds.................................................................................................................................................................... 48!
Management and Structure............................................................................................................................................................ 50!
Management of Gap Funds........................................................................................................................................................... 50!
Funding Vehicle and Financial Expectations................................................................................................................................. 52!
Funding Cycle, Projects Funded, and Amount Funded per Project............................................................................................... 55!
Process ............................................................................................................................................................................................ 58!
Promotion and Proposal ................................................................................................................................................................ 61!
Evaluation and Decision Making ................................................................................................................................................... 63!
Resource Allocation....................................................................................................................................................................... 70!
Gap Fund Support Programs......................................................................................................................................................... 74!

3. Impact ............................................................................................................................................................................................... 77!
Process Indicators ......................................................................................................................................................................... 78!
Building a Community of Innovation .............................................................................................................................................. 82
Business Formation and Job Creation .......................................................................................................................................... 84!
Financial Returns and Attraction of Capital ................................................................................................................................... 86!
Success Stories .............................................................................................................................................................................. 89!
MTG 2011 Participants.................................................................................................................................................................... 98!
! Works Cited .................................................................................................................................................................................... 99!
Mind the Gap Report Overview
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4. Mind the Gap Report Overview
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TABLE OF FIGURES
Figure 1: Traditional Model of Early Stage Capital ................................................................................................................................ 12!
Figure 2: Venture Capital Landscape.................................................................................................................................................... 16!
Figure 3: Angel Capital Landscape ....................................................................................................................................................... 19!
Figure 4: New Model of Early Stage Capital.......................................................................................................................................... 24!
Figure 5: Overview of Participation........................................................................................................................................................ 29!
Figure 6: Defining the Gap .................................................................................................................................................................... 31!
Figure 7: Fund Type Breakdown (by type, size of institution, region).................................................................................................... 35!
Figure 8: Vintage Year and Growth Rates............................................................................................................................................. 37!
Figure 9: Sources of Funds ................................................................................................................................................................... 42!
Figure 10: Breakdown of Sources by Individual Funds ......................................................................................................................... 43!
Figure 11: Lifetime of Funds.................................................................................................................................................................. 45!
Figure 12: Lifetime of Fund compared to Source of Fund .................................................................................................................... 45!
Figure 13: Initial Size of Funds .............................................................................................................................................................. 47!
Figure 14: Sustainability of Gap Funds ................................................................................................................................................. 50!
Figure 15: Management of Funds ......................................................................................................................................................... 51!
Figure 16: Form of Funding and Financial Expectations ....................................................................................................................... 53!
Figure 17: Funding Cycle ...................................................................................................................................................................... 56!
Figure 18: Projects Funded per Cycle................................................................................................................................................... 58!

5. Figure 19: Amount Funded per Project ................................................................................................................................................. 57!
Figure 20: Gap Fund Process ............................................................................................................................................................... 58!
Figure 21: Promotion Strategy............................................................................................................................................................... 62!
Figure 22: Criteria for Selection............................................................................................................................................................. 65!
Figure 23: Yield Rate............................................................................................................................................................................. 67!
Figure 24: Advisory Board Overview..................................................................................................................................................... 68!
Figure 25: Advisory Board Make-up (Individual Funds) ........................................................................................................................ 69!
Figure 26: Use of Funds........................................................................................................................................................................ 72!
Figure 27: Sample Budgets ................................................................................................................................................................... 73!
Figure 28: Gap Support Programs ........................................................................................................................................................ 76!
Figure 29: General Expectation Timeline for Impact ............................................................................................................................. 78!
Figure 30: Process Indicator Model....................................................................................................................................................... 79!
Figure 31:Process Indicators Participant Overview............................................................................................................................... 79!
Figure 32: Process Indicators by Fund Type......................................................................................................................................... 80!
Figure 33: Gap Fund Commercialization % compared to Fund Considerations ................................................................................... 82!
Figure 34: Building a Community of Innovation..................................................................................................................................... 83!
Figure 35: Business Formation and Job Creation ................................................................................................................................. 85!
Figure 36: Summary of Financial Returns and Attracted Capital .......................................................................................................... 87!
Figure 37: Financial Return Ratios ........................................................................................................................................................ 88!
Figure 38: Attracted Capital (Leverage Ratios) ..................................................................................................................................... 88!
Mind the Gap Report Overview
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6. Table 1: Sub-analysis of Seed Stage Venture Capital .......................................................................................................................... 17!
Table 2: Response Rate........................................................................................................................................................................ 27!
Table 3: Type of Fund by Size of University.......................................................................................................................................... 34!
Table 4: Sample Checklist for Process Evaluation................................................................................................................................ 60!
Table 5: Summary Checklist for Selection Criteria ................................................................................................................................ 61!
Mind the Gap Report Overview
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7. REPORT SUMMARY
Innovation is an exercise in progress. Through successes and failures it is the one force that can truly dictate our reality and shape a
future of possibilities. Ideally, innovation delivers new products, services, talent, and inspiration to the market while sustaining and
growing a society capable of procuring them; however, this opportunity is dependent on an educated working class, breakthrough
technologies, and ideas that can grow existing companies and that drive new venture and industry creation. Research universities
are perhaps the only source that can deliver all of these.
Through education, access to expertise, licensable technologies, and spin-out companies, research universities shape the future of
innovation. For example, according to the Association of University Technology Managers(AUTM) [1], a professional organization for
university technology transfer professionals, since the passage of the Bayh-Dole Act in 1980, research universities have:
• Added 4,350 licensed products to the market
• Spun out more than 6,000 companies (and are currently averaging more than 500 new start-ups a year)
• Created 279,000 advanced jobs in the US (from 1996-2007)
• Impacted GDP by $187B, and gross industrial output by $457B (from 1996-2007)
While universities provide talent and incremental, product-improving technology for companies of all sizes, they have a unique role in
assisting small businesses and spinning out job-creating start-ups. A recent report from the Kauffman Foundation [2] suggests that
new firms add 3 million jobs in the first year, while older firms lose 1 million jobs annually. With the shift in focus of large
multinationals from developed economies to emerging markets, start-up companies, and therefore research universities, have never
been more important to the type of growth that the US, and other countries, will need to develop future opportunities and prosperity.
Yet, even with historical success as a contributor to innovation and economic creation, the future ability of research universities to
support this innovation is threatened, or at least constrained, by the lack of early stage capital (and support) available to transition
government and industry sponsored research from the lab to the marketplace. This “gap” extends from where the government
funding of basic research ends to where existing companies or investors are willing to accept the risk to commercialize the
technology. The negative result is a large portion of economic creation that goes unrealized simply because it isn’t funded and
supported.
In response, universities are developing or partnering with gap funding programs as a solution to address this issue—a strategy to
relieve a bottleneck in the innovation system that rests between concept and commercialization where other forms of capital won’t or
aren’t structured to go. These gap funding programs are often initiated by the universities themselves as an extension of their
technology commercialization efforts and combine talent and capital around the goal of progressing innovation. This report will

8. Mind the Gap Report Overview
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demonstrate that university gap funding should be a priority for future innovation practices and policies because of its ability to not
only catalyze the commercialization of technology, but for its ability to develop a culture of innovation.
The report will begin with an updated version of the university (or early stage) technology funding landscape that positions gap
funding relative to other forms of traditional, emerging and disruptive sources of early stage capital. This new model is more
representative of technology development and commercialization and takes into account the under-represented, yet vital
translational research and proof of concept stages of technology development that take place prior to any commercialization.
Next, it will take an in-depth look at the functionality of 63 gap funding programs across 40 organizations, which creates a roadmap
for current and aspiring fund managers to develop gap funding programs and presents benchmarks for policymakers to support these
initiatives. While primarily focused on US programs, the report also includes examples of non-US funds and externally-partnered gap
fund programs through accelerators and state-based funds. This analysis is joined with perspectives from fund managers, success
stories, and past experiences with over 40 additional gap funds.
Finally, this report will suggest and explore various impacts, from a subsection of the survey participants, that depict the real value of
gap funding initiatives, including:
• High commercialization rates
o 76-81% of funded projects commercialized on average
• Attraction of early stage capital
o $2.8B leveraged from public and private investment sources
• Business formation and job creation
o 395 new start-up companies
o 188 technology licenses to existing companies
o 7,761 new jobs, at cost of $13,600 gap fund dollars per job
• Building a community of innovation
o Thousands of faculty and students engaged in the process
o Incorporate networks of technical and business professionals in the evaluation, mentorships, and leadership of these
technologies
• Organizational returns
o $75M returned to the organizations through repayments, royalties, and equity sales
o Maximize resource allocation and downstream savings, by permitting early failures through exploratory and evaluation
tactics
o Empower universities to continue to take risks that support the type of breakthroughs that define our present, and the
type of innovation that will carry us into the future

9. Mind the Gap Report Overview
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Introducing Fund Types
The “gap” in gap funding refers to a vast shortage in capital and other commercialization support to identify, evaluate, and deliver
university technology 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; therefore, we propose and will demonstrate
a more actionable, segmented system based on real observations.
Gap funding approaches to the larger “gap” can be broken down into a system of four fund types, each with individual characteristics,
structures, and commercialization priorities. Adopting this vantage leads to a schematic model (Fig.6) with three main advantages:
• 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: Creates 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
Figure 6: Defining the Gap

10. Mind the Gap Report Overview
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Definition of Fund Types
Translational Research
Translational Research funds step in after traditional investment in basic research runs out, and supports the promising
projects that require additional applied development. Often, this funding can be found at the university college-level, research
center, or associated hospital as a way to transition technology toward commercial evaluation. These funds are often
associated with university priorities (emerging or historical scientific competencies) or technologies with longer development
timelines (e.g. therapeutics, biologics). 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 funding evaluates commercial potential, demonstrates the value of the technology, and generally de-risks it
(or perception of risk) to commercial partners or investors. By developing the commercial groundwork, including prototypes
and application evaluation, these funds aim to identify and secure a route to commercialization (license to existing company
or spin-out). These funds also act as a filter by identifying weakness in the technology for further development, or saving
resources early in the process by deciding to not pursue the technology (a common recommendation in most new product
development literature). These funds are often administered through the technology transfer offices or equivalent at the
college level. Externally-partnered state funds, accelerators, and corporate funds may assist at this level and are often run in
part through the existing university technology commercialization process. From our research, this is the most widely-utilized
university gap fund type.
Business Formation
To fill the capital gap for university start-ups as early stage investment sources move to later stages, this emerging gap fund
type helps assist in the early formational steps of new company creation - often prior to it becoming a legal entity. This fund
type could be seen as a start-up-focused extension of proof of concept funding that develops the business application of the
technology with actions like market research, product development, business development, management, space, and
equipment. This direct investment by managing universities, or partners, in their start-ups is a transitional strategy to attract
third party interest and capital.

11. By Fund Type with each requirement weighted in importance:
(Not Necessary (0), Encouraged (1), Mandatory (3))
Not readily
commercializable
Interested third
party
Not readily
commercializable
Interested third
party
Mind the Gap Report Overview
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Criteria for Selection
Clear Competitive Advantage
Not readily
commercializable
Interested third
party
Prelim biz plan/
Not readily
commercializable
Interested third
party
Figure 22: Criteria for Selection
0 20 40 60 80 100%
Disclosure Filed with TTO
Clear IP Protection
Passionate Leader beyond PI
Preliminary Business Strategy
PI/team willing to provide own resources
Clinical Strategy
Interested Third Party
Not readily commercializable
through another route
Disclosure Filed
3
2.5
2
1.5
1
0.5
0
Clinical Strategy
PI/Team own
resources
Passionate leader/
not PI
Clear IP protection
Clear Comp
advantage
Prelim biz plan/
financials
Disclosure Filed
3
2.5
2
1.5
1
0.5
0
Clinical Strategy
PI/Team own
resources
Passionate leader/
not PI
Clear IP protection
Clear Comp
advantage
financials
Disclosure Filed
3
2.5
2
1.5
1
0.5
0
Clinical Strategy
PI/Team own
resources
Passionate leader/
not PI
Prelim biz plan/
financials
Disclosure Filed
3
2.5
2
1.5
1
0.5
0
Clinical Strategy
PI/Team own
resources
Passionate leader/
not PI
Clear IP protection
antage
Prelim biz plan/
financials
Translational Research
Proof of Concept
Business Formation Business Growth
Clear Comp
Clear Comp Clear IP protection
advantage
advantage
Not
Mandatory Encouraged Necessary

12. 100 %
80
60
40
100%
80
60
40
Mind the Gap Report Overview
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100 %
80
60
40
100 %
80
60
40
Figure 25: Advisory Board Make-up (Individual Funds)
20
Translational Research Proof of Concept
Business Formation
0
Advisory Board Make-up by Individual Funds
%
20
0
20
0
20
0
Business Growth
Tech Transfer Office/Central Staff
Technical/Scientific Professionals
Business- Corporate/Entrepreneurial
Business- Investor

13. Mind the Gap Report Overview
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Impact
The final section in this analysis will suggest a structure for measuring gap funding impact, both financial and programmatic. These
measures align gap funding practices with the mission of the research university, and other public and private sources of early stage
capital, while demonstrating how the practice supports innovation and commercialization on a larger scale.
These suggested impact measures for gap funding can be separated into four groupings:
• Process Indicators
• Building a Community of Innovation
• Business Formation and Job Creation
• Returns to the Funding Organization and Capital Attraction
A major insight is that a majority of the suggested impacts do not involve direct financial return to the university, but instead focus on
impacting the innovation landscape itself. In fact, most of their immediate and near term returns are focused solely on catalyzing
commercialization through innovation community-building, business formation and job creation, and attraction of capital and
commercialization partners. Figure 29 generalizes the reported impacts from a subsection of funds with their vintage year as a way to
visualize when these impacts are realized.
General Expectation Timeline for Impact
Time from Intial Investment (Based on Vintage Year of Funds)
Immediate Nearterm Midterm Longterm
BENEFIT
Managing and Forecasting
Creating Culture of Innovation
Process Indicators
1-3 Years 3-5 Years 5 +Years
Building a Community of Innovation
Capital Attraction
Incentivizing Other Investment
Driving New Businesses and Job Creation
Returning Capital to the Gap Fund
Business Formation and Job Creation
Returns (Repayment, Royalties)
Returns (Equity Sale)
Figure 29: General Expectation Timeline for Impact

14. Mind the Gap Report Overview
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Process Indicators
The major goals of gap funding programs are to evaluate the opportunity of the proposed technology, to make a decision on route to
commercialization, and then to decide, develop, and de-risk the opportunity to a point where it can find success through a license to
existing company or start-up. The proposed process indicators are a way to visualize that process (Fig. 30).
The four impact nodes are:
• Projects-in-process: Projects funded but still under review
• Initiated Projects: Projects that have been either commercialized or waived
• Waived technologies: During the initial funding process, management decided not to pursue the project for
commercialization
• Commercialized: The gap funded project resulted in commercialization
o Licensed to existing company
o Licensed to a new start-up
The pathways between these impact nodes create five process indicators:
• % Initiated: Percentage of proposals that
management has acted on and funded
• % Waived/Did Not Pursue: Percentage of
proposals that management decided not to
pursue. In this case, this is considered a
positive result.
• % Commercialized: Percentage of projects
that were commercialized
o % License to existing companies
o % License to new startup
Projects in
Process
Commercialization%
Initiated
Commercialized
Waive/
Did Not Pursue
Start-up
License to
Existing Company
%Initiated
Waive/DNP%
Startup%
License%
Figure 30: Process Indicator Model

15. innovosource is an awareness and disruptive strategy firm that works with research universities and their key innovation
partners (high-tech companies, early stage investors, and government agencies) to develop new opportunities for
interaction.
As part of our vision to shape the future of our partners and clients, we launch regular conversation-building initiatives like
Mind the Gap. These discussion platforms challenge convention through the exploration of emerging topics that are vital
to the future of university innovation.
Our goal is to transition this knowledge into understanding that supports the success of our clients’ operations, and that
advocates for the university innovation community at a programmatic- and policy-level.
Mind the Gap Report Overview
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Thank you for joining the conversation. We look forward to working with you for the future!
CONTACT US:
Phone: 612 280 2462
Email: connect@innovosource.com
Web: http://www.innnovosource.com
Twitter: @innovosource
FOR MORE ON GAP FUNDING:
Web: www.gapfunding.org
LinkedIn Group: mindthegap