For decades, America’s economic success has been driven by an engine of innovation that periodically creates new industries and companies that change the world. The JOBS (Jumpstart Our Business Startups) Act was passed to make it easier for startups to get off the ground and access early-stage investments. Small businesses are the growth engine of the US economy, and by helping them thrive, the JOBS Act will undoubtedly create growth for the US economy for years to come.
As CEO of Crowdfunder, I was part of a small leadership group in Washington D.C. that helped shape the JOBS Act, and I’ve been part of helping it come to life through our fundraising platform. But there is also an earlier point in the evolution of a technology that America must address to help the JOBS Act reach its fullest potential.
From Google to Gatorade, innumerable products used worldwide once began as research projects in American universities. Though the U.S. is home to the world’s premier higher education system and its most entrepreneurial business culture, these two forces are disconnected by the Valley of Death — a narrow space in the life of an invention when it is too mature and too “applied” to be eligible for research funding… and too immature for venture capitalists or established companies to fund or in-license. So there it sits, with vast, untapped potential.
Bridging this Valley of Death may be the single best way to ensure that our innovation-driven economy continues to grow, and to secure America’s competitive advantage for generations to come. But before discussing the solutions to this problem, let’s turn to the conditions that created it and take stock of where we are today.
The Cost of Invention in America
To drive innovation, the federal government spends roughly $125 billion of taxpayer money annually on research grants and development grants. Of this, $46 billion goes to its own laboratories and research centers, industry receives $40 billion, and the university system receives $32 billion.
Of all grants for development, 56% are awarded to industry to generate products that create revenue, profit, and jobs for American workers. The expectations for academic centers are quite different–and mostly for good reason.
Of the $32 billion given to academic centers, 97.6% is for research and only 2.4% is for development. True, the mission of academic centers is to create new knowledge rather than new products. But this imbalance overlooks the prime role that academic centers have always played in developing hundreds of consumer, technology, and medical products.
A small increase in the amount of development funding could can drive powerful returns from the large investments we make in basic research. A bridge for research projects to evolve into product development, company formation, and/or out-licenses to industry is all that is needed.
One Solution: The Gap Fund
Knowing this, many universities have developed dedicated Gap Funds, which provide seed funding to university-based startups. Gap Funds provide the runway needed to de-risk and mature novel products to a point where investors and corporate partners could take real interest. Dozens of universities have launched Gap Funds–many with great success.
As one example, Stanford’s SPARK program, which focuses on biomedical innovations, has seen more than 50% of the programs it funded either out-licensed to a startup/partner or enter clinical trials. These projects also generated over $5 in outside funding for every $1 invested by SPARK. This not only benefits Stanford, its faculty/investors, and some day, patients. It increases the success rate of the products that VCs and corporate partners eventually get behind, creating benefits for the local ecosystem of innovation.
According to Dr. Kevin Hunt, the Director of Biopharmaceutical Development at the world-renowned UT Southwestern Medical Center, “UT Southwestern is producing world-class research that could become the basis for launching successful biotech companies. But without funding to demonstrate proof-of-concept, it’s hard to prove that to investors. A relatively small amount of capital could be the difference between a city like Dallas becoming a biotech hub, or not.”
Can Alumni Fill the Gap?
But not every academic institution has the funds available and/or the administrative wherewithal to create a Gap Fund, and those that do are often unable to support the number of startups they’d like. The problem is particularly acute for public universities, which suffer from the largest funding shortfalls and deal with a gauntlet of red tape for establishing a Gap Fund.
An alternative to institutional sources for a Gap Fund is to raise it from the people who already care about the university, support it financially, and most often already have an active investing portfolio: the university’s alumni.
Universities already rely heavily upon their alumni for financial support. According to the Council on Aid for Education, roughly $35 billion is raised by colleges and universities annually in the United States– more than the $32 billion coming from the federal government and the second largest source of funding overall.
But trouble is brewing for universities. Even as the ability to capture and maintain active contact data for alumni increases, alumni participation is on a precipitous decline:
More Americans are graduating from college than ever, and it has never been easier to stay in touch with them. But less are responding to alumni relations’ efforts to engage them.
The one recent bright spot has been rewards crowdfunding (non-equity)–where student clubs, faculty labs, and other on-campus groups are raising funds online from alums and other supporters. Several have met with success and define a model where rewards & donation crowdfunding can be used to raise funds for non-profit Gap Funds.
The Opportunity With Equity Crowdfunding
The process of patenting, marketing and licensing new technologies is the domain of technology transfer offices. It turns out that, for 85% of universities, technology transfer is a cost center, not a profit center.
In other words, millions of dollars in research grants flow in, but the financial returns are so small that they cannot even support the staff required to monetize the fruits of the university’s research. This reality will become an increasingly uncomfortable, especially if/when more accountability in the use of tax dollars is called for.
So, to take a step back, research universities have:
1. developed some of the most successful products ever made
2. a shortfall in development funds
3. a base of engaged and supportive alumni
4. tech transfer offices that aren’t able to get investors and corporate partners on board
Which is why is why equity-based crowdfunding represents a strong model to help foster and grow an ongoing slate of university-based startups that possess unique technology and intellectual property. Alums represent not only an investor base but also a network of professionals whose resources and contacts could be transformative for an early-stage company.
There’s also an inherent value in engaging alumni in for-profit ways they can support their alma mater, instead asking them to donate their dollars while non-affiliated investors reap the rewards of startup success.
Closing the Gap in Gap Funding
As I mentioned above, small businesses are the engine of growth for the US economy. With a small shift in how universities engage their surrounding ecosystem and alumni, a growing amount of applied research on the cusp of commercialization can make the leap out of academic labs.
In the hands of an established company, with a commercial leadership team and funding, these technologies can become products that continue America’s history of leading the world through innovation.