This article appeared in the June 2019 issue of University-Industry Engagement Advisor. Click here to subscribe.

Start-ups are often thought of by many as seekers of financing; after all, lacking resources is part of the classic picture of companies in their early stages of development. That’s why it may come as a surprise that a number of universities are finding their own start-ups as excellent sources of funds for research — true industry partners, even as they are seeking to solidify their own futures.

How can both things be true? Because, in their search for support of their own continued research, start-ups apply for and often receive SBIR and other grants, or perhaps even Series A funding, which can not only finance their continued progress, but can also be directed — whether for their own use or that of other researchers — back to the university that helped launch them.

“We do, in fact, target virtually all of our start-up companies that make it past a certain point to be sponsors of research in the university,” says Ian Biggs, senior associate director for start-ups with the University of Georgia’s Innovation Gateway. “The rationale, at the 30,000-foot level, is economic development,” adds Paul Roben, associate vice chancellor for innovation and technology commercialization at the University of California San Diego, which has been working with start-ups as research sponsors for a number of years. “Why does the university engage in any of this stuff? The economic and social development agenda, the creation of companies and jobs, so the region continues to thrive.”

“Industry sponsored research is definitely a priority at CU Boulder and other universities in Colorado,” says Brynmor Rees, assistant vice chancellor for research and innovation, and managing director of Venture Partners at CU Boulder. “We’ve observed, looking at industry-sponsored funding over the last five years, that on average 25% of it comes from our own start-ups.”

A no-brainer?

Getting start-ups involved in sponsored research often serves the self-interest of the young companies, and that’s a point industry engagement professionals should make to start-up leaders early on. “First of all, it is in their best interests,” says Roben. “They have generally been born from some research here. It comes down to a patent or licensing program to breathe life into a company, but typically that is not the end of the story. Research continues, it still has value, and we want them to have access to research so they can continue to develop products. A company does not usually make it on a single product.”

What’s more, he adds, “when you’re a small company you need credibility if you do not have — or even if you do have — a stellar management team that has raised money before and exited. You can still get access to key opinion leaders in the technology from our faculty.”

The university, he continues, also helps start-ups figure out how to do an SBIR grant proposal. “We conduct workshops for all of our spinouts, including one-on-one mentoring and engagement — working on applications with people who know how to get grants to try and increase their chances for success,” says Roben. “I believe we’ve doubled their success rate.”

The value of research sponsorships “is blindingly obvious if a project requires a lot of expensive equipment,” says Biggs. “If you need to use a mass spectrometer, you’re not going to go out and buy one if you only received a half million dollars total [in grant funding].”

A path to SBIR/STTR funds

Beyond that, he says, there are the same general reasons any corporation might do less in-house research. “You can’t be expert at everything,” he says. “One cancer project guy realized he could get access to a lot more expertise than if he brought the research to his own company. You just can’t get many of those skills and resources until the start-up is significantly bigger.”

Biggs notes several other ways that such arrangements benefit the start-ups. “They can get some relatively small-scale funding to get more work, but the next port of call is an SBIR or STTR — 30% or 60% of which can be spent in a university,” he points out. “The start-up can choose to do research in-house or subcontract it to the university. We try to get there as early on as possible to convince them to subcontract to the university. This allows them to pivot if they find their pathway is not the right one — that way they haven’t invested a lot of fixed money.”

He offers the hypothetical of a company that has been developing a diagnostic. “They think they have a good idea, but they need to do further research to get to the commercial stage,” he posits. “A Phase I SBIR may broadly be a half million dollars. They would approach our sponsored projects office and say, ‘We would like this research done within UGA; here are the things we want done.’ We write a normal agreement, with terms, conditions, and timing. Then the start-up merely pays the money to the sponsored projects office.”

The amount of money, he explains, depends entirely on the nature of what they need to do. “When you do a start-up, how big are you in terms of people?” he questions. “You may not be on a permanently upward trajectory. You may decide it’s better to subcontract rather than do the research in-house.” Biggs recalls that when he did a start-up, he realized his company could not do the research internally, so he found experienced researchers within the university and subcontracted out the research. In such cases at UGA, he says the sponsored research office and the start-up may mutually identify the best researchers, or the start-up may ask for a specific lab.

Biggs’ second example involves a start-up that is further along, where they are gathering either institutional investment or angel investment. “We have one that raised $5 million this year, and put most of it back through the university,” he shares. “We even have somebody who has created a ‘virtual’ start-up company that is moving a cancer drug along. They do not have a lab, so they sub-contract everything they do either to UGA or a specialist to move that project along. In general, it will be less driven by ‘Gosh, I can’t afford that equipment’ and more driven by speed.”

One of the other reasons UGA encourages start-ups to use sponsored projects, he continues, is that “many questions they want to solve do not go into neat buckets — or any one person’s skills. You often need a team to work on it, and the university is good at doing that sort of collaborative sponsored project — even if it crosses departmental lines.”

Education starts early

Universities should educate their start-ups early on about the advantages of becoming research sponsors. At CU Boulder, for example, “at the earliest stages of start-up formation — when they’re a baby company — we’re already advising them that often the best and most efficient use of their capital is leveraging university resources, expertise, and conducting research here,” says Rees. “When they get larger, they become a candidate for the Office of Industry Collaboration to foster a strong relationship.” One biotech start-up that was only four years old raised $100 million, “so they were in a great position to leverage gene editing here,” he says. “They have their own gene editing facilities, but they still wanted to access our talent.”

“Every single start-up that begins at UGA, we hold hands with in some form or other, helping them with their market assessment,” adds Biggs. “When they decide things look good, we help them think through their plan, and we will always talk about doing subcontracted research at UGA.”

Virtually all start-ups, he continues, will have SBIRs, and most will subcontract at least some of their research because they can’t be expert at everything. “As they get bigger, they will do more subcontracting, because it allows them to move faster,” says Biggs. “If you have one lab you have to do research in a serial manner, but if you have a number of labs you can do parallel research, with more options more quickly.”

“Faculty certainly would target them because they gave birth to them, so generally we don’t have to,” says Roben. “If a company has been spun out, they already have a strong relationship with the labs. We educate the start-ups on how to do it and convince them why it’s in their interests to do it — and show them different mechanisms for doing it in their favor. We try to make it easy and remove any barriers. We do not take a pound of flesh; we offer several options.”

Structuring the deals

“Quite often what the start-up will need is an actual service agreement,” Roben continues. “To develop further, they need for a lab to test the improvements they’ve made. They give it back to us, we run tests, then give it back to them. You can do that easily in a fee-for-service agreement, and that is quite often what they need.”

If, on the other hand, the start-up is looking to do research through a grant, they have a number of options, he says. “They can spend some money in a lab here and get an option for IP development in research,” Roben suggests. “Or, if they’d rather take the risk and have to negotiate a license after the fact, for an extra 10% they can have a non-exclusive, and for 15% a full exclusive up front and they get a license for everything they develop in research.”

Different companies have different risk profiles, Roben adds. “Some of them will not go for the second option because they do not believe they have real IP; some are terrified to have to talk to a university again,” he says. “We basically try to look at it from the perspective of the company.”

Roben adds: “The biggest bottleneck has been getting the technology licensed into these companies anyway, and we’ve completely changed the way we’ve done that in the last few years.”

He calls it a “simplified” approach. “Rather than squeeze money out on the front end, we say give us 5% dilutable,” Roben explains. “We’re not trying to recoup any patent costs, and we’re not really charging a license fee. We charge $500, or certain maintenance fees. If you have a start-up company that has raised some money, we shouldn’t be taking money from you. If we have a piece of equity and they do well, hopefully we all will do well.”

UGA does not offer any specific financial incentives, says Biggs, “but when their needs become more complex, particularly if they are cross-disciplinary, we sometimes identify someone within the university who will help coordinate the different departments.”

Quite often, he points out, start-up companies will subcontract any animal testing they need. “We have our animal veterinary school, diagnostic labs, and somebody will sit in the middle of that to make sure information flows around the university the way it needs to,” he explains. “It’s much easier for the sponsor — particularly one so young — to have a single point of contact.”

Another option

In addition to a more “standard” approach to obtaining start-ups as corporate sponsors, CU Boulder initiated an event last year, called Destination Start-up, which Rees believes will also lead to more start-ups sponsoring research. “Its mission is to elevate and grow the entire start-up ecosystem in the state and attract out-of-state investment capital,” he explains. “Colorado has a pretty strong presence of software investment capital, but less in others. We’re trying to magnetize investors.”

The presenters are drawn from a pool of start-ups statewide — from any university or federal lab. “We pre-screen them,” says Rees. “The value proposition to the investor is to come for one visit and see a curated cohort of top start-ups from the whole state.”

Since one of the event’s primary goals is to create a new influx of capital, he continues, it could ultimately lead to start-ups becoming more involved in sponsored research. “It often provides specific investor feedback to start-up companies on what their next milestones might be,” he explains. “Whether they get money or not, they might have milestones and they may best be carried out through sponsored research too,” Rees adds. “If they do get capital, for those focused on seed money and Series A level, our baseline assumption is that the work would be done at the university. I’d be surprised if we did not have that conversation.”

Start-ups return as sponsors

Rees sees a mixture in the start-ups who are investing in research at CU Boulder. “Some are ‘legacy,’ really established companies like Ball Aerospace, but in a lot of cases they are newer — they raised money either through investment capital or grants,” he says. “It’s not likely they will create their own building and high burn rate, so they do it at the university.” Rees says this is “a large and growing cohort — effectively doing R&D here. Whenever they want to do anything to drive start-up growth, we drive start-up funding.”

With the number of start-ups increasing to about 10 a year, he says there may be a total of 120 start-ups just from CU Boulder. “An army of those is coming back [as research sponsors],” he says.

For Roben, the benefits to the university are more than just financial. “It’s a little bit more tangential,” he notes. “Professors are not typically business people, and yet we try to encourage this type of activity where they develop research in such a way as it generates commercial value. Often the professors do not know what that means; they just develop to publish. Having these companies engage in the university in a real sense actually helps us meet the goals of educating students and faculty about what to do once they leave the academic world.” In fact, he adds, “we often ask the CEO if they will come on a panel or mentor a student, because that fosters broader entrepreneurial goals.”

Whatever they’re doing, they must be doing it right. Roben reports that UCSD has “doubled the number of companies coming off campus.” That number now is about 30, he says, “with an equivalent number started by students.” At least one-third, he says, have come back and sponsored projects at the university. “One bought a massive bit of equipment we didn’t have,” he says. “When they’re not using it we can use it.”

This isn’t, however, achievable without a commitment that starts at the top, he stresses. “I think you need support from the leadership,” says Roben. “Our Chancellor and Vice Chancellor are two people who pushed this. Without that kind of support from the top it would be very hard. If you take a traditional approach that tech transfer is just a revenue producer, then you’ll want high license fees and high maintenance fees. I believe there is a move from revenue focus to what we believe is a relationship exercise. If we license, we should bring that relationship, so they can come and talk to the university on many levels — like funding research and employing our students.”

Contact Biggs at 706-542-4308 or ibiggs@uga.edu; Rees at 303-735-4474 or brynmor.rees@colorado.edu; and Roben at 858-246-0473 or pwroben@ucsd.edu.