8 Steps to Raising and Sustaining Gap Funds

Research institutions and hospitals establish Gap Fund and Accelerator Programs (GAP) to evaluate and de-risk innovations discovered by faculty, clinicians and students and to help them advance towards commercialization. A well-thought-out approach to raising a new or expanding an existing gap funding program is the most critical action to set up the initiative for future success. Taking a bottom-up approach to building a raise strategy is a good way to approach it. You’ll need to consider these eight areas:

1. Ask and answer pre-raise questions.

The answers to these questions will help you to determine mission, , expectations and relationship structure.

  • Mission: Is there alignment between the proposed source(s) and institutional missions and priorities?
  • Sustainability: Is the source(s) capable of sustaining the fund for the time horizon necessary to observe results (at least five years)?
  • Perception: What will the source(s) signal about your fund, and how it will reflect on the perception of the institution and on campus?
  • Expectations: Is there alignment of source(s) expectations with that of your institution and your ability to deliver?
  • Relationship structure: Are there mutually beneficial future relationship motivations between sponsoring source(s) and institution

2. Sources of Gap Funds.

It’s important to review historic sources of Gap funds and to identify realistic options for your institution. These should align with your pre-raise question findings. Sources include funding from university sources like reinvestment of royalties or equity windfalls or philanthropy, or external sources like foundations, corporations, investment firms or government authorities.

Inside Tip: “Our findings suggest that across the board, 70 cents on the dollar come from university sources,” Jacob Johnson, founder of Innovosource, says. “In addition to re-investment of past wins, venture philanthropy is becoming a larger piece of the pie. Make sure you explore this with your foundation or advancement office.”

3. Funding Cycles.

Establish funding cycle schedules that are formal or informal. Funding cycles should align with the expectations of proposed funding sources and provide a basis for structuring investment size, projects per cycle and initial size of fund. Most common are formal annual RFPs and more proactive targeting of promising projects.

4. Amounts Awarded/Number of Awards per Cycle.

Gap fund managers must identify the proper amount to invest per project and number of projects to fund per cycle to adequately structure the fund so that each technology or startup can take the specific steps to progress it towards a commercial decision or event – fund too little and the project will stall, fund too much and money will be wasted. The cost-benefit of moving many opportunities forward at early-stage (and at the relatively “cheap” portion of development) is positive.

5. Projected Lifetime of Fund. 

The three most common fund lifetime structures that should be considered prior to approaching stakeholders are evergreen (fund sustains itself off returns); capped (structured similar to a traditional VC fund with set investment pool and lifetime); and annual – budgeted year to year.

6. Funding Vehicle. 

This step, like all the others, builds on the step before it. You’ll need to match funding vehicle and requirements to fund expectations and lifetime. The choice of funding vehicle is closely associated with the financial expectations of the gap funds and financial return requirements (grant or investment).

7. Initial Size of Fund.

Now, it’s time to set the initial size of the fund which is the amount that the research institution or sponsoring organization initially invests in the gap fund program prior to the first funded project. Unless a pilot, this initial fund should adequately fund your program for 5+ years.

“There’s nothing worse than a program that is set up with too short of a runway,” Johnson says. “These programs will often be ‘sunsetted’ before meaningful impact can be realized.”

8. Plans for Sustainability.

Finally, many current modeled gap fund efforts are set up to support the development of technology and businesses that will likely not show returns for years, decades, or at all. When routes to realizing financial returns on commercialization can be 2-10 years, there is a real danger that many funds may not be able to sustain long enough to see the returns they supported. One way to extend fund life is to publicly “kill” a bad project and demonstrate it as a success early in the fund life. This communicates the reality of risk and that the termination of a project due to weaknesses is also a win.

 

For more ways to extend fund life and to get details for each step mentioned above, download the summary or purchase the full Mind the Gap Report 2022.

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