[Note: This is the entire version of a white paper previously only available via download. To receive the downloadable PDF visit this page]
This white paper covers how crowdfunding is an opportunity and challenge for academic research institutions. Issues such as intellectual property, proper use of university resources, and tech transfer policy guidelines need to be addressed. Most crowdfunding platforms are not designed to accommodate the special needs of research universities.
What is Crowdfunding?
Crowdfunding uses the Internet and other forms of digital communication, such as social media, to connect donors with individuals seeking financial support.
Project Donor Systems
Crowdfunding sites like Kickstarter (creative and design projects) and PetriDish (scientific research), among others, use a donation model where a project with a specific fundraising target is promoted on a website. There is usually a finite time period when donors may contribute. They are often charged only if the fundraising target is met by this deadline. Project owners are usually responsible for most of the promotional burden and often offer incentives for donating at various levels. In many cases, the crowdfunding site has become an opportunity for artists and innovators to pre-sell products like musical CDs, DVDs and gadgets. Crowdfunding for equity was recently passed into law and will be available after the SEC clarifies its regulatory framework by the end of this year. (This will be addressed further in the paper.)
Other crowdfunding sites like Kiva.org use a microloan model, whereby a donor can loan a small amount of money to a microbusiness owner. These loans started in third-world countries where access to even tiny amounts of credit is limited for entrepreneurs. The movement has expanded globally and loans are now made in many countries, including the US. Loans are expected to be repaid and are often recycled into another project. The incentive is altruistic.
Innovocracy: Crowdfunding for Gap Funding
Innovocracy.org is a donor system website, similar to those mentioned above, with critical features to address the specific challenges associated with funding innovation within a research university. We partner with top universities and work with them to ensure that the necessary steps are followed when their faculty, students and researchers post projects:
- Clear commercialization objectives. Innovocracy’s mission is to help commercialize promising academic innovations. Thus, our project submission process focuses on helping innovators define a concrete time-scoped project that increases the likelihood for commercialization. While traditional funding sources often do not encourage further commercial pursuit, Innovocracy is specifically focused on this. Upon completion of the project, the innovation is expected to be much closer to being licensed or spun out into a startup. Our submission process helps the innovator think through a market lens, differently form a researcher seeking grant funding. This often leads to redefining the project in ways that will favor a successful outcome. Innovators whose projects are not accepted receive constructive feedback to increase the probability of future posting.
- Protection of institutional brand image. With crowdfunding, universities need to determine how to leverage their “brand,” while protecting it. Unlike other crowdfunding platforms, Innovocracy provides a web page for each partnering university. All projects go through a formal curation process to maintain consistency of quality. Only projects that have been approved by the university are posted. Unlike other sites, we do not allow “rogue” researchers or students who may seek to post inappropriate projects and use the university name.
- Clarification of intellectual property (IP). Intellectual property considerations are important for innovators who are seeking commercialization opportunities. Innovocracy works with a designated technology transfer officer at each university to ensure that appropriate provisional or other patent filings have been completed and that no current licensing discussions are compromised. At the outset of the relationship, Innovocracy develops a process and reporting system in conjunction with the university that satisfies the institution’s needs and adheres to its policies.
- Standardization of fund flows. Innovocracy uses two mechanisms to deliver the funds raised through our website. In the research funding model, we work directly with the university department responsible for research funding administration. Upon a successful funding, we provide an award letter with a budget that had been previously approved. The funds are transferred into an academic research account from which the researcher can make withdrawals, ensuring that the funds are spent appropriately. At the conclusion of the project, the researcher prepares a one-page summary of the results, which Innovocracy forwards to the financial sponsors. With the gift funding model, the funds are forwarded to the development office. A similar process to the research funding model is followed thereafter.
- Integration with accounting and over-head allocation processes. Innovocracy bridges the gap between classic research funding and funding to take a potential product to prototype or proof concept. The amounts in question generally range from $3,000-$15,000, although more may be raised. At these levels, ensuring that virtually all of this funding is used for the project is a critical element of the model. As a result, institutions generally waive their over-head allocation as long as the institution-wide over-head rates are not impacted.
- Tax deductibility. Innovocracy’s intermediary role in the fundraising process, allows the sponsors to obtain a tax deduction since the funds are transferred directly to the university. We have worked closely with our university partners to assure full compliance and reporting.
- Support of downstream commercialization objectives. Innovocracy provides additional support programs to selected teams requesting them. This may include introductions to manufacturing partners, venture capital firms, as well as potential customers. Presently, these services are offered ad hoc and there is no requirement to partake.
Designed For The Unique Requirements of the Research University Environment
Innovocracy’s model was designed for research university environment. Meanwhile, researchers have become aware of crowdfunding and some have been attracted to unaffiliated sites. When a researcher, working in a campus facility or on a project that has a connection to research funding through the university, decides to “go it alone” and raise money through a crowdfunding platform, serious problems may arise. The inventor may be violating agreements with the university, facilities funded for other purposes may be used inappropriately, intellectual property may be compromised, and there may be issues about correct use of funds. Our model provides an open, transparent platform that works for the researcher and the university.
Getting Products to Market: Technology Transfer and Crowdfunding
Because the funds raised through Innovocracy are used with commercialization in mind, the outcome of a successful project is often a prototype that moves the concept closer to marketability. The identification and development of businesses and licensing opportunities around these products is the goal of university technology transfer departments. Innovocracy enables this process by encouraging inventors to self-identify, articulate their projects, request funding and, then, use that funding to bring that product closer to a marketable state.
Gaining Early Traction
When a project is funded on a crowdfunding site, more is accomplished than the basic raising of money. A highly motivated early adopter constituency may form. It is a group that could provide an initial market assessment and create what is often referred to as “traction in the market.” This may increase the perceived value of the product to potential partners and investors, increasing the probability of successful commercialization. Even at an early stage in Innovocracy’s development we see this traction forming for our projects. While it is too early to judge whether this can be expected, we have seen that public access to information about new products coming out of academia does increase the likelihood of accelerating the tech transfer process.
Raising Equity With Crowdfunding
With the recent passage of the JOBS Act, restrictions on the ability of startups to raise equity from the public were loosened significantly. Crowdfunding sites are being organized to facilitate raising equity (up to $1 million) from small investors. While it is too early to determine the value of this movement — the Act is subject to the SEC producing regulatory guidelines by 2013 — it is a development that can have an impact upon university innovations. It would seem to be a natural progression from donor-based funding for product development to seed or start-up funding via crowdfunding for equity. This could complete a financial loop and close a gap that is often difficult to overcome for campus entrepreneurs and inventors.
Crowdfunding is a rapidly evolving and growing movement. Crowdfunding in a university environment, however, has complexities that put the university at risk. Innovocracy reduces this risk by working closely with universities to ensure that funds reach inventors while satisfying the requirements of the institution. If deployed correctly, crowdfunding may be ideally suited to address the needs of university technology transfer programs. It offers access to modest amounts of capital, potentially mitigating the gap funding problem, and exposes commercially promising opportunities to the marketplace.