Where US start-ups get their money: principal funding sources for US start-ups, 2004

23 Nov 2005 | News | Update from University of Warwick
These updates are republished press releases and communications from members of the Science|Business Network

Individuals are a larger source of start-up funding than institutions, according to the AUTM survey. The survey is based on 115 US respondents, some of whom reported funding types for more than one company.

To attract investors, university researchers are having to add more value before they try to hand over a technology to a partner, and they're doing it largely at their own expense.

A new survey by the Association of University Technology Managers (AUTM), Northbrook, Illinois, shows that 49.3 per cent of the initial funding for new spin-outs came from individuals.

The largest source of funds overall - 20.5 per cent -  came from friends and family. Venture capital came in second at 18.6 percent, and also topped the sources of institutional funding.

Individual angels provided 12.4 per cent, and angel networks, 5.7 per cent. State funding came in at 7.9 per cent, and federal small business research grants were 7 per cent.

The numbers, based on 115 US respondents, are the most detailed yet about who funds the gap to bring inventions to a point where they could be turned into commercial innovations.

In its 2003 survey, the University Companies Association (UNICO), Cambridge, England, found that 50 institutions created 151 spinout companies, 140 of which were partially or fully owned by the institutions that formed them. Some 64 percent of the companies had external investment. Thirty-four of the spin-outs used University Challenge Seed Funding and 63 had money from other external sources.

The AUTM survey is the first time that the organisation  asked respondents: "What was the initial source of funding for your new spin-out company?" There were a total of 458 spin-outs in 2004.

"The gap has widened in venture capital in the past few years," said Ashley Stevens, vice president of AUTM's annual meeting and director of Boston University's offices of technology transfer and technology development. He made the remarks at a recent technology transfer investing conference at his university.

Stevens added that a lot of professors at Boston University can raise $250,000 from friends and family.

Sometimes the money results from a chance meeting. Robert Thomas, a pulmonologist at Beth Israel Deaconess Medical Center in Boston, discovered that low concentrations of carbon dioxide could treat people with sleep disorders such as sleep apnoea and Cheyne Stokes respiration. The treatment could potentially help 4 million patients in the United States alone. Some patients wake up 400 or more times per hour.

Thomas mentioned the treatment to a new patient who had come to him because no treatment elsewhere had worked. Thomas told the patient he could be treated with carbon dioxide, but there was no way to give him the gas to take home. The patient, an engineer and serial investor who had retired because his disorder had become so debilitating, became a co-inventor for a new device to dispense the treatment, the positive airway pressure gas modulator.

Beth Israel Deaconess Medical Center had originally tried to interest pharmaceutical companies in licensing the technology, but there were no takers. The patient and other individuals involved in developing the treatment, as well as friends and family, raised $350,000. The patient helped pay for the patent expenses and then donated his part of the intellectual property to the medical centre as a charitable contribution. He also gave money that helped get a prototype of the device built and fund some clinical validation data on six patients.

A new company, SomRx Corp., was spun out of the centre. It already has filed for 510(k) approval for the medical device with the US Food and Drug Administration, and plans to file for European CE Mark approval in late 2006 or early 2007.

"This could only happen in an academic medical centr," said Mark Chalek, chief of the centre's business ventures. "Physicians take an observation from the bedside to the bench, and then back from the bench to the bedside."

Never miss an update from Science|Business:   Newsletter sign-up