In philanthropy, research is often considered a category unto itself that's well serviced by government and billionaire philanthropists. People assume market efficiencies exist in early stage commercial spinouts - that valuations in early stage lab spinouts reflect stage and risk of a company and that capital is generally available.
The reality is different, and the gaps represent not only a major risk to our economy and social welfare, but a major opportunity for investors and philanthropists looking to prioritize impact
Federal funding for research has shifted away from high risk, long timeline projects in favor of later stage validated work with established scientists. Most discoveries never make it beyond the patent stage, where they sit and collect dust due to a lack of risk capital. The ones that do manage to get funded, even when research milestones are achieved, and plans are made to commercialize them, face even greater hurdles when they become commercial entities.
This stage is often referred to as the "valley of death," - the gap between the commercialization stage and the milestones needed in today's environment to attract traditional investment capital. The difficulty of acquiring capital at this stage often proves too challenging.
When people think of research as a share of total U.S. giving they'd probably be surprised to know that it's less than 4%. With all the advertising campaigns and fundraisers we see for charities that are disease focused, and taking into consideration all the areas where research is related to societal benefits, most would guess it was a number much higher than that.
This is what economists refer to as an inefficient market, one in which an asset's market prices don't accurately reflect its true value. Following this analogy, imagine not having a market maker, an exchange, or a broker - that's pretty much sums up how inefficient philanthropy in research is today.
It's less important to focus on how we got here than how we'll fix it, but major contributors include the non-profit sector's conflict with mission, inefficient processes, and general lack of awareness.
It's astounding how much money passes through most charities and how little actually ends up in the hands of the researcher - in most cases, we're talking single digit percentages. Other factors include the time and expense involved in the traditional process of applying for grants, and the perception of high cost long-term nature of research.
A US Trust Report on High Net Worth Giving reported 91% participation in philanthropy and 60% dissatisfaction in the experience, where lack of efficiency (money going to the intended cause), engagement in the process, and constant solicitations were cited as primary factors.
The good news for philanthropists is that we're in a perfect storm, which makes this a buyer's market! Discoveries and breakthroughs are happening at an accelerated pace and at an ever reduced cost. Researchers and entrepreneurs are competing for small, disparate sources of capital.
There are also multiple ways to get money to research: giving (no strings attached), granting (strings attached), and investing (direct ownership interest) that can be deployed according to the stage of research and donor's interests, which can include evergreen elements.
University launched companies are far more likely to be successful than their counterparts.
Benefunder facilitates all of the above
, and I will discuss them in further detail in future CEO Corners.