Proof of Concept Funds – Rationale and role in funding early stage innovation focused projects

1. What is a Proof of Concept?

Numerous definitions and interpretations of ‘Proof of Concept’ exist but in dictionary terms, it is “the stage during

the development of a product when it is established that the product will function as intended”. As such it follows

that Proof of Concept (PoC) would require that such demonstration is performed via certain actions. However,

depending on the concept, such demonstration can vary significantly, hence it is a complex term associated with

complex actions.

In practical terms, Proof of Concept activities include but are not limited to:

Often Proof of Concept has a more specialised meaning, which is linked to the development of a technology or

know how across the Technology Readiness Level (TRL) Index, initially set up by NASA to evaluate early stage

technologies according to their readiness level and vastly utilised as a ‘barometer’ of proof of concept develop-

ment1. Scale such as TRL has been particularly useful in sectors such as automotive, space, transport and wider

manufacturing. In medical sciences, in particular, therapeutics development, other industry accepted standard

scales might be more applicable such as pre-clinical, clinical development (in stages) etc. In sectors characterised

by soft Intellectual Property (IP) rights such as copyright-based ideas and products (digital, software, arts) often

the proof of concept is brought down to the concept of creation of a Minimum Viable Product (MVP)2.

Below is a graphical representation of the TRL index levels and the associated stages of technological develop-

ment.

1 https://en.wikipedia.org/wiki/Technology_readiness_level2 https://en.wikipedia.org/wiki/Minimum_viable_product

Functional prototype development Feasibility study

Demonstration of technical feasibilityPre-clinical research studies for medical tech-

nologiesInvestigation and protection of intellectual

propertyConcept design and development strategy

Market analysis, testing and competitors’ analysis

Product commercialization study/ plan

Figure 1: Graphical description of the Technology Readiness Level Index developed by NASA3.

According to an IP Pragmatics’ study4 completed in September 2015 for Innovate UK, companies and universities

see also value in proof of concept activities related to the following:

• Co-design, design and development

• Community benefit feasibility studies

• Purchase of equipment to support design

• Consultations with key opinion leaders

• Testing investor appetite (for spinning out)

• Certification requirements and compliance

• Commissioning and trials

• Sizing and Scalability

What is typically excluded from PoC funds are research activities, production scale up, and sometimes IP protec-

tion, which as an accepted item varies from a scheme to a scheme.

Figure 2: Presentation of typical Proof of Concept pathway which varies according to the level of development of the technology or project,

defining the various types of gap funds

What is however clearly common among the various sectors, sciences and arts, is that creation of proof of con-

cept involves an activity that would require resources and that funding such activity has historically been scarce,

given the high risk associated with the activity.

PoC is therefore an important issue for all sides of the Triple Helix paradigm5.

3 For the purposes of the European Commission’s Horizon 2020 Programme, the experimental proof of concept level is defined as TRL 3 on a nine-level scale. 4 REVIEW OF UK PROOF OF CONCEPT SUPPORT https://www.gov.uk/government/publications/review-of-uk-proof-of-concept-support5 https://triplehelix.stanford.edu/3helix_concept

Research Organisations and Universities – who are committed to exploit commercially the benefits of the new

technologies to achieve both economic and social impact as per their missions.

Businesses and the private investors – who have interest in supporting new product development but are not

ready to take the highest risk in the exploitation phase

Governments – and their role to boost innovation and to do so need to cater for the evident market gaps, such as

the PoC funding gap, also known as ‘the valley of death’, acting as a bridge between the world of academia and

the world of business.

2. Typical Sources of Funding

Proof of Concept funds are often set up to facilitate the validation (prototype, demonstrator, etc.) and explore

avenues for the commercialisation of technologies developed within Public Research Organisations (PROs) and

micro-enterprises/SMEs as well as corporations. The specific objectives for such funding are often associated with

the following:

1. Provision of early stage funding that addresses the TRL 3 to TRL 4 ‘gap’ as to bridge the traditional fun-

ding for innovation in public research organisations and funding from private enterprises

2. To ensure that a broad range of activities are eligible for funding that increase the TRL and strengthen

the innovation offering

3. To increase the capacity of researchers and intermediaries to identify a robust route to market and build

a strong commercialisation strategy.

While there are no Europe-wide statistics available for the number of PoC funds across the continent, a study

performed in 2009 in the UK, demonstrated that there were around 50 national, regional and institutional PoC

dedicated funds in the country. It is safe to assume that this number has probably significantly increased since

then. Despite that, it is difficult to estimate the total amount of funding employed by proof of concept activi-

ty. This is because there are other sources of PoC funding, which include business angels’ investments, charity

direct contributions, national and EU-wide translational research schemes and others. While it is not possible to

accurately estimate the amount of external funding available to Proof of Concept funds, the survey employed by

Innovate UK demonstrated that such sources of funding exist and that both universities and companies tap into

these.

Below is a graph that depicts the main sources of PoC funding, employed by both British universities and com-

panies. It is common therefore for organisations to manage some form of PoC funds internally but also take

advantage of external sources, in particular national and European support schemes.

Figure 3: Main sources of PoC funds for both universities and private enterprises

In the Mind the Gap study performed by Innovosource6 similar conclusions were revealed, with an exception that

a great deal of funding is associated with the activities of the universities themselves. As seen by the 2011

Innovosource report ‘Mind the Gap’, the sources of Proof of Concept funding in the USA identified spanned over

university donations, alumni endowments and royalties collections, generated through commercialisation activi-

ties. And these present the bulk of funding available for PoC.

Figure 4: Raising and sustaining funds for PoC at American universities and PROs

According to the Dutch Enterprise Agency, which runs a PoC fund for the Netherlands, for 2017 alone its budget

for PoC is €13.54 million, shared among academics, innovative start-ups and SME businesses. However, in their

case, the applicant should supply a fully developed business model and a letter from investors expressing inte-

rest to match the grant provided by the PoC fund.

The landscape for PoC funding has been changing in the past few years and the main changes concern the fo-

llowing aspects:

• Regional funding changes nature with more money available at regional level and related to smart spe-

cialisation strategies

6 ‘Mind the Gap: the resource for technology and start-up gap funding’, https://www.innovosource.com/

• Initiation of multiple new translational funding schemes and networks which have an element of PoC,

such as technology transfer funds, accelerator funds, innovation funds and networks

• Many schemes have been pilot runs and/or only last for short periods as opposed to becoming long-term

sustainable support programmes.

In terms of capital structure, the majority of the PoC funds are built on the basis of grants with no expec-

tations for pay back. In some cases, such grant contributions can be converted into loan or equity. Some grant

schemes however are clearly equity based, often as part of ‘evergreen’ structures where the equity can be sold

and used as a source of fresh funds. In some instances, PoC schemes could be loan based, an example of which

is the PoC fund at Delft University in Netherlands. Delft Enterprises, for example, provides legal entities with a

unique convertible loan up to of EUR 250,000 at a fixed interest rate of 8 percent. This could be supplemented by

a grant from the Technology Foundation STW, which was established as a foundation to serve the entire spec-

trum of technical sciences. Its Take Off program is aimed at stimulating entrepreneurship at Dutch universities in

all fields of academic research.

Often PoC funds require matched funding for a grant or investment to be disbursed. In Germany, the Helmholtz

Validation Fund (HVF) grants awards between €250,000 and €1 million per year per project, and projects may

also receive less than the minimum amount when this is justified. As the funding is co-financed by the Helmholtz

Centres and industry partners, projects may receive up to €2 million each year. Given a funding period of 2 years,

the maximum possible amount of funding is €4 million. The HVF has funds totalling €20 million, which it alloca-

ted between 2011 and 2015. In the UK, most funding programmes also require matched funding. The rationale

is that the requirement for matched funding can demonstrate commitment from the funding beneficiary.

The links between public sources of Proof of Concept funding and the next stage private sector seed/VC funding

are important. Activities such as networking events and access to online data on funded projects are helping to

strengthen these links and this is supported by the private sector funders. These closer links would also help to

support systems whereby there is greater flexibility in allowing successful grant applicants to use the provisional

public funding approval to help leverage and secure private funding or follow-on investments.

On typical funding size, according to the survey completed by IP Pragmatics, the average size of funding acces-

sed for Proof of Concept is between EUR 30,000 and EUR 50,000 per project with less than 10% of the projects

requiring over EUR 100,000. In some case, PoC financing can reach up to EUR 300,000 but these are generally

exceptions, very often in the medical science space.

3. Implementation of PoC Funds – Typical structures

The management and implementation of the PoC programmes would largely depend on the funding sources.

Some are funded by private sources, others by public sources or charities. There are a number of aspects to be

considered according to the size of the business/ organisation. Larger companies usually use their own internal

funds for PoC activities falling within their core business or area. Where the area of activity is even more innova-

tive / higher risk, larger companies do appreciate external PoC support. For smaller companies with less available

resources, securing external PoC funding is often the only way forward with their project.

A number of PoC schemes are implemented by or in collaboration with universities. While, in principle, the funding

comes from external /public sources or programmes, universities (mostly in Northern and Western Europe) typi-

cally manage their PoC schemes internally. An example is the Higher Education Innovation Funding (HEIF) in the

United Kingdom.

Below there is an overview of various European and national schemes, whether publicly funded, private or cha-

rity-funded or a combination in the form of a public-private partnerships. The programmes described provide a

glimpse of typical implementation structures.

Figure 5: Table comprising of various PoC programmes across Europe

What the table in Figure 5 demonstrates is that there is no ‘one size fits all’ approach to Proof of Concept pro-

grammes, their structures and processes, and often such schemes would depend on the nature of the sponsor,

the economic structure of the jurisdiction and the availability of similar or complementary products in the given

geography. PoC programmes therefore need to be customised with a very clear objective which funding gap these

are going to close and how, which makes them risky and often time-limited ventures.

4. Success of PoC programmes

Success rates of PoC funding programmes can vary dependent on the size, experience and network of the organi-

sation. Companies working in close collaboration with other organisations (e.g. building partnerships with uni-

versities or with other companies already experienced in similar schemes) have higher chances for a successful

realisation of PoC. Universities usually have dedicated internal systems for assisting staff to apply for financing.

This in turn reflects the amount of support available prior to making an application.

As to the successful implementation of the PoC project once funding has been secured, a number of factors are

considered important, inter alia the idea, the existence of PoC coaching and/or commercialisation support given

to the team and the use of clear milestones. Usually success is measured by the commercial activities beyond

the PoC stage and by the amount of follow up funding attracted by the commercially feasible projects of the PoC

portfolio.

As an example of a successful PoC programme, outlined here is the University Challenge Seed Fund Scheme-ba-

sed fund at Oxford University. The purpose of this government scheme has been to “to enable universities to

access seed funds in order to assist the successful transformation of good research into good business.”

Figure 6: Key metrics of the University Challenge Seed Fund at Oxford University in 2009

The fund was set up in June 1999, with a starting fund size of £4m made up from: £1.4m from UK Government;

£1.6m from the charities Wellcome Trust and the Gatsby Charitable Foundation; and £1m from the University of

Oxford. Technology transfer managers at Oxford work with the researchers to prepare applications to the Fund

for amounts not exceeding £250,000 to support activities such as pre-patent research, reduction to practice,

commercial demonstration, prototypes, business planning support, and spin-out company investments. Proposals

are presented to an Investment Advisory Committee which makes investment recommendations. By mid-2003

the fund awarded 68 projects and was fully invested; new investments were put on hold until successful exits

returned cash to the Fund in April 2006. Based on this success, the University provided an additional £1m into

the Oxford University Innovation Fund, managed alongside the existing fund structure. The Innovation fund is still

active, close to fully invested, having made 34 investments to date (in 2009). Above in Figure 6, key indicators of

the original PoC fund upon its 10th Anniversary in 2009 are presented, which demonstrates that PoC funding can

generate not only social but also economic impact.

Notes

NotesNotes

EU Science Hubec.europa.eu/jrc

@EU_ScienceHub

EU Science Hub - Joint Research Centre

Joint Research Centre

EU Science Hub

JRC Mission

As the science and knowledge service of the European Commission, the Joint Research Centre’s mission is to support EU policies with independent evidence throughout the whole policy cycle.