The R&D Tax Credit Aspects of University Startups
Unviersity-Startups
Research efforts at universities across the
country have resulted in an increasing number of “spinouts”,
business start-ups born out of university research labs.
The start-ups benefit by receiving research funding,
gaining access to school lab equipment, and in many cases even
having their start-up costs completely covered by the
school.
What’s more is that many
schools act as liaisons, teaming entrepreneurs with
scientists, fostering collaborations and breeding
innovation. In addition, the federal government is
encouraging these actions in order to bring widespread
innovation to markets. Not only do they provide most
university R&D funding but they also provide start-up
incentives in the form of R&D tax credits. The value
of the dollar-for-dollar tax credits can be quite substantial
especially when paired with state R&D tax credits.
The Research &
Development Tax Credit
Enacted in 1981, the federal Research and
Development (R&D) Tax Credit allows a credit of up to 13%
of eligible spending for new and improved products and
processes. Qualified research must meet the following four
criteria:
- New or improved products,
processes, or software
- Technological in nature
- Elimination of uncertainty
- Process of experimentation
Eligible costs include
employee wages, cost of supplies, cost of testing, contract
research expenses, and costs associated with developing a
patent. On December 18, 2015 President Obama signed the
bill making the R&D Tax Credit permanent. Beginning
in 2016, the R&D credit can be used to offset Alternative
Minimum tax and startup businesses can utilize the credit
against payroll taxes.
Universities Create
Increasing Start-Ups
Universities and other research
institutions created 818 startups in FY 2013, up from 705 in
2012 and 670 in 2011, according to the Association of
University Technology Managers. Startups created in 2014
include a broad range of innovative companies including the
following:
ADC BioMed
is a biomedical research company spun out of the University of
Minnesota that focuses on diagnostics and therapeutics to
prevent and treat cancer, autoimmune diseases, and infectious
diseases.
BluHaptics
is a spin-out from the Applied Physics Laboratory at the
University of Washington that creates systems for underwater,
remote-operated robots and drones. The University of
Washington launched a record 18 start-ups in 2014.
Efficient Windows
Collaborative (EWC) is a non-profit web based
company spun out of the University of Minnesota.
EWC provides information on the benefits of energy efficient
windows, descriptions of how they work, and recommendations
for their selection and use.
BARO is a
mobile app company, out of New York University, that makes it
possible for small businesses and consumers to rent high-tech
items like Go Pro cameras, drones, and 3-D printers.
EmboMedics
is a University of Minnesota start-up that develops
biodegradable drugs that can pinpoint tumors and block off
blood cells to the area to in order to kill the tumors.
Zepto Life
Technology is a St. Paul, MN company also spun out
of the University of Minnesota that researches early disease
detection in order to provide more effective treatments to
patients.
Foxtrot Systems
is a Massachusetts Institute of Technology and Tufts
University start-up that created a web app to help
distributors execute better and faster deliveries.
Getting More Out of
University R&D
The rise of a global, knowledge based
economy and increasingly competitive global markets has
intensified the need for strategic partnerships that go beyond
funding of research projects. Although the number of
university start-ups is on the rise, the potential that
university/business collaborations can bring to the national
and worldwide economy could be even greater. R&D
spending in 2014 is projected to be about 2.8% of U.S.
GDP. Of the $465 billion that was projected to be spent
on R&D last year, over $68 billion was spent by
universities alone. That $68 billion is a large slice of
the world’s largest economy however, businesses and
universities can better maximize the economic value from those
research dollars if they can lay out a collaboration plan that
better meets business objectives. If researchers and
businesses were more interactive, both researchers and venture
capitalists would be better able to identify opportunities and
build upon them.
MIT states in a 2010
Best Practices for Industry-University Collaboration study
that, “it is important to have two-way knowledge transfer
between the university research team and the company personnel
managing the project.” The report then lays out the
following seven keys to collaboration success:
1. Define the project’s strategic
context:
- Use your company research
portfolio to determine collaboration opportunities
- Define specific collaboration
outputs that can provide value
- Identify internal users of this
output at the working level
2. Select boundary-spanning project
managers with three key attributes:
- In depth knowledge of the
technology needs in the field
- The inclination to network
across functional and organizational boundaries
- The ability to make connections
between research and opportunities for product
applications
3. Share with the university team the
vision of how the collaboration can help the company:
- Select researchers who will
understand company practices and technology goals
- Ensure that the university team
appreciates the project’s strategic context
4. Invest in long-term relationships:
- Plan multiyear collaboration
timeframes
- Cultivate relationships with
target university researchers, even if research is not
directly supported
5. Establish strong communication
linkage with the university team:
- Conduct face-to-face meetings on
a regular basis
- Develop an overall communication
routine
- Encourage extended personnel
exchange, both company to university and university to
company
6. Build broad awareness of the
project within the company:
- Promote university team
interactions with different functional areas within the
company.
- Promote feedback to the
university team on project alignment with company needs.
7. Support the work internally both
during the contract and after:
- Provide appropriate internal
support for technical and management oversight
- Include accountability for
company uptake of research results as part of the
project manager role.
By working closely and
interactively on research projects, start-ups and universities
can turn innovative ideas into profitable ventures.
Google Inc., Sun Microsystems Inc. and Yahoo Inc. are all
prime examples of extremely successful university
spinoffs. Still, acknowledging the entrepreneurial
success of those companies is no reason to be content. When
companies and universities work in tandem to push the
frontiers of knowledge, they become a powerful engine for
innovation and economic growth.
Silicon Valley provides
a good example. Long-running collaborations in the region have
given rise to some of the biggest breakthroughs of the 20th
and 21st century.
Other regions around the
country have recognized the potential for economic stimulus
that comes from research clusters like Silicon Valley and the
collaboration with local universities that occurs there.
In New York, for
example, certain zones that are created through partnerships
with colleges and universities are tax free for businesses
under the START-UP NY program. Under the program,
start-ups and other businesses will be free from
state tax for a period of ten years while employees will be
tax free for the first five years. START-UP NY is
aimed at businesses that correlate with the academic mission
of the sponsoring colleges and universities.
Funding For Start-Ups
For innovative start-up companies, there
are several clever avenues to funding innovation. A few
of them are described below:
1. Incubators – A start-up
incubator is a company, university, or other organization that
gathers resources such as cash, marketing, laboratories,
consulting, and office space in exchange for equity in small
companies.
2. Venture Capital – Venture
capitalists are investing at an increasing pace as the economy
continues to rebound. During 2014, venture capital firms
raised $29.8 billion. That amount was a 69% increase
from 2013 and the strongest annual period for fundraising
since 2007. What’s more is that many of these
investments are in start-ups as well. The recent New
York Times article, “Throwing Money at Start-ups in Frenzy to
Find the Next Uber” describes a few companies that didn’t
exist a few years ago and are now worth billions of
dollars. The article also describes the trend of venture
capitalists investing in the start-ups, despite many of them
lacking revenue and even a market plan.
3. Crowdfunding – Crowdfunding
involves gathering contributions from a large number of
people, usually through the internet or social media.
Conclusion
Research efforts at universities often
result in large corporate opportunities and successful
start-ups. Given the increasingly competitive global
economy, researchers at universities and relative businesses
are being encouraged by the government and other stakeholders
to collaborate with each other in order bring more research
results to market and generate the most possible economic
value from the efforts. Federal and state R&D tax
credits are available to help stimulate and support the
innovative efforts of university start- ups.