Your Spinouts Need Capital. Do They Need Venture Capital?

The Funding Gap Is Real. The Solution Might Be Wrong.

Your tech transfer office processes hundreds of invention disclosures. Your proof-of-concept program funds promising projects. Your innovation partnerships team supports faculty-founded startups through early development.

Then you watch those startups struggle to close their first meaningful round.

The instinct is to solve this with venture capital. If startups need funding and VCs provide funding, the university should either launch a venture fund or build stronger relationships with existing venture investors.

But this logic assumes your spinouts are venture-backable. Many are not, and that is fine. The question is whether you are building investment infrastructure for companies that will never fit the venture model.

What University Spinouts Actually Look Like

University spinouts cluster into distinct categories with different capital needs.

Some spinouts are genuinely venture-backable. They pursue large markets with defensible technology advantages. They can articulate paths to $100 million in revenue. They fit the pattern VCs recognize. These companies can raise venture capital, and university investment may be unnecessary or even counterproductive if it complicates cap tables.

Other spinouts are growth companies. They commercialize valuable technology into businesses that will reach $5 million, $15 million, or $30 million in revenue. They create jobs. They generate licensing revenue for the university. They may never raise a Series A because they do not need one and would not benefit from the growth pressure that comes with it.

Still other spinouts are lifestyle businesses or consulting practices built around faculty expertise. These are legitimate outcomes that may not require investment at all.

A university investment strategy should recognize these categories and design appropriately for each. Treating all spinouts as pre-venture companies waiting for their Series A misallocates resources and creates frustration for founders whose companies do not fit that path.

The Venture Mismatch

Universities that partner with traditional venture funds or build venture-style investment programs often discover a mismatch between fund design and spinout reality.

Venture funds need portfolio companies to pursue aggressive growth. A company content to reach $10 million in revenue does not generate venture returns. Fund managers will either push for growth the founders do not want or pass on companies that do not fit the model.

Venture timelines assume exit orientation. But many valuable university spinouts work better as long-term operating businesses. The founder wants to run the company, not sell it. This is a legitimate outcome that venture structures discourage.

Venture due diligence focuses on market size and competitive dynamics. University spinouts often have technical advantages that take years to translate into market position. Traditional venture evaluation may undervalue companies whose technical moats are stronger than their current commercial traction suggests.

None of this means venture capital is wrong for university spinouts. It means venture capital is wrong for many university spinouts, and investment strategies should account for this.

Designing for Growth Companies

University investment programs designed for growth companies look different from traditional venture structures.

Flexible Deal Structures: Rather than standardized equity terms, growth-oriented programs use instruments matched to company situations. Revenue-based financing works for spinouts with commercial traction. Convertible notes work for earlier-stage companies. Equity works where venture outcomes are plausible. The program chooses structures based on company characteristics, not fund requirements.

Patient Timelines: Growth companies do not operate on venture schedules. A spinout that reaches $8 million in revenue over seven years while generating consistent returns is a success. Fund structures should accommodate these timelines rather than forcing premature exits or artificial growth acceleration.

Multiple Return Mechanisms: Venture funds depend on equity appreciation and exit events. Growth-oriented funds can generate returns through revenue participation, structured buybacks, and dividend recapitalizations alongside traditional equity upside. This diversification improves fund economics when not every company achieves a venture-scale outcome.

Aligned Incentives: University spinouts often involve ongoing relationships with faculty founders, licensing arrangements, and research collaborations. Investment structures should support rather than complicate these relationships.

Three Models That Fit

Universities successfully supporting spinouts through investment typically use one of three approaches.

The Evergreen Growth Fund: An investment vehicle funded by philanthropy or endowment allocation that deploys patient capital across spinout stages without traditional venture return pressure. These funds can hold investments indefinitely, accept modest returns from steady growth companies, and still pursue equity upside when venture outcomes emerge.

The Flexible Proof-of-Concept Bridge: Gap funding programs that use investment structures rather than pure grants. Companies receive capital with lightweight return mechanisms, such as revenue participation or success fees, that generate some return to the program without imposing venture expectations on non-venture companies.

The GP-as-a-Service Partnership: Universities partner with fund managers who specialize in growth company investment rather than traditional venture. The university contributes deal flow and technical evaluation. The partner provides fund management infrastructure and flexible investment execution. This approach accesses professional investment management without forcing spinouts into venture frameworks.

Questions Before You Build

Before your innovation office commits to an investment structure, gather data to answer these questions.

What does your spinout distribution actually look like? Review the past five years. How many companies were genuinely venture-backable? How many were growth companies? How many were lifestyle businesses? Your investment strategy should reflect actual proportions, not aspirational ones.

Where do growth companies struggle? If your venture-backable spinouts can raise capital but your growth companies cannot, building more venture capacity does not solve the problem. You need structures designed for the companies being underserved.

What investment capabilities exist internally? Do you have staff with experience in growth company investment, not just venture capital? If not, partnership models likely outperform internal builds.

What does success look like? Define metrics beyond financial return. Job creation, technology commercialization, regional economic impact, and founder satisfaction all matter. Your investment structure should optimize for the outcomes you actually value.

The Opportunity

Universities sit at the beginning of company formation. You see technologies before markets exist for them. You work with founders before they know they are founders. You understand technical potential better than any outside investor could.

This position creates opportunity to support companies that traditional capital markets underserve. Growth companies built on university technology can create substantial value without ever becoming venture-backable. They need investment structures designed for their actual trajectories.

Your spinouts need capital. Whether they need venture capital depends on honest assessment of what kinds of companies you actually produce and what kinds of outcomes you actually want to support.