1. Improving Government-SME Partnerships for the Development of New Technologies
The U.S. Small Business Innovation Research Program
The U.S. Advanced Technology Program
6 Countries Programme Conference
Vancouver, Canada
June 6, 2003
Charles Wessner, Ph.D.
Director, Innovation and Technology
National Research Council
Charles W. Wessner, Ph.D.

2. Presentation Trends and Anomalies in the U.S. Innovation System
Trends in U.S. R&D Funding
Responding to September 11
Ambivalence over Support for Industry R&D
Linear and Non-Linear Models of Innovation
Capital Market Imperfections
U.S. Policies for Innovation-Led Growth
An Enabling Business Environment
Government Awards to Spur Growth
SBIR
ATP
Conclusions
Charles W. Wessner, Ph.D.

3. The U.S. National Academies
NAS
The NRC is the Operating Arm of the National Academies, which includes the Board on Science, Technology, and Economic Policy (STEP)
The NRC Mission is to Advise the Government and the Nation on Science, Engineering, and Medicine.
NAE
IOM
NRC
Charles W. Wessner, Ph.D.

4. STEP Recognizes New Challenges to the
The National Academies’ Board on Science, Technology, and Economic Policy
STEP Recognizes New Challenges to the
U.S. Innovation System
Post Cold War imbalances in U.S. public and private R&D
Changing relationships among industry, government, and universities
Growing recognition of value of partnerships to bring new technologies to market and capture the benefits of heavy U.S. R&D investments
Charles W. Wessner, Ph.D.

5. Trends & Anomalies in U.S. R&D Funding
Charles W. Wessner, Ph.D.

6. Trends in U.S. R&D Funding The Good News
Charles W. Wessner, Ph.D.

7. Trends in U.S. R&D Funding The Less-good News
Private Research is Up
But it is Closer to Market
Many of the large industrial labs are smaller or gone
Public Research has Surged in Some Areas yet Dropped in Others
Important: Support for Public R&D Contributions Has Dropped Relative to the Increased Size of the U.S. Economy
Charles W. Wessner, Ph.D.

8. Trends in U.S. R&D Funding The Bad News: An Uneven Record
Changes in Federal Research Obligations for All Performers and University/College Performers FY 1993–1999
Charles W. Wessner, Ph.D.

9. Trends in U.S. R&D Funding The Really Bad News
Real Declines in Federal Obligations for Research
FY 1993–1999*
*constant, 1999 dollars
Charles W. Wessner, Ph.D.

10. Basic Research Underpins Science-Based Growth
Basic Research is key in supplying a steady stream of “fresh and new” ideas
Ideas if effectively transferred to the private sector, can become innovations
With the right policy support, innovations can become commercial products driving growth
Basic research is essential, but it is not enough!
Developing incentives to spur innovative ideas for new products is a central policy challenge
Charles W. Wessner, Ph.D.

11. Dynamic Government Response
September 11, 2001
New Challenges
Real Anger
Dynamic Government Response
Charles W. Wessner, Ph.D.

12. Securing the U.S. Homeland
$37.7 billion (FY 2003) for Homeland Security
up from $19.5 billion in 2002.
Department of Homeland Security R&D Budget
$800 million in FY’03
$1 billion in FY’04
Homeland Security Advanced Research Projects (HSARPA) will be created on DARPA model
Bio-terrorism R&D portfolio stays in NIH
Charles W. Wessner, Ph.D.

13. New Challenges: Countering Bio-Terror Large Increases for Bio-terrorism R&D and Facilities at NIAID
Source: Science 21 February 2003
Charles W. Wessner, Ph.D.

14. Government Support for R&D in Industry A Key Element in an Innovation System, but often Controversial in the United States
Charles W. Wessner, Ph.D.

15. Significance of Early-Stage Technology Development
Early-Stage Technology Development is Important.
It transforms Nation’s Portfolio of Science & Engineering Knowledge into Innovations.
New Technologies Generate New Markets and Industries.
Large Returns to National Economic Capability Can Result from Relatively Small National Investments.
Charles W. Wessner, Ph.D.

16. Role of Government in Early-Stage Technology Development
Markets for Allocating Risk Capital to Early-Stage Technology Ventures are not Efficient
Most Early-Stage Funding comes from
Individual private-equity “Angel” investors
Corporations
Federal Government
Not Venture Capitalists!
Federal Technology Development funds can Complement Private Funds
More important than we thought
Charles W. Wessner, Ph.D.

17. Estimated Distribution of Funding Sources for Early-Stage Technology Development
Branscomb & Auerswald, Between Invention and Innovation An Analysis of Funding for Early-Stage Technology Development, NIST, 2002
Charles W. Wessner, Ph.D.

18. U.S. Policymakers are Ambivalent about Government Support of Industry R&D
Ideology overstates the efficiency of “the market”
“If it is a good idea, the market will fund it.”
Successful ATP program associated with the Clinton Administration, therefore opposed by Republicans
This view ignores past achievements as well as current practices in the U.S. and abroad
Policymakers are most comfortable with “linear model” of innovation
Many believe that increasing government support for basic R&D in critical areas will transfer seamlessly to meet national needs
European Call for 3% R&D Target Adopts a Linear Model
Charles W. Wessner, Ph.D.

19. Improving Our Understanding of the Innovation Process Linear & Non-Linear Models of Innovation Challenges Small Firms Face in Bringing Innovation to Market
Charles W. Wessner, Ph.D.

20. The Myth of the Linear Model of Innovation
Basic Research
Applied
Research
Development
Commercialization
Major overlap between Basic and Applied Research, as well as between Development and Commercialization
Principal Investigators and/or Patents and Processes are Mobile, i.e., not firm dependent
Many Unexpected Outcomes
Linear model omits “feedback loops”, which suggest that technological breakthroughs may precede, as well as, stem from basic research.
Charles W. Wessner, Ph.D.

21. Non-Linear Model of Innovation
Quest for Basic Understanding
New Knowledge
Fundamental Ideas
Basic
Research
Potential Use
Application of Knowledge to
a Specific Subject
“Prototypicalization”
Feedback:
Basic Research
needed for discovery
Search for new
ideas and solutions to
solve longer term
issues
New
Unanticipated
Applications
Applied
Research
Feedback:
Applied Research
needed to design
new product
characteristics
Development of Products
Goods and Services
Development
Feedback: Market Signals/
Technical Challenge
Desired Product Alterations
or New Characteristics
Cost/design trade-off
Commercial-
ization
Charles W. Wessner, Ph.D.

22. Models of Innovation are Models
The Real Innovation Process Needs Help
Information is imperfect
So Markets are imperfect
Management Challenges are high
Yet Potential Social Gains are Great
Government Action can Help
Charles W. Wessner, Ph.D.

23. Early-Stage Funding
Firms Face Multiple Hurdles in Bringing Innovation to Market
What are the Main Hurdles?
Charles W. Wessner, Ph.D.

24. Federally Funded Basic Research Creates New Ideas
The Valley of Death
Early-Stage Funding Gap
Capital to Develop Ideas
Federally Funded Basic Research Creates New Ideas
To Innovation
Applied Research
&
Innovation
No Capital
Charles W. Wessner, Ph.D.

25. Branscomb’s Darwinian Sea
Business Risks
Charles W. Wessner, Ph.D.

26. Small Firms Actually Face Many Hurdles Crossing the Valley of Death and the Darwinian Sea only to Arrive in the Jungle of Prosperity
“Valley of Death”
The Darwinian Sea
Basic
Research
Invention
Innovation &
New Businesses Must Swim Past:
Management Failure
Technology Obsolescence
Alternative Business Models
Debilitating Legal Proceedings
Hostile Acquisitions
in the Jungle
of Prosperity
Charles W. Wessner, Ph.D.

27. Imperfections in the U.S. Innovation System Early-Stage Finance
Charles W. Wessner, Ph.D.

28. Capital Markets are Imperfect
VC Firms:
Limited information on new firms
Prone to herding tendencies
Focus on later stages of technology development
Most VC investors seek early exit
Large U.S. venture capital market is not focused on early-stage firms
Charles W. Wessner, Ph.D.

29. Breakdown of U.S. Venture Capital by Stage of Development-2001
$799 million
Total= $41,284 million
Source: PricewaterCoopers, Venture Economics, National Venture Capital Association, 2003
Charles W. Wessner, Ph.D.

30. Breakdown of U.S. Venture Capital by Stage of Development-2002
$302.8 million
Total = $21,179 million
Source: PricewaterCoopers, Venture Economics, National Venture Capital Association, 2003
Charles W. Wessner, Ph.D.

31. Important in Early-Stage Funding
Average Deal Size
Important in Early-Stage Funding
Charles W. Wessner, Ph.D.

32. Shock and Response of VC Investors
Front-End Shock: No New Funding
Young companies have difficulty gaining customers and generating revenues due to the decline in technology spending
Back-End Shock: No Exit
Current financial markets present sobering valuations and illiquidity
Result: Venture investment dropped 44% in 2002
14% drop in healthcare investing
48% drop in IT products
60% drop in IT services
Source: Ernst & Young/VentureOne Venture Capital Survey, January 27, 2003
Venture Capitalists are now more risk-averse
Fewer seed and first round investments
Charles W. Wessner, Ph.D.

33. “Venture Capital Outlook Remains Bleak” The Washington Post, May 5, 2003
Since peaking in early 2000, VC investment has plummeted for 12 consecutive quarters
The number of new companies being financed is at an 8-year low
Total investments, nationwide, in Q is $3.6 billion, down from $4.3 billion in Q4, 2002
Charles W. Wessner, Ph.D.

34. Capital Market Challenges
Institutional Role of Venture Capital in Early-Stage Finance is Limited
Growth in Average Deal Size Works Against Small Firms
Increased Risk Aversion by Institutional Investors Works Against New Innovations, especially those in small firms
Government Support for R&D partnerships is effective—but no policy consensus
Charles W. Wessner, Ph.D.

35. U.S. Policies for Innovation-Led Growth
An Entrepreneur-Friendly Environment
Charles W. Wessner, Ph.D.

36. U.S. Entrepreneurial Environment
A Key to Knowledge-Based Growth
Sources and Limitations
Drive for Ownership: High Rates of Business Formation
High Social Value placed on business success
Low Regulatory barriers for entry
Ease of company formation
Pace of activity increases the effective value of capital
Access to early-stage financing—very important
Deep and Diverse capital Markets = Access to Capital
Substantial Growth in VC Funding, very rapid in late 1990s
Substantial Contraction since 2000—trend now negative
Charles W. Wessner, Ph.D.

37. Positive Policy Framework
Microeconomic Incentives for an Entrepreneurial Environment
Intellectual Property Regime: Incentive for Invention
Tax Policy: Incentive for High Risks
Regulatory Policy: Low Regulation for New Entrants
Labor Flexibility: Hire and Fire as Needed
Public-Private Partnerships
Innovation Awards
Industry Consortia
3. Growing Role of Universities as Innovators & Investors
Enabling Policy Framework with Incentives for Professors and Universities
Universities are (or have to become) more agile, more flexible, more diverse to encourage commercialization
S&T Parks growing in importance
Charles W. Wessner, Ph.D.

38. U.S. Policies for Innovation-Led Growth Government Awards to Spur Innovation-Led Growth: SBIR & ATP
Charles W. Wessner, Ph.D.

39. Programs to Bridge the Valley of Death
Uncertainty and
Distance to Market
Startup: Friends, Families & Fools
Strategic research
Curiosity research
Applied research
Seed: Angel Backers
The Financial
“Valley of Death”
The Focus of SBIR and ATP
SBIR Procurement
ATP
Need for Supportive Policy Framework
Prototype
Product development
Commercialisation
1st Round VC
2nd Round VC
Capital Allocation Curve
Business development
Investment
Expansion
Total Allocated
Resources
Charles W. Wessner, Ph.D.

40. Small Business Innovation Research Program
The SBIR Program
Small Business Innovation Research Program
Created in 1982, Renewed in 1992 & 2001
Participation by all federal agencies with an annual extramural R&D budget of greater than $100 million is mandatory
Agencies must set aside 2.5% of their R&D budgets for small business awards
No budget line, No budget debate
Currently a $1.6 billion per year program
Largest U.S. Partnership Program
Common 3-Phase Structure Across Agencies
Variation within Agencies based on Mission
Charles W. Wessner, Ph.D.

41. SBIR: 3 Phase funding approach:
Phase I or Feasibility Phase
Competitive award of limited federal research funds for short term investigation of scientific merit and feasibility
Up to $100,000 in funding
Normally up to 6 months to complete the first phase
Highly Competitive—only 12 to 14% of submitted proposals receive Phase I awards
Charles W. Wessner, Ph.D.

42. SBIR: 3 Phase funding approach:
Phase II or Prototype Phase
Selection emphasizes research projects with strong scientific merit as well as strong commercial merit
Maximum award level of $750,000
Sometimes more, e.g., for drug development
Typically restricted to two years for completion
Still Competitive
Only 40% of Phase I of firms receive Phase II awards
Charles W. Wessner, Ph.D.

43. SBIR: 3 Phase funding approach:
Phase III or Commercialization Phase
No Additional SBIR Program Funding
Federal agencies can provide procurement funds, but the agency must finance Phase III using non-SBIR funds
Intent: Product development and Commercialization arising from Phase II projects
Fact: Sometimes Multiple Awards But Usually Not
Charles W. Wessner, Ph.D.

44. SBIR differs among agencies
Multiple Program Goals
Commercialization and Research
Multiple Agency Goals
NIH is often directed more towards long-term product development: makes larger awards
DoD is directed more towards product acquisition and often encourages outside commercial application
Agency Sub-Units have different goals
From Special Forces equipment to Vaccines to Supply Management
Multiple, Flexible Management Systems
Each agency typically has its own manner of choosing awardees and screening applications.
Charles W. Wessner, Ph.D.

45. Contributions of SBIR
Catalyzes the Development of New Ideas and New Technologies
Capitalizes on Substantial U.S. R&D Investments
Addresses Gaps in Early-Stage Funding for Promising Technologies
Certification Effect—Government Endorsement of Technical Quality
Charles W. Wessner, Ph.D.

46. Contributions of SBIR
Provides a Bridge between Small Companies and the Agencies, especially for Procurement
Contributes New Methods and New Technologies to Agency Missions
Provides a Bridge between Universities and the Marketplace
Encourages Local and Regional Growth, increasingly through the University connection
An Interesting Program; Not Well Understood
Charles W. Wessner, Ph.D.

47. The Advanced Technology Program: A Unique Role
ATP funds high-risk, high payoff technologies beyond capabilities/hurdle rates of individual firms.
ATP can, thus, act as a countervailing force to “herding” tendencies of venture finance.
ATP is uniquely positioned to contribute to cross-disciplinary challenges—such as those in genome research
ATP encourages the formation of partnerships and consortia to encourage technology development and diffusion
Charles W. Wessner, Ph.D.

48. ATP Characteristics Industry-initiated Proposals: Bottom-up Approach
Highly Competitive:
Rigorous selection process
Independent evaluation of the project's technical merit, commercial worthiness and potential for broad-based benefits
De-briefing for all non-winners
Cost Share: All Awards are cost shared with industry—Acts as a Reality Check
Partnering Encouraged: Dissemination of enabling technologies is key to public benefits and rationale for public support
Assessment Program is Well-developed
Prove Program Effectiveness
Charles W. Wessner, Ph.D.

49. ATP Characteristic: Constant Assessment
Ex ante: Selection Process
Real Time: Project Monitoring
Post Hoc: Evaluation of Project Impact
Portfolio of Evaluation Techniques
External Objective Assessment Requests
National Academies
Charles W. Wessner, Ph.D.

50. Ex Ante Evaluation Rigorous Selection Process
Companies Must Prove Need for Government Support
Social Benefits and Goals
Spillovers
Technical Merit
Quality
Feasibility
Commercial Merit
Business Plan required
Joint Ventures receive more funds
Charles W. Wessner, Ph.D.

51. Real-Time Project Monitoring
Compliance with Regulations?
Progress: Technical Milestones Achieved?
Goals consistent with Award?
ATP STOPS projects that are failing
Willingness & Ability to
Stop, Drop, & Recommit
is rare in public programs
Charles W. Wessner, Ph.D.

52. Post Hoc—Follow-up Evaluation
Impact of award
Technical Goals Achieved?
Additional Funding Obtained?
Sales?
Market Penetration Achieved?
Social benefits
Savings to Health Care Systems?
Better Outcomes for Patients?
Jobs Retained?
Indirect Paths to Commercialization
Charles W. Wessner, Ph.D.

53. Who Wins ATP Awards? For What? Small Companies 63% of Awards
Large Companies Valuable Partners
Role of Universities Growing
For What?
Electronics & Computers 38%
Manufacturing 22%
Biotech and Advanced Materials 14%
Information Tech 12%
Charles W. Wessner, Ph.D.

54. Results of NRC Assessment
NRC Found that “the ATP Program works”
NRC Analysis Also Found that the ATP Needs:
More stable funding
More cooperation with universities
Result of NRC Analysis:
$200 million restored by Congress
Policy analysis works!
Charles W. Wessner, Ph.D.

55. Innovation Awards vs. Tax Credits
R&D Tax Credits are often too Broad in Application
Cost is too high compared to awards
Tax Credits Imply Revenue—Small Firms do not Have (Credits Can Help Established Businesses)
Tax Credit Impact and Additionality Hard to Calculate
Charles W. Wessner, Ph.D.

56. Innovation Awards vs. Tax Credits
Innovation Awards are Targeted on Specific Outcomes: Higher Impact at Lower Cost
Innovation Awards are:
Powerful through leveraged resources
Conditional: work can be stopped
Industry-driven:
Less bureaucratic
Closer to market
More “take up” of technologies
Charles W. Wessner, Ph.D.

57. Characteristics of U.S. Innovation Awards
Both SBIR & ATP are
Highly Competitive: Many Apply; Few Win
Rely on Industry Initiation and Leadership
Keep Public Funding Limited in Time and Amount
Have Clear Objectives—ATP more rigorous
Employ Regular Assessments & Learning—ATP only
Both Play Valuable, if Limited, Roles in the U.S. Innovation System
Charles W. Wessner, Ph.D.

58. Awards Help Move Ideas up the Innovation Ladder
Address very-early-stage financing (SBIR)
Fund promising new technologies with broad applications (ATP)
Advance new university-based ideas towards the market (SBIR)
Draw synergies among universities, small business, and large companies (ATP)
Attract private funding (SBIR & ATP)
Charles W. Wessner, Ph.D.

59. Conclusions
Charles W. Wessner, Ph.D.

60. Sustaining Science-Based Growth
Generating Science-Based Growth is a Major Policy Interest around the World
Not Enough is Known about Early-Stage Finance
The Linear Innovation Model Needs Help!
Inputs for more research are not enough (e.g., the 3% R&D target)
The process of ideas to innovations to products can be improved with awards to small business innovation
Small business is instrumental in bringing the benefits of university research to the marketplace
Charles W. Wessner, Ph.D.

61. Government plays a unique role in partnerships:
Imperfect Markets Give Imperfect Outcomes
Government-SME Partnerships
stimulate technology diffusion;
provide conduit to the marketplace for national R&D investments and stimulate universities; and
help justify further R&D support.
Regular, Institutionalized Evaluation is Essential
Internal and external evaluation works best
Charles W. Wessner, Ph.D.

62. Common Challenges
National Innovation Systems are Different in Scale and Flexibility
All Systems Have Common Challenges
Need to justify R&D expenditures
Need to create new jobs
Need for institutional reform
Need to recognize that project failure does not equal program failure
Learning from Each Other is a Pathway to Progress
Charles W. Wessner, Ph.D.

63. END Charles W. Wessner, Ph.D. http://www.nationalacademies.org/step
Board on Science, Technology, & Economic Policy
National Research Council
500 Fifth Street NW
Washington, D.C
Tel:
Charles W. Wessner, Ph.D.