Presentation on theme: " The U.S. Small Business Innovation Research Program"— Presentation transcript:
1Improving Government-SME Partnerships for the Development of New Technologies The U.S. Small Business Innovation Research ProgramThe U.S. Advanced Technology Program6 Countries Programme ConferenceVancouver, CanadaJune 6, 2003Charles Wessner, Ph.D.Director, Innovation and TechnologyNational Research CouncilCharles W. Wessner, Ph.D.
2Presentation Trends and Anomalies in the U.S. Innovation System Trends in U.S. R&D FundingResponding to September 11Ambivalence over Support for Industry R&DLinear and Non-Linear Models of InnovationCapital Market ImperfectionsU.S. Policies for Innovation-Led GrowthAn Enabling Business EnvironmentGovernment Awards to Spur GrowthSBIRATPConclusionsCharles W. Wessner, Ph.D.
3The U.S. National Academies NASThe 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.NAEIOMNRCCharles W. Wessner, Ph.D.
4STEP Recognizes New Challenges to the The National Academies’ Board on Science, Technology, and Economic PolicySTEP Recognizes New Challenges to theU.S. Innovation SystemPost Cold War imbalances in U.S. public and private R&DChanging relationships among industry, government, and universitiesGrowing recognition of value of partnerships to bring new technologies to market and capture the benefits of heavy U.S. R&D investmentsCharles W. Wessner, Ph.D.
5Trends & Anomalies in U.S. R&D Funding Charles W. Wessner, Ph.D.
6Trends in U.S. R&D Funding The Good News Charles W. Wessner, Ph.D.
7Trends in U.S. R&D Funding The Less-good News Private Research is UpBut it is Closer to MarketMany of the large industrial labs are smaller or gonePublic Research has Surged in Some Areas yet Dropped in OthersImportant: Support for Public R&D Contributions Has Dropped Relative to the Increased Size of the U.S. EconomyCharles W. Wessner, Ph.D.
8Trends 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 1993–1999Charles W. Wessner, Ph.D.
9Trends in U.S. R&D Funding The Really Bad News Real Declines in Federal Obligations for ResearchFY 1993–1999**constant, 1999 dollarsCharles W. Wessner, Ph.D.
10Basic Research Underpins Science-Based Growth Basic Research is key in supplying a steady stream of “fresh and new” ideasIdeas if effectively transferred to the private sector, can become innovationsWith the right policy support, innovations can become commercial products driving growthBasic research is essential, but it is not enough!Developing incentives to spur innovative ideas for new products is a central policy challengeCharles W. Wessner, Ph.D.
11Dynamic Government Response September 11, 2001New ChallengesReal AngerDynamic Government ResponseCharles W. Wessner, Ph.D.
12Securing the U.S. Homeland $37.7 billion (FY 2003) for Homeland Securityup from $19.5 billion in 2002.Department of Homeland Security R&D Budget$800 million in FY’03$1 billion in FY’04Homeland Security Advanced Research Projects (HSARPA) will be created on DARPA modelBio-terrorism R&D portfolio stays in NIHCharles W. Wessner, Ph.D.
13New Challenges: Countering Bio-Terror Large Increases for Bio-terrorism R&D and Facilities at NIAID Source: Science 21 February 2003Charles W. Wessner, Ph.D.
14Government Support for R&D in Industry A Key Element in an Innovation System, but often Controversial in the United StatesCharles W. Wessner, Ph.D.
15Significance 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.
16Role of Government in Early-Stage Technology Development Markets for Allocating Risk Capital to Early-Stage Technology Ventures are not EfficientMost Early-Stage Funding comes fromIndividual private-equity “Angel” investorsCorporationsFederal GovernmentNot Venture Capitalists!Federal Technology Development funds can Complement Private FundsMore important than we thoughtCharles W. Wessner, Ph.D.
17Estimated 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, 2002Charles W. Wessner, Ph.D.
18U.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 RepublicansThis view ignores past achievements as well as current practices in the U.S. and abroadPolicymakers are most comfortable with “linear model” of innovationMany believe that increasing government support for basic R&D in critical areas will transfer seamlessly to meet national needsEuropean Call for 3% R&D Target Adopts a Linear ModelCharles W. Wessner, Ph.D.
19Improving Our Understanding of the Innovation Process Linear & Non-Linear Models of Innovation Challenges Small Firms Face in Bringing Innovation to MarketCharles W. Wessner, Ph.D.
20The Myth of the Linear Model of Innovation Basic ResearchAppliedResearchDevelopmentCommercializationMajor overlap between Basic and Applied Research, as well as between Development and CommercializationPrincipal Investigators and/or Patents and Processes are Mobile, i.e., not firm dependentMany Unexpected OutcomesLinear model omits “feedback loops”, which suggest that technological breakthroughs may precede, as well as, stem from basic research.Charles W. Wessner, Ph.D.
21Non-Linear Model of Innovation Quest for Basic UnderstandingNew KnowledgeFundamental IdeasBasicResearchPotential UseApplication of Knowledge toa Specific Subject“Prototypicalization”Feedback:Basic Researchneeded for discoverySearch for newideas and solutions tosolve longer termissuesNewUnanticipatedApplicationsAppliedResearchFeedback:Applied Researchneeded to designnew productcharacteristicsDevelopment of ProductsGoods and ServicesDevelopmentFeedback: Market Signals/Technical ChallengeDesired Product Alterationsor New CharacteristicsCost/design trade-offCommercial-izationCharles W. Wessner, Ph.D.
22Models of Innovation are Models The Real Innovation Process Needs HelpInformation is imperfectSo Markets are imperfectManagement Challenges are highYet Potential Social Gains are GreatGovernment Action can HelpCharles W. Wessner, Ph.D.
23Early-Stage FundingFirms Face Multiple Hurdles in Bringing Innovation to MarketWhat are the Main Hurdles?Charles W. Wessner, Ph.D.
24Federally Funded Basic Research Creates New Ideas The Valley of DeathEarly-Stage Funding GapCapital to Develop IdeasFederally Funded Basic Research Creates New IdeasTo InnovationApplied Research&InnovationNo CapitalCharles W. Wessner, Ph.D.
25Branscomb’s Darwinian Sea Business RisksCharles W. Wessner, Ph.D.
26Small 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 SeaBasicResearchInventionInnovation &New Businesses Must Swim Past:Management FailureTechnology ObsolescenceAlternative Business ModelsDebilitating Legal ProceedingsHostile Acquisitionsin the Jungleof ProsperityCharles W. Wessner, Ph.D.
27Imperfections in the U.S. Innovation System Early-Stage Finance Charles W. Wessner, Ph.D.
28Capital Markets are Imperfect VC Firms:Limited information on new firmsProne to herding tendenciesFocus on later stages of technology developmentMost VC investors seek early exitLarge U.S. venture capital market is not focused on early-stage firmsCharles W. Wessner, Ph.D.
29Breakdown of U.S. Venture Capital by Stage of Development-2001 $799 millionTotal= $41,284 millionSource: PricewaterCoopers, Venture Economics, National Venture Capital Association, 2003Charles W. Wessner, Ph.D.
30Breakdown of U.S. Venture Capital by Stage of Development-2002 $302.8 millionTotal = $21,179 millionSource: PricewaterCoopers, Venture Economics, National Venture Capital Association, 2003Charles W. Wessner, Ph.D.
31Important in Early-Stage Funding Average Deal SizeImportant in Early-Stage FundingCharles W. Wessner, Ph.D.
32Shock and Response of VC Investors Front-End Shock: No New FundingYoung companies have difficulty gaining customers and generating revenues due to the decline in technology spendingBack-End Shock: No ExitCurrent financial markets present sobering valuations and illiquidityResult: Venture investment dropped 44% in 200214% drop in healthcare investing48% drop in IT products60% drop in IT servicesSource: Ernst & Young/VentureOne Venture Capital Survey, January 27, 2003Venture Capitalists are now more risk-averseFewer seed and first round investmentsCharles 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 quartersThe number of new companies being financed is at an 8-year lowTotal investments, nationwide, in Q is $3.6 billion, down from $4.3 billion in Q4, 2002Charles W. Wessner, Ph.D.
34Capital Market Challenges Institutional Role of Venture Capital in Early-Stage Finance is LimitedGrowth in Average Deal Size Works Against Small FirmsIncreased Risk Aversion by Institutional Investors Works Against New Innovations, especially those in small firmsGovernment Support for R&D partnerships is effective—but no policy consensusCharles W. Wessner, Ph.D.
35U.S. Policies for Innovation-Led Growth An Entrepreneur-Friendly EnvironmentCharles W. Wessner, Ph.D.
36U.S. Entrepreneurial Environment A Key to Knowledge-Based GrowthSources and LimitationsDrive for Ownership: High Rates of Business FormationHigh Social Value placed on business successLow Regulatory barriers for entryEase of company formationPace of activity increases the effective value of capitalAccess to early-stage financing—very importantDeep and Diverse capital Markets = Access to CapitalSubstantial Growth in VC Funding, very rapid in late 1990sSubstantial Contraction since 2000—trend now negativeCharles W. Wessner, Ph.D.
37Positive Policy Framework Microeconomic Incentives for an Entrepreneurial EnvironmentIntellectual Property Regime: Incentive for InventionTax Policy: Incentive for High RisksRegulatory Policy: Low Regulation for New EntrantsLabor Flexibility: Hire and Fire as NeededPublic-Private PartnershipsInnovation AwardsIndustry Consortia3. Growing Role of Universities as Innovators & InvestorsEnabling Policy Framework with Incentives for Professors and UniversitiesUniversities are (or have to become) more agile, more flexible, more diverse to encourage commercializationS&T Parks growing in importanceCharles W. Wessner, Ph.D.
38U.S. Policies for Innovation-Led Growth Government Awards to Spur Innovation-Led Growth: SBIR & ATP Charles W. Wessner, Ph.D.
39Programs to Bridge the Valley of Death Uncertainty andDistance to MarketStartup: Friends, Families & FoolsStrategic researchCuriosity researchApplied researchSeed: Angel BackersThe Financial“Valley of Death”The Focus of SBIR and ATPSBIR ProcurementATPNeed for Supportive Policy FrameworkPrototypeProduct developmentCommercialisation1st Round VC2nd Round VCCapital Allocation CurveBusiness developmentInvestmentExpansionTotal AllocatedResourcesCharles W. Wessner, Ph.D.
40Small Business Innovation Research Program The SBIR ProgramSmall Business Innovation Research ProgramCreated in 1982, Renewed in 1992 & 2001Participation by all federal agencies with an annual extramural R&D budget of greater than $100 million is mandatoryAgencies must set aside 2.5% of their R&D budgets for small business awardsNo budget line, No budget debateCurrently a $1.6 billion per year programLargest U.S. Partnership ProgramCommon 3-Phase Structure Across AgenciesVariation within Agencies based on MissionCharles W. Wessner, Ph.D.
41SBIR: 3 Phase funding approach: Phase I or Feasibility PhaseCompetitive award of limited federal research funds for short term investigation of scientific merit and feasibilityUp to $100,000 in fundingNormally up to 6 months to complete the first phaseHighly Competitive—only 12 to 14% of submitted proposals receive Phase I awardsCharles W. Wessner, Ph.D.
42SBIR: 3 Phase funding approach: Phase II or Prototype PhaseSelection emphasizes research projects with strong scientific merit as well as strong commercial meritMaximum award level of $750,000Sometimes more, e.g., for drug developmentTypically restricted to two years for completionStill CompetitiveOnly 40% of Phase I of firms receive Phase II awardsCharles W. Wessner, Ph.D.
43SBIR: 3 Phase funding approach: Phase III or Commercialization PhaseNo Additional SBIR Program FundingFederal agencies can provide procurement funds, but the agency must finance Phase III using non-SBIR fundsIntent: Product development and Commercialization arising from Phase II projectsFact: Sometimes Multiple Awards But Usually NotCharles W. Wessner, Ph.D.
44SBIR differs among agencies Multiple Program GoalsCommercialization and ResearchMultiple Agency GoalsNIH is often directed more towards long-term product development: makes larger awardsDoD is directed more towards product acquisition and often encourages outside commercial applicationAgency Sub-Units have different goalsFrom Special Forces equipment to Vaccines to Supply ManagementMultiple, Flexible Management SystemsEach agency typically has its own manner of choosing awardees and screening applications.Charles W. Wessner, Ph.D.
45Contributions of SBIRCatalyzes the Development of New Ideas and New TechnologiesCapitalizes on Substantial U.S. R&D InvestmentsAddresses Gaps in Early-Stage Funding for Promising TechnologiesCertification Effect—Government Endorsement of Technical QualityCharles W. Wessner, Ph.D.
46Contributions of SBIRProvides a Bridge between Small Companies and the Agencies, especially for ProcurementContributes New Methods and New Technologies to Agency MissionsProvides a Bridge between Universities and the MarketplaceEncourages Local and Regional Growth, increasingly through the University connectionAn Interesting Program; Not Well UnderstoodCharles W. Wessner, Ph.D.
47The 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 researchATP encourages the formation of partnerships and consortia to encourage technology development and diffusionCharles W. Wessner, Ph.D.
48ATP Characteristics Industry-initiated Proposals: Bottom-up Approach Highly Competitive:Rigorous selection processIndependent evaluation of the project's technical merit, commercial worthiness and potential for broad-based benefitsDe-briefing for all non-winnersCost Share: All Awards are cost shared with industry—Acts as a Reality CheckPartnering Encouraged: Dissemination of enabling technologies is key to public benefits and rationale for public supportAssessment Program is Well-developedProve Program EffectivenessCharles W. Wessner, Ph.D.
49ATP Characteristic: Constant Assessment Ex ante: Selection ProcessReal Time: Project MonitoringPost Hoc: Evaluation of Project ImpactPortfolio of Evaluation TechniquesExternal Objective Assessment RequestsNational AcademiesCharles W. Wessner, Ph.D.
50Ex Ante Evaluation Rigorous Selection Process Companies Must Prove Need for Government SupportSocial Benefits and GoalsSpilloversTechnical MeritQualityFeasibilityCommercial MeritBusiness Plan requiredJoint Ventures receive more fundsCharles W. Wessner, Ph.D.
51Real-Time Project Monitoring Compliance with Regulations?Progress: Technical Milestones Achieved?Goals consistent with Award?ATP STOPS projects that are failingWillingness & Ability toStop, Drop, & Recommitis rare in public programsCharles W. Wessner, Ph.D.
52Post Hoc—Follow-up Evaluation Impact of awardTechnical Goals Achieved?Additional Funding Obtained?Sales?Market Penetration Achieved?Social benefitsSavings to Health Care Systems?Better Outcomes for Patients?Jobs Retained?Indirect Paths to CommercializationCharles W. Wessner, Ph.D.
53Who Wins ATP Awards? For What? Small Companies 63% of Awards Large Companies Valuable PartnersRole of Universities GrowingFor What?Electronics & Computers 38%Manufacturing 22%Biotech and Advanced Materials 14%Information Tech 12%Charles W. Wessner, Ph.D.
54Results of NRC Assessment NRC Found that “the ATP Program works”NRC Analysis Also Found that the ATP Needs:More stable fundingMore cooperation with universitiesResult of NRC Analysis:$200 million restored by CongressPolicy analysis works!Charles W. Wessner, Ph.D.
55Innovation Awards vs. Tax Credits R&D Tax Credits are often too Broad in ApplicationCost is too high compared to awardsTax Credits Imply Revenue—Small Firms do not Have (Credits Can Help Established Businesses)Tax Credit Impact and Additionality Hard to CalculateCharles W. Wessner, Ph.D.
56Innovation Awards vs. Tax Credits Innovation Awards are Targeted on Specific Outcomes: Higher Impact at Lower CostInnovation Awards are:Powerful through leveraged resourcesConditional: work can be stoppedIndustry-driven:Less bureaucraticCloser to marketMore “take up” of technologiesCharles W. Wessner, Ph.D.
57Characteristics of U.S. Innovation Awards Both SBIR & ATP areHighly Competitive: Many Apply; Few WinRely on Industry Initiation and LeadershipKeep Public Funding Limited in Time and AmountHave Clear Objectives—ATP more rigorousEmploy Regular Assessments & Learning—ATP onlyBoth Play Valuable, if Limited, Roles in the U.S. Innovation SystemCharles W. Wessner, Ph.D.
58Awards 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.
60Sustaining Science-Based Growth Generating Science-Based Growth is a Major Policy Interest around the WorldNot Enough is Known about Early-Stage FinanceThe 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 innovationSmall business is instrumental in bringing the benefits of university research to the marketplaceCharles W. Wessner, Ph.D.
61Government plays a unique role in partnerships: Imperfect Markets Give Imperfect OutcomesGovernment-SME Partnershipsstimulate technology diffusion;provide conduit to the marketplace for national R&D investments and stimulate universities; andhelp justify further R&D support.Regular, Institutionalized Evaluation is EssentialInternal and external evaluation works bestCharles W. Wessner, Ph.D.
62Common ChallengesNational Innovation Systems are Different in Scale and FlexibilityAll Systems Have Common ChallengesNeed to justify R&D expendituresNeed to create new jobsNeed for institutional reformNeed to recognize that project failure does not equal program failureLearning from Each Other is a Pathway to ProgressCharles W. Wessner, Ph.D.
63END Charles W. Wessner, Ph.D. http://www.nationalacademies.org/step Board on Science, Technology, & Economic PolicyNational Research Council500 Fifth Street NWWashington, D.CTel:Charles W. Wessner, Ph.D.