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A Venturesome Government Randy Mitchell International Trade Strategist for Venture Capital U.S. Department of Commerce
Agenda 1.Summary snapshot 2.Role of the USG in the earliest stages on the continuum of capital formation—the role for the USG in feeding the venture pipeline 3.USG as a venturesome consumer 4.Conclusion
Disclaimer The views expressed in this presentation do not necessarily reflect the views of the U.S. Government
Key Points Facilitating New Funds o SBIC Encouraging Pension Funds o Prudent man rule Attracting Business Angels o Favorable capital gains tax rate creating a differential between capital gains and ordinary income rates was instrumental in changing the attitudes of potential investors—creating a mind- set that successful investments in entrepreneurial companies offered extraordinary returns
Key Points Providing Tax Incentives o The tax-free reorganization provisions of the Internal Revenue Code, the treatment of the "pooling” of assets by FASB, and the available exemptions from antitrust review, all made the acquisition of entrepreneurial companies attractive to larger companies. o It was primarily through acquisitions that investors, employees, and suppliers owning stock in entrepreneurial companies realized the accrued value of their holdings Ensuring Exit Markets o The creation of NASDAQ constituted a lynchpin of the financial markets that funds entrepreneurial firms. Stimulating Innovation among Entrepreneurs o SBIR offers competition-based awards to stimulate technological innovation among small private-sector businesses while providing government agencies new, cost- effective, technical and scientific solutions to meet their diverse mission needs.
Small Business Innovation Research (SBIR) grants providing government agencies new, cost- effective, technical and scientific solutions to meet their diverse mission needs. o Small business concerns are recognized as a unique national resource of technological innovation to meet Federal research and development needs
A Venturesome Government Question: Is your government sowing seeds for innovation and then harvesting (consuming/procuring) from those innovation seeds? The United States government must procure ~23.6% from SME’s To secure the latest and greatest USG agencies work in a venturesome manner with researchers whether it be with individuals or via universities. o Stanford for example receives 87% of its $1 billion in annual research dollars from the USG (and this has nothing to do with SBIR), and Stanford is not even the largest recipient. o Over 400 university startups are created nationally each year based on federally funded R&D, which included Google, Netscape, Genentech, Lycos, Sun Microsystems, Silicon Graphics, and Cisco Systems
Small Business Innovation Research (SBIR) grants Federal agencies with extramural R&D budgets over $100 million are required to administer SBIR programs using an annual set- aside of 2.5%. Currently, eleven Federal agencies participate in the SBIR program: Environmental Protection Agency, National Aeronautics and Space Administration, National Science Foundation, and Departments of Agriculture, Commerce, Defense, Education, Energy, Health and Human Services, Transportation, and Homeland Security. Over $10 billion has been awarded by the SBIR program to various small businesses. “For many venture backed companies, the SBIR program is their only funding mechanism for critical early stage projects.”
Conclusion If an entrepreneur / innovator is looking for a particularly large pain to address then the USG sends signals of its needs by way of the research it seeks. We saw for example how each Department within the USG expresses or addresses its needs by specifying SBIR requests—as one example of research spending. Those Departments then interact in a venturesome way with the innovators through the three levels of the SBIR. Often, but by no means always, the Department becomes a consumer of the innovations. Whether it be through programs such as the SBIR, or pure research, the USG is sowing seeds in ultimate support of a buoyant venture capital ecosystem for private finance to emerging growth technology companies.
For Further Information Randy Mitchell International Trade Strategist for Private Equity Senior Adviser for Entrepreneurship U.S. Department of Commerce 1401 Constitution Avenue, NW, Room 1800 A Washington, DC 20230 Office Telephone: 1 202 482 2967 Personal Mobile: 1 240 447 0025 See also: “The Venturesome Economy” by Amar Bhide (2008)
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