The Challenge of Early-Stage Finance

Norway Technology Forum

October 4, 2004

Charles W. Wessner, Ph.D.Director, Technology and Innovation

National Research Council

Strong U.S. Commitment to R&D

Shares of Total World R&D, 2001• Total World R&D =

$746.7 billion• U.S. share = $276

billion• EU share = $187

billion• French share =

$36.6 billion

Source: OECD Main S&T Indicators, 2004; AAAS, 2004

Calculated using purchasing power parities, Jan 2004

More Good NewsPublic Research has Surged in Health:

A National Decision to Increase our Bet

Source, AAAS, 2003

R&D: Response to Terror Threat

Source, AAAS, 2003

Counter-terrorism R&D Budget:

Doubled to $1.2 billion in FY’02

More than doubled to $3 billion in FY’03

NIH is the lead Agency

The Myth of U.S.Venture Capital Markets• U.S. Myth: “U.S. VC Markets are broad &

deep, thus there is no role for government awards”

• Reality: Venture Capitalists have– 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

Breakdown of U.S. Venture Capital by Stage of Development-2003

1.95% 18.27%

54.18%

26.60%

Startup/Seed Early Stage Expansion Later Stage

Startup/Seed$354.3 million

Total = $18.2 billion

The Funding Ladder: The Missing Step

Capital Required

$30m plus

$10m - $20m

$2m - $10m

Concept Development Commercialization

Founder

Friends, Family, Fools

$500k - $2m

$250K-$500K

$10K - $250K

Less

Early-Stage VC

Expansion Funding

IPO Stock Market

Angel Investors

The Missing StepRole for Government in Early-Stage Technology Development

The SBIR Program

The Small Business Innovation Research (SBIR)

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• To be a $2 billion per year program in 2004

– Largest U.S. Partnership Program

SBIR: Critical Source of Predictable Funding for Early-Stage Finance• SBIR—Main Source of

Federal Funding for Early-Stage Technology Development

• SBIR over 85% of Federal Financial Support for Early-Stage Development

• SBIR over 20% of Funding for Early-Stage Development from all sources

*Estimate of Federal Government Funding Flows to Early-Stage Technology Development—Based on total funding for ATP, SBIR & STTR programs by Branscomb and Auerswald 2002

*SBIR

The SBIR Model

PHASE IFeasibilityResearch

PHASE IIIProduct

Developmentfor Gov’t orCommercial

Market

Private Sector Investment

Tax Revenue

Federal Investment

PHASE IIResearchtowards

Prototype

Socialand

Government Needs

$750K$100K

R&

D

Investm

en

t

The University Connection

SBIR Plays a Key Role

University-Industry Cooperation is Key• Cooperative Research

– University research draws ideas from commercial trends more than ever before

– Feedback loops from industry to universities are important

– Major contribution to training for real jobs

• Regional Growth

– Regional economies need their research universities more than ever before

• Firm Formation– University innovation + early government funding have

been key to the growth of many successful technology companies

• Supportive University Culture & Incentives are crucial

Pasteur’s Quadrant: Research can be Applied, Practical, and Basic at the

Same Time• Use-inspired research – increases existing

understanding and creates improved technology.

– can take existing technology to new levels but it

• can also improve understanding of fundamental principles

Pure Basic Research (Bohr)

Use-Inspired Research (Pasteur)

Pure Applied Research (Edison)

No Yes

Que

st fo

r F

unda

men

tal

Und

erst

andi

ng ?

Yes

No

Quadrant Model of Scientific Research

Considerations of Use?

From Donald Stokes, Pasteur’s Quadrant,

1997

SBIR & the Benefits of University-Industry Cooperation

• SBIR Innovation Awards Directly Cause Researchers to create New Firms– Firms contribute Jobs and Regional Growth– Cooperation creates High-Tech Jobs

• Universities help diversify and grow the job base– Increasingly universities are the largest

regional employer for all types of employment• Cooperation validates Research Funding

– Returns to Society in Health, Wealth, & Taxes– SBIR is a proven mechanism in an uncertain

game

The 21st Century University• For the Knowledge Economy, the University needs to

– Teach the next generation• With up to date laboratories on real market questions• About the sciences needed to address current and

future questions (e.g., nuclear waste, stem cell research, genetically modified food)

– Conduct Research• “Curiosity-driven Research,” certainly but • the University also needs to bring Science to bear on

Social Problems and Industry Needs– Commercialize Learning

• Bring new Science-led solutions to societal problems• Generate new Products, Processes, and Market-ready

students

The 21st Century University

• Some criticism of the evolving U.S. university “model” are no doubt valid. Still,

To suggest that, somehow, universities are not and should not be engines of economic growth is missing the central point of how our economy grows and how we create jobs.

Robert Birgeneau, Chancellor, UC BerkeleyQuoted on NPR Morning Edition, Date: 08-09-04

Common Challenges• National Innovation Systems are Different in

Scale and Flexibility– Flexibility is a differentiator– It is less how much is spent but how well

• All Systems Have Common Challenges– Need to justify R&D expenditures by creating new

jobs & new wealth– Need to reform institutions (or invent new ones) and

change attitudes– Need new mechanisms that shift innovation

incentives in a positive way• Learning from each other is a Pathway to Progress

THANK YOU

Charles W. Wessner, Ph.D.The National Academies

500 Fifth Street, NWWashington, D.C. 20001

cwessner@nas.eduTel: 202 334 3801

http://www.nationalacademies.org