The Challenge of Early-Stage Finance

Report
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 News
Public Research has Surged in Health:
A National Decision to Increase our Bet
Source, AAAS, 2003
R&D: Response to Terror Threat
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
Source, AAAS, 2003
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
Startup/Seed
$354.3 million
26.60%
1.95%
18.27%
54.18%
Startup/Seed
Early Stage
Expansion
Total = $18.2 billion
Later Stage
The Funding Ladder:
The Missing Step
Capital
Required
$30m plus
$10m - $20m
$2m - $10m
$500k - $2m
$250K-$500K
IPO Stock Market
Expansion Funding
Early-Stage VC
The Missing Step
Angel Investors
$10K - $250K
Friends, Family, Fools
Founder
Less
Role for
Government in
Early-Stage
Technology
Development
Concept  Development  Commercialization
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 EarlyStage Development
• SBIR over 20% of
Funding for EarlyStage Development
from all sources
*
SBIR
*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
The SBIR Model
R&D Investment
Social
and
Government Needs
Private Sector
Investment
PHASE II
Research
towards
Prototype
PHASE I
Feasibility
Research
$100K
PHASE III
Product
Development
for Gov’t or
Commercial
Market
$750K
Tax Revenue
Federal Investment
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
– increases existing
understanding and
creates improved
technology.
– can take existing
technology to new
levels but it
• can also improve
understanding of
fundamental principles
From Donald Stokes,
Pasteur’s Quadrant, 1997
Quadrant Model of Scientific Research
Considerations of Use?
Quest for Fundamental
Understanding ?
• Use-inspired research
Yes
No
No
Yes
Pure
Basic
Research
(Bohr)
UseInspired
Research
(Pasteur)
Pure
Applied
Research
(Edison)
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
st
21
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 Berkeley
Quoted 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, NW
Washington, D.C. 20001
[email protected]
Tel: 202 334 3801
http://www.nationalacademies.org

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