The Challenge of Early-Stage Finance

1. The Challenge of Early-Stage Finance  Norway Technology Forum October 4, 2004 Charles W. Wessner, Ph.D. Director, Technology and Innovation National Research Council

2. Strong U.S. Commitment to R&DShares 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

3. More Good NewsPublic Research has Surged in Health: A National Decision to Increase our Bet Source, AAAS, 2003

4. R&D: Response to Terror Threat Counter-terrorism R&D Budget: Doubled to $1.2 billion in FY’02 More thandoubled to $3 billion in FY’03 NIH is the lead Agency Source, AAAS, 2003

5. 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

6. Breakdown of U.S. Venture Capital by Stage of Development-2003 Startup/Seed $354.3 million Total = $18.2 billion

7. The Funding Ladder: The Missing Step Capital Required $30m plus $10m - $20m $2m - $10m IPO Stock Market Expansion Funding Early-Stage VC The Missing Step $500k - $2m $250K-$500K $10K - $250K Less Role for Government in Early-Stage Technology Development Angel Investors Friends, Family, Fools Founder Concept  Development  Commercialization

8. The SBIR Program

9. 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

10. 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 * 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

11. The SBIR Model Social and Government Needs Private Sector Investment PHASE III Product Development for Gov’t or Commercial Market PHASE I Feasibility Research PHASE II Research towards Prototype R&D Investment $100K $750K Tax Revenue Federal Investment

12. The University Connection SBIR Plays a Key Role

13. 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

14. 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 Pasteur’s Quadrant: Research can be Applied, Practical, and Basic at the Same Time Quadrant Model of Scientific Research Considerations of Use? No Yes Yes Quest for Fundamental Understanding ? No From Donald Stokes, Pasteur’s Quadrant, 1997

15. 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

16. 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

17. 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 Berkeley Quoted on NPR Morning Edition, Date: 08-09-04

18. 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

19. THANK YOU Charles W. Wessner, Ph.D. The National Academies 500 Fifth Street, NW Washington, D.C. 20001 cwessner@nas.edu Tel: 202 334 3801 http://www.nationalacademies.org