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 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 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 Step Role 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 I Feasibility Research PHASE III Product Development for Gov’t or Commercial Market Private Sector Investment Tax Revenue Federal Investment PHASE II Research towards Prototype Social and Government Needs $750K$100K R&D 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 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 Quest for Fundamental Understanding ? 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 21 st 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 21 st 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:

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 Tel: