1 Dr. Ronald Cooper Small Business Administration USA

2 Small Business Innovation Research Program (SBIR) Small Business Technology Transfer Program (STTR) Member, National Academy of Sciences, U.S. Innovation Policy Committee Instructor, American University, USA Science, Technology, and Economic Policy Board, National Academy of Sciences Publications: Technological Innovation, Economic Policy, and Economic Development

3 Financing Small Firm Innovation in the United States Ronald S. Cooper, Ph.D Office of Technology U.S. Small Business Administration The Small Business Innovation Research (SBIR) program and related programs

4 Public innovation programsU.S. U.S. experience -- national, state, local -- models, practices, lessons Targeting small firms and individual entrepreneurs -- ¼ th R&D $, 55% innovations -- incentive: possibility of high returns -- risk is manageable, failure is an option

5 National policy shift 1950s, 60s -- Federal role was to support basic research in Federal labs and large businesses 1970s, 80s -- Policy shift towards: - commercialization of federal R&D - government-industry partnerships - greater role for small business –Stevenson-Wydler Act of 1980 –University and Small Business Patent Procedure Act of 1980 (Bayh-Dole Act) –Small Business Innovation Development Act of 1982 established the SBIR program

6 Concern over competitiveness of US industryproductivity Disconnect between invention and innovation Economic context only 5% inventions in federal labs licensed VC industry no good angel investor networks funding gap valley of death for early- stage innovation

7 SBIR addresses innovation finance gap Dimensions of the Gap Public program 1. Information Certification effect, outreach 2. Short Timeframe Awards/grants

8Source: MoneyTree SurveyPricewaterhouseCoopers, Thompson Venture Economics, NVCA. Expansion Early Stage Late Stage Start Up US Venture Capital Investments by Stage, 2002

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10 SBIR addresses innovation finance gap Dimensions of the Gap Public program 1. Information Certification effect, outreach 2. Short Timeframe Awards/grants 3. Size of financing Small grants (< $1m)

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12 SBIR addresses innovation finance gap Dimensions of the Gap Public program 4. Few (fad) technologies Wide range of technologies 5. Geographic specialization Broad geographic coverage 1. Information Certification effect, outreach 2. Short Timeframe Awards/grants 3. Size of financing Small grants (< $1m)

13 Objectives of SBIR program: Stimulate technological innovation Use small business to meet federal R&D needs Increase private-sector commercialization of innovations derived from federal R&D Small Business Innovation Research (SBIR) Program

14 SBIR program today National program providing $2 billion each year to small businesses for innovation Over 1,500 firms receive over 5,000 awards each year Enables US small businesses to engage in federally- funded R&Dwith potential for commercialization Enables/encourages federal agencies to utilize the innovation advantages of small firms

15 SBIRs 3-Phase Structure PHASE I Ü Feasibility of idea Ü $100,000 (1 year) PHASE II Ü Full R&D, prototype Ü $750,000 (2 years) Ü Commercialization plan PHASE III Ü Commercialization stage Ü Use of non-SBIR funds (private capital or federal follow-on)

16 Small business located in the U.S. 500 or fewer employees Organized for-profit U.S. business At least 51% owned and controlled by U.S. citizens (individuals) Principal Investigators primary employment must be with the small business Research partners are allowed/encouraged (up to 1/3 of Phase I, up to 1/2 of Phase II) SBIR eligibility requirements

17 Federal agencies with extramural research budgets of over $100 million per year must reserve a percentage for small business through the SBIR program. Amount of R&D budget to be set-aside for SBIR: 1997-present present 2.5% 0.2+% 1.25% 1.5% 2.0% 2.5% Source of funds for SBIR:

18 U.S. federally-funded R&D U.S. federally-funded R&D Total: $85 billion in 2002 $62B

19 Program Structure Each participating Federal agency administers its own SBIR program –Solicitations (with technology topic areas) –Proposal review & selection (scientific merit / commercial) –Highly competitive: 16% of proposals accepted - Phase I ½ of Phase I projects win Phase IIs SBA has oversight and outreach responsibilities - Policy directive - Monitoring - National conferences - Evaluation - Outreach programs - Reporting to Congress and activities

20 Defense (DOD)600 Health (HHS,NIH)487 Space (NASA)110 Energy (DOE) 95 Science (NSF) 78 Agriculture (USDA) 17 Commerce (DOC) 7 Education (ED) 7 Environment (EPA) 6 Transportation (DOT) 6 SBIR participating agencies TOTAL ~ $2 B FY 2004 (FY2002) $ millions SBA (oversight)

21 Project selection process Integrity of selection processkey to program success 1.Independent review panel of experts (vol.) proposals ed to each reviewer 3.Reviewers grade proposals scientific/technical merit commercialization potential 4.Review panel convenes, ranks proposals (1) Must fund, and (2) award if funds available 5.Agency official makes awards [choice] Balance between very new ideas and commercial viability

22 Key features Grants & contracts, not loans truly early-stage, no pay-back, no debt burden program continues to fund high-risk research Small business owns intellectual property government must protect IP for 4 years agency retains royalty-free license for government use only of technical data (IP)

23 SBIR program evolution 1982 Federal Government Small Businesses

24 SBIR program evolution 1982 Small Businesses State Government Quasi-Government Corporations Economic Development Entities Technology Centers Federal Government

25 State/regional assistance programs Non-profit org Matching funds established with state govt funding (1:2) Firms required to find commercial partners Firms receive funds in installments only when they pass business milestones: Business plan, management structure, marketing strategy, secure private risk capital Assistance also includes: matching with VCs, angel network, mentor networks, incubators, universities, export assistance Conditional payback: 5% of sales, if successful times original investment self-financing after +- 5 years

26 Modified 3-phase structure PHASE I Ü Feasibility of idea Ü $100,000 (1 year) PHASE II Ü Full R&D, prototype Ü $750,000 (2 years) Ü Commercialization plan PHASE III Ü Commercialization stage Ü Use of non-SBIR funds (private capital or federal follow-on) PHASE IIb (NSF) $400,000 initially $350,000 only with matching invest. $700,000 cash $1,450,000

27 Outreach & assistance initiatives Outreach to bring in new firms. Is needed: –to maintain quality of proposals, cutting-edge research –to improve geographic dispersion (political support) Federal support for state-level assistance programs that support innovation success –Federal & State Technology Partnership (FAST) program –Rural Outreach Program –63% of SBIR projects need assistance with commercialization activities

28 Federal and State Technology Partnership (FAST) Program Purpose: to provide support to state-level organizations that help small businesses in, or interested in, the SBIR program –Mentoring networks: Business advice & counseling Matching grants to state-level organizations –incentive for states with lower levels of SBIR participation –administered by SBA Target: All states eligible, one grant per state Funding = FY 2001: $3 million, 30 grants FY 2002: $3 million, 27 grants FY 2004: $2 million, 10 grants (Grant size: $100K)

29 Rural Outreach Program Purpose: to geographically expand competition for SBIR awards by supporting outreach efforts in states with low levels of program participation. Target: 25 rural states Matching 5-year grants: one per state, 1:2 (state:federal) Funding level: FY 2001: $1.5 million, 25 awards FY 2002: $500K, 10 awards FY 2004: $250K 5 awards Grant sizes: $40K, $52K, $80K

30 SBIR program evolution 1982 Small Businesses State Government Quasi-Government Corporations Economic Development Entities Technology Centers Federal Government Academia University Research Parks Faculty & Graduate Students Technology Incubators Research Foundations

31 Small Business Technology Transfer Program (STTR) Promoting Small Business-University Collaboration Set-aside program to facilitate cooperative R&D between small businesses and U.S. research institutions Established 1992, recently extended through 2009 Similar structure to SBIR, administered by SBIR offices Funding: –Set-aside = 0.3 % of extramural R&D $200 million –Agencies with extramural R&D > $1B must participate FY2002: 356 Phase I awards 114 Phase II awards

32 STTR - SBIR Differences STTR requires research institution partner University or college / non-profit research org. / FFRDC Research partner share: min.= 30% max.= 60% Award always goes to small business Requires written agreement allocating IPRs Principal Investigators primary employment can be with research institution or small business

33 SBIR program impacts Is often only source of funding available Enables new startups, spin-offs Induces entrepreneurial activity (demonstration effect) Enables small firms to develop innovative capacity Complements private ventures (reduces risk) Success rate: 39% of projects had sales attributable to SBIR (55% had sales or additional investment) Market value of companies started with SBIR projects (?)

34 Lessons learned There is an effective role for government in funding early-stage small-firm innovation; grant and payback One program cannot do everything: different programs for different stages Eligibility: restrict to for-profit small businesses Proposal selection: integrity, quality, balance (between very new ideas and commercial feasibility) Small firms must own the IP (incentive), public programs must protect it Need to design so that it compliments and coordinates with private risk capital (angel, VC, etc.)

35 Lessons learned Lessons learned (contd) Must have university-specific part of program, or separate (linked) program (like STTR) to deal with IP and promote spin-offs Must coordinate with regional/local business assistance programs Outreach is needed to maintain program at cutting-edge (new blood) Outreach (not quotas) to achieve geographic dispersion--helps create political support Program flexibility where possible

36 SBIR & STTR Programs SBIR & STTR Programs Office of Technology U.S. Small Business Administration For more information Contact individual agency websites Cross-agency websites: Ronald S. Cooper (202)

37 Dr. Ronald Cooper Small Business Administration USA