1 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

2 Public innovation programs—U.S. “U.S. experience” -- many US experiences: national, state, local -- replicate → models, practices, lessons Targeting small firms and individual entrepreneurs: -- 15% of R&D $, 55% of innovations -- incentive: possibility of high private returns -- risk is manageable, failure is an option

3 SBIR Program I.Structure & operation II.Evolution and learning: outreach & links with private $ university research III.Economic impacts IV.Lessons learned

4 SBIR program Enables US small businesses to engage in federally-funded R&D—with potential for commercialization Enables/requires federal agencies to utilize the innovation advantages of small firms National program, providing $2 billion each year to small businesses for innovation Over 5,000 grants to over 1,500 firms each year

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 industry—productivity  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 Federally Funded Basic Research Creates New Ideas Applied Research & Innovation Capital to Develop Ideas No Capital The Valley of Death Early-Stage Funding Gap To Innovation

8 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

9 SBIR’s 3-Phase Structure PHASE I Ü Feasibility of idea, proof of concept 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)

10 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 Investigator’s 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

11  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:

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

13 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

14 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)

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

16 Key features  Grants & contracts not loans, no direct pay-back  truly early-stage, no debt burden  program continues to fund high-risk research (avoids bureaucratic drift towards downstream)  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)

17 SBIR program evolution 1982 Federal Government Small Businesses

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

19 Support outreach & assistance programs/initiatives Outreach to bring in new firms is needed: 1.to maintain quality of proposals, cutting-edge research 2.to improve geographic dispersion (political support) Federal support as catalyst for state/local assistance programs targeting innovation Survey: “63% of SBIR projects need assistance with commercialization activities”  SBA’s Federal & State Technology Partnership (FAST) program

20 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 –1:2, 1:1 (incentive for states with lower SBIR participation) –administered by SBA Target: All states eligible, one grant per state Governor endorses proposal Funding: FY 2001: $3 million, 30 grants (Grant size: $100K) FY 2002: $3 million, 27 grants FY 2004: $2 million, 10 grants

21 State/regional assistance programs  Non-profit org (model: “KTEC” in state of Kansas)  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, business mentors (networks), university research & incubators, export assistance  Conditional loan with payback: 0 – low interest, pay only if successful 5% of sales, times original investment Program self-financing after +/- 5 years

22 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 Private Investor Connecting with private sector investors

23 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

24 Promoting Small Business-University Collaboration Small Business Technology Transfer Program (STTR) 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 (5) with extramural R&D > $1B must participate FY2002: 356 Phase I awards 114 Phase II awards

25 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 Investigator’s primary employment can be with the small business or the research institution

26 SBIR program impacts  Enables new startups, spin-offs, is often only source of funding  Induces further 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)  Possible measure: current market value of companies started with SBIR projects  Catalyst for innovation by addressing early stage finance “gap”

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

28Source: MoneyTree Survey—PricewaterhouseCoopers, Thompson Venture Economics, NVCA. Expansion Early Stage Late Stage Start Up US Venture Capital Investments by Stage, 2002

29

30 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)

31

32 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)

33 Lessons learned There is effective role for government in funding early-stage small-firm innovation; grants and loans One program cannot do everything: - use 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.)

34 Lessons learned Lessons learned (cont’d) 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: local initiative

35 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)