Financing Small Firm Innovation in the United States

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Financing Small Firm Innovation in the United
States
The Small Business Innovation Research (SBIR)
program and related programs
Ronald S. Cooper, Ph.DOffice of TechnologyU.S.
Small Business Administration
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Public innovation programsU.S.

• U.S. experience -- many US experiences
  national, state, local -- replicate ?
  models, practices, lessons
• Targeting small firms and individual
  entrepreneurs -- 15 of RD , 55 of
  innovations -- incentive possibility of high
  private returns -- risk is manageable, failure
  is an option

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SBIR Program

• Structure operation
• Evolution and learning
• outreach links with private
• university research
• Economic impacts
• Lessons learned

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SBIR program

• Enables US small businesses to engage in
  federally-funded RDwith 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

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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 RD -
  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

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Economic context

• Concern over competitiveness of US
  industryproductivity
• Disconnect between invention and innovation

• only 5 inventions in federal labs licensed
• VC industry
• no good angel investor networks
• funding gap (valley of death) for early-
  stage innovation

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The Valley of Death Early-Stage Funding Gap
Capital to Develop Ideas
Federally Funded Basic Research Creates New Ideas
To Innovation
Applied Research Innovation
No Capital
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Small Business Innovation Research (SBIR) Program

• Objectives of SBIR program

• Stimulate technological innovation
• Use small business to meet federal RD needs
• Increase private-sector commercialization of
  innovations derived from federal RD

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SBIRs 3-Phase Structure

• PHASE I
• Feasibility of idea, proof of
  concept
• 100,000 (1 year)

• PHASE II
• Full RD, prototype
• 750,000 (2 years)
• Commercialization plan

• PHASE III
• Commercialization stage
• Use of non-SBIR funds (private capital or
  federal follow-on)

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SBIR eligibility requirements

• 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)

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Source of funds for SBIR

• 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 RD budget to be set-aside for
SBIR 1982-86 1987-92 1993-94
1995-96 1997-present 0.2 1.25
1.5 2.0 2.5
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U.S. federally-funded RDTotal 85 billion in
2002
62B
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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

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SBIR participating agencies
(FY2002) millions

• SBA (oversight)

• 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

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Project selection

• Integrity of selection processkey to program
  success
• Independent review panel of experts (volunteer)
• 3-5 proposals e-mailed to each reviewer
• Reviewers grade proposals
• scientific/technical merit
• commercialization potential
• Review panel convenes, ranks proposals
• (1) must fund, (2) award if funds available,
  (3) X
• Agency official makes awards choice
• Balance between very new ideas commercial
  viability

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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)

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SBIR program evolution
1982
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SBIR program evolution
1982
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Support outreach assistance programs/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 as catalyst for state/local
  assistance programs targeting innovation
• Survey 63 of SBIR projects need assistance
  with commercialization activities
• SBAs Federal State Technology Partnership
  (FAST) program

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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
• 12, 11 (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

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State/regional assistance programs

• Non-profit org (model KTEC in
  state of Kansas)
• Matching funds established with state govt
  funding (12)
• 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, - 2-3 times
  original investment
• Program self-financing after /- 5 years

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Modified 3-phase structure

• PHASE I
• Feasibility of idea
• 100,000 (1 year)

Connecting with private sector investors

• PHASE II
• Full RD, prototype
• 750,000 (2 years)
• Commercialization plan

PrivateInvestor

• PHASE IIb (NSF)
• 400,000 initially
• ? 350,000 only with matching invest.

700,000 cash

• PHASE III
• Commercialization stage
• Use of non-SBIR funds (private capital or
  federal follow-on)

1,450,000
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SBIR program evolution
1982
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Promoting Small Business-University Collaboration
Small Business Technology Transfer Program
(STTR)

• Set-aside program to facilitate cooperative RD
  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 RD ? 200
  million
• Agencies (5) with extramural RD gt 1B must
  participate
• FY2002 356 Phase I awards
  114 Phase II awards

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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 the small business or the research
  institution

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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

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SBIR addresses innovation finance gap

• Dimensions of the Gap Public program

1. Information ? Certification
effect, outreach 2. Short Timeframe
? Awards/grants
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US Venture Capital Investments by
Stage, 2002
Expansion
Late Stage
Early Stage
Start Up
Source MoneyTree SurveyPricewaterhouseCoopers,
Thompson Venture Economics, NVCA.
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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
(lt 1m)
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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
(lt 1m)
4. Few (fad) technologies ? Wide
range of technologies 5. Geographic
specialization ? Broad geographic coverage
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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.)

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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 local
  initiative

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SBIR STTR ProgramsOffice of Technology U.S.
Small Business Administration

• For more information
• Contact individual agency websites
• Cross-agency websites
• www.sba.gov/sbirwww.sbirworld.com
• Ronald S. Cooper
• ronald.cooper_at_sba.gov
• [phone]