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Financing Small Firm Innovation in the United States

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

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Financing Small Firm Innovation in the United States

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  1. 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

  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 • Structure & operation • Evolution and learning: • outreach & links with private $ • university research • Economic impacts • 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. Economic context • Concern over competitiveness of US industry—productivity • 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

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

  8. Small Business Innovation Research (SBIR) Program 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

  9. SBIR’s 3-Phase Structure PHASE I • Feasibility of idea, proof of concept • $100,000 (1 year) PHASE II • Full R&D, prototype • $750,000 (2 years) • Commercialization plan “PHASE III” • Commercialization stage • Use of non-SBIR funds (private capital or federal follow-on)

  10. SBIR eligibility requirements • Small business located in the U.S. • 500 or fewer employees • Organized for-profit U.S. business • At least 51% ownedand controlled by U.S. citizens (individuals) • Principal Investigator’s primary employmentmust be with the small business • Research partners are allowed/encouraged (up to 1/3 of Phase I, up to 1/2 of Phase II)

  11. 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 R&D budget to be set-aside for SBIR: 1982-861987-921993-941995-961997-present 0.2+% 1.25% 1.5% 2.0% 2.5%

  12. U.S. federally-funded R&DTotal: $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. TOTAL ~ $2 B FY 2004 SBIR participating agencies (FY2002)$ 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

  15. Project selection Integrity of selection process—key 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

  16. Key features • Grants & contracts not loans, no direct pay-back • truly early-stage, nodebtburden • 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 forgovernment use only of technical data (IP)

  17. Federal Government Small Businesses SBIR program evolution 1982

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

  19. 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” • 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 stateGovernor 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, - 2-3 times original investment • Program self-financing after +/- 5 years

  22. Modified 3-phase structure Connecting with private sector investors PHASE I • Feasibility of idea • $100,000 (1 year) PHASE II • Full R&D, 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

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

  24. Promoting Small Business-University CollaborationSmall 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 businessorthe 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 GapPublic program 1. Information Certification effect, outreach 2. Short Timeframe  Awards/grants

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

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

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

  31. 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 theIP (incentive), public programs must protect it • Need to design so that it compliments and coordinates with private risk capital (angel, VC, etc.)

  32. 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

  33. 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@sba.gov (202) 205-6455

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