1 Dr. Ronald Cooper Small Business Administration USA.

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Dr. Ronald CooperDr. Ronald CooperSmall Business AdministrationSmall Business Administration

USAUSA

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• 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

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Financing Small Firm Innovation in the United States

Ronald S. Cooper, Ph.DOffice of TechnologyU.S. Small Business Administration

The Small Business InnovationResearch (SBIR) program

and related programs

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Public innovation programs—U.S.Public innovation programs—U.S.

• “U.S. experience” -- national, state, local-- models, practices, lessons

• Targeting small firms and individual entrepreneurs

-- ¼th R&D $, 55% innovations-- incentive: possibility of high returns-- risk is manageable, failure is an option

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National policy shiftNational 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

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Concern over competitiveness of US industry—productivity

Disconnect between invention and innovation

Economic contextEconomic context

• 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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SBIR addresses innovation finance gapSBIR addresses innovation finance gap

Dimensions of the Gap Public program

1. Information Certification effect, outreach

2. Short Timeframe Awards/grants

8Source: MoneyTree Survey—PricewaterhouseCoopers, Thompson Venture Economics, NVCA.

1.4%

62.7%

19.2%

16.7%

Expansion

Early Stage

Late Stage

Start Up

US Venture Capital InvestmentsUS Venture Capital Investmentsby Stage, 2002by Stage, 2002

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US Venture Capital Investments by Stage

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1995 1996 1997 1998 1999 2000 2001 2002

Source: MoneyTreeSurvey

Later Stage

Expansion

Early Stage

Startup/Seed

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SBIR addresses innovation finance gapSBIR 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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US Venture Capital Disbursements by size of financing round

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

Source: NVCA and Venture Economics, special tabulations.

Mill

ions

of 1

998

dolla

rs

> $10 million

$1-$10 million

< $1 million

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SBIR addresses innovation finance gapSBIR 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)

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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 Small Business Innovation Research (SBIR) ProgramResearch (SBIR) Program

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SBIR program todaySBIR 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&D—with potential for commercialization

• Enables/encourages federal agencies to utilize the innovation advantages of small firms

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SBIR’s 3-Phase StructureSBIR’s 3-Phase Structure

PHASE I Feasibility of idea $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)

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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 requirementsSBIR eligibility requirements

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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:

1982-86 1987-92 1993-94 1995-96 1997-present1997-present

0.2+% 1.25% 1.5% 2.0% 2.5%2.5%

Source of funds for SBIR:

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U.S. federally-funded R&DU.S. federally-funded R&DTotal: $85 billion in 2002

Small Business 5%

Big Business 27%

Univ. & Colleges 34%

Non-Profit 7%

Extramural 74%

Federal Labs 27%

$62B

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Program StructureProgram 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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• 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 agenciesSBIR participating agencies

TOTAL ~ $2 BTOTAL ~ $2 BFY 2004FY 2004

(FY2002)

$ millions SBA (oversight)

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Project selection processProject selection process

Integrity of selection process—key to program success

1. Independent review panel of experts (vol.)

2. 3-5 proposals e-mailed 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

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Key featuresKey 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)

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SBIR program evolution1982

FederalGovernment

SmallBusinesses

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SBIR program evolution1982

SmallBusinesses

StateGovernment

Quasi-Government Corporations Economic Development Entities Technology Centers

FederalGovernment

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State/regional assistance programsState/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 - 2-3 times original investment

• self-financing after +- 5 years

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Modified 3-phase structureModified 3-phase structurePHASE I

Feasibility of idea $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)

“PHASE IIb” (NSF)≈ $400,000 initially

→ $350,000 only with matching invest.

$700,000 cash

$1,450,000$1,450,000

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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”

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Federal and State Technology Partnership Federal and State Technology Partnership (FAST) Program(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)

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Rural Outreach ProgramRural 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

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SBIR program evolution1982

SmallBusinesses

StateGovernment

Quasi-Government Corporations Economic Development Entities Technology Centers

FederalGovernment

Academia University Research Parks Faculty & Graduate Students Technology Incubators Research Foundations

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Small Business Technology Transfer Program Small Business Technology Transfer Program (STTR)(STTR)

Promoting Small Business-University CollaborationPromoting 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

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STTR - SBIR DifferencesSTTR - 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 research institution or small business

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SBIR program impactsSBIR 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 (?)

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LessonsLessons learned 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.)

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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

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SBIR & STTR ProgramsSBIR & 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

[email protected]

(202) 205-6455

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Dr. Ronald CooperDr. Ronald CooperSmall Business AdministrationSmall Business Administration

USAUSA