© Charles W. Wessner Ph.D. 1 Global Scientific Innovation & Policy Transitioning Research Across...

© Charles W. Wessner Ph.D. 1

Global Scientific Innovation & Policy

Transitioning Research Across the Valley of Death

4th Annual SABPA Pacific Forum

November 8, 2008University of California, San Diego

Charles W. Wessner, Ph.D.Director, Technology, Innovation, and Entrepreneurship

The National Academies


The National Academies

• National Academy of Sciences– Chartered by Congress in 1863– A self-perpetuating Honorary Society

• National Research Council (1916)– The Operating Arm of the National Academies

• National Academy of Engineering (1964)• Institute of Medicine (1970) Today’s Presentation reflects my personal views


Today’s Presentation• New Realities in Innovation

– China’s Drive for Innovation– Innovation Strategies from around the World

• What is the U.S. Innovation Strategy?– Strengths and Challenges– Troubling Trends in U.S. R&D Spending– Recent U.S. Policy Initiatives

• Innovation Myths and Realities– The Linear Innovation Myth– The Perfect Market Myth– The Venture Capital Solution Myth

• Transitioning Research Across the Valley of Death– The SBIR Innovation Awards Program– The NRC Evaluation of SBIR

• Conclusions


The View From Some in the United States

• “Life is good, so why worry about the future?”

• The answer:

“A good life today may not be a good life tomorrow”

“Things change, & change rapidly”

• Dr. Wladawsky-Berger, IBM

© Charles W. Wessner PhD5

The View from AbroadInnovation is a 21st Century Reality

“Compete or Be Left Behind”

6 © Charles W. Wessner, Ph.D.

A Chinese Perspective“In today's world, the core of each country's competitive strength is – intellectual innovation,– technological

innovation, and – high-tech

industrialization.” (1999)

7 © Charles W. Wessner, Ph.D.

China’s Drive for Innovation

• Government with strong sense of national purpose– Strong investments in education and training – Strategy to move rapidly up value chain – Effective requirements for training and tech transfer– Critical mass in R&D is beginning to be deployed to

generate autonomous sources of innovation & growth

• Government goal is to acquire technological capabilities both to grow and to maintain national autonomy.

Modified from C. Dahlman, Georgetown University


China’s Remarkable R&D Growth

15.5%

6%

2007

1999


China is Inspiring Innovation Policies

Around the World• India: Policy Liberalization is unleashing

private industry to innovate and expand– Emerging as a center for high-end R&D– New focus on Biotech, following success in IT

and Services • Japan is Restructuring its Innovation

System– High level policy focus and major investments

• Europe: Netherlands, France, and the United Kingdom are among those renewing & funding tech programs


The Innovation Imperative

• 3 Key Points– Innovation is Key to Improving

Global Health– Small Businesses and Universities

Play a Key Role in the Innovation Process—essential for progress

– New Institutions and Incentives are Required to Address Global Health Challenges

© Charles W. Wessner PhD11

Addressing the Global Health Challenge

How is the United States Responding to the Innovation Imperative?

What are the key Advantages and Challenges for Innovation in the United

States?


Current U.S. Advantages in Innovation• Key Advantage: A society open to innovation

– Trust in Science & Scientific Institutions

• An economic and institutional infrastructure that quickly re-deploys resources to their most efficient use– Strong & diverse higher educational system

– Deep and flexible capital and labor markets

– Strong S&T institutions

– Entrepreneurial Culture

• A large and integrated domestic market– Ability to grow new Large Firms


U.S. Norms Create Positive Incentives for Entrepreneurs• Positive Social Norms

– High Social Value on Commercial Success – Forgiving Social Norms allow more than one try

• Entrepreneur-friendly Policies– Markets Open to Competition– Gentle Bankruptcy Laws permit rapid recovery– Taxes give Prospect of Substantial Rewards

• Strong Intellectual Property Regime: • Encourages Research & Investment

• A Regulatory Perspective that Encourages Local Initiative


The Small Businesses Advantage

• U.S. Small Businesses generated 60 to 80 percent of net new jobs annually over the last decade

• Employed 39 percent of high tech workers, such as scientists, engineers, and computer workers

• Produced 13 to 14 times more patents per employee than large patenting firms– Patents are of High Quality– Twice as likely as large firm patents to be among the

one percent most cited• Small Companies are a Key source of Innovation by

themselves and for Large Companies

Sources: SBA Office of Advocacy (2005) data drawn from U.S. Bureau of the Census; Advocacy-funded research by Joel Popkin and Company (Research Summary #211); Federal Procurement Data System; Advocacy-funded research by CHI Research, nc. (Research Summary #225); Bureau of Labor Statistics, Current Population Survey; U.S. Department of Commerce, International Trade Administration


America’s Secret Weapon: We Invest in R&D

• The U.S. government supports R&D that serves important national needs– For example, in areas such as national defense,

health, energy, the environment, natural resources, and agriculture.

• The U.S. government supports most of the nation's basic or fundamental research and much of the applied research– Focused on gaining knowledge or understanding

phenomena irrespective of any specific application

– Mission needs often drive research


Another “Secret Weapon:”The Research University

• A limited number of U.S. universities have received the bulk of research funding

• Universities are entrepreneurial – Faculty compete for federal grants– Presidents compete for donations and earmarks– States provide limited support

• U.S. research universities produce top quality science and commercialize the results– Research is both basic and applied

• This results in both good research and socially useful applications

© Sujai Shivakumar PhD17

What is the Bad News?

Charles W. Wessner, PhD18

Federal Funding for R&D has been declining in real

terms

19

Significant Drop-off in NIH Funding

20

Impact of Declining Health R&D Budgets

• Missed opportunities to pursue promising research and technologies

• Cohorts of new Post-Docs with limited opportunities for new RO1 grants– Excludes the young and the women

• A growing budget should let NIH– Invest in new grants for new researchers– Encourage more cooperation across

institutions and with industry

21

More Bad

News:

Pharma is experiencing

declining returns on

investment

Number of new drug registrations (US)

Global R&D $bn

22

Concerns about Allocation:58% of U.S. Federal R&D is for

Defense

23

…But DoD Focus is on Development

Is U.S. R&D Leadership Therefore a Myth?The focus on weapons development and testing overstates the R&D element of the budget.

It is often not basic or even applied research but rather testing and certification.

24

Growing Chorus of Concern on US Innovation Policy

• National Innovation Initiative (2004)– Led by IBM and leading Universities– Ignored by the White House, but not by the Congress

• President’s Council of Advisors on Science and Technology’s Reports (2004)– Called for renewed investments in US Science &

Engineering Capabilities– Called Attention to Growing Global Challenge in IT

Manufacturing & Competitiveness • Rising Above the Gathering Storm (2006)

– A major National Academies assessment requested by the US Congress

– Warns of an “abrupt” loss of US leadership unless timely and adequate investments are made to support R&D

25

Concerns about U.S. Competitiveness led to the

America Competes Act• Signed into Law on August 6, 2007 • Authorized (but did not allocate) $43.3 billion in

federal spending in FY 2008-2010 in Science, Engineering, Mathematics, & Technology research

• “America Competes” Promised to– Double budgets of NSF, DOE’s Office of Science, NIST, MEP– Increase funding for new researchers

• The new law reflects recognition that the U.S. needs to change policy to meet the global innovation challenge

• Only one problem, the funding was not provided!

26

R&D Funding Lost Out to:• The huge expense of the Iraq war• Election year focus on funding deficits• Complacency about the U.S. position in the

world• Pervasive myths about the power of "Perfect

Markets” • Result: Shortfall in support for the research

and the infrastructure that supports future wealth generation

• What are some of these Myths?

© Charles W. Wessner, PhD27

The U.S. Myth of Perfect Markets• Strong U.S. Myth: “If it is a good idea, the market

will fund it.”

• Reality:– Potential Investors have less than perfect knowledge,

especially about innovative new ideas

– “Asymmetric Information” leads to suboptimal investments

• This means that it is hard for small firms to obtain funding for new ideas

• George Akerlof, Michael Spence and Joseph Stiglitz received the Nobel Prize in 2001, "for their analyses of markets with asymmetric information“

• What do these “market imperfections” create?

©Charles W. Wessner PhD28

Federally Funded

Research Creates

New Ideas

Innovation &

Product Development

Capital to Transform Ideas into Innovations

No Capital

The Early-Stage Funding

Valley of Death

Dead Ideas


Venture Capital: A Powerful Tool • Venture Capital refers to

– Equity investments made to fund the launch, early development, or expansion of a young company with perceived long-term growth potential.

– Involves a substantial element of risk

• Venture Capital brings– Capital for Firm Development– Management Expertise– Market Expertise– Reputational Benefits

• But Private Venture Capital Markets are Limited– This reality is not always recognized by policymakers, both

in the U.S. and elsewhere


The Myth of U.S.Venture Capital Markets

• Myth: “U.S. VC Markets are broad & deep, thus there is no role for government awards”– “If you have a good idea, a good team, and you

sell it well, you will be funded• George Scalise, President SIA, 29 April, 2008

• Reality: Venture Capitalists have– Limited information on new firms– Prone to herding tendencies– Focus on later stages of technology development– Most VC investors seek early exit


Large U.S. Venture Capital Market is Not Focused on

Early-Stage Firms• Information on potential product is limited: Risk is too high– Proof of concept/prototype often absent or not yet

achieved– Even Angel investors need more information

• Fund Operations: Small Investments have High Overhead Costs– Most Early Stage firms need investments in the $100K to

$700K range– Average VC investment is $8.3 million– Most VC firms do not want to manage numerous small

investments

• See the current Funding break out


The Venture Capital ConstraintLarge U.S. Venture Capital Market is

Not Focused on Seed/Early-Stage Firms

Source: PriceWaterhouseCoopers/Thompson Venture Economics/ NVCA 2007

U.S. Venture Captial by Stage of Investment 2007

4%18%

41%

37%

Seed Stage: $1.2 billion415 Deals

Early Stage: $5.2 billion 995 Deals

Expansion Stage$10.8 billion1235 Deals

Later Stage$12.2 billion1168 Deals

Total: $29.4 Billion

© Charles Wessner, Ph.D. 33

How to Bridge the Valley of Death?

• The US “System” includes (incoherently)– University Research supported by DoE, DoD,

NSF & NIH– DARPA Funding for long-term goals– Proof of Principle & Prototype with SBIR– Joint Ventures with ATP/TIP– Industry-led Consortia for Standards & Joint

Research– Tax Credits – Broad R&D and New Investment

Tax Credits– All complemented by an Entrepreneurial-

friendly Policy Environment

The Role of the Small Business Innovation Research (SBIR) Program

A Public-Private Partnership that “Works”

© Charles Wessner, Ph.D. 35

SBIR Program—Key Features• Long-lived:

– In place for 25 years– Created by the Small Business Innovation Act of 1982 &

renewed in 1992 & 2001• Decentralized:

– Each Agency uses its funds to support (or create) research by small companies

– Program ownership rests with many agencies, not a single “tech agency”

• Large Scale: – Largest U.S. Innovation Partnership Program– Currently a $2.3 billion per year

• Focus on the Valley of Death – Funds Proof of Concept to help firms across the Valley of

Death and attract private capital or public contracts

. 36

The SBIR “Open Innovation” Model

PHASE IFeasibilityResearch

PHASE IIIProduct

Developmentfor Gov’t orCommercial

Market

Private Sector Investment

Tax RevenueFederal Investment

PHASE IIResearchtowards

Prototype

Socialand

Government Needs

$750K$100K

R&

D

Investm

en

t

Non-SBIR Government Investment

$143 billion

. 37

Is the Program Successful?

• Just completed Academies study found that “The SBIR program is sound in concept and effective in practice.”

• Many kinds of successes– Knowledge Creation Success– Mission Success– Firm and Job Creation Success– Commercialization Success– NASDQ Success


SBIR’s Knowledge Success • SBIR Pushes the Scientific Frontier

– Awards select for High Risk, Novel Research– Project failures are associated with technically

challenging projects and not a sign of program failure• SBIR Creates Multiple Knowledge Outputs

– SBIR projects yield new scientific & engineering data– Results visible in numerous publications, patents and

licenses, research equipment • SBIR Enhances Human Capital

– Opportunities for research and training for junior research staff

– Knowledge gained often applied to other research projects


SBIR’s Mission Success: NIH

• At NIH, SBIR funds projects that have a positive impact on health– NIH awards are selected for their potential to

advance knowledge and provide new solutions in health care and bio-medicine

• SBIR companies bring new products to Market, including:– Improved Dialysis catheters– Safe mass inoculation technologies– High throughput screening assay to identify

specific inhibitors of smallpox variola virus


SBIR’s Innovation Success• 40 percent of NIH funded firms in the NRC survey

reported SBIR projects that reached the marketplace– More are expected to reach the market over time

• Support for Commercialization of Ideas– NIH’s SBIR Technology Assistance Programs help awardees

develop and implement effective commercialization plans

• Helps Attract Additional funds from Angels, VC– Angel Investors: 37 percent of NRC survey respondents

attracted additional investment from Angels and other sources

– Venture Funding: SBIR is a signal of research quality and commercial potential. Over $1.5 billion in added VC investments between 1992 and 2005

– Acquisition: e.g., Philips acquisition of Optiva for $1 billion

. 41

SBIR Awards Have a Substantial Impact on

Participating Companies• Company Creation: 20% of responding companies

said they were founded as a result of a prospective SBIR award

• Research Initiation: SBIR awards played a key role in the decision to pursue a research project (70% claimed as cause)

• Company Growth: Significant part of firm growth resulted from award

• Partnering: SBIR funding is often used to bring in Academic Consultants & to partner with other firms

. 42

SBIR’s NASDQ Success: Martek

• Martek manufactures Micronutrients for Infant Formula:

• DHA and ARA are produced from microalgae in a patented process

• Martek CEO Pete Linsert credits SBIR with helping to develop these products

– Martek’s 2007 Market Capitalization = $665 million


“The SBIR program has become a key force in the innovation economy

of the United States”

• SBIR now accounts for nearly a quarter of all ‘U.S. R&D 100’ winners, an annual list of top 100 innovations– Source: Block and Keller, “Where do innovations come from?” July, 2008

SBIR Founded

Conclusions

© Charles W. Wessner, PhD45

“Innovation” is the Key to how Nations Improve Health in the

Twenty-first Century• Supporting innovation should be recognized as a

central function of the government– Key to a nation’s wellbeing and competitiveness

• Need for Public-Private Partnerships – Programs like SBIR spur entrepreneurship, develop

knowledge, address national missions– Concept has been successfully adapted to other

innovation systems

• Successful Innovation policies require sustained attention & regular review– Sustained, policy attention– Requires an understanding of the innovation ecosystem


Our Common Challenge• Adjusting to the new Globalization Dynamic is the

Challenge of the 21st Century

• This involves National Initiatives to encourage change through competitive incentives: – Incentives for entrepreneurial activity for Small Firms,

Large Firms, and Universities

– Incentives (not mandates) for cooperation among all actors

– Public-private partnerships like SBIR can play an important role

• Mutual Learning and Cooperation are Essential for our Common Future


Thank You

Charles W. Wessner, Ph.D.Director, Program on

Technology, Innovation and EntrepreneurshipThe U.S. National Academies

500 Fifth Street NWWashington, D.C. 20001

[email protected]: 202 334 3801

http://www.nationalacademies.org/step

© Charles W. Wessner Ph.D. 1 Global Scientific Innovation & Policy Transitioning Research Across...

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