Between Invention and Innovation

9 Aug 2010 Sandeep Mehta

Here is something different – an excellent report developed for the National Institute of Standards & Technology on analysis of funding for early-stage technology development.  You might want to dig through the 150+ page report when you have time, but here are my notes on what I learned from it:

The project has sought to answer two sets of questions:
– What is the distribution of funding for early-stage technology development across different institutional categories? How do government programs compare with private sources in terms of magnitude?
– What kinds of difficulties do firms face when attempting to find funding for early stage, high-risk R&D projects? To what extent are such difficulties due to structural barriers or market failures?

Some findings:

We found that most funding for technology development in the phase between invention and innovation comes from individual private-equity “angel” investors, corporations, and the federal government-not venture capitalists. Our findings support the view that markets for allocating risk capital to early-stage technology ventures are not efficient. Despite (or in response to) market inefficiencies, many institutional arrangements have developed for funding early-stage technology development. This suggests that funding mechanisms evolve to match the incentives and motivations of entrepreneurs and investors alike.

We also found that the conditions for success in science-based, high-tech innovation are strongly concentrated in a few geographical regions and industrial sectors, indicating the importance in this process of innovator-investor proximity and networks of supporting people and institutions. Among corporations, the fraction of R&D spending that is dedicated to early-stage technology development varies both among firms and within industries. The latter variation may be related to industry life cycles. Overall, we found that the federal role in early-stage technology development is far more significant than would be suggested by an uncritical glance at aggregate R&D statistics. Federal technology development funds complement, rather than substitute for, private funds. Decisions made today regarding the nature and magnitude of federal support for early-stage technology development are likely to have an impact far into the future. 

1: Most innovation funding comes from everyone but venture capitalists. As per the article venture capitalists are not in R&D / innovation business, they are in financial business.

Most funding for technology development in the phase between invention and innovation comes from individual private equity “angel” investors, corporations, and the federal government — not venture capitalists.

 2. Markets for allocating risk capital to early stage technology ventures are not efficient.  Many entrepreneurs remain thirsty for funds while venture capitalist are sitting on funds.

A report from the National Commission on Entrepreneurship notes that “the substantial amount of funding provided through informal channels, orders of magnitude greater than provided by formal venture capital investments and heretofore unknown and unappreciated, suggests some mechanisms for filling the gap may have developed without recognition” (Zacharakis et al. 1999: 33).

3. Geographic concentration because of angels and technologists (needs virtual teams to get products to market?)

Conditions for success in science-based, high-tech innovation are strongly concentrated in a few geographical regions, indicating the importance in the process of innovator-investor proximity and networks of supporting people and institutions. 

 4. Early stage technology development funding (as a fraction of total R&D spend) varies from 0% in software to 30% in biotech)

Among corporations, the fraction of R&D spending that is dedicated to early-stage development varies both among firms and within industries. The latter variation may be related to industry lifecycles.

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