that characterizes defense acquisition.15 In addition to complex federal acquisition procedures, there are strong disincentives for high-profile projects to adopt untried technologies. Technology transfer in commercial markets can be equally difficult. A failure to transfer to commercial markets can occur even when a technology is technically successful if the market is smaller than anticipated, competing technologies emerge or are more competitive than expected, if the technology is not cost competitive, or if the product is not adequately marketed. Understanding and accepting the varied sources of project failure in the high-risk, high-reward environment of cutting-edge R&D is a challenge for analysts and policy makers alike.

This raises the issue concerning the standard on which SBIR programs should be evaluated. An assessment of SBIR must take into account the expected distribution of successes and failures in early-stage finance. As a point of comparison, Gail Cassell, Vice President for Scientific Affairs at Eli Lilly, has noted that only one in ten innovative products in the biotechnology industry will turn out to be a commercial success.16 Similarly, venture capital funds often achieve considerable commercial success on only two or three out of twenty or more investments.17

In setting metrics for SBIR projects, therefore, it is important to have a realistic expectation of the success rate for competitive awards to small firms investing in promising but unproven technologies. Similarly, it is important to have some understanding of what can be reasonably expected—that is, what constitutes “success” for an SBIR award—and some understanding of the constraints and opportunities successful SBIR awardees face in bringing new products to market. From the management perspective, the rate of success also raises the

15

For a description of the challenges small businesses face in defense procurement, the subject of a June 14, 2005, NRC conference and one element of the congressionally requested assessment of SBIR, see National Research Council, SBIR and the Phase III Challenge of Commercialization, Charles W. Wessner, ed., Washington, DC: The National Academies Press, 2007. Relatedly, see remarks by Kenneth Flamm on procurement barriers, including contracting, overhead, and small firm disadvantages in lobbying in National Research Council, SBIR: Program Diversity and Assessment Challenges, op. cit., pp. 63–67.

16

Gail Cassell, “Setting Realistic Expectations for Success,” in National Research Council, SBIR: Program Diversity and Assessment Challenges, op. cit., p. 86.

17

See John H. Cochrane,“The Risk and Return of Venture Capital,” Journal of Financial Economics 751:3–52, 2005. Drawing on the VentureOne database, Cochrane plots a histogram of net venture capital returns on investments that “shows an extraordinary skewness of returns. Most returns are modest, but there is a long right tail of extraordinary good returns. Fifteen percent of the firms that go public or are acquired give a return greater than 1,000 percent! It is also interesting how many modest returns there are. About 15 percent of returns are less than 0, and 35 percent are less than 100 percent. An IPO or acquisition is not a guarantee of a huge return. In fact, the modal or ‘most probable’ outcome is about a 25 percent return.” See also Paul A. Gompers and Josh Lerner, “Risk and Reward in Private Equity Investments: The Challenge of Performance Assessment,” Journal of Private Equity 1 (Winter 1977): 5–12. Steven D. Carden and Olive Darragh, “A Halo for Angel Investors,” The McKinsey Quarterly 1 (2004), also show a similar skew in the distribution of returns for venture capital portfolios.



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