1. Multiple Indicators of Commercial Activity. The full extent of commercialization for both government and private use is insufficiently captured by simply recording sales of a product or service. The Committee’s analysis uses five measures of commercial activity, although sales in the marketplace are obviously of particular importance. These indicators are:

    1. Sales (using a range of different benchmarks to indicate different degrees of commercial activity)

    2. Additional non-SBIR research funding and contracts

    3. Licensing revenues

    4. Third-party investment (including both venture funding and other sources of investment)

    5. Additional SBIR awards for related work

  1. A Skewed Distribution of Sales. SBIR awards result in sales numbers that are highly skewed, with a small number of awards accounting for a very large share of the overall sales generated by the program.3 This is to be expected in funding early-stage technological innovation and is broadly consistent with the general experience of other sources of early technology financing by angel investors.4 Most projects, however, do not achieve significant commercial success; a few companies do.5

e.g., the successful companies (those still in existence) are more likely to respond. Survey bias can manifest itself in several ways, however, and in some cases understate returns. For a fuller discussion of this important caveat, see Box 4-1 in Chapter 4: SBIR Program Outputs.

3

See Figure 4-2.

4

Even venture capital—a proximate referent group not appropriate for direct comparison because venture investments do not provide the same kind of project financing—shows a high returns skew. Nonetheless, returns on venture funding tend to show a similar high skew as characterize commercial returns on the SBIR awards. See John H. Cochrane, “The Risk and Return of Venture Capital,” Journal of Financial Economics, 75(1):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. 15 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.

5

This is expected with research that pushes the state-of-the-art where technical failures are expected and when companies face the vagaries of the procurement process. A small proportion (3-4 percent) of projects generate more than $5 million in cumulative revenues. At NIH for example, only 6 of 450 projects in the recent NIH survey were identified as generating more than $5 million in revenues.



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