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An Assessment of the SBIR Program at the Department of Energy
The DoE SBIR program is focused on commercialization and hasseen meaningful achievement. There are, nonetheless, opportunitiesfor improvement in commercialization.
A significant percentage of DoE SBIR projects are commercializedto some degree.
Reaching the market. NRC Phase II Survey data indicate that 41 percent of SBIR-funded projects reach the marketplace or have commercialization underway.2 Using a different methodology, DoE’s internal survey reported that 30.3 percent of firms reached the market.
Revenue skew. The NRC Phase II Survey data also show that a much smaller number (4 percent) of projects generate more than $5 million in revenues.3 The distribution of sales resulting from SBIR awards from DoE is not qualitatively different from the distribution of returns from private sector investments.4 These few projects have, however, been extremely successful; in the case of Atlantia Offshore, for example, a single Phase I and Phase II pair of awards resulted directly in a product that generated over $500 million in sales, in addition to other societal benefits. DoE’s survey of their Phase II awardees indicated that 11 percent of companies reported sales greater than $850,000.
Licensing revenue. The NRC Phase II Survey indicates that licensing revenues have not been a significant source of additional commercial success at DoE.5
See Figure 4-1. Twenty-four percent of NRC Phase II Survey respondents reported products/ services/or processes in use at the time of the survey, and 18 percent reported commercialization underway (figures rounded). See NRC Phase II Survey, question 1.
See NRC Phase II Survey, Question 4b.
As with investments by angel investors or venture capitalists, SBIR awards result in highly concentrated sales, with a few awards accounting for a very large share of the overall sales generated by the program. These are appropriate referent groups, though not an appropriate group for direct comparison, not least because SBIR awards often occur earlier in the technology development cycle than where venture funds normally invest. Nonetheless, returns on venture funding tend to show the same high skew that characterizes 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. 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):5-12, 1977. 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.