Venture Funding and the NIH SBIR Program

BOX 2-1

Downward Bias in the Estimation of the Impact of the SBA Directive

Assessing the impact of the SBA exclusion of majority venture-funded firms is difficult because obtaining data on the ownership structure of companies, especially private-held small firms, is hard to do. This assessment therefore relies on a sample of firms that received Phase II SBIR awards during the period 1992-2002 (before the directive was issued). The use of such data is likely to yield a downward bias in the estimate of the effects of the SBA exclusion for two reasons:

Recent shift of venture capital to the biotechnology sector. The life sciences and biotechnology were relatively embryonic industries during the sample period (before 2002). More importantly, venture capital started shifting towards biotechnology and life sciences after the Internet bubble burst in 2001.^a Thus, the number and proportion of small life science-based firms receiving venture funding may be much higher than can be captured from data focused on the 1992-2002 period.
Venture funding barred as biotechnology firms matured. Leading papers in the economics of innovation literature point out that technological and product development opportunities (and thus, commercialization of research) become more prevalent as an industry matures.^b Venture funding is focused mainly on product development. This implies that it is likely that the SBA ruling may be excluding a higher percentage of firms in this sector as the industry matures.

	^aDouglas P. Lee and Mark D. Dibner, “The Rise of Venture Capital and Biotechnology in the US and Europe,” Nature Biotechnology, 23:672-676, 2005.
	^bOn product innovation and commercialization in a wide variety of industries, see Edwin Mansfield, “Academic Research and Industrial Innovation: An Update of Empirical Findings,” Research Policy, 26(7-8):773-776, April 1998.

2.3
CASE STUDY AND OTHER DATA

One final area of analysis concerns the impact of the ruling on the biotech industry itself. As noted earlier, BIO and other groups have claimed that the exclusion of venture funded companies from SBIR will result in a critical “gap” in the funding flow, one that may prevent important discoveries from being commercialized.

To substantiate these claims, BIO conducted telephone and Internet surveys of its “emerging company” membership—defined as firms with fewer than 350 employees and no marketable products.²³ The surveys suggest that a large

²³	BIO appears to have contacted all 650 firms that make up its emerging company membership, with a response rate of about 41 percent. BIO provided no additional background information about the surveys. For a description of the surveys, see Appendix E of this report.

Table of Contents

Front Matter R1-R14

Executive Summary 1-4

1 Introduction 5-21

2 Study Methodology 22-29

3 Venture Funding for NIH Phase II Winners, 1992-2002 30-38

4 Focus on the Top 200 Award Winners 39-42

5 Other Sources of Data on the Participation of Venture-owned Firms 43-48

6 Comparing Project Outcomes 49-60

7 Impact of the SBA Ruling on the NIH SBIR Program 61-68

Appendixes 69-70

Appendix A: Venture-funded Firms Among the 200 Most Prolific Winners of NIH Phase II Awards 1992-2002 71-75

Appendix B: NRC Non-participant Survey 76-79

Appendix C: NIH List of Firms Excluded on the Grounds of Venture Capital Ownership 80-81

Appendix D: Venture-funded Firms: Data from Hoover's Small Business Database and VentureSource 82-91

Appendix E: Analysis of the Evidence Submitted by BIO 92-94

Appendix F: SBA Administrative Ruling on Appeal of Cognetix, Inc. 95-102

Appendix G: Letter from Elias A. Zerhouni, Director, National Institutes of Health to Hector V. Barreto, Administrator, U.S. Small Business Administration, June 28, 2005 103-106

Appendix H: Testimony by Steven C. Preston, SBA Administrator, to the House Small Business Committee, March 13, 2008 107-111

Appendix I: Bibliography 112-126

2.3
CASE STUDY AND OTHER DATA

Table of Contents

Front Matter R1-R14

Executive Summary 1-4

1 Introduction 5-21

2 Study Methodology 22-29

3 Venture Funding for NIH Phase II Winners, 1992-2002 30-38

4 Focus on the Top 200 Award Winners 39-42

5 Other Sources of Data on the Participation of Venture-owned Firms 43-48

6 Comparing Project Outcomes 49-60

7 Impact of the SBA Ruling on the NIH SBIR Program 61-68

Appendixes 69-70

Appendix A: Venture-funded Firms Among the 200 Most Prolific Winners of NIH Phase II Awards 1992-2002 71-75

Appendix B: NRC Non-participant Survey 76-79

Appendix C: NIH List of Firms Excluded on the Grounds of Venture Capital Ownership 80-81

Appendix D: Venture-funded Firms: Data from Hoover's Small Business Database and VentureSource 82-91

Appendix E: Analysis of the Evidence Submitted by BIO 92-94

Appendix F: SBA Administrative Ruling on Appeal of Cognetix, Inc. 95-102

Appendix G: Letter from Elias A. Zerhouni, Director, National Institutes of Health to Hector V. Barreto, Administrator, U.S. Small Business Administration, June 28, 2005 103-106

Appendix H: Testimony by Steven C. Preston, SBA Administrator, to the House Small Business Committee, March 13, 2008 107-111

Appendix I: Bibliography 112-126

2.3CASE STUDY AND OTHER DATA

2.3
CASE STUDY AND OTHER DATA