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

5.1
NON-PARTICIPANT SURVEY

In conducting its assessments of the SBIR program, members of the Committee have drawn on multiple perspectives.1 For this study on venture capital and SBIR, in addition to the data discussed above, and NIH and NRC surveys discussed below, the Committee sought to develop data relating to the firms and principal investigators who applied for NIH funding during the period leading up to the 2002 SBA ruling, but who have not since applied for funding. This dataset may provide direct evidence about the impact of the SBA ruling.

Accordingly, in cooperation with NIH, the Committee developed a survey of these non-participants that focused on the question of why these firms were no longer applying for NIH SBIR funding. The survey questionnaire is found in Appendix B.

NIH identified a total of 3,913 firms that applied for NIH funding during 1992-2002 inclusive, but did not do so during 2003-2006. Of these, 3,382 had email addresses, and these formed the initial target of our survey.2

Of the 3,382 potential targets, 1,331 did not have a current valid email (i.e. at least two emails to those addresses were returned to sender). This is in line with the NRC’s experience with other email-based SBIR surveys. The final baseline for the survey is therefore the 2,051 respondents with valid email addresses.

1

National Research Council, An Assessment of the Small Business Innovation Research Program—Project Methodology, Washington, DC: The National Academies Press, 2004. Access at <http://www.nap.edu/catalog.php?record_id=11097>.

2

The survey questionnaire is included as Appendix B.



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5 Other Sources of Data on the Participation of Venture-owned Firms 5.1 NON-PARTICIPANT SURVEY In conducting its assessments of the SBIR program, members of the Com- mittee have drawn on multiple perspectives.1 For this study on venture capital and SBIR, in addition to the data discussed above, and NIH and NRC surveys discussed below, the Committee sought to develop data relating to the firms and principal investigators who applied for NIH funding during the period leading up to the 2002 SBA ruling, but who have not since applied for funding. This dataset may provide direct evidence about the impact of the SBA ruling. Accordingly, in cooperation with NIH, the Committee developed a survey of these non-participants that focused on the question of why these firms were no longer applying for NIH SBIR funding. The survey questionnaire is found in Appendix B. NIH identified a total of 3,913 firms that applied for NIH funding during 1992-2002 inclusive, but did not do so during 2003-2006. Of these, 3,382 had email addresses, and these formed the initial target of our survey. 2 Of the 3,382 potential targets, 1,331 did not have a current valid email (i.e. at least two emails to those addresses were returned to sender). This is in line with the NRC’s experience with other email-based SBIR surveys. The final baseline for the survey is therefore the 2,051 respondents with valid email addresses. 1 National Research Council, An Assessment of the Small Business Innoation Research Program— Project Methodology, Washington, DC: The National Academies Press, 2004. Access at . 2The survey questionnaire is included as Appendix B. 3

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 VENTURE FUNDING AND THE NIH SBIR PROGRAM From this base, we received a total of 386 responses, an 18.8 percent re- sponse rate.3 These results provide an additional basis for assessing relative importance of the venture capital exclusion among those not applying for further SBIR funding from NIH. Of the 386 responses, 49 identified their firms as having received, in fact, further SBIR funding. This may be because the names of firm can change, or because of inaccuracies in the tracking databases. These responses were elimi - nated from our analysis. Also eliminated were 87 respondents who indicated that they had not applied during the 2003-2006 timeframe but that they still expected to apply again in the future. These firms were therefore not “excluded” for the program by rule. The remaining 269 responses—13.1 percent of the target popu- lation—provided valuable data. These respondents were asked two key questions. First, they were asked to provide multiple-choice answers as to why their firms were no longer applying. The survey data summarized in Table 5-1 indicate that the three most fre- quent reasons for not applying were drawn from the operation of the program itself. These are: the level of competition (which at one level is a very positive statement about the quality of the program4); concerns about selection mecha- nisms; and funding delays.5 Conversely, venture ownership was one of the three lowest-scoring options, along with foreign ownership, and the shift to public ownership of the company. Only 12 responses (1.8 percent of the total) indicated that the venture funding exclusion was one of their reasons for leaving the program. This suggests that at least for the firms that responded to the survey, the impact of the ruling on non-participation has been very modest. The survey data generate a result that identifies excluded firms at a considerably lower rate than our direct analysis of eligibility in Chapter 3. Because being excluded is itself a sufficient condition for non-participation, it also seemed possible that venture ownership would be an especially powerful reason for non-application among those who mentioned it at all, so we also asked 3The response rates for the SBIR survey are high for a technology survey, especially given that this survey is targeted to small firms. Fledgling companies tend to have a very high attrition rate. See Vangelis Souitaris, “Technological Trajectories As Moderators of Firm-Level Determinants of Innova- tion,” Research Policy, 31:877-898, 2002. Also see Vangelis Souitaris, “Firm-Specific Competencies Determining Technological Innovation. A Survey in Greece,” R&D Management, 32(1)61-77, 2002. Finally, see Pilar Rodolfo Vargas, Zárate Salinas, and Luis Ángel Guerras, “Does the Technological Sourcing Decision Matter? Evidence From Spanish Panel Data,” R&D Management, 37(2):161-172, 2007. 4 It is also true that if success rates fall below a certain level, the incentive for firms to apply diminishes as well. 5These concerns are discussed in National Research Council, An Assessment of the SBIR Program at the National Institutes of Health, Charles W. Wessner, ed., Washington, DC: The National Acad- emies Press, 2009.

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 OTHER SOURCES OF DATA ON THE PARTICIPATION OF VENTURE-OWNED FIRMS TABLE 5-1 Survey Question: Why Is Your Firm No Longer Applying to the NIH SBIR Program? (Multiple answers permitted.) Number of Percent of Response Responses Responses 1 Company is out of business 81 12.2 2 No longer a research oriented company 24 3.6 3 No longer working in technical areas that are likely to be funded 31 4.7 by NIH 4 The competition for awards is such that the likelihood of 102 15.3 winning an award is too small to justify the effort to apply 5 The selection mechanism is not one that we believe will allow us 96 14.4 to make winning proposals 6 Risk to our IP or business secrets during the selection procedure 25 3.8 is too high 7 The delays in funding are too long to make the effort worthwhile 89 13.4 8 No longer eligible for the program because we have more than 12 1.8 500 employees 9 No longer eligible for the program because we are now a 10 1.5 publicly owned company with more than 50 percent institutional ownership 10 No longer eligible for the program because we are majority 7 1.1 foreign-owned 11 No longer eligible for the program because we are majority 12 1.8 institution-owned (e.g., by venture capital companies) 12 The size of awards is insufficient to justify the effort involved in 69 10.4 applying 13 Other 108 16.2 (Denominator) 666 100.0 SOURCE: NRC Non-participant Survey. respondents to identify the single primary reason for not applying to the program. The results are summarized in Table 5-2. Firms that indicate ownership-related concerns in Table 5-2 also indicate that these issues tend to dominate their application decisions. Of the 12 respondents that mentioned venture ownership as a reason for not applying, eight (or two- thirds) identified this as the primary reason. However, we should also note that this still only accounts for 2.5 percent of all responses. In contrast, the company going out of business was the most important single reason—although this merely reflects the normal, but high, levels of churn among small, early-stage companies. More than one-third of all respondents indicated that some characteristic of the program—notably the degree of competition for awards and concerns about the selection mechanism—were their primary reasons for non-application. Conversely, 6 percent indicated that ownership consider- ations prevented further applications for funding.

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 VENTURE FUNDING AND THE NIH SBIR PROGRAM TABLE 5-2 Survey Question: Why Is Your Firm No Longer Applying to the NIH SBIR Program? (Primary reason only.) Number of Percent of Response Responses Responses 1 Company is out of business 74 22.8 2 No longer a research oriented company 11 3.4 3 No longer working in technical areas that are likely to be funded 14 4.3 by NIH 4 The competition for awards is such that the likelihood of 44 13.6 winning an award is too small to justify the effort to apply 5 The selection mechanism is not one that we believe will allow us 49 15.1 to make winning proposals 6 Risk to our IP or business secrets during the selection procedure 2 0.6 is too high 7 The delays in funding are too long to make the effort worthwhile 26 8.0 8 No longer eligible for the program because we have more than 7 2.2 500 employees 9 No longer eligible for the program because we are now a 5 1.5 publicly owned company with more than 50 percent institutional ownership 10 No longer eligible for the program because we are majority 6 1.9 foreign-owned 11 No longer eligible for the program because we are majority 8 2.5 institution-owned (e.g., by venture capital companies) 12 The size of awards is insufficient to justify the effort involved in 27 8.3 applying 13 Other 51 15.7 (Denominator) 324 100.0 SOURCE: NRC Non-participant Survey. NOTE: There may be more than one response for some firms because more than one project was surveyed in firms with multiple projects. Hence the 321 denominator reflects responses, not firms. Though interesting, these results must be treated with some caution given relatively low response rate. However, they do provide a useful cross-check on our other estimates for excludability, and they indicate that this survey at least provided no evidence that our estimates of the percentage of firms negatively affected by the ruling are too low. 5.2 NIH-IDENTIFIED EXCLUDED FIRMS Much of the analysis in this report is focused on the years 1992-2002, because these are years for which the most data are available, in particular out - comes data to which we will turn in the next section. These are also the years

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7 OTHER SOURCES OF DATA ON THE PARTICIPATION OF VENTURE-OWNED FIRMS immediately before the SBA ruling, when firms applied at a rate not affected by the ruling. However, there are other more recent indications that firms are being excluded based on venture ownership. The most important source is NIH itself, which has provided a list of firms it believes have been excluded.6 NIH lists a total of 55 firms, (provided in Appendix C). Approximately half of the firms were self-certified as ineligible, and half were so certified by SBA. Of these firms, 11 had won NIH Phase II awards during the study period 1992-2002. Of these 11, five were identified within the VentureSource database. All of these five firms were also marked as being excluded under the criteria for exclusion developed above (either at least two rounds of funding or at least $5 million in venture funding). This suggests both that the VentureSource database is not a complete record of venture funding activity in the sector, and that the exclud- ability assumptions developed in Section 3.2 are again validated. While the list (which is not definitive) contains a considerable number of firms, this should be put into perspective. During 2003-2006, NIH made 1,442 Phase II awards to 942 different firms.7 The firms on the NIH list of firms ex- cluded on venture ownership grounds amounts therefore to 5.8 percent of all firms winning Phase II awards 2003-2006. This is not an insignificant number, and it is likely the NIH list is incomplete.8 It is also a figure approximately in line with the data from the non-participant survey, and with the analysis of awards undertaken in Chapters 3 and 4. 5.3 BALANCING OBJECTIVES: A VIEW FROM MARTEK’S EXPERIENCE9 Martek—a commercially successful company, with a market capitalization of over $665 million in 2007—provides the perspective of a successful firm that has benefited from complementarities between SBIR awards and venture funding. 10 Martek has licensed its nutritional oils to 28 infant formula manufacturers, who collectively represent approximately 70 percent of the estimated $8.5 to $9.5 billion worldwide wholesale market for infant formula and nearly 100 percent of the estimated $3.0 to $3.5 billion U.S. wholesale market for infant formula, including the wholesale value of Women, Infant & Children program (“WIC”) 6The list, which is not dated, was received in 2007 and covers firms believed to be excluded in the period after the ruling. 7 National Institutes of Health, Private communication, October 2007. 8There is no central registry of eligible and ineligible firms. 9 Based on an interview with Pete Linsert. Mr. Linsert serves on the NRC Committee evaluating the SBIR program. He stepped down as CEO of Martek Biosciences in June 2006. 10Data in this section is provided from Martek’s annual statement of accounts, for the year ending Octo- ber 31, 2008, accessed at , and from Martek’s 2007 Annual Report, .

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 VENTURE FUNDING AND THE NIH SBIR PROGRAM BOX 5-1 Martek’s Path to Successa • University of MD—Incubator—Taps—1985. • Venture Capital—1986. • SBIRs: NIH, NSF, DoE—1980s �� 1990s. —1980s 80s �� 1990s. • More Venture Capital—1989 �� 1990s. • Maryland Industrial Partnerships—MIPS—1980s �� 1990s. • Infant Formula Licensees—1990s. • Public Market Finance—1993 IPO. • Limited Sales—1990s. • Secondary Public Offerings—1990s. • Sales Sky Rocket—2000s. • Profitable in Q4 2003. • Major Expansion of Plants. aSlide presentation by Pete Linsert, “The Martek Experience,” at National Research Council, Accelerating Innovation 2005 Conference, Washington, DC, October 19, 2005. rebates. Licensees include Mead Johnson Nutritionals, Nestle, Abbott Laborato- ries, Wyeth and Royal Numico. Licensees now sell infant formula products con - taining Martek ingredients in over 70 countries. In 2006 and 2007, Martek signed multiyear sole source agreements with Abbott Laboratories and Mead Johnson to provide proprietary ingredients for infant formula, a core business of Martek.