Focus on the Top 200 Award Winners
In an effort to ensure that the most prolific award winners at NIH were fully analyzed, the Committee focused additional attention on the 200 firms that won the most Phase II awards in 1992-2002.
Data from the Thomson VentureSource database was supplemented by a manual cross-check using data from the RDNA database, for the top 200 NIH recipients of Phase II funding 1992-2002.1 This manual cross-check resulted in identification of 13 firms not identified by the VentureSource database alone, for a total of 51 firms with some venture investment.
The 51 firms among the top 200 NIH Phase II award winners identified as venture-funded are listed in Appendix A. In aggregate, these 51 firms received a total of $272 million in NIH funding (Phase I and Phase II awards), largely through 285 Phase II awards. They also received a total of $1.59 billion in venture funding, spread over a total of 224 rounds. These data support the hypothesis that venture funding—when it comes—is considerably larger than Phase II funding (an average of $31.2 million per firm for venture investment, as against an average of $5.3 million in SBIR funding per firm).
In order to ensure that venture-funded firms among firms winning the most NIH awards are not missed as a result of incomplete data, we conducted telephone interviews with the top 25 recipients of Phase II awards from NIH identified as not having received venture funding. These companies do not appear in the three databases used in the initial assessment of the top 200 Phase II award winners.
The analysis did identify additional firms with some links to venture funding that were not previous identified as such:
Two companies were identified as having received venture funding in the past—in one case more than ten years ago, the other at some indeterminate point before going public. Both are now publicly traded.
Two companies were in some indirect way connected to venture capital (respondents did not wish to be clear on this point).
Four companies would not respond.
This suggests that of the top 200 recipients of Phase II funding at NIH, 53 can now be identified as receiving venture capital. It does not seem likely that this analysis missed a significant number of venture-funded firms. And the two additional firms identified as receiving funding cannot be determined to breach the de minimis conditions used for identifying venture-funded companies in this report.
Analysis of the top 200 winners can also help to answer another question about the role of venture funding is its relationship to SBIR funding. One conceptualization of this relationship suggests that SBIR awards can often serve as a bridge toward venture funding. On this view, SBIR awards not only fund the very-early-stage funding needed to get to proof of technical concept, they may also provide a “halo effect”: Funding by the NIH SBIR program, with its attendant well-respected peer review program, provides additional support for the proposed investment and in particular validation of the technical approach.
An alternative view is that resources available to venture-funded firms are likely to result in greater success in garnering SBIR awards—a point argued by some supporters of the SBA ruling. This view would seem to be prima facie supported by the data in Table 4-1, which shows that two-thirds of SBIR award recipients received their first Phase II funding after their first venture round.
This linear conceptualization of innovation—distinguishing a sequence of successive stages from very-early-stage to proof-of-concept to commercialization—has its merits. However, our analysis of top 200 firms at NIH indicates
TABLE 4-1 Sequencing of SBIR Awards and Venture Funding
that the story is more complex.2 The presence of SBIR funding may enhance the likelihood of venture funding, but the obverse may also be true. With regard to the firms identified here, the actual sequencing of awards and venture funding does not support a simple linear hypothesis, as illustrated in Table 4-1.
Looking closely at the 51 venture-funded firms for which we have detailed data on individual venture investments, we find that:
Thirty-four of the firms (67 percent) received their first Phase II funding after their first venture round. For these firms, it appears that SBIR funding is typically auxiliary or complementary to the venture funding they have already received.3 This view is supported by case studies completed for the NRC report on the NIH SBIR program. Representatives of Illumina, Neurocrine, and Martek among other firms indicated that once funded by venture partners, it was not necessary to rely on highly uncertain funding like SBIR to develop the company’s primary commercial product or service, but that such funding could be critical to the development of additional products.
Seventeen firms (33 percent) received their most recent venture funding after the start of their most recent Phase II award. This suggests the existence of a “halo effect” where the SBIR award provides a signal of quality to investors. It also suggests that SBIR and venture funding are used in a complementary, parallel fashion by these recipients.
Six firms (12 percent) received their first venture funding after the start of their most recent NIH Phase II award. For these firms too, it is possible that
the SBIR award had a “halo effect,” helping venture capital firms to identify especially promising firms and technologies for investment.
This sequencing analysis does not support a simple view of SBIR and venture funding—that SBIR is seed funding and is subsequently replaced by venture funding later in the development cycle. Only six of the 51 firms exhibit sequencing that matches the seed-development distinction.
A different, more nuanced analysis of the SBIR-venture funding relationship is therefore necessary. This analysis must include the important distinction between firms and projects. A firm may have multiple projects in its portfolio with multiple sources of financing and may grow and develop in a non-linear fashion. By contrast, individual projects may indeed develop in a somewhat linear direction from idea to prototype, testing, and eventually development. However, there is now growing evidence—including from recent NRC research—to indicate that even for individual projects the road to the market is far more winding and circuitous than suggested by simple linear models.4 Simple linear models do not tell the full story.5
These complexities at the project level are multiplied many times at the firm level, where different projects at different stages of development compete for scarce resources. Several interviewees indicated that funding from venture partners was in many cases tied very tightly to the costs of development for a particular lead product; more speculative or alternative research projects were often excluded from venture funding, and had therefore to turn to SBIR and other resources.6 In some cases, such as Illumina, these alternative paths became over time highly successful.
Thus it is simplistic to conclude that the receipt of venture funding is itself sufficient to insulate firms from the need to find more resources for other projects outside the critical path being funded by the venture capital investment. This is an important conclusion.