The Advanced Technology Program provides cost-shared funding
for early stage technology development with potential to deliver
widespread economic benefits that would likely not be developed
because private sector capital is unavailable.
Between Invention and Innovation, a Funding Gap Exists
- The United States system of university- and national lab-based
basic research is the best in the world. These labs are supported
in large part by the Federal government.
- There
is a class of technologies that is not yet developed
enough for private sector investment, but is “too commercial” to
sufficiently interest the universities or national labs,
says David Morganthaler, an active venture capitalist since
the late 1960’s.
- In the
phase between science-based “inventions” and
commercially viable “innovation,” inefficiencies
exist in our capital markets, according to Harvard Professors
Branscomb and Auerswald’s new study.1 These
capital market inefficiencies contribute to the funding gap
for early stage technology development.
Why is there a Funding Gap?
- The technical risks and market uncertainties associated
with early stage technologies are high, and the inability
of innovators to capture the full benefits makes it an unattractive
investment.
- Venture
capital funds raised approximately $43 billion dollars
in 2001, up from $2.5 billion in 1991. Most of this money
funds the growth of companies (product development and
business development)–very little goes into early-stage
research. (Price Waterhouse Coopers, 2002)
- Venture capitalists are making larger investments per deal
for efficiency reasons:
- Between 1990 and 2001, the average deal size has grown
to $16.5 million from $2.5 million.
- It takes about as much work to identify and monitor
a $1 million dollar investment as it does a $10 million
dollar investment.
- Thus, venture capitalists are not as interested in opportunities
requiring lower dollar amounts.
- According
to David Morganthaler, “when we [venture
capitalists] invest in Nobel prize winning research, we do
it by mistake.” “[Venture capitalists should]
very rarely invest in enabling technology.” Venture
capitalists, he says, should not invest in early-stage, high-risk
technology research.
What does ATP do that Venture Capitalists do not do?*
- As of June 30, 2002, venture capital money remained
concentrated in two regions of the country (Price Waterhouse
Coopers, 2002):
- Northern California accounted for 35% of venture capital
investments.
- The New York/New England area accounted for 18% of venture
capital investments.
- Most venture capitalists are unwilling to consider an
investment more than a few hours travel away because
of the inconvenience of monitoring it.
- In contrast, the ATP funds many regions of the
country.
- The ATP spends about 18% of its total award funding
on projects in Northern California.
- About 16% of total ATP award money goes to the New
York/New England area.
- The
ATP also has projects across 41 states.
- Venture capital is concentrated in one technology
area:
- Computer-related companies received approximately 85%
of venture funding in 2001.
- By contrast, such important areas as industrial/energy
companies received only 2% of venture funding.
- In
contrast, a wide variety of important technologies
receive ATP funding*:
Technology Sectors:
Click to view
large-scale image.
- Venture capitalists typically provide funding to
companies for business development and commercialization
activities.
- In contrast, ATP funds projects to develop early-stage,
high-risk technologies. The ATP does NOT fund business
development or commercialization activities, but
does require that companies plan ahead.
- The “bottom line” for
venture capitalists is the direct monetary return
on their investment.
- In
contrast, the “bottom line” for
ATP is broad, national economic benefit.
____________________
1 These
findings are taken from Branscomb and Auerswald’s forthcoming
report to ATP, Between Invention and Innovation: An Analysis
of the Funding for Early Stage Technology Development.
* Data are for all projects funded between 1993 and September
2002.
Factsheet 1.C2 (November 2002)
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