The entrepreneurial environment for science-based university start-ups in the US: comparisons to and...

8/14/2019 The entrepreneurial environment for science-based university start-ups in the US: comparisons to and lessons for J

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Management of Technology 2006

DRAFT

13 The Entrepreneurial Environment for Science-Based University Start-Ups

in the United States: Comparisons to and Lessons for Japan

with Annotated Bibliography on Innovation Policy and Entrepreneurialism

with Notes and Commentary by Brian T. Edwards

DePaul University

Kathryn Ibata-Arens, Ph.D


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IBATA-ARENS

Working Paper: METI MOT / NAIST Survey ProjectDo not cite or quote without express written permission of author


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summary

This working paper provides an overview of the national innovation system in

the United States as it relates to providing an environment conducive to R&D type

(science) university-based new business creation. Major factors underlying the United

States capacity for innovative new science and technology based new business

creation include: the nature of the market, scientific seeds, commercialization,

venture capital, policy, patent system, and socio-political climate. Comparisons to

similarities and differences with the entrepreneurial environment for new business in

Japan are highlighted. The paper concludes with comments on current policy

initiatives in Japan and the lessons that can be drawn from the policy history in the

U.S. Supplementary materials include a brief summary (and sample survey) of a 2006

survey to R&D type university start-ups in the U.S., based on a similar survey to

Japanese start-ups in 2005 by METI and an annotated bibliography reviewing the

literature in the United States on innovation policy and university-based

entrepreneurial activity in the United States.


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1 Introduction

One way of thinking about the potential and ability of countries, regions and

firms for innovation and new business formation is in terms of push (e.g. national

intellectual property, tax policy) pull (market), drag (hindering progress) and

jump (targeted strategies to speed up the trajectory of growth) factors. Table: Life

Science National Innovation Systems in the US and Japan: National Level Push, Pull,

Drag and Jump Factors outlines the components of the national innovation systems in

the United States and Japan for entrepreneurship and new business formation.

Life Science National Innovation Systems in the US and Japan:

National Level Push, Pull, Drag and Jump Factors

FACTORS US JAPAN

Market Pull Pull

Scientific Seeds Push Drag

Commercialization Push Drag

Venture Capital Push Drag

Policy: Push Push

Patent System Push Drag

Socio-Political: Culture Entrepreneurialism and

Jump

Religious Lobby and

Anti-Stem Cell Drag

Anti-Entrepreneurial Drag

Religious Bias-Free Policy

Climate


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Among university start-ups, a primary source of new business creation in life

science, the U.S. leads, with over 400 new university start-ups in 2004 alone.

University start-ups have a very high success rate in the United States. To date, over

two-thirds of all university start-ups remain in business. In Japan, the total number of

university start-ups rose from 1132 in 2003 to 1364 in 2004 (232 new) and 1503 in

2004 (239 new).2

2 Daigakuhatsuvencha, p. 5.


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2 Market

The market acts as a pull factor in both economies, the baby boomer

generation in the US and the aging population in Japan have increased demand for

healthcare products and services, biopharmaceuticals and medical devices. Likewise,

the size of the biotech market in terms of sales and employment has been growing at a

rapid pace in both countries.


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3 Scientific Seeds

At its core, life science is a scientific enterprise, highly dependent on high

quality research generating patentable science and technology. This research and

development is found primarily in quality graduate level research programs and their

related institutes at research-oriented universities. Private research labs, often

funded by large corporate giants (such as pharmaceutical and chemical firms) as well

as top tier government research labs provide other sources of scientific seeds. The

number of patents and scientific papers generated by universities are indicators of this

scientific potential. For example, Graph: University (Life Science) Scientific

Publications shows the rankings of top scientific article generating universities.

Harvard University and Tokyo University top the list, followed by UCLA, Michigan

and Toronto Universities. The United States dominates 12 of the top 20 spots, with

schools including Stanford University, University of California Berkeley and Johns

Hopkins University. Japan is also represented in the top 20, with Kyoto University

(7th), Osaka University (15th), and Tohoku University (16th).


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and University of Michigan (132) occupy the top 3 slots in the United States. In Japan,

Osaka University (22) tops the list, followed by Keio University (13) and Tohoku

University (11).

Large firms, especially pharmaceutical and chemical firms also play a role in

generating scientific seeds in the U.S. For example, Monsanto, developer of a wide

variety of bio-agricultural products (its Roundup brand of herbicide holds a virtual

monopoly), has spawned a number of start-ups. While in electronics, Japanese firms

generate as many patents as American firms, in emerging sectors such as bio, they lag

behind. Many of these start-ups are led by former executives and research staff.

American firms generate many more patents than Japanese firms (leading Japanese

critics to observe that the Japanese pharmaceutical industry has a not-invented-here

syndrome).

Scientific Seeds: Top US Universities by Patents

Start-Ups

Rank in 2004

Number of

Patents in

2004 U.S. University (Rank)


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1 424 University of California 5

2 135 California Institute of Technology 14 (4)

3 132

Massachusetts Institute of

Technology 20 (1)

4 101 University of Texas 5

5 94 Johns Hopkins University 5

6 75 Stanford University 9 (8)

7 67 University of Michigan 13 (5)

8 64 University of Wisconsin 2

9 58 University of Illinois 16 (2)

10 52 Columbia University n/a

Source: Compiled from United States Patent and Trademark Office (2004 data) and

the Chronicle of Higher Educations Tech Transfer Scorecard.

Scientific Seeds and Commercialization:

Top Japan Universities by Patents and Start-Ups

2004

/

1 22 71 10.37

2 13 50 7.39


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3 11 48 7.3

3 11

5 10 92 10.49

6 8 8.7

7 7

8 6 7.14

8 6 8.49

8 6 39 6.93

11 5 44 7.85

20 3 75

20 3 59 10.21


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4 Commercialization

TLOs - Having the capacity to generate scientific seeds and subsequently

obtain patents does not automatically translate into new firm start-ups, however.

Universities, for example, a major source of new technology, must have the will and

wherewithal to commercialize science and technology, either through encouraging

faculty new firm start-ups, or via licensing the technology to existing firms. This

function is usually managed by the technology licensing office and/or related

technology licensing organization (TLO). In the United States the quality of TLOs in

terms of commercialization rates (their ability to get university patents licensed,

developed and marketed) varies widely. There are approximately 232 university TLOs

in the United States (AUTM 2004 data).

No national TLO model exists, though several top universities have model

TLOs. The epitome of best practice in this regard is the WARF (Wisconsin Alumni

Research Foundation) model of University of Wisconsin, Madison.3 Established and

managed by alumni, WARF was instrumental in licensing the technology to produce

3 Science and Technology in Congress, September 2001.


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Vitamin D in the 1930s, which in addition to revolutionizing the treatment of rickets

(which caused spinal deformities) in children, netted millions in revenue, much of

which has been donated to the University of Wisconsin system. It should be noted

that WARF was established after university administrators refused to fund the patent

application for the vitamin D technology. The WARF model goes one better than a

standard TLO, through funding frontier research that might have commercial

potential in addition to operating autonomously from the university. More recently,

the isolation of human embryonic stem cells in 1998 by Dr. James A. Thompson at

University of Wisconsin, Madison was also funded in part by WARF.

Other top universities falter at commercialization due in part to university

administered TLOs and licensing offices prioritizing maximizing (short-term)

university revenue and/or protecting the university from potential liabilities.4

4 Andrew A. Toole, Understanding Entrepreneurship in the US BiotechnologyIndustry: Characteristics, Facilitating Factors, and Policy Changes in David M. Hart,ed. The Emergence of Entrepreneurship Policy: Governance, Start-ups, and Growth inthe U.S. Knowledge Economy, Cambridge University Press, 2003; Lach, Saul andMark Schankerman. The Impact of Royalty Sharing Incentives on TechnologyLicensing in Universities. (January 4, 2006); Myers, Robert A. Challenges forJapanese universities technology licensing offices: what technology transfer in theUnited States can tell us. Center on Japanese Economy and Business Working PaperSeries, Columbia University, based on presentation given to the Institute of


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University licensing offices are often controlled by legal staff, and prolonged licensing

deal negotiations often sap the life out of potential private sector deals. In sum,

UW-Madison has a TLO that works, while many other top universities have TLOs

that dont.

Japan began to acknowledge the role of TLOs in the late 1990s, and by the

early 2000s had established a number of TLOs, though success so far has been spotty.

After government reform to encourage universities to get into the technology

licensing business, for example in reducing patent fees to government approved

TLOs, in the late 1990s, the number of TLOs shot up from less than 5 in 1998 to 35

in 2003. 5

University Start-ups - Another way that universities contribute to the growth

of new business in emerging sectors, including life science is by encouraging university

start-ups. University start-ups are defined here as a new business established using

Intellectual Property in Tokyo, Japan (March 10, 2005).5 Jon Sandelin, Japans Industry-Academic-Government Collaboration andTechnology Transfer Practices: A Comparison with United States Practices, Journal ofIndustry-Academia-Government Collaboration, No. 3; Yuko Harayama, JapaneseTechnology Policy on Technology Transfer: Development of Technology LicensingOrganizations and Incubators Tech Monitor, Mar-Apr 2004.


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science or technology developed at a university.6 A university faculty may also take

an equity stake in the new business, and even be a founder of the new company. In the

US of the total number of start-ups at leading start-up universities such as MIT

and Stanford University a growing proportion of all new start-ups in recent years have

been bio. Likewise, in Japan, about 1/3 of all new university start-ups are in bio, with

the number increasing each year. At universities such as Osaka, Tokyo and Kyoto,

more than half of all new start-ups are bio7

Commercialization: Top Ten U.S. Universities by Start-Ups

(2004)

Rank U.S. University Start-Ups

1 Massachusetts Institute of Technology 20

2 University of Illinois 16

3 Georgia Institute of Technology 15

4 California Institute of Technology 14

6 More than three thousand university start-ups were in existence by 2004, accordingto the AUTM Survey. AUTM Survey 2004; Djokovic, Djordje and Vangelis Soultaris.Spinouts from academic institutions: a literature review with suggestions for furtherresearch. Cass Business School (June 2004); Di Gregorio, Dante and ScottShane. "Why do some universities generate more start-ups than others?" ResearchPolicy(2004).

7 METI HS 18 Daigaku bencha ni kan suru kiso chosa hokoku sho pp. 10, 18


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5 University of Michigan 13

6 Duke University 10

7 University of Pittsburgh 10

8 Stanford University 9

9 University of Colorado 9

10 University of Florida 8

Source: AUTM U.S. Licensing Survey, FY 2004 Survey Summary, The Association of

University Technology Managers, 2005.

Incubators - Another way that university science and technology is

commercialized is through nurturing new university related businesses within

university-sponsored incubators. Like TLOs, there is wide variation in the quality of

incubator facilities. In the US, incubators are of three kinds: university, private sector

and government. According to the National Business Incubator Association there are

1114 business incubators in the US. Of the 1400 in all of North America (U.S.,

Canada, Mexico), 25% are university sponsored. 8 It is estimated that between 75% to

90% of incubators in North America are non-profit with an economic development

8 National Business Incubator Association,http://www.nbia.org/resource_center/bus_inc_facts/index.php.


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focus. Most American incubators provide a variety of services above and beyond

merely offering firms low cost rental space, including introductions to the local VC

community, service providers such as patent attorneys and accountants (sometimes

on a pro-bono basis), and marketing assistance. Most incubators have a full-time

manager whose job it is to support tenant firms and help them grow and eventually

graduate out of the incubator and continue on their own. Leading incubators also

coordinate community building social events as well, adding to the potential for a

creative, innovative milieu within incubators, comprised of member firms and the

service and other networks to which the incubator is connected.9 Studies have found

that these quality value-added services have a positive impact on tenant firm

performance. According to the NBIA, of all start-ups, those that benefit from being in

incubators are most likely to survive (87% of incubator tenants are said to have

survived). The Small Business Administration (SBA) in the United States was

instrumental in encouraging the establishment of incubators in the U.S., which in 1980

9 Wiggins, Joel and David V. Gibson. "Overview of US incubators and the case of theAustin Technology Incubator". Int. J. Entrepreneurship and Innovation Management(2003) 3, 56-66.


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had only 12 incubators nationwide. Studies have also shown that incubators also

contribute to the growth of university research parks.10

In Japan, the number of incubators is smaller, with the bulk of them being

government-sponsored, mostly by city and prefecturial governments. By 2002 the

Japan Association for New Business Incubation Organizations (JANBO) estimated

that there were 325 incubation facilities in Japan. The vast majority of them were

established after 1999, after a variety of incentives (e.g. subsidies) were put in place

by METI and MEXT to encourage incubator formation. According to a survey by

JANBO in 2002 of 113 incubators, nearly 80% of incubators were non-profit. In both

types of incubators, more than a third of tenant firms were software start-ups.11 One

of the major weaknesses in Japanese incubators is the lack of managerial expertise and

other support services provided to tenant firms. In fact, many incubators do not have

full-time managers, or managers at all. According to JANBO, less than 10% of

incubators surveyed offered tenants support services. Support in this case was

10 Link, Albert N. and John T. Scott. "US University Research Parks." J Prod Anal(2006) 25: 43-55.11 Inkyubeshon shisetsu no jittai chosa 2002 nigatsu.


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usually limited to providing firms with information. The few incubators that have

managers at all tend to be (albeit well-intentioned) career government bureaucrats. In

a 2005 survey by METI to 371 university related start-up firms, few respondents

found incubators to be helpful in any service other than providing the firm space.12

In the US, over 74% of new ventures are formed near the universities where

the technology originates. In recent years, new ventures have become

more-and-more science based. For example, in VC-intensive industries in the United

States, biotechnology has become the leading source of growth in employment, and

second only to software in sales growth. As the American software industry continues

to move offshore, it is expected that the bio industry will become the primary engine

of growth in the future (See Tables: Sales Growth in VC Intensive Industries,

Employment Growth in VC Intensive Industries) In Japan, bio start-ups outpace other

types, comprising nearly 38% of all university start-ups (total 1,112 in 2005),

compared to a total of 29.9% in software.13

12 METI 2005 Daigaku hatsu bencha chosa, Heisei 17, roku gatsu, Keizaisangyosho.13 METI Daigaku hatsu bencha ni kan suru kiso chosa hokoku sho Heisei 17 nen 6


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Sales Growth VC Intensive Industries 2001 2003

(Top 5)

VC sales growth Total sales growth

Computer software 31% -2%

Biotech 28% 22%

Healthcare services 26% 25%

Retailing/media 20% 9%

Computer hardware and

services

12% 5%

Source: Venture Impact 2004, Global Insight Survey, NVCA.

Employment Growth VC Intensive Industries 2001 2003

(Top 5)

VC employment growth Total employment

growth

Biotech 23% 5%

Computer software 17% -8%

Retailing/media 12% -1%

gatsu, zu 2-3: saikin setsuritsu sareta daigakuhatsu vencha no jigyo bunya, p. 9


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Healthcare services 10% 9%

Computer hardware and

services

-1% -14%

Source: Venture Impact 2004, Global Insight Survey, NVCA.


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5 Venture Capital

One of the biggest hurdles for a new business start-up is amassing the capital

to grow and build the business. For science-based start-ups, the initial capital

requirements are often much higher than in other sectors such as software, due to the

need for laboratory and testing equipment, and often wet-lab space.

The term venture capital or VC describes funds invested in new, unproven

businesses. An unproven business is a new enterprise that has an unproven track

record in sales revenue and profit (in fact, it could merely exist as an idea in the mind

of the founder). Broadly, VC is a type of private equity investment in which an

equity stake in a firm is taken in exchange for cash investment. In Europe, VC is often

referred to as private equity.

Most importantly, venture capital involves hands-on venture management on

the part of the venture capitalist. The venture capitalist not only provides money, but

also relevant know-how and expertise (primarily management, but could also be

technical). Venture capitalists also provide new entrepreneurs access to their


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personal networks, which has benefits for new firms including introducing new board of

advisor members and qualified service providers. For this reason, individual venture

capitalists and venture firms tend to invest mainly in firms in their immediate locales

(i.e. they tend to be region-specific). Surveys by the NVCA confirm that VC firms

tend to invest primarily in their immediate locales, and invest in other places as part

of a syndicate of investors, where another firm takes the lead investment position

(and therefore the greatest risk).

There are generally six stages in VC investment, from the first idea (scientific,

technological seeds, initial business model concept) to exit (when investors cash out):

pre-seed, seed (or start-up), early, expansion, later and exit.

Before a firm becomes a firm, it exists in the minds of the potential

entrepreneur (e.g. through the discovery, invention of scientific or technological

seeds or the development of a new business model). Particularly in high-tech

industries, new entrepreneurs seek financial support to flesh out the idea into a

product prototype design, or to demonstrate that their new product idea has market


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appeal. This pre-seed stage is often described as the one in which the concept for the

new business is validated as a good one, called the proof-of-concept.

Once a new entrepreneur has decided (in the best case scenario, after

consulting with qualified experts in the area and evaluating the potential market

impact and competition in that product space) to go ahead and start a business he

or she starts to put together the people and material resources (infrastructure) of the

new firm. This seed or start-up process usually takes up to 18 months (shorter for

software, longer for bio). In the next, early stage after formation, the firm might be

producing prototypes or beta versions of its product, and introducing its product to

market. The firm is usually 1 3 years along since inception. By the expansion stage,

the firm has begun generating sales revenue, though not necessarily profit and also

receiving critical market feedback, helping it to improve its product and expand sales.

By later stages, the firm has been around (on average) for at least 3 years and has

earned a steady stream of revenue. It may even be profitable. Once a venture firm has

entered the later stage of its development, its investors often seek an exit cashing


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out on their investment. This happens through initial public offering (IPO), an

acquisition of the firm by another firm, re-sale of firm stock to a third party, or

buy-back of equity by the firms principals. In most cases, the exit stage (particularly

if the firm is going public) requires a cash infusion, for example for the services of

lawyers and auditors.

Venture capital has played a major role in the United States in supporting new

business creation and growth. In life science, VC has fueled rapid growth in some of

the nations stellar start-ups including Genentech. However, a common misperception

of the role of VC in the US attributes the greatest credit to venture capital firms, also

referred to as classic VC. This is a misnomer really, since the bulk of venture

capital for new firm start-ups is actually of the angel variety. That is, most seed to

early stage venture funding comes from high net-worth individuals, often successful

entrepreneurs themselves. Further, after the collapse of the tech bubble in 2000,

classic VC in the US became risk averse. That is, while in biotech the amount of funds

per investment has risen dramatically, the number of deals has dropped considerably.


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For example, in 2006, the majority of classic or institutional VC went to

expansion or later stage firms. At the peak of the VC boom (1999-2000) in the United

States, nearly $95 billion dollars was invested in over 6000 investments (or deals).

After the tech collapse of the dot.coms in the U.S., investments were down to $22

billion by 2002 and the number of investments also experienced a precipitous decline

to just over 2300 deals. 2006 has shown some recovery, but the United States has

yet to return to the 2000 peak levels.14

This description of the activities of venture capital firms only paints a very

small part of the picture of the process of getting a new business from

concept-to-market-to-profit. In reality, so-called classic VC, that provided by VC

firms, represents a tiny proportion of the funds that it takes to get a firm up and

running. According to the Global Entrepreneurship Monitor (2005 Executive GEM

Report), classic VC represents only an average of 13.4% of classic and informal VC

put together in 25 GEM countries. In other words, the bulk of start-up capital for new

14 2006 Venture Capital Industry Report, Dow Jones Venture Source.


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firms comes from informal sources, including the traditional 4 Fs: Founders,

Friends, Family and Fools (or foolhardy strangers).

Angels vs classic VC - It is estimated (since angel finance is often informal,

i.e. non-contractual, in nature) that the 250,000 angels in the U.S. invest in 90% of

new firms at their earliest stages of conception. The amounts are not huge $2 million

or less per investment but the number of firms impacted by angel investors is

significant upwards of 30,000 50,000 per year.

In contrast, the 1417 active (measured by Dow Jones as the number of firms with at

least one investment between 2000 and 2006, See 2006 VC Industry Report), the

bulk of which (942, or 66%) invested in 4 or fewer firms. In 2005, there were a total of

only 2239 deals or investments. Further, the angel market is estimated at twice the

size of the classic VC market, $100 billion (angel) versus less than $50 billion

(classic).15 Table: Angels vs. Classic VC provides an overview:

Table: Angels v. Classic VC

15 William F. Payne, Angels Shine Brightly for Start-up Entrepreneurs, KauffmanThoughtbook 2004, Kauffman Foundation; Andrew Young, Angel Finance: the OtherVenture Capital January 2002, Paper University of Chicago Graduate School ofBusiness.


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# of Firms

invested per

year

Amount per dealStage Market size

Angels

250,000

(SBA)

30 50 K $2 million or

less

90% of

seed/start-ups

$100 bil.

($30 bil.

annually)

Venture Capital

1417*

3K Up to 100s of

millions

Expansion/

later

$48.3 bill

($ 22 bil.

annually)

Compiled from NVCA, SBA and Kauffman Foundation data.

Some alarming differences can be seen when comparing the state of VC in the

U.S. to other industrial centers, particularly Japan. Cumulative VC in the United

States, that is venture capital investment that has yet to exit, remains the worlds top,

closely followed by cumulative investments in Europe. Far behind are cumulative VC

investments in Japan. See Graphs: Cumulative VC Investment in Europe, Japan and

the United States and Trends in VC Investment in Europe, Japan and the United

States.


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Cumulative VC Investment in Europe, Japan and the United States

Source: 17 Venture

Enterprise Center, http://www.vec.or.jp/vc/survey-17j.pdf

VC

2,692 2,729 2,7472,789

1,719

82 102 100 97 88

2,387

1,485

2,170

1,932

1,307

-

500

1,000

1,500

2,000

2,500

3,000

2000 2001 2002 2003 2004


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Trends in VC Investment in Europe, Japan and the United States

Japan remains at the lowest rankings of all the 27 OECD countries plus the European

Union, behind Hungary and above only the Slovak Republic.16

16 See Figure 1, Venture Capital Investment by stages as a share of GDP, 1999-2002,Science Technology Industry, Venture Capital: Trends and Policy Recommendations,undated report, OECD.

VC

438

231 238

384

653

23 28 17 16 15 20

1,132

225202

486404

513

338

-

200

400

600

800

1,000

1,200

2000 2001 2002 2003 2004 2005

17 2005NVCA Money Tree 1$=1072005EVCA Final ActivityFigures 2005 (1=139


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6 Policy

National level policies supporting new business creation in emerging sectors

have played an important role in facilitating growth in new industries. Apart from

signaling national-level support for new businesses in frontier sectors, specific

measures have provided incentives and impetus for new business formation. In the

United States, for example, the role of SBIRs and STTRs in the earliest stages of

growth in high technology and science-based new firm start-ups has been critical in

supporting new businesses.17 Other key policies have included Bayh-Dole (1980), the

Small Business Innovation Development Act (1982) (SBIRs), Orphan Drug Act (1983),

the Small Business Tech Transfer Act (1992) (STTRs), and the FDA Critical Path

Initiative (2004).

Bayh-Dole (1980) The intent of Bayh-Dole was to establish patent policy

that would encourage patent holders to collaborate with the private sector.

Specifically, the intellectual property rights of inventions resulting from Federal

17 The Advanced Technology Program (ATP), created in 1990, has also had a positiveimpact on technology commercialization. Fogarty, Michael S., Amit K. Sinha and AdamB. Jaffe. ATP and the Innovation System. A Methodology for Identifying EnablingR&D Spillover Networks. National Institute of Standards and Technology (October2006) GCR 06-895.


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funding would remain with the inventor under certain conditions. The conditions

included prioritizing small business in the granting of licensing rights to commercialize

technology. The institutions targeted by Bayh-Dole were primarily federally-funded

research institutes, and secondarily universities.

Since Bayh-Dole was enacted, university patents and start-ups have both

increased significantly.18 Universities have also increased their licensing revenue,

over the long term. For example, Stanford Universitys $400 million in royalty income

between 1991 and 2000 (compared to $4 million for the period 1981 - 1990) can be

traced to disclosures made back in the 1970s.19

18 Lita Nelson, The Rise of Intellectual Property Protection in the American

University, Science, March 6, 1998, Vol. 279, Issue 5356; Sampat, Bhaven N. PrivateParts: Patents and Academic Knowledge in the Twentieth Century Working Paper.19 Sandelin, undated. Some have cast doubt regarding the true impact of Bayh-Dole,for example by arguing that while the number of patents increased after Bayh-Dole,the quality of patents declined. Sampat et. al. re-examine this thesis using longer-termpatent data in Bhaven N. Sampat, David C. Mowery and Arvids A. Ziedonis, Changesin university patent quality after the Bayh-Dole act: a re-exmination, InternationalJournal of IndustrialOrganization, 21 (2003) 1371-1390, Elsvier. See also David C.Mowery, Richard R. Nelson, Bhaven N. Sampat and Arvids A. Ziedonis, The growth ofpatenting and licensing by U.S. universities: an assessment of the effects of theBayh-Dole act of 1980, Research Policy30 2001 99-119; David C. Mowery and BhavenN. Sampat, Universities in national innovation systems chapter draft;


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University Licensing Activity

-

2,000.00

4,000.00

6,000.00

8,000.00

10,000.00

12,000.00

14,000.00

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Time Series

Invention disclosures received

New U.S. patent applications

U.S. patents granted

Startup companies formed

Revenue-generating licenses

New licenses executed

Source: Figure 1: National Science Foundation, Division of Science Resource

Statistics 2006, http://www.nsf.gov/statistics/seind06/append/c5/at05-69.xls.

SBIRs (1982) The Small Business Innovation Research Program (SBIR) was

established in 1982 in order to stimulate public-private sector innovation by requiring

eleven major federal departments and agencies to allocate a small percentage of their

budgets to award to American-owned small business.20 The largest SBIR granting

20 Scott J. Wallsten, The effects of Government-Industry R&D Programs on PrivateR&D: the Case of the Small Business Innovation Research Program, The RANDJournal of Economics, Vol. 31, No. 1 (Spring 2000), pp. 82-100; Joshua S. Gans andScott Stern, When Does Funding Research by Smaller Firms Bear Fruite?: Evidencefrom the SBIR Program Economic Innovation and New Technology, 2003, Vol. 12(4),pp. 361-384;Audretsch, David B., Albert N. Link and John T. Scott. Public/PrivateTechnology Partnerships: Evaluating SBIR-Support Research. Research Policy


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agencies include the Department of Defense (DoD), the National Science Foundation

(NSF) and the Department of Health and Human Services (DHHS, within which the

National Institutes of Health, NIH, resides). Awards are granted in two phases:

start-up (up to USD 100,000) and phase two (up to USD 750,000). In 2005, for

example, the Department of Defense provided over USD 1 billion to small businesses

through SBIR grants.21

Phase one corresponds to the VC proof-of-concept, whereby funds are

granted for about 6 months to test the merit or feasibility of the technology. Phase

two awards support further R&D and testing, at this stage aiming for

commercialization. Curiously, long-term studies of SBIR recipients have found that

firms receiving only phase one support have been more successful in

(January 2001); Toole, Andrew A. and Dirk Czarnitzki. Biomedical AcademicEntrepreneurship Through the SBIR Program. (June 2005); Toole, Andrew andCalum Turvey. The relationship between public and private investment in early-stagebiotechnology firms: Is there a certification effect? Prepared for presentation at theInternational Conference on Agricultural Biotechnology, Ravello, Italy (July 6-102005); Cooper, Ronald S. Purpose and Performance of the Small Business InnovationResearch (SBIR) Program. Small Business Economics(2003) 20: 137-151; Siegel,Donald S, Charles Wessner, Martin Binks & Andy Lockett. Policies PromotingInnovation in Small Firms: Evidence from the US and UK Small Business Economics(2003) 20: 121-127.21 http://www.dodsbir.net/annualreport/annrpt.html


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commercialization than those seeking and obtaining phase two awards. One might

interpret this as the government supporting firms in later stages that do not otherwise

have market viability.

STTRs (1992) The Small Business Technology Transfer (STTR) program is

similar to the SBIR program in that the goal has been to promote the

commercialization of technology that has been developed with federal funds.22 The

main differences are twofold. First, unlike the SBIR, scientists and faculty

employed-full time at a university and/or research institution are allowed to apply.

Secondly, the phase two awards under STTR are currently capped at a lower amount:

USD 500,000. Also, the number of granting agencies are fewer (only five):

Department of Defense (DoD), Department of Energy (DoE), Department of Health

and Human Services (DHHS), National Aeronautics and Space Agency (NASA), and

the National Science Foundation (NSF). The NSF tracks public investment in the

national scientific infrastructure, including the SBIRs. See Graph below:

22 Jonathon Baron, The Small Business Technology Transfer (STTR) program:converting research into economic strength, Economic Development Review, 11 No. 4(Fall 1993).


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Orphan Drug Act (1983) The Orphan Drug Act when first enacted, put the

onus on firms to demonstrate how prohibitive the R&D costs of developing drugs that

could only be marketed to those with rare diseases would be.23 Start-up firms,

however, lack the resources to prepare such time-intensive paperwork and not

surprisingly, few firms applied for orphan drug status. It was not until the Act was

revised to allow firms orphan drug status if they could demonstrate that they were

developing a drug for ailments that affected less than 200,000 Americans. While

23 Rohde, David Duffield. The Orphan Drug Act: An Engine of Innovation? At WhatCost? Food and Drug Law Journal55 (2000) 125-148.


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orphan drug status does not grant developing firms a patent, it does allow them a

seven year monopoly on the sales of the product. Since its enactment in 1983, a

number of drugs have been developed to treat ailments such as tuberculosis. Further,

a report by the Department of Health and Human Services noted that orphan drug

approval has been helpful in stimulating the development of the biotechnology

industry, for example, in attracting venture financing to biotech companies developing

orphan drugs.24

FDA Critical Path Initiative (2004) In response to the slowdown in the early

2000s of new submissions to the FDA for drugs, therapies and medical device

approvals, the FDA published a white paper in 2004 outlining a national strategy to

speed-up and improve the quality of evaluations of new technologies in the approval

pipeline. To date, there is a high failure rate among new potential products while at

the same time the cost of developing new prescription drugs in particular has risen

dramatically to more than USD 800 million by 2000. Further, more potential new

24 The Orphan Drug Act: Implementation and Impact, Department of Health andHuman Services, Office of Inspector General, May 2001, OEI-09-00-00380.


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products fail in the 2000s than failed in the 1980s, despite major advances in basic

science such as in genomics. The Initiative includes measures to improve the

evaluation process in terms of the ability to better gage the likelihood of success in a

potential new product. Specifically, measures are underway to better utilize

bioinformatics, biomarkers and disease models in evaluating new technologies.

25

Comparison: Review of Recent Policy Initiatives in Japan

Japan has emulated several of the aforementioned policies in recent years

through its own Bayh-Dole-esque university reform. For example, national

universities after 2000 are expected to fund a significant portion of their own budgets

with the intent of having universities act more independently of government, and

ideally more innovative. The result has been to encourage more private sector

initiatives to capitalize on university technology, including supporting the

development of technology licensing and university start-ups. In Japan, the most

significant national policy initiative to-date - apart from a reform of SME policy in

25 Challenge and Opportunity on the Critical Path to New Medical Products:Innovation or Stagnation?White Paper, Department of Health and Human Services,U.S. Food and Drug Administration, March 2004.


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general - has been the Innovation Cluster Initiative.26

As I have written in my 2005 Innovation and Entrepreneurship in Japan, METI

(Ministry of Economy Trade and Industry) launched its Cluster Initiative and

Cluster Plan in 2000 and 2001 respectively. The Plan intends to promote

innovation and new business creation, particularly in high technology industries.

Related policies by MEXT (Ministry of Education, Culture, Science, Sports and

Technology) are aimed at encouraging more science and technology-based university

start-ups via two main measures: establishing TLOs and expanding graduate MBA

programs. Within the Cluster Initiative is an emphasis on promoting the biotech

industry, particularly in the Kinki and Hokkaido regions. By fiscal year 2002, the

national life science budget had grown to 440 billion yen. Other initiatives include the

establishment of and SBIR program, modeled on the SBIR program in the U.S., as well

as measures targeting thejinzai(personnel skills) problem such as the NEDO Fellow

program that places young scientists and other professionals in small businesses,

26 See Ibata-Arens, Innovation and Entrepreneurship: Politics, Organizations andHigh Technology Firms, Cambridge University Press, 2005, chapter 4 Japans Questfor Entrepreneurialism.


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whose salaries are paid for a time by the Japanese government.


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7 Patent System

Though reforms began in late 1990s, essentially the Japanese patent system

was designed to diffuse foreign technologies into large Japanese corporations. Until

the 2000s, the Japanese patent system was geared toward technology diffusion as

opposed to the protection of intellectual property. This is evidenced in the policy of

laying open the details of all patent applications after filing a patent yet-to-be

granted. This has generally resulted in large firms, with the financial and legal

resources, to routinely engage in patent flooding of small firms patents-in-progress.

In Japans first-to-file model, a shuuhenstrategy is used, whereby the larger firm

obtains patents on all potential permutations/expansions on the core technology of

the original patent. This is in marked contrast to the patent system in the US, which

is based on a first-to-invent philosophy. In the latter model, the intellectual

property of the inventor has precedence over any later attempts to exploit the

invention.27

27 Ibata-Arens The Business of Survival Special Issue on Dysfunctional Japan At Home

and in the World,Asian Perspective, Vol. 24, No. 4, 2000.


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8 Socio-Political Culture

Debates over the use of stem cells, fueled by religious concerns over the use

of embryonic stem cells in particular have put a drag on growth in life science capacity

in the United States.28 For example, responding to pressures by Christian lobby

groups, the Bush administration imposed national restrictions on federal funding for

stem cell research in 2001, limiting federal funds to existing cell lines, meaning those

cells that had already been isolated. Further, emboldened by these national signals,

local Christian groups have targeted particular states as test cases, aiming for a

constitutional amendment forbidding stem cell research. One of these test states is

Missouri, home to the emerging St. Louis life science cluster.

After a 30 million dollar PR campaign, the stem cell initiative (protecting

researchers rights to use stem cells) was narrowly passed via state-wide referendum

in November 2006. 29 million dollars of the 30 was funded by the Stowers, two cancer

survivors who established the Stowers Institute in Kansas City, Missouri. It has been

28 Stem cells are of two types: adult and embryonic. The debate over stem cell researchis over the use of embryonic though in public discourse the two have often beenconflated.


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estimated that several hundred million dollars in research dollars has been lost to

other states, notably to researchers at Massachusetts Harvard University - funds

that could have been invested in the local economy of Kansas City. Worse,

neighboring states have tried to capitalize on the troubles of Missouri. In 2005, the

governor of Illinois sent a personalized letter to the top 100 or so scientists in

Missouri, inviting them to come on over. Rod Blagojevich backed this offer with a

state-sponsored initiative of $10 million dollars to support stem cell research.

California, already the nations leading high tech state, announced a USD 10 billion

stem cell initiative, to be invested over the next ten years. Competition has come

from farther afield as well.

A 2007 Business Weekarticle chronicled the rising incidence of Americans

traveling to China to obtain stem-cell based treatments for spinal cord injuries.

Clinical developments in China are progressing at a rapid pace, and Chinese

biotechnology companies are reportedly forging ties with forward thinking others


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around the world.29 What we have in the US in the early 2000s is a mixed message

from the national government, signaling on the one-hand support for fast tracking of

new drug discoveries, but on the other, indicating that new developments in stem cell

therapies should be governed in part by ethical considerations. Japans religious-bias

free scientific environment might prove a boon in this regard.

29 Stem-Cell Refugees: Yanks are flocking to China for therapy, Business Week,February 12, 2007.


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Supplementary Materials

1)

US Venture Survey: Brief Summary and Project Overview

2) Annotated Bibliography on Literature on Innovation Policy and

University-Based Entrepreneurialism in the United States by Brian

Edwards


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(1) US Venture Survey: Brief Summary

In November 2006, a mailing was sent to 1000 start-up venture businesses across the

United States. The mailing included a cover letter requesting participation in the

survey and promising complete anonymity and confidentiality to the respondents, as

well as a complimentary copy of the Comparative Survey Report outlining the results

in the previous surveys in the UK and Japan (2005). Whenever possible, the letter

was personalized, meaning it was addressed to the personal name of the

president/CEO. The mailing included a project overview (attached), a 25 question

four page survey and a pre-addressed, stamped return envelope, requesting a reply

by November 30, 2006. By the end of December, we received 117 responses

(response rate 11.7%) representing all regions of the U.S., including Hawaii.

We are currently in the process of interpreting the survey results. However, several

preliminary comparisons are worth noting:

1) U.S. new business start-ups are aiming, in terms of exit, for merger andacquisition to a much higher degree than seeking IPO. This tracks with the

reality of exits for start-ups. That is, globally, about 80% of all exits are

non-IPO. Japanese start-ups, on the other hand, seem to be aiming for IPO

to a much higher degree than American start-ups, for whatever reason.

2) A greater number of respondents to the US survey (57.1%), than the eitherthe UK (39.6%) or Japan (37.1%) were life science type start-ups (bio, medical

or healthcare), which might be reflective of the shift in the U.S. out of its

earlier high growth in software start-ups, into the emerging global life science

sector.

3) US start-ups have a strong R&D basis, either through developing in-housepatented technologies or via license arrangements with universities.


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4) To obtain customers, US start-ups make better use, and to a higher degree ofa variety of networks/resources (introductions from previous employers

colleagues, Internet, trade shows, direct sales, R&D collaborators, incubators,

university professors, shareholders, etc.).

5) Confirming common perceptions of the biggest challenges for new start-ups,like their contemporaries in the UK and Japan, US start-ups struggle to raise

start-up finance.

6) In all three countries, company founders make use of their personal networksfor many business-related goals. This indicates the importance of social

capital in new business start-ups.

7) UK firms appear to be more reliant on government agencies and consultingservices than their counterparts in the US and Japan, while Japanese

start-ups are more reliant on government subsidies.

8) VC firms in the US provide a variety of extra services to start-ups, beyondmonetary investments. These services include assistance with business plans,

personnel recruitment and financial management.

9) Angel investors in the US play similar roles, and are even more hands-on thanVCs in this regard. Stimulating an angel investment community in Japan might

therefore have a positive impact on new business formation and start-up

success.


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VENTURE BUSINESS in the US, UK and JAPAN

PROJECT OVERVIEW

Scope of Survey

Our survey research project compares the entrepreneurial environments in the US,UK and Japan, analyzing how to help their firms grow and prosper entrepreneurs

make use of various support resources including university technologies and venture

capital. Findings will be used to compare and make recommendations regarding best

practices in local, regional and national level entrepreneurship strategy and policy.

The Survey has already been implemented in the United Kingdom and Japan (2005).

Results from the current survey will be compared to best practices in the UK and

Japan.

Participants

The Survey is being sent to a total of 1000 U.S. companies, which the organizers have

selected from state, university and local incubator/business development sources.

These companies are mainly in high-growth fields, developing new technologies, or

providing high-value services. Most are less than 10 years old.

Research Team

Kathryn Ibata-Arens, PhD Northwestern University, is assistant professor in the

department of political science at DePaul University in Chicago. Her research

interests are in innovation and technology policy, particularly in the United States and

Japan. Ibata-Arens current research examines emerging life science (biotechnology

and medical device) regions in Japan and the United States. In 2005 and 2006, she


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was a CGP/Abe Research Fellow, Faculty of Commerce, Doshisha University, Kyoto.

Her work has appeared in publications including the Asian Wall Street Journaland

Review of International Political Economy. Ibata-Arens book, Innovation and

Entrepreneurship in Japan: Politics, Organizations and High Technology Firms,

Cambridge University Press (2005) examines firm and region level strategies of

innovation and includes comparisons to regions in the American Midwest.

Ibata-Arens lead research assistant for this project, Brian Edwards, is a political

science major with a concentration in political economy and international business.

His interests are in high tech global market research, especially China, and becoming

an entrepreneur.

Tetsuya Kirihata, MS in economics, Kyoto University, is associate professor in the

Research Center for Advanced Science and Technology at Nara Institute of Science

and Technology. His research interests are in venture capital, high-tech ventures and

commercialization of science and technology in Japan. Kirihatas current research

examines the support needs of new technology based firms and the post-investment

activities of venture capital firms in Japan. His work has appeared in leading Japanese

business journals including Venture Business Japan. In his book How to Win in the

Nanotechnology Revolution (Japanese) Kodansha (2005), Kirihata analyzes trends

and new business strategy in the global nanotech industry. Kirihatas lead research

assistant for this project, Hiro Yamagata, is a graduate student in Business, Doshisha

University, Kyoto. His interests are in international logistics and business translation

(English-Japanese). He plans to become a university professor.

DePaul University

Founded in 1898 and located in the heart of Chicago, DePaul University has grown to

become Americas largest Catholic university. DePaul has a number of award winning

programs in business and technology. Its part-time MBA Program ranks in the top 10

nationally.


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Nara Institute of Science and Technology (NAIST)

NAIST is a graduate science and technology university, and is one of only two in

Japan focusing exclusively on technology. The University has three schools:

Information Science, Biological Sciences and Materials Science. NAIST is located in a

research triangle known as Keihanna (Kansai Science City) which links the cities of

Nara, Kyoto and Osaka. The Keihanna area is one of the most technology-rich areas

of Japan, with a strong venture business tradition. It has a population of around 16

million people and a GDP equivalent in size to that of Canada.

Research Support

The survey research project is supported by DePaul Universitys University

Research Council (URC) and Political Science Department, NAISTs Research

Center for Advanced Science and Technology and with grant monies from Japans

Ministry of Economy, Trade and Industry (METI), Management of Technology

Program (MOT). METIs MOT Program seeks to stimulate new business ventures in

Japan, particularly those emerging out of the science and technology of Japanese

universities (http://www4.smartcampus.ne.jp/index.php?7).

Copies of Survey Report

For a complimentary copy of the Survey Report: Venture Business in the UK, US and

Japan (to be released in February 2007) send a request to Ibata-Arens via email,

telephone or fax.

Contact Information

Kathryn C. Ibata-Arens, Assistant Professor

Department of Political Science, DePaul University

990 W. Fullerton Ave., Suite 2200, Chicago, IL 60614, Phone: 773-325-4716

(direct)

http://condor.depaul.edu/~kibataar/intro.htm [email protected]


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Tetsuya Kirihata, Associate Professor

Research Center for Advanced Science and Technology

Nara Institute of Science and Technology (NAIST)

Takayama, 8916-5, Ikoma, NARA, JAPAN, 630-0192

Phone: 81-743-72-5600 Fax: 81-743-72-5609

http://ipw.naist.jp/cast/ [email protected]


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(2) Annotated Bibliography on Innovation Policy and Entrepreneurialism with Notes

and Commentary

Annotated Bibliography on Innovation Policy and Entrepreneurialism with Notes and Commentary

Brian T. Edwards

National Policy

The federal government has enacted several policies in the last

quarter-century with the expressed intention of providing incentives and

resources to US business to undertake research on projects that the

constraints of the market would have otherwise made impractical. Beginning

with the Bayh-Dole Act of 1980, and culminating with the Advanced

Technology Program of 1990, several policy measures were adopted to

streamline the process through which universities could patent and

subsequently license intellectual property created by their research

professors. This paper is provides a brief review of the prevailing literature

on the subjects of national innovation policy, academic entrepreneurialism,

business incubation and research parks, and technology licensing in US

universities.

SBIR Policy(http://www.zyn.com/sbir/sbres/sba-pd/)


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The Small Business Innovation Research Program (SBIR) program is the

largest government partnership program with industry, and it is thought by

many researchers, economists, and of course politicians, to be the most

successful innovation policy enacted anywhere in the world. Enacted in

1982 with the passage of the Small Business Innovation Development Act

(SBIR), the SBIR program was intended to fill the gap left by disincentives,

which prevented private industry from sufficiently funding the development of

an innovative small business environment. Initially, the Act mandated that

each federal agency with a budget in excess of $1 billion reserve a fixed

percentage for small business.

In 2000, the Congress passed the Small Business Innovation Research

Program Reauthorization Act (Public Law 106-554), which amended the

original provisions for the second time since they were first signed into law.

Among the more significant specifications put forth in the amendments were a

requirement that the SBA create a database of all SBIR award research which

would be publicly searchable and clarify data rights for achievements during all

three phases of the program, mandates that candidate firms completing Phase

II submit a detailed commercialization plan before graduating to Phase III or in

the case of non-viability an assessment of reasons for failure must be


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completed. Additionally, the Reauthorization Act established the Federal

and State Technology Partnership Program (FAST) to strengthen the

competitiveness of small businesses throughout the country.

Awards are administered in three phases. Phase I is the startup phase,

which is a six month period of heavy research on technology feasibility and

potential, with awards not in the excess of $100,000. Phase II is a two year

investment of $750,000. During this time the technology is evaluated

through R&D and the commercial potential of the venture is assessed.

Phase III is non-funded and is entirely focused on determining the commercial

viability of the technology developed. Firms that have succeeded in passing

the first two Phases are left to the mercy of the market, but participation

alone in the SBIR program is generally viewed by researchers as a

commercially beneficial characteristic from the point of view of venture

capitalists.

Audretsch, David B., Albert N. Link and John T. Scott. Public/Private

Technology Partnerships: Evaluating SBIR-Support Research. Research

Policy (January 2001)

http://www.dartmouth.edu/~jtscott/Papers/01-01.pdf.


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Keywords: Department of Defense; Basic Research; SBIR

This essay evaluates public support of private-sector research and

development through the Defense Department SBIR program. It uses as it

basic premise the argument put forward by Baron (1998) that, "the rational

for SBIR is the same as the general argument for government R&D- positive

externalities, social benefits exceeding private ones." The paper does not

debate the appropriateness of the SBIR program generally, taken that as an

established given, but instead focuses on evaluating its effectiveness.

The methodology employed includes three elements; (1) a broad-based

statistical analysis of SBIR recipients; (2) a case-based investigation of

recipients regarding the impacts associated with SBIR awards, and; (3) a

case-based investigation of the social rate of return from SBIR-funded

research. First they try to determine whether SBIR recipients are achieving

innovation and commercialization of their research. The authors conclude

that the DoD's SBIR program is encouraging commercialization from research

(with 1/3 of recipients succeeding at great profit) that would not have been

undertaken without SBIR support; and, moreover, it is overcoming reasons for

market failure that cause the private sector to under-invest in

R&D. Additionally, based on the case studies done, the authors conclude


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that most of the companies that relied on SBIR funding to further their basic

research to the Phase II level would not have undertaken such research

without public funding, which is a stated goal of the SBIR program.

The second question to which the authors hope to unlock the answers is

whether or not the SBIR program changes the behavior of knowledge-workers

and thereby helps create a science-based entrepreneurial economy. They

conclude that the program has an overwhelmingly stimulating effect on

scientists and engineers, which also has a spillover effect on the greater

scientific community with academic entrepreneurs inspiring their colleagues to

undertake similar ventures.

Toole, Andrew A. and Dirk Czarnitzki. Biomedical Academic

Entrepreneurship Through the SBIR Program. (June 2005)

http://bibserv7.bib.uni-mannheim.de/madoc/volltexte/2005/1121/pdf/dp0

547.pdf.

Keywords: Academic Entrepreneurship; SBIR Program; University R&D

Paper considers the effectiveness of the SBIR program as a policy fostering

academic entrepreneurship. Toole is unquestionably one of the international

leading scholars tracking SBIR policy, and this is one of several studies that


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are widely cited throughout all the scholarship focused on SBIR

policy. There are two main characteristics of the program that make it

effective at spawning academic entrepreneurship; (1) the SBIR program will

fund promising but unproven technologies earlier than private investors,

which creates an incentive to pursue commercialization; (2) the SBIR program

requires academic entrepreneurs to commit "full-time" to the

commercialization process throughout the duration of the project, though it

does not require them to leave their position at the research institution.

In the biotech sector in particular, there is mounting evidence that faculty

involvement in the commercialization of university-based technologies is

important for success. This study also focuses on tracking so called "star

scientists, otherwise known as principal investigators (PI), and it is

hypothesized that these individuals possess valuable specialized knowledge,

network contacts, or reputations. The authors hypothesize that because of

these specialized capabilities or advantages, SBIR firms "linked" to an

academic entrepreneur should be more successful than similar "non-linked"

SBIR firms.

The papers findings determine first that the SBIR program is effective at

promoting academic entrepreneurialism, and the firms that are associated with


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these scientists perform significantly better than other non-linked firms in

terms of follow-on VC funding, SBIR program completion, and patenting.

Toole, Andrew and Calum Turvey. The relationship between public and

private investment in early-stage biotechnology firms: Is there a certification

effect? Prepared for presentation at the International Conference on

Agricultural Biotechnology, Ravello, Italy (July 6-10 2005).

http://www.economia.uniroma2.it/conferenze/icabr2005/papers/Toole_pape

r.pdf.

Keywords: SBIR Program; Certification Effect; Biotechnology

Toole and Turvey attempt in this study to further understanding how small

business financing programs in the US and EU interact with alternative

sources of private funding like venture capital. The most interesting concept

seized upon by the authors was whether or not a firm experiences a

certification effect once it has proven that its technology is sufficient to

earn acceptance for Phase II SBIR funding. The basic premise underlying the

certification effect is that venture capital firms use SBIR and other programs

that fund small biotechnology ventures as a sort of litmus test, providing them

with a risk adverse investment opportunity. The study concludes that it is


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indeed beneficial for firms to have received Phase I approval in order to earn

the investment of a major VC firm. Additionally, the data show there to be an

unmistakably positive correlation between the firms that have a full-time

academic researcher, and those that do not. However, beyond the basic

certification effect, there is no evidence that public investment in product

development is enhanced by the presence of a former university scientist.

Cooper, Ronald S. Purpose and Performance of the Small Business

Innovation Research (SBIR) Program. Small Business Economics(2003) 20:

137-151.

http://www.springerlink.com/content/k638316p1j5x3m83/fulltext.pdf.

Keywords: SBIR Program; Certification Effect; Innovation Policy

This paper clarifies the needs and rationale for the SBIR program and

reviews the recent findings regarding the programs impact. Another identifies

five dimensions of the innovation capital gap and outlines a possible extension

of the program to better address this finance gap. Originally chartered to

bring small businesses into the federally funded R&D process and foster

innovative solutions at all levels of the US business community. Evidence has


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shown that while the program has succeeded in providing high quality

research meeting agency requirements, the small business share of federally

funded R&D remains small. In 1999, only 17% (3,334 of 19,000) of applicants

received funding.

A survey done in that same year of DoD SBIR found that average quality of

SBIR research was the same as that of other federally funded research. SBIR

recipients are viewed by financial markets and potential investors as

practitioners of high-quality research and are considered to be more viable

investments. This is known as the certification effect. Reviews of

commercialization of SBIR funded research generally conclude a significant

and positive impact on growth of firms. Sales and employment have been

found to increase at a substantially higher rate in firms that receive SBIR

funding versus those that do not. SBIR program also has positive effect on

start-up rates and focus on commercialization by inventors who otherwise

may not have brought product to the market. Finally, SBIR grants support

innovation by addressing a gap in early-stage financing.

Siegel, Donald S, Charles Wessner, Martin Binks & Andy Lockett.

Policies Promoting Innovation in Small Firms: Evidence from the US and

UK Small Business Economics (2003) 20: 121-127.


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http://www.springerlink.com/content/h81x31q478848657/fulltext.pdf.

Keywords: New-Technology Based Firms; SBIR; ATP

This essay on the comparative innovation policies of the US and UK was

the first in a series published out of Nottingham University in London, which

held a simultaneous conference at which all of the authors listed presented

their findings in more detail, so this was more of a summation. The focal point

of all research is on new-technology based firms (NTBFs).

The authors approach their analysis making a few assumptions, primarily,

that public funding for NTBFs is absolutely necessary, as policymakers

generally agree that a non-negligible percentage of NTFBs would fail without

some sort of public assistance in the early stages of business development.

The findings of the four economists reached three primary conclusions; (1)

program evaluation is much more prevalent in the US than in the UK; (2) the

US Advanced Technology Program (ATP) and Small Business Innovation

Research (SBIR) program have been successful; (3) shared costs between

government and industry and frequent assessment are the keys to ensuring

that such programs are successful.

Bayh-Dole Act of 1980(http://www.niddk.nih.gov/patient/patent.pdf)


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Sampat, Bhaven N. Private Parts: Patents and Academic Knowledge in the

Twentieth Century,

http://www.econ.iastate.edu/workshops/ispw/SAMPAT-Nov-03.pdf.

Keywords: Bayh-Dole; Innovation Policy; University Research

The Bayh-Dole Act was first proposed when it became apparent to legislators and

bureaucrats at the federal level of government that the system for determining patent

and licensing rights for inventions derived from publicly funded research was

unnecessarily cumbersome and counter-intuitive.

Critics of the Bayh-Dole Act assert that it is basically a tax on academic innovation,

and it impedes upon the traditional academic tradition of collaboration through open

publishing in peer-reviewed journals by encouraging researchers to withhold their

discoveries from the public sphere until they have filed all necessary paperwork for

patent. Statistics on invention disclosure, patent application and technology

licensing, which have only been tracked nationally the early 1990s, show that each

has increased dramatically since the ratification of the Bayh-Dole Act.

According to data collected by the Association of Technology Managers (AUTM),

over the ten-year period from 1991-2000, invention disclosures grew 80% while

licenses executed grew 160%. Patents granted from 1993, the first year such stats

were recorded, grew by 137% in the seven years until the end of the decade. These

statistics show that there is an undeniable trend toward entrepreneurial activity


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amongst university researchers, but more strikingly, the aggregate increase in

invention disclosure to licenses executed was nearly two to one. This indicates that

reorientation of national policy to encourage university faculty to be more

entrepreneurial has achieved its goal, but it also suggests that they have been less

successful at actually licensing those technologies to industry.

Advanced Technology Program (ATP)(http://www.atp.nist.gov/)

Fogarty, Michael S., Amit K. Sinha and Adam B. Jaffe. ATP and the

Innovation System. A Methodology for Identifying Enabling R&D Spillover

Networks. National Institute of Standards and Technology (October 2006)

GCR 06-895.

http://www.atp.nist.gov/eao/gcr06-895/gcr06-895_report.pdf.

Keywords: Advanced Technology Program; Innovation Policy; Knowledge

Spillovers

In 1990 the federal government passed the Advanced Technology Program

(ATP) as a means of establishing partnerships with industry to conduct

high-risk research in nascent technologies that have significant long-term

commercial potential and could have a dramatic impact on the national

economy. The success of the program is determined through the programs


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Economic Assessment Office (EAO), which conducts multifaceted evaluations

of the impact of the program on the national economic landscape and the

benefits derived by the taxpayers who are the shareholders in any government

investment in industry. Using statistical analysis and other methodological

approaches, the EAO measures the programs effectiveness in terms of (1)

inputs, (2) outputs, (3) outcomes, and (4) impacts.

As of the EAOs most recent comprehensive evaluation, it has been

established that the program has been a resounding success, with 9 out of 10

organizations reporting that ATP funding has accelerated their R&D cycle.

ATP participation in a firms R&D is also found to have a Halo effect or

certification effect in the eyes of private investors. Additionally, because

the ATP stresses the importance of collaboration and partnership during the

R&D process, 85% of firms that receive ATP funding report establishing

industry partnerships in the course of conducting their research. These

three findings together indicate that the program is effective in facilitating

knowledge spillovers, which in turn has a significant impact on the state of the

national economy generally, and thus taxpayers are realizing the benefits of

their investment in their daily lives.

Small Business Technology Transfer Program (STTR)


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(http://www.sba.gov/sbir/indexsbir-sttr.html#sttr)

The Small Business Technology Transfer Program (STTR) is a federally

mandated public/private partnership between the government and small

businesses and non-profit research organizations. The programs central

objective is to foster the innovation necessary to meet the scientific and

technological challenges of the 21st century. History has proven that the

innovation and innovators thrive in a small business environment, but too

often the risks and costs of R&D are beyond the means of these organizations

and the innovative capacity is left untapped. Conversely, non-profit

research institutes (i.e. incubators) have been an indispensable facet of

Americas prowess as a bastion of high-tech achievement and discovery.

However, these advancements are often confined to the theoretical, not the

practical because of disincentives inherent in pursuing any technological

advancement that is without precedent. STTR serves as the arbiter and

matchmaker, bringing these two entities into partnership by joining the

entrepreneurial instincts of small businesses with the high-tech research

capabilities of research institutions. The fruits of these partnerships in the

form of technologies and products are transferred on to the individual

consumer through the normal channels well established in the American


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marketplace, with the small business reaping the profits of this

commercialization, which, in turn, stimulates the economy.

Small businesses must meet certain criteria to be considered for STTR

participation. It is essential that the firm be an American-owned and

independently operated, for-profit organization of fewer than 500 employees,

and the principal researcher need not be employed by the small business

under consideration. Conversely, there is no size limitation placed upon

non-profit research organizations, but they too must be located in the US,

and must fall under one of three definitions established by the USSBA; (1)

nonprofit college or university; (2) domestic nonprofit research organization;

(3) federally funded R&D center (FFRDC).

Five US federal agencies are required under STTR to reserve a portion of

their R&D funding for awards to small business and nonprofit research

organizations, under the guidelines stated above for consideration. These

agencies are the Department of Defense (DoD), Department of Energy (DoE),

Department of Health and Human Services (DHHS), National Aeronautics

and Space Agency (NASA), and the National Science Foundation (NSF).

Each agency is responsible for designating research topics and vetting

proposals submitted by small business applicants. Agencies award STTR


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funding based upon small business/research institution qualification, degree of

innovation, and future market potential.

Once award recipients are chosen they begin a three-phase program.

Phase I is known as the start-up phase and it involves the allocation of

$100,000 over one-year which is used to fund the exploration of the scientific,

technical and commercial feasibility of the firms idea or technology. Upon

ending this one-year feasibility study, companies that have shown their

technologies to be both viable and practical are graduated to Phase II.

Phase II awards up to $750,000, for as long as two years, to expand upon the

basic research done during Phase I. This is the most R&D intensive phase of

the STTR program and upon its completion the commercial potential of the

technology should be apparent. If this research is deemed to be fruitful, the

firm then enters Phase III, which does not

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