NIST GCR 02–841 Between Invention and Innovation An Analysis of Funding for Early-Stage Technology Development Prepared for Economic Assessment Office Advanced Technology Program National Institute of Standards and Technology Gaithersburg, MD 20899-4710 By Lewis M. Branscomb Aetna Professor of Public Policy and Corporate Management, emeritus Kennedy School of Government, Harvard University [email protected] Philip E. Auerswald Assistant Director, Science, Technology, and Public Policy Program Kennedy School of Government, Harvard University [email protected] Grant 50BNB0C1060 November 2002 T OF C EN OM M M T E R R A C P E E D U N A I C T I E R D E M ST A ATES OF U.S. DEPARTMENT OF COMMERCE Donald L. Evans, Secretary TECHNOLOGY ADMINISTRATION Phillip J. Bond, Under Secretary of Commerce for Technology NATIONAL INSTITUTE OF STANDARDS AND TECHNOLOGY Arden L. Bement, Jr., Director Table of Contents PROJECT ADVISORY COMMITTEE . vii ABOUT THE AUTHORS . ix ABSTRACT . xi ACKNOWLEDGMENTS . xiii EXECUTIVE SUMMARY . 1 Motivation . 1 Objectives . 2 Approach . 3 Findings . 3 A. Sources of most funding . 3 B. Inefficiency of markets . 5 C. Institutional arrangements for funding . 6 D. Conditions for success . 7 E. Corporate R&D spending . 8 Conclusion . 9 INTRODUCTION: MOTIVATION AND APPROACH . 13 1. Motivation . 13 2. Project Objectives . 16 3. Approach . 20 A. Workshops . 20 B. Models for interpreting the data . 21 C. Assumptions and limitations . 22 4. Project Outputs . 24 5. Team . 25 Page iii UNDERSTANDING EARLY-STAGE TECHNOLOGY DEVELOPMENT . 27 1. The economic nature and value of technology-based innovations . 27 A. Toward a project-level definition of technology-based innovation . 27 B. Applied research? Seed investment? Defining “early stage” . 27 2. From invention to innovation . 32 A. Modeling the interval between invention and innovation . 32 B. Three elements of Stage 3 . 35 C. Infrastructure requirements and complementary assets . 38 D. Value capture . 39 3. Funding institutions and their roles . 41 A. Corporations . 42 B. Venture Capital . 47 C. Angel Investors . 49 D. Universities . 51 E. State Programs . 52 F. Federal Funding . 53 4. Conclusion . 56 ESTIMATING THE DISTRIBUTION OF FUNDING FOR EARLY-STAGE TECHNOLOGY DEVELOPMENT . 59 1. Overview . 59 2. Results . 61 3. Detailed assumptions underlying the two models in Table 1 . 64 A. Corporations . 64 B. Venture Capital . 67 C. Angel Investors . 69 D. Universities and Colleges . 70 E. State Governments . 72 F. Federal Government . 73 REFERENCES . 77 ANNEX I. SUMMARY OF REPORT BY BOOZ ALLEN & HAMILTON . 85 Introduction . 85 Trends . .85 R&D Process Evolution: Increasing Complexity and Web-Like Process . 86 Pressure for Measurable Results: Financial Return . 86 Industry and Company Life-Cycle Influences . 86 Implications . 87 Scale and Scope Changes for R&D . 87 Bias Toward Product Development and Known Markets . 88 Page iv Emergent Responses . 89 Portfolio Management Models . 89 Alliances and Acquisitions and Venture Funds . 90 Spin-Out of R&D Function: ESTD Engines for Hire . 91 ANNEX II. COMPANY NARRATIVES . 93 1. Affymetrix . 93 2. Energy Conversion Devices . 97 3. Marlow Industries . 100 4. PolyStor Corporation . 102 ANNEX III. AGENDAS FOR WORKSHOPS AND PARTICIPANT BIOGRAPHIES . 105 Washington, D.C. (Carnegie Endowment for International Peace): January 25, 2001 . 106 Panel 1. Early-stage, technology-based innovation: Overview of data and definitions . 106 Panel 2. Technology focus: Amorphous silicon . 106 Panel 3. Mapping corporate investments . 107 Panel 4. Mapping venture capital and angel investments . 108 Panel 5. Regional distribution of investments and state programs . 109 Panel 6. Technology focus: Life sciences . 109 Panel 7. Mapping federal government investments . 109 Participant Biographies . 110 Palo Alto, CA (Xerox Palo Alto Research Center): February 2, 2001 . 120 Panel 1. Early-stage, technology-based innovation: Overview of data and definitions . 120 Panel 2. Technology cases (I) . 120 Panel 3. Mapping venture capital and angel investments . 121 Panel 4. Institutional innovations: Networks and incubators . 121 Panel 5. Technology cases (II) . 122 Panel 6. University-industry cooperation and regional innovation . 122 Participant Biographies . 123 Cambridge, Massachusetts (Kennedy School of Government, Harvard University): May 1 and 2, 2001 . 128 Keynote Speaker (May 1) . ..