Driving Innovations Across the Valley of Death

Public-private partnerships play a key role in helping the United States advance its research portfolio by bringing new ideas to meet the needs of the marketplace and the nation. They do so by helping entrepreneurs bridge the early-stage capital gap, often called the Valley of Death, between federally funded basic research and venture capital funded later-stage product development. Many believe that private venture capital markets bridge this valley, and sometimes they do. But in the tough world of early-stage finance, potential investors operate under conditions of less than perfect information-making many unwilling to fund risky and un-validated ideas, however promising. Vernon Ehlers, one of the few scientists in the U.S. Congress, described the situation with the striking image shown in Figure 1 (1). To cross this Valley of Death, the United States has developed a range of programs, including awards for innovation. Two of these award programs are the Advanced Technology Program (ATP) and the Small Business Innovation Research Program (SBIR, a two-phase program that provides small awards to encourage innovation from small companies (i.e., fewer than 500 employees). Both play a key role in early-stage finance by creating and signaling new information to markets about the commercial and technological potential of new ideas. They are also an important means of drawing together expertise that is distributed across the U.S. to focus it on national challenges in health, the environment and, most recently, the war on terrorism. The Role of Innovation Awards Funding for innovation is a key factor in the success of U.S. innovation. Although business angels and venture capital firms, along with industry, state governments and universities, do provide funding for early-stage technology development, recent research by Harvard University's Lewis Branscomb and Philip Auerswald (2) found that the federal government provides between 20 and 25 percent of all funds for early-stage technology development-a substantial role by any measure (see Figure 2). This federal contribution is all the more significant because the SBIR and ATP awards address the part of the innovation cycle where private investors face the most risk and are therefore most hesitant to invest. The ATP-Proven but Under-funded Along with the SBIR Program, the ATP is a prime example of programs designed to address this funding gap and allocate the federal government's positive contribution to early-stage technology development. ATP's mission is to provide funds for the development of generic technologies that are often too risky for individual firms but, if successful, can offer high payoffs for society as a whole. Proposals for ATP funding are first vetted by both technical and business experts-a distinguishing feature of the program. Another key feature is the requirement for matching funds from the firms themselves, which helps ensure that public funds are used effectively. Moreover, the requirement for significant risk and broad-based economic benefits means that ATP awards replace private capital because venture capitalists normally search for projects with lower risks that will generate profits in a fairly short time. Over the last 15 years, ATP has developed an impressive record of accomplishment. Its awards have helped foster new commercial technologies from fuel cells to proteomics to medical diagnostics to new lithography technologies. In a National Academies' study led by Intel's Gordon Moore, the program received high marks for its conception and operation (4). This includes a highly competitive application process (fewer than 12 percent are winners), the 50-percent cost share between industry and the government (more for larger companies), and its encouragement of joint ventures to disseminate technologies between small companies, universities and large companies. Internationally it is often seen as a best-practice model from the United States. …