Between Invention and Innovation An Analysis of Funding for Early-Stage Technology Development

The purpose of the Between Invention and Innovation project is to support informed design of public policies regarding technology entrepreneurship and the transition from invention to innovation by providing a better understanding of the sources of investments into early-stage technology development projects. National investment into the conversion of inventions into radically new goods and services, although small in absolute terms when compared to total industrial R&D, significantly affects long-term economic growth by converting the nation’s portfolio of science and engineering knowledge into innovations generating new markets and industries. Understanding early-stage technology development is important because a national and global capacity to sustain long-term economic growth is important.The project has sought to answer two sets of questions:* What is the distribution of funding for early-stage technology development across different institutional categories? How do government programs compare with private sources in terms of magnitude?* What kinds of difficulties do firms face when attempting to find funding for early stage, high-risk R&D projects? To what extent are such difficulties due to structural barriers or market failures?We have pursued two approaches in parallel to arrive at a reasonable estimate of the national investment in early-stage technology development: first, learning from the observations of practitioners in the context of a series of workshops held in the U.S., and second, collecting the data available on early-stage technology development investments from other studies and from public statistical sources. These approaches have been supplemented by four case studies conducted by a team of Harvard researchers and a set of forty-six in-depth interviews of corporate technology managers, CEOs, and venture capitalists conducted on our behalf and with our direction by Booz Allen & Hamilton.We found that most funding for technology development in the phase between invention and innovation comes from individual private-equity “angel” investors, corporations, and the federal government-not venture capitalists. Our findings support the view that markets for allocating risk capital to early-stage technology ventures are not efficient. Despite (or in response to) market inefficiencies, many institutional arrangements have developed for funding early-stage technology development. This suggests that funding mechanisms evolve to match the incentives and motivations of entrepreneurs and investors alike.We also found that the conditions for success in science-based, high-tech innovation are strongly concentrated in a few geographical regions and industrial sectors, indicating the importance in this process of innovator-investor proximity and networks of supporting people and institutions. Among corporations, the fraction of R&D spending that is dedicated to early-stage technology development varies both among firms and within industries. The latter variation may be related to industry life cycles. Overall, we found that the federal role in early-stage technology development is far more significant than would be suggested by an uncritical glance at aggregate R&D statistics. Federal technology development funds complement, rather than substitute for, private funds. Decisions made today regarding the nature and magnitude of federal support for early-stage technology development are likely to have an impact far into the future.