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An Assessment of the SBIR Program at the National Institutes of Health
meaningful achievement. There are, nonetheless, opportunities for improvement in commercialization.
A significant percentage of SBIR projects are commercialized to somedegree.
Reaching the market. NRC Phase II Survey data suggest that 40 percent2 of SBIR-funded projects reach the marketplace.3 Over time, NIH data suggests that this figure will rise significantly; subsequent assessment is required to capture this trend.
Revenue skew. The survey data also show that a much smaller number (7.9 percent of NRC Phase II Survey respondents) of projects generate more than $5 million in revenues.4 This type of “skew” or concentration—in which a majority of projects are at least modestly successful while a small proportion earns large revenues—is typical of early-stage finance.5
Licensing revenue. In some cases, substantial licensing revenues have been generated on the basis of SBIR-funded projects.6
Additional private investment. Some companies have received substantial additional investment from the private sector, or have been
Forty point seven percent of NRC Phase II Survey respondents reported sales. The NIH Survey found that 30.3 percent of the projects surveyed reached the marketplace. National Institutes of Health, National Survey to Evaluate the NIH SBIR Program: Final Report, July 2003.
See Figure 4-2. One of the 496 projects recently surveyed by the NRC generated revenues of more than $50 million. Case studies identified other projects not included in the survey with similar results (e.g., Optiva, Martek).
As with investments by angel investors or venture capitalists, SBIR awards result in highly concentrated sales, with a few awards accounting for a very large share of the overall sales generated by the program. These are appropriate referent groups, though not an appropriate group for direct comparison, not least because SBIR awards often occur earlier in the technology development cycle than where venture funds normally invest. Nonetheless, returns on venture funding tend to show the same high skew that characterizes commercial returns on the SBIR awards. See John H. Cochrane, “The Risk and Return of Venture Capital,” Journal of Financial Economics, 75(1):3-52, 2005. Drawing on the VentureOne database Cochrane plots a histogram of net venture capital returns on investments that “shows an extraordinary skewness of returns. Most returns are modest, but there is a long right tail of extraordinary good returns. 15 percent of the firms that go public or are acquired give a return greater than 1,000 percent! It is also interesting how many modest returns there are. About 15 percent of returns are less than 0, and 35 percent are less than 100 percent. An IPO or acquisition is not a guarantee of a huge return. In fact, the modal or ‘most probable’ outcome is about a 25 percent return.” See also Paul A. Gompers and Josh Lerner, “Risk and Reward in Private Equity Investments: The Challenge of Performance Assessment,” Journal of Private Equity, 1(Winter 1977):5-12. Steven D. Carden and Olive Darragh, “A Halo for Angel Investors,” The McKinsey Quarterly, 1, 2004 also show a similar skew in the distribution of returns for venture capital portfolios.