The Small Business Innovation Research Program An Assessment of the Department of Defense Fast Track Initiative (2000) / Chapter Skim
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Evaluating the Small Business Innovation Research Program: A Literature Review
Evaluating the Small Business Innovation Research Program: A Literature Review
Pages 307-324
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From page 307... ...
This article first explores the underlying challenges that the financing of young firms poses, the ways that specialized financial intermediaries address them, and the rationales for and problems faced by public efforts to finance these companies. The final two sections review earlier efforts to assess these programs, and discuss the proposed evaluation of the Small Business Innovation Research program.
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Perhaps more significant, the bulk of the public funds went to earlystage firms, which in the past decade had accounted for only about 30 percent of the disbursements by independent venture capital funds (Venture Economics, 1996~. Some of America's most dynamic technology companies received support through the SBIC and the Small Business Innovation Research (SBIR)
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VENTURE CAPITALISTS AND THE FINANCING CHALLENGE The initial reaction of a financial economist to the argument that the government needs to invest in young firms is likely to be skepticism. A lengthy literature has highlighted the role of financial intermediaries in alleviating moral hazard and information asymmetries.
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By intensively scrutinizing firms before providing capital and then monitoring them afterward, they can alleviate some of the information gaps and reduce capital constraints. Responses by Venture Capitalists The financial intermediary that specializes in funding young high-technology firms is the venture capital organization.
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On the one hand, venture capitalists had backed during the 1980s and 1990s many of the most successful high-technology companies, including Apple Computer, Cisco Systems, Genentech, Netscape, and Sun Microsystems. A substantial number of service firms (including Staples, Starbucks, and TCBY)
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These circumstances have led to venture capital organizations emerging as the dominant form of equity financing for privately held technology-intensive businesses.2 RATIONALES FOR AND PROBLEMS OF PUBLIC VENTURE CAPITAL PROGRAMS At the same time, there are reasons to believe that despite the presence of venture capital funds, there still might be a role for public venture capital programs. In this section, we assess these claims.
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A response to this argument emphasizes the limitations of the venture capital industry. Venture capitalists back only a tiny fraction of the technology-oriented businesses begun each year.
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show that IPOs that had previously received equity financing from venture capitalists outperform other offerings. These findings underscore concerns about policies that seek to encourage public investments in companies that are rejected by professional investors.
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Distortions in the Award Process Even if these problems are substantial, however, the government may not be able to address them dispassionately. An extensive political economy and public finance literature has emphasized the possible distortion that may result from government subsidies as particular interest groups or politicians seek to direct subsidies in a manner that benefits themselves.
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In this section, we examine two classes of problems that affect the design of public venture capital programs. First, certain company characteristics attributes that may not be adequately considered in the award selection process appear to be highly correlated with a company's ability to achieve its research and commercialization goals.
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Another telltale characteristic of underachieving firms was the existence of factors outside the scope of "public venture capital" projects that undermined their ability to successfully complete and later commercialize technology. Legal troubles, for instance, can divert substantial amounts of human and financial resources away from a company' s R&D projects.
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Finally, the firms have a tremendous need to enter the marketplace rapidly. Rapid market entry is critical in the technology-driven industries targeted by public venture capital programs, particularly for small firms without the large marketing budgets that major corporations enjoy.
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Because of the characteristics of high-technology firms discussed earlier, these delays often made it difficult for the firm to sustain its innovative effort or to commercialize its findings. THE CHALLENGE OF EVALUATION As public venture capital programs have increased in number, policy makers and economists increasingly are grappling with the question of how to assess these programs.
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In theory, these frameworks should be applicable to the assessment of public venture capital programs. An analysis along these lines is undertaken by Wallsten (1996~.
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To interpret such a short-run reduction in other research spending as a negative signal is very problematic. A second academic approach is to examine the long-run impact of participation in public venture capital programs on the growth of the firms themselves, relative to a matched set of firms.
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1984. "Information imperfections in the capital market and macroeconomic fluctuations," American Economic Review Papers and Proceedings 74: 194199.
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Rorke, 1983, A study of the Small Business Innovation Research program (Lake Forest, Illinois, Mohawk Research Corporation)
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1987. Federal Research: Small Business Innovation Research Participants Give Program High Marks.
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