Copyrighted 2000-2008All Rights Reserved … into the Valley of Death: examining the ‘Business of SBIR Phase III’ Ann Eskesen, President Innovation Development

Copyrighted 2000-2008All Rights Reserved

… into the Valley of Death:

examining the ‘Business of

SBIR Phase III’ Ann Eskesen, President

Innovation Development InstituteVoice: (781) 595-2920

[email protected]

Federal Laboratory ConsortiumMid-Atlantic Regional MeetingSeptember 15-17Cumberland, MD


SBIR-STTR: at a

crossroads

…because the world is a fundamentally different place


…that the current SBIR political challenge (and economic need) is that of bringing the program

into the 21st century…. to maintain SBIR relevance

in the world in which all of those involved must now do

business


Organizing premise and take-home message of presentation:

…that the recent political furor surrounding the issue of SBIR-STTR eligibility by VC-funded firms is actually not about eligibility - or really perhaps about VC per se at all. …that it is more about the potentially crippling Valley of Death issue - how to fund the demonstration (Phase III) work that comes post R&D and before full use-condition


Organizing premise and take-home message of presentation cont:

… that if we can effectively address how to get quality SBIR projects from Phase II into Phase III, that we can truly realize the value of what SBIR has created.


…realizing the value of SBIR


re·al·ize (rē'ə-līz') v. To comprehend completely or correctly. --Reviewing the full record of the program across all the

agencies, he finally realized the range and extent of the SBIR impact on the economy.

--We realized that among this wide array of projects are many directly relevant to our current concerns.

To obtain or achieve, as gain or profit: --She realized a substantial return on the investment

made in that SBIR-involved firm. --Licensing by fields-of-use not core to their own needs,

enabled the Awardee to realize far more of the value of their developed technology(ies). Cash straight to the bottom line


Synopsis of presentation Overview of the Innovation Process as a full cycle

of endeavorExamination of how that is currently playing out

in the SBIR-STTR context with consideration ofo what are probably the real factors driving the

current VC-SBIR eligibility issue ando implications for program management and

public policy matters If there is time, a brief look at what the next

generation of SBIR needs to look like - and why I think it might actually happen


SBIR-STTR as a mirror for prevailing conditions:


What this presentation is NOT about is--how-to cross the Valley --or how to help others do that -

with or without the requisite bottle of water

Instead the approach is look at some of the issues involved such that those of us in the Tech Transfer/Tech Development community can get our arms around what this is about .. and perhaps be able to do something about it.


Probably more questions than answers

…. but hopefully thought-provoking


SBIR is NOT a closed systemx


Proposal I: practical near-term objective

Not to be achieved by increase in SBIR percentage. DOA proposal

A different need requires a different type and pool of funding explicitly designated as ‘transition’ dollars

Not ‘new’ money - not in this economy and with these deficits

An SBIR-like percentage against existing ‘technology deployment’ funding. DHS


Proposal II: more blue-sky but longer-term, much more importantThat the next administration and the 111th Congress need to initiate a serious discussion on how this country supports, encourages and manages technology innovationEquivalent to the 1980 White House Conference on Small Business?? -- the type of approach to important policy decisions which directly engages those affected by those decisions - in this case, technology innovation stakeholders.


SBIR: a mature program:

An impressive track record economic impact and technological innovation

Some examples:


SBIR Community members:Across range of technology and industry space, some currently high name-recognition and/or important product developing firms having (had) various levels of SBIR involvement.

Millennium Pharma

Qualcomm.

Amgen

Genzyme

Titan

ABIOMED

Geron

Chiron Corporation

Affymatrix

iRobot Corporation

Aerovironment

Neocrine Bioscience

Stem Cells IncAmorworks Inc

Symantec

AMTI

American Biophysics - Mosquito Magnet

IPEX CorporationJarvick Heart, IncA123 Systems

JDS UniphaseNanosys, Inc

Biogen (Idec)


A knowledge-based economy


SBIR signed into lawJuly 21,1982

DJIA 832

September 11, 2008DJIA 11,433

Tracking the Dow-Jones Industrial Average 1960-present


Setting SBIR Patent Issuance in Context:

0

500

1000

1500

2000

2500

1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

0

1000

2000

3000

4000

5000

Total SBIR-STTR Awardees

Awardees New to Program

SBIR-STTR Awardee Patents

Patents issued to US Universities


SBIR-STTR patent portfolio To date SBIR involved firms have

issued almost 70,000 US domestic patents.

100,000 related international patents About 20,000 more in the applications

pipeline An estimated 25,000-34,000 more that

are in-licensed


Data as of August 2008Whole SBIR-

STTR ProgramFirms with

PatentsFirms Without

Patents

Number of SBIR-STTR Awardees 17,558 5,848 11,710Percentage of All Awardees 33.31% 66.69%Number SBIR-STTR Awards 77,667 47,158 30,509Percentage of All Awards 60.72% 39.28%Average Number of Awards per Awardee 4.42 8.06 2.61

Comparing the extent of SBIR-STTR Activity among Patenting Awardees versus those holding No Patents.

8.06 vs 2.61SBIR-STTR Awards


Data as of

August 2008.

All current SBIR-STTR awardees

with patents

Firms with Venture Capital

Firms with no External

InvestmentNumber of patenting firms among currently SBIR-STTR-active

2,353 525 1,828Percentage of those currently SBIR-STTR involved issuing patents

22.31% 77.69%Number of Issued Patents 25,695 12,695 13,000Percentage of All Issued Patents 49.41% 50.59%Average Patents per Awardee 10.92 24.18 7.11

Comparison of Extent of Issued Patents among Currently Active SBIR-STTR Awardees: VC Funded SBIR Awardees

versus those with no external investment


SBIR enabling legislation:Originally enacted in 1982, legislation requires all federal agencies with an annual extramural R&D budget in excess of $100 Million to allocate a legislated percentage of that budget into a program for which only small firms are eligible to compete.

Since 1992, that SBIR percentage sometimes referenced as the SBIR ‘tax’-

has been at 2.5%


Show me the money….

… now $2.2+ Billionannually of bottom-line money

no debt to service no outside ownership

no downstream royalties to pay


Year Span Total SBIR-STTR Dollars % of all SBIR-STTR Dollars

1983-1987 $1,586,697,642 6.30%1988-1992 $2,797,635,102 11.11%1993-1997 $5,180,414,479 20.57%

1998-2002 $7,493,715,518 29.75%

2003-2008 $8,128,611,484 32.27%

Dollar Totals

Percentage all SBIR-STTR program $$$ 100.00%

SBIR-STTR Dollar Allocations in Five-Year Increments

$25,187,074,225


Primary objective of SBIR program

Conversion of Research & Development into

technological innovation and in-use condition.


Definition of Innovation:The process of taking an idea for a new product or new process through all the stages of:

Research DevelopmentDemonstration

… into use-condition… into use-condition



Taking the long-term view...

What will it take to get from here to there?


Science versus technology

Invention versusInnovation

Eureka - I found it!Epolesa - I sold it!


Invention versusInnovation

What is the “it” that an SBIR-

involved firms is

now assumed to be selling?


Important Differences between Federal Agencies re. their R&D funding objectives and the Pertaining Phase III Issues

Type of Agency Objective Agencies

Mission Primary focus is on meeting the agencies OWN technology needs. Agency is a (the) primary customer for what is being solicited

DOD; NASA and DHS … plus parts of DOE, EPA and DOT

Contractual obligation

R&D Supporting

These sources are explicitly charged to funding scientific endeavor to push out the boundaries of knowledge. Rarely, if ever, will they buy the results of the work they fund. In fact, in-house R&D may be a major focus of their R&D efforts.

NIH and NSF … plus most other smaller

agenciesGrant funding mechanism


Being SBIR-Involved has always fundamentally been about Raising the Money


What type of money? And how much?The answer to these two will also drive the critical third question

From whom?

Idea

Technological risk

Marketpenetration

ProductdevelopmentPrototype Development

development

Proof of concept

SBIR

Phase IPhase II

The Innovation Process

Capital Requirements


Rule of SevenAn accepted industry rule–of-thumb used to make preliminary assessment of the likely cost of a high-risk project::Research function: Phase I….…$1Development stage: Phase II ….$7

Though it matches the SBIR-STTR model, this formula actually came out of industry.

Typically such projects require 7X7 i.e. multiples of $49 to support the other "D" in the technology development cycle - Demonstration.


SBIR Program Structure

IMPORTANT: Successful completion of Phase I is a basic prerequisite for Phase II consideration

Phase I

Phase II

Phase III

• Scientific and technical feasibility proposal (25 pgs) in response to agency-defined research needs described in solicitation

• Evaluation includes scientific/technical review AND preliminary assessment of commercialization (end-use) plans and objectives.

• Special consideration of 15 awards/5 year firms• Award dollars up to $100,000 (NIH commonly larger) • Duration of project - SIX months

• Primary effort of project - usually assume to protoype stage • Scientific and technical evaluation. Also major consideration

of proposed commercialization plans with assessment of success of firm’s previous commercialization efforts.

• About 40% Phase I to Phase II conversion (though of those which

actually apply for Phase II consideration, approxiamtely 70% are funded)

• Award dollars up to $750,000 (NIH commonly larger) • Duration of project - TWO-THREE years

• commercial market development using appropriate private sector resources• government application under some form of non-SBIR federal procurement


An implicit and fundamental assumption of those who crafted SBIR was always that monies other than SBIR would support that post R&D effort The funding pool was R&D The size of that pool was judged never

likely to be enough to support that very expensive Phase III demonstration effort

Making those type of commercial application, business decisions was not an appropriate federal role

Idea

Not SBIR dollars

Technological risk

Marketpenetration


development

Proof of concept

SBIR

Phase IPhase II




SBIR Program Structure

IMPORTANT: Successful completion of Phase I is a basic prerequisite for Phase II consideration

Phase I

Phase II

Phase III

• Scientific and technical feasibility proposal (25 pgs) in response to agency-defined research needs described in solicitation

• Evaluation includes scientific/technical review AND preliminary assessment of commercialization (end-use) plans and objectives.

• Special consideration of 15 awards/5 year firms• Award dollars up to $100,000 (NIH commonly larger) • Duration of project - SIX months

• Primary effort of project - usually assume to protoype stage • Scientific and technical evaluation. Also major consideration

of proposed commercialization plans with assessment of success of firm’s previous commercialization efforts.

• About 40% Phase I to Phase II conversion (though of those which

actually apply for Phase II consideration, approxiamtely 70% are funded)

• Award dollars up to $750,000 (NIH commonly larger) • Duration of project - TWO-THREE years

• commercial market development using appropriate private sector resources• government application under some form of non-SBIR federal procurement

Phase I already requiring evidence of pre-submission work done

Phase II - major indication of commercialization plan

More and more of the work which was previously assumed to happen in Phase II now isn’t viewed that way

To an important extent, Phase II has become Phase III


Turning innovation into dollars: only seven options

Outright sale of technologyVarious forms of out-licensingJoint venture and/or collaborationsStrategic alliances

New products/processes for firmSpin-off technology to new

business entity

Donation of the technology

Raise external capital

Generates income to the firm


Raise external capital

Awards to VC

Funded Firms

Total Awards

% SBIR dollars to VC funded firms

Awards to VC Funded Firms

Total Awards


Awards to VC

Funded Firms

Total Awards

% SBIR dollars to VC funded

firms

Awards to VC

Funded Firms

Total Awards


firms

Awards to VC

Funded Firms

Total Awards


firms

Awards to VC

Funded Firms

Total Awards


1983 14 288 4.86% 15 144 10.42% 9 105 8.57% 6 106 5.66% 9 103 8.74% 1 52 1.92%

1984 29 372 7.80% 23 232 9.91% 9 125 7.20% 9 102 8.82% 8 107 7.48% 4 74 5.41%

1985 43 555 7.75% 80 433 18.48% 12 150 8.00% 12 109 11.01% 14 125 11.20% 3 103 2.91%

1986 70 1022 6.85% 75 425 17.65% 15 168 8.93% 9 101 8.91% 16 152 10.53% 4 117 3.42%

1987 113 1265 8.93% 58 365 15.89% 19 207 9.18% 12 113 10.62% 24 156 15.38% 5 125 4.00%

1988 111 1086 10.22% 55 338 16.27% 27 228 11.84% 10 134 7.46% 29 183 15.85% 4 113 3.54%

1989 122 1078 11.32% 83 445 18.65% 29 257 11.28% 17 157 10.83% 30 168 17.86% 4 116 3.45%

1990 125 1365 9.16% 96 459 20.92% 26 290 8.97% 12 169 7.10% 30 195 15.38% 8 134 5.97%

1991 138 1347 10.24% 109 516 21.12% 37 302 12.25% 16 172 9.30% 30 215 13.95% 3 150 2.00%

1992 126 1101 11.44% 108 578 18.69% 45 349 12.89% 13 198 6.57% 34 263 12.93% 11 174 6.32%

1993 142 1283 11.07% 112 644 17.39% 34 378 8.99% 17 168 10.12% 45 318 14.15% 9 183 4.92%

1994 164 1397 11.74% 142 660 21.52% 40 438 9.13% 29 269 10.78% 35 301 11.63% 9 197 4.57%

1995 158 1390 11.37% 170 725 23.45% 40 333 12.01% 25 221 11.31% 51 300 17.00% 12 249 4.82%

1996 136 1364 9.97% 150 651 23.04% 32 388 8.25% 23 192 11.98% 30 267 11.24% 8 175 4.57%

1997 173 1495 11.57% 194 868 22.35% 34 385 8.83% 30 216 13.89% 28 231 12.12% 15 251 5.98%

1998 133 1487 8.94% 163 829 19.66% 26 344 7.56% 18 217 8.29% 31 249 12.45% 20 206 9.71%

1999 132 1449 9.11% 199 952 20.90% 18 308 5.84% 25 222 11.26% 26 264 9.85% 21 227 9.25%

2000 108 1365 7.91% 267 1129 23.65% 18 300 6.00% 14 221 6.33% 12 131 9.16% 23 249 9.24%

2001 110 1619 6.79% 177 988 17.91% 24 328 7.32% 18 235 7.66% 26 220 11.82% 13 212 6.13%

2002 165 2274 7.26% 203 1029 19.73% 21 296 7.09% 18 247 7.29% 38 328 11.59% 12 245 4.90%

2003 174 2049 8.49% 265 1157 22.90% 26 354 7.34% 17 236 7.20% 52 414 12.56% 11 169 6.51%

2004 182 2569 7.08% 244 1286 18.97% 14 327 4.28% 13 309 4.21% 16 165 9.70% 28 230 12.17%

Totals 2668 29220 9.13% 2988 14853 20.12% 555 6360 8.73% 363 4114 8.82% 614 4855 12.65% 228 3751 6.08%

Percentage of SBIR-STTR Awards to VC Funded Firms SBIR-STTR Awarby Agency and Year 1983-2004

Smaller to include DHSDOD NSFDOENASANIH

Copyrighted: Innovation Development Institute,

Swampscott, MA 2008 All Rights Reserved

Venture Capital interest in SBIR is not a new

phenomenon

Extent of SBIR-Involvement by VC-Funded firms: Break-

out by Agency 1983-2007

Copyright Innovation Development Institute 2005-2008. All Rights Reserved

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Aggregate NIH

NSF DOD

NASA DOE

Smaller


SBIR-STTR AgencyTotal Number

of Awardees

Number VC

Funded

Awardees

Percentage of All

Awardees that

are VC-Funded

Number of

Awardees

Currently SBIR-

Active

Number VC-

Funded,

Currently

SBIR-Active

Percentage of

Current Awardees

that are VC-Funded

% of all current

VC Funded, SBIR-

STTR active firms

with agency

involvement

Department of Air Force 3379 265 7.84% 1330 113 8.50% 13.80%

Department of Navy 3146 242 7.69% 1158 84 7.25% 10.26%

Department of Army 2779 252 9.07% 1120 121 10.80% 14.77%

Missile Defense Agency 1582 165 10.43% 591 64 10.83% 7.81%

Defense Advanced Research Projects Agency 1528 180 11.78% 386 53 13.73% 6.47%

Office of Secretary of Defence 711 70 9.85% 407 44 10.81% 5.37%

Defense Threat Reduction Agency 228 16 7.02% 65 5 7.69% 0.61%

Special Operations Command 226 21 9.29% 119 13 10.92% 1.59%

Chemical & Biological Defense 140 21 15.00% 82 16 19.51% 1.95%

National Geospatial-Intelligence Agency 24 3 12.50% 11 2 18.18% 0.24%

All Department of Defense 7780 578 7.43% 3114 286 9.18% 34.92%

National Institutes of Health 6066 1033 17.03% 2515 482 19.17% 58.85%

National Aeronautics & Space Administration 2345 171 7.29% 696 55 7.90% 6.72%

Department of Energy 1693 166 9.81% 572 55 9.62% 6.72%

National Science Foundation 2662 287 10.78% 838 98 11.69% 11.97%

USDA 1027 74 7.21% 351 31 8.83% 3.79%

Department of Commerce 468 45 9.62% 73 7 9.59% 0.85%

Environmental Protection Agency 437 34 7.78% 127 14 11.02% 1.71%

Department of Education 487 18 3.70% 117 6 5.13% 0.73%

Department of Transportation* 406 23 5.67% 40 0 0.00% 0.00%

Department of Homeland Security 198 26 13.13% 198 26 13.13% 3.17%

Setting these data in context:

Copyrighted 2005-2007. Innovation Development Institute, Swampscott, MA 01907. All Rights Reserved

* Not able to access DOT current data. These numbers therefore are incomplete and do not reflect extent of VC activity in DOT involved firms at this point.

Total number of SBIR Awardees over life of program to date is now 16.953 firms .

1645 SBIR Awardees to date have been in receipt of VC Funding at some level. Though these data do include a fair amount of Angel funding, given the lack of any

systematic way to track Angel investment in all its iterations, it can be assumed that this fo

814 VC-Funded firms are currently active in the SBIR-STTR program

1796 VC Entities have SBIR-STTR involved firms in their porfolios. About 250 of these funding sources have been/are seriously SBIR firm involved I.e. an important

percentage of their portfolios are these firms.

Distribution of VC Funded Awardees

among SBIR-STTR Participating Agencies1983-present Currently Active

Since these data are across all agencies and many firms are involved in several agencies, totals exceed 100%.

DOD 34.92%

NIH: 58.85%


Total VC funding in SBIR-STTR firms is now in region of

$35-38 Billion

Wealth creation:


Total VC Funding Source: PriceWaterhouseCoopers; Thomson Venture Economics & NVCA MoneyTree Survey SBIR Funding source: Innovation Development Institute Comprehensive 4D tracking system

SBIR VC Dollars (in Billons)

All VC Funding (in Billons)

SBIR VC Investment as Percentage of all US VC

Funding

2000 $2.80 $104.70 2.67%2001 $3.00 $40.62 7.39%2002 $3.16 $22.03 14.34%2003 $2.72 $19.74 13.78%2004 $2.99 $22.46 13.31%2005 $3.02 $23.00 13.13%2006 $3.13 $26.55 11.79%2007 $3.28 $29.41 11.15%

SBIR VC Funding as Percentage of all VC Funding in US 2000-2007


Between 2002-2007 approximately ONE in every

SEVEN Dollars of VC Investment in the US has involved an SBIR firm


Of these awardees, 1,724 have received Venture Funding

Total Number of SBIR-STTR awardees to date: 17,590

Doing some of the SBIR-VC numbers (September 2008)


Doing some of the SBIR-VC numbers cont (September 2008)

Over the life of SBIR

9.8%of all SBIR Awardees

are VC-Funded at some levelInterestingly, however,

VC-funded firms have taken • over 13% of all awards

• but 15.72% of all dollars


Why are VCs so SBIR interested?

Why are they putting their money where their mouth is?


6234 Awardees are currently SBIR-funded

Among current awardees 709 are VC-funded

Doing some of the SBIR-VC numbers: current guys



Factoring ONLY to current awards on which theyare working- not all the awards they have

received - that percentage of current SBIR Awards going to VC-backed firms is

Among firms currently SBIR-involved

11.37%are VC-Funded

12.20%



Is this a problem?

Only 12.20%?

Probably not!


Doing some of the SBIR-VC numbers: current guys in all agencies by dollars

Currently SBIR-involved Awardees with NO other

external funding

Currently involved SBIR Awardees with

VC-backing

Percentage of SBIR Dollars to VC-backed firms

Phase I $1,881,276,352 $268,476,352 14.27%Phase II $5,437,687,175 $748,064,712 13.76%

Total $7,318,963,527 $1,016,541,064 13.89%

Distribution of current SBIR project dollars 2004-2008


Doing the SBIR-VC numbers with a focus to the

National Institutes of Health: Over the life of the program 1983 to

present Current program activity - 2005

Phase I and 2004 Phase II


Data as of July 2008Whole SBIR-

STTR ProgramFirms With NO

external InvestmentFirms with Venture

CapitalNumber SBIR-STTR Awardees 6,228 5,155 1,073Percentage of All Awardees 82.77% 17.23%Number SBIR-STTR Awards 18,385 14,242 4,143Percentage of All Awards 77.47% 22.53%Dollar value of Awards (in billions) $7.25 $5.18 $2.07Percentage of All Dollars 71.45% 28.55%

Analyzing the Extent of SBIR Activity Specific to NIH Involving VC and Non-VC backed Awardees: 1983-present


SBIR Awardees

with NO VC currently funded in

NIH 81.70%

VC-Backed SBIR

Awardees with

currently funded in

NIH 18.30%

Total NIH Awards taken

by current SBIR

Awardees with NO VC

backing82.07%

Total NIH Awards taken

by VC-Backed

current SBIR Awardees17.93%

Distribution of Current Awardees and Awards by VC-status in the National Institutes of Health


Distribution of Current Awardees and Awards by VC-status in the National Institutes of Health Continued

Considering just the number of awards being made by NIH to VC-funded firms presents nothing startling.

The percentages are entirely proportional - roughly 18% of the VC-backed companies receiving approximately 18% of the awards.

BUT let’s look at the DOLLARS represented by those awards


Doing some of the SBIR-VC numbers: current guys NIH-involved, by dollar

Currently SBIR-involved Awardees with NO other

external funding

Currently involved SBIR Awardees with

VC-backing

Percentage of SBIR Dollars to VC-backed firms

Phase I $575,071,329 $154,308,084 21.16%Phase II $1,241,963,359 $891,544,572 41.79%

Total $1,817,034,688 $1,045,852,656 36.53%

NIH SBIR Program: Distribution of current dollars 2004-2008


Much larger NIH awards (especially at Phase II) to better established,

more experienced firms


Critical point:What are these larger, better funded projects?

Answer: Valley of Death DemonstrationDOD variation on this theme:

Double- occasionally even Triple Phase II awards

Idea

Technological risk

Marketpenetration


development

Proof of concept

SBIR

Phase IPhase II



SBIR


Analysis:How did this happen?Why did this happen?What sort of consequences?Why should we care?


$500-S600M:


0

500

1000

1500

2000

2500

1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Total Number of Awardees

Newcomers to SBIR-STTR

Percentage of New Firms

Doing the SBIR-STTR numbers: newcomers-oldcomers by year (September 2008)

What’s going on here?

Over 40% drop new firms in NIH!


Why am I (sort-of) hopeful that this problem

can be fixed?


Just about every major corporation has some level of in-place working relationship with at least one - and often several - SBIR firms

Effective SBIR participation is about Collaborations:

An increasing number of mid-sized firms - $2-10 billion revenue - are finding SBIR collaborations are hugely useful ways to complement and supplement internal capabilities


Fill in gaps in-house capabilities Facilitate new market entry.

Factors driving external collaborations: Shortened product life cycles Globalization of competition Increased specialization of skills and

capabilities, particularly in knowledge and research based endeavor


Why this external focus by the business community?“No company can afford to maintain permanently the complete and ever-changing set of core capabilities required for success in an industry driven by innovation”

Brian Morgan, formerly director and VP of Strategic Licensing, SmithKline Beecham:


A major percentage of R&D activity in larger firms is now focused on external relationships

Balance is spent primarily on addressing near-term product needs


It is substantial evidence of considerable interest (perceived

value-added) by Major Corporations and others in the ready, early-stage

access to the leading-edge, technology-development capabilities and intellectual assets of this large,

pre-qualified population of technology-competent small firms -

SBIR awardees


SBIR sub-contract

Forms of business relationship:

Joint Venture

Research contract

Minority equity position

In-Licensing Out-Licensing

OEM supplier Co-Marketing

Service agreement

Project collaboration

Strategic alliance Product purchase

Supply agreement Acquisition


The “new” economyTWO fundamental realities define the New EconomyMarket capitalization has

become a critical measure of success

Entrepreneurial ventures have become the primary source of economic growth


“….. real share-holder wealth will be created by companies whose corporate strategies include well-developed venture strategies”


The Corporate Dilemma:

meet their quarterly numbers BUT

To satisfy Wall Street they must

also offer compelling evidence for top-end growth


The Corporate Dilemma:

…. Perhaps even more of a challenge that it may even first appear since

“virtually no Fortune 50 company has ever achieved annual growth in excess of 5 percent”

Lew Platt, former Chair and ceo of Hewlett Packard


The Corporate Dilemma cont:

The limits are not to size … but to the growth of the type demanded2-3% organic growthAn aggressive program

of acquisitions


A different type of acquisition:

o of the firm o of its skill-sets and capabilitieso and/or the intellectual assets

Relationships to high value-added small firms


Who has been acquiring SBIR

Awardees?


Extent of M&A Transaction involving SBIR-STTR firms (to September 2008):

To date, we have record of 1204 M&A transactions involving SBIR-STTR firms 17,590 SBIR-STTR involved firms 1204 M&A transactions

6.84%

890 acquiring firms


Extent of M&A Transaction involving SBIR-STTR firms: keeping it in the family (to September 2008):

SBIR firms are themselves actively engaging in M&A activity with other SBIR firms

Of the 1204 SBIR acquisitions so far logged, 269 involved another SBIR firm

22.34%


L3:35

L3:35

L3 Communications 19

Titan Corporation 16

General Electric 11

BAE Systems. EDO Corporation,

Invitrogen Corp & JDS Uniphase

8

Agilent Technologies, General Dynamics

& SAIC

7

Becton Dickinson, Corning, Genzyme,

Johnson & Johnson, Northup Grumman &

Pfizer

6

Amgen, Raytheon & Tyco International 5

Firms which have acquired

Multiple SBIR companies


A total of 78 firms have acquired 2 SBIR awardees

749 firms have so far acquired just 1 SBIR awardee

SBIR M&A Transactions continued

4

3

Alliant TechSystems Inc., Beckman Coulter, BF Goodrich, CACI

International, Charles River Labs, GalxSmithKline PLC, Integra

Lifesciences, Intermagnetic General, Inversness Medical

Innovation, Lockheed Martin, Mantech International Coroporation,

Millennium Pharmaceuticals, MSC Software, QIAGEN NV, Royal

Phillips Siemens, Teledyne Technologies & Thermo Electron

Alion Science and Technology , Argon ST, Bio-Rad Laboratories

Inc. Chiron Corporation, Coherent Inc, Corixa Corporation, Elan

Pharmaceuticals, Flir Systems, Foster Miller Inc, Gilead Sciences

Inc, Honeywell International, Icx Technologies, Microsoft, Nanogen

Inc, OrthoLogic Corporation, OSI Systems Inc, Photon Dynamics,

Inc., Schering-Plough, Serologicals Corporation, Sigma Aldrich

Corporation, SM&A Corporation, SRA International Inc, Sterking

Software Inc & Veeco Instruments


Prices paid?

Less now than the “monopoly money” of late nineties – but

still very healthy.


Prices paid?

Mean valuation: $42M

Range: $520K to $42 Billion

For those transactions where we have the details of the deal ….

Earlier mean valuation: $65-70M

Average price: c. $383M$224M


There is considerable evidence to suggest that

prices being paid for SBIR-involved firms is

somewhat better than for comparable, but non-SBIR-involved firms


Breakout of M&A Transactions by VC Status of Firm

38%62%

Transactions involvingVC Funded firms

M&Deals involvingfirms with NO VCfunding


Distribution of M&A Transactions involving SBIR-STTR Awardees by size of deal and by VC status of firm

0

10

20

30

40

50

60

70

Less than$1M

$1-$2.4M $2.5M-$4.99M

$5M-$9.99M $10M-$24.9M

$25m-49.99M

$50M-$74.99M

$75M-$99.99M

$100M-$249.99M

Over $250M

Non VC Funded

VC Funded


Interesting recent phenomenon:

Buy-back – in whole or in part by some/all of original SBIR

management.. but for a lot less than the selling price

Documents

Copyrighted 2000-2008All Rights Reserved … into the Valley of Death: examining the ‘Business of SBIR Phase III’ Ann Eskesen, President Innovation Development