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UNC-Greensboro Economists Uncover Factors That Help Bring NIH SBIR Projects to Market

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Christopher Ruhm
Professor of economics
University of
North Carolina
NAME: Christopher Ruhm
 
POSITION: Professor of economics, Joseph M. Bryan School of Business and Economics, University of North Carolina-Greensboro
 
BACKGROUND: Assistant professor of economics, Boston University, 1984-1991; PhD, economics, University of California, Berkeley, 1984
 
Most entrepreneurs, university tech-transfer officials, or early-stage investors would agree that Small Business Innovation Research grants play an important role in the early development of a technology, particularly in the life sciences.
 
But what happens after a startup company burns through its SBIR funding? What other factors might help ensure an SBIR-funded project reach the commercialization stage?
 
A pair of economics researchers from the University of North Carolina at Greensboro has attempted to tackle those questions, at least in the context of SBIR projects funded by the National Institutes of Health.
 
In a working paper entitled Bringing Science to Market: Commercializing from NIH SBIR Awards, economists Albert Link and Christopher Ruhm examined the long-term commercialization prospects of 405 SBIR Phase II grants awarded through the NIH between 1992 and 2001; identified factors that helped commercialize the technology; and provided recommendations for improving the commercialization prospects of NIH-backed SBIR projects.
 
In particular, Link and Ruhm found that about 51 percent of all Phase II NIH SBIR projects examined eventually resulted in a commercialized product, process, or service.
 
The most important correlate to commercial success, according to the paper, was projects receiving some sort of additional development funding, particularly non-SBIR funds from federal sources and from personal or internal funds. About 74 percent of commercialized projects received such add-on funding, while only about 42 percent of non-commercialized projects received such funding.
 
In addition, the researchers found that the probability of commercialization increased when companies had received previous SBIR funding and had strong ties to universities or research institutes; but that probability was not particularly affected by additional VC funding, state or local funding, or an increase in the relative size of the SBIR award.
 
The full paper is available for purchase at the National Bureau of Economic Research website.
 
This week, Ruhm took a few moments to discuss with BTW some of the paper’s key findings and their implications for life sciences technology commercialization.
 

 
What was the impetus for conducting this research?
 
It’s sort of two-fold. On one hand, this whole notion of the role of the SBIR and STTR programs, and the way we try to commercialize new technologies, is very interesting to us. The role of small businesses in this process is particularly interesting.
 
And when we look at the SBIR program, NIH is one of the biggest components of it; and of course, the whole role of health-related research and commercialization is critically important. We see very high rates of return for health-related technologies and investments.
 
In addition, our view is that what we know about this commercialization process is very limited. But we got access to this nice dataset, and we though we could add to the knowledge base.
 
What expertise did you and your co-author Albert Link bring to bear?
 
Albert’s expertise is in technology policy. He’s been working in that area for 25 years or so. My area is more on the health economics side. This is a natural collaboration because he brings the technology background and he brings the health background, and we’re talking about the commercialization of NIH projects in this paper.
 
Have you talked with anyone at NIH or the SBA about some of the results of this research or your preliminary recommendations?
 
I have not and I’m not sure that Albert has either, although he may have talked with people in other areas [of the government] where SBIR grants are administered. But we haven’t talked with NIH yet – that would be interesting to do.
 
One of the key findings was that the involvement of universities was a strong indicator of commercialization success for SBIR awardees. Can you talk about that a little more?
 
My sense is that there has been some question as to whether universities are a good thing or bad thing here. Certainly university involvement brings a certain type of expertise that might otherwise be lacking. And then I think there might be the question of whether the people from universities that are involved are less interested or effective at commercializing. I guess since both of us are at universities, our prior [assumption] would be that university involvement is a good thing, and that’s how it turned out here.
 
Our hypothesis was that university involvement would be a positive for commercialization. But if it had turned out the other way, I’m not saying we would have been shocked.
 
I’m probably stating the obvious, but universities have in general become much more interested and involved with technology transfer and commercialization. I don’t know if the same result would have been true 20 years ago.
 
Did you define what university involvement meant? Does it mean licensing IP from universities, or having a collaborative research program?
 
We were actually fairly limited in how we defined it in this paper. These were responses to the survey question: ‘Was there any involvement by university faculty, graduate students, and/or university officials in developing the technologies?’ So in this sense, like a lot of the things in this paper, this is preliminary in that there are a lot of different forms of university involvement, and those could have different effects. It would be interesting in future work to look at this. It would be interesting to see, for example, if there university faculty members were directly involved in a project.
 
It might be interesting to conduct this type of study looking at STTR data since it is an award that mandates university involvement.
 
It would be interesting but I don’t believe that the same kind of data currently exists.
 
Another thing that would be interesting is if we see the same kinds of trends with other agencies as we do with the NIH. It’s not immediately obvious. It might be that with NIH SBIRs, university involvement is more [important] because obviously the role of NIH grant funding in general for R&D for the biological sciences is critical.
 
The major finding of the paper was that one of the strongest indicators for commercialization success was some type of non-SBIR secondary funding. However, this funding didn’t necessarily need to be venture capital funding, right?
 
Yes, and one of the issues here is that the number of projects with VC backing in our sample was quite small. That said, what we found was the most important was own-company funding or owner funding. If anything that appeared more important than VC funding. There are a variety of possible reasons for that. One might be that when you have a stake in the project you might have extra motivation. But it also could be that the fact you are willing to put your own money into a project is an information signal: ‘I really believe in this. I think this technology is going places.’
 
Did you get a sense as to whether certain secondary funding sources played more important roles than others, or were they all more or less equal?
 
No they were not equal. For example, the state and local support did not come out as being particularly important, which I guess could be bad news for a number of states that are trying to do this kind of thing.
 
In our basic models, we had roughly equal importance of supplying your own funding; non-SBIR federal funding; and venture capital. But when we did some of the additional runs, that’s where the “own funding” seemed a bit more important. But VC and non-SBIR federal funding also seemed to be fairly important.
 
But other non-VC sources of funding and state and local government funding did not come in as being very important.
 
Did you get a sense of how obtaining funding beyond SBIR was able to advance commercialization? In other words, what stage did add-on funding allow life sciences companies to reach that they couldn’t with SBIR funding?
 
I don’t think we can really answer that with our data. One of the problems is that we don’t have good information on the timing of when additional funds were received. That’s something we’ve worried about, and it’s even possible, in some cases, that funds were received after commercialization already occurred. It’s very hard to know the answer.
 
One thing we do know is that there is information on how important the SBIR funding was to companies that were able to commercialize. The vast majority said that it was critical. So we didn’t have a lot of sense from people who reported that they really didn’t need the SBIR funds. That said, it is a survey about SBIR funding, so it may not be likely that someone would respond, ‘Yeah, we’re flush, and we didn’t even need that [SBIR funding].’
 
Although SBIR funding was critical, you also found some evidence that increasing the size of a Phase II SBIR award didn’t necessarily provide any greater boost for commercialization, correct?
 
Specifically, the size of the award didn’t turn out to be a critical factor. In other words, we didn’t see substantially different commercialization success with larger or smaller awards. But we need to be a little bit careful about interpreting that. The whole process of obtaining an award – you could pay too much for something that is not very promising. That said, they just changed the maximum amount for SBIR awards, but even before they changed it, the awards were often higher than the maximum.
 
For example, in our sample, something like 20 percent of the awards were over the [Phase II SBIR] maximum of $750,000. That’s sort of a guideline that they were allowed to exceed. But it’s not so clear what raising that amount will do. Don’t take that as a criticism of raising the ceiling.
 
How can the results of this analysis help startup companies – particularly university spinouts – better leverage their SBIR awards? Is there anything they can take away from it to help with their commercialization efforts?
 
Let me say that there is nothing in here that will tell you how to increase your chances of getting SBIR funding, because we are not addressing that issue at all. But if the issue is, ‘What can you do to commercialize a technology?’ then in some sense many of the same recommendations to policy makers would apply to entrepreneurs. We do seem to see that university involvement is helpful, as is previous related SBIR experience. If you’re a new company and don’t have that experience, then you can’t magically get it. But that doesn’t mean you couldn’t think about some kind of partnership or collaboration with another company or folks at universities that have that experience.
 
You can also pretty much assume that it is going to be necessary in one way or another to put up your own money – not expecting that you’re going to get it all from SBIR funding or other outside sources. We see that almost universally among the projects that were commercialized.
 
Were there any findings that surprised you in terms of what contributes to commercialization success of SBIR projects?
 
I don’t think there were huge surprises, but I was a little surprised by this key role of internal additional funding, or own funding, versus VC or other private equity funding. I wouldn’t have particularly anticipated that.
 
We also looked at some things like whether there were differences in commercialization success with female owners or minority owners. We didn’t see any strong evidence of a difference one way or another. I don’t think we expected to, and in a way I’m kind of reassured that we didn’t. But that was an interesting result.
 
I wouldn’t say that my prior hypotheses going in were so strong one way or another that I would have dramatically expected one thing and gotten something else. But I would say that the differences in funding sources were a little bit surprising.

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