Government Venture Capitalist? The Neglected Component Of National Security


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What is the best way to increase our national security posture, increase net job creation and boost our economy? Perhaps the federal government should be a venture capitalist!

This deck has been modified from slides supporting discussions and presentations about the efficacy of R&D spending, translational research funding or other efforts to better commercialize technology and stimulate early stage company growth.

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  • Truth
    Misguided Conventional Wisdom
    Uninformed Conventional Wisdom or False
  • Government Venture Capitalist? The Neglected Component Of National Security

    1. 1. Government Venture Capitalist? The Neglected Component Of National Security Presented by Roger London Chairman American Security Challenge
    2. 2. Welcome! We hope you enjoy this unconventional approach to national security through a strong economy and strong job growth. Clearly the better the economy, the more money public and private sector has to invest in security goods and services. We created this presentation in 2009 and while the economy has changed, the conclusions are perhaps even more relevant today. A better economy means: 2014 update by Roger London • More money for R&D • More money for startup investment • More money for federal Defense & IC budgets • More money for private sector critical infrastructure protection But where do we get the most technology jobs… is it R&D, translational research, tech transfer or commercialization? But where do we get the most technology jobs… is it R&D, translational research, tech transfer or commercialization?
    3. 3. What is Innovation?
    4. 4. Previous slide shows an innovative approach, but not all innovation is worthwhile (clearly!). Merriam Webster definition: Innovation is “a new idea, method or device.” Relative to technology, the forefather of innovation is usually research and development. Without this innovative thinking and significant investment in research and development, our nation would suffer dramatically. Not that we would not continue to innovate, but R&D is most of the iceberg under the waters surface. We will however question traditions and suggest ways to maximize this R&D with exponentially greater results. These suggestions will undoubtedly trouble those in established and entrenched R&D fields. What is innovation?
    5. 5. Wikipedia: Translational research “has the potential to advance applied science….to move from bench to bedside.” Relative to technology, this takes innovation and learnings from research and development and refines them with a specific problem or opportunity in mind. In other words, translational research takes the abstract innovation which is not scalable, replicable, profitable, desirable and/or marketable and works to make it so. What is translation research?
    6. 6. Wikipedia: technology transfer (tech transfer) “is the process of transferring skills, knowledge, technologies, methods of manufacturing, samples of manufacturing and facilities among governments or universities and other institutions to ensure that scientific and technological developments are accessible to a wider range of users who can then further develop and exploit the technology into new products, processes, applications, materials or services.” Tech transfer is usually a legal or business process of assignment to an entity that will attempt to commercialize the technology. Tech transfer is frequently misused and is NOT the same as commercialization. What is tech transfer?
    7. 7. Now we get down to where the rubber meets the road….. Wikipedia: commercialization “is the process or cycle of introducing a new product or production method into the market.” While that is technically true, it is imperative to realize that commercialization is NOT the finish line. UNSUCCESSFUL commercialization is an attempt to sell a product or service to the marketplace that is NOT embraced. In this case the rubber meets the road in a parked car. Successful commercialization on the other hand is actual adoption by the market and definitive proof of traction. In this case the rubber meets the road touring down the interstate at 60MPH. What is commercialization?
    8. 8. So successful commercialization... = ADOPTION
    9. 9. Who is Net Job Creator? • Nov 2009 Kauffman Foundation report unequivocally determines that “Young Companies” are responsible for most net job creation. • In 2007, 1-5 yr. old companies responsible for 8 out of 12 million new jobs • Job growth is related to company age, not company size • Key to stimulating job creation is not funding for research but supporting young companies “Where Will The Jobs Come From?” Kauffman Foundation report
    10. 10. Who is Net Job Creator? Startups, 37% 1-5 Yr Old Companies 33% Older Companies, 30% 2007 New Jobs
    11. 11. Young Companies Drive 2/3 of Net Job Creation
    12. 12. Young Company impact on national net job creation over 30 years The First Source of Job Creation: Startups +27 years+7 years
    13. 13. Truth: Net job creation engine= startups and young companies less than 5 years old Net job creation definitions: truth or misguided conventional wisdom Misguided CW: “Small businesses are net job creation engine”. This is partially true if small businesses are young companies. But note that small businesses over 5 years old are NOT net job creation engines. This also means that any “job program” addressing technology or entities during R&D, translational, or tech transfer is NOT the most efficient way to create jobs. While these kind of programs may create jobs, some even permanent jobs, they are not nearly as effective at net job creation as those that target young companies less than 5 years old…..period.
    14. 14. Net job creation engine= startups and young companies less than 5 years old -see Kauffman Report Net job creation definitions: truth or misguided conventional wisdom Misguided CW: Small businesses are net job creation engine. -Partially true if small businesses are young companies but small businesses >5 years old NOT net job creation engines Uninformed CW or False: Innovation (meaning R&D) is a net job creation engine -see Kauffman Report
    15. 15. How to Create Security Startups? • Research and Innovation infrastructure? • Translational research? • Early stage investment capital?* Sooo, where should we put our money to create the most jobs in the security space? *Tech transfer is really a process so not included above. Commercialization is also more a process or stage, but pivotal to that stage is early stage capital which is the activity discussed.
    16. 16. ITIF 2009 “Stim-novation” Report Job output per $20B investment in R&D Total Scientific Research Equipment Facilities Direct and Indirect Jobs 196,190 97,345 27,270 71,575 Induced Jobs 205,640 119,595 32,340 53,705 Direct, Indirect and Induced Jobs 401,830 216,940 59,610 125,280 NOTES: • 50 percent of final funds go to fund research, 25 percent of funds go to purchases of new research equipment, and 25 percent of funds go to building and renovating research facilities • Jobs are created or saved (reduce number of researchers and others who become unemployed) • Funding supports one year temporary jobs • Average annual salary of the 402k jobs is $45, 857
    17. 17. ITIF 2009 “Stim-novation” Report Job output per $20B investment in R&D R&D as a job creator: • Investment in R&D is an investment in temporary jobs. This is not pejorative of the value of the job or the work, but regardless of how meaningful without more grant funding, the job goes away unless the R&D produces a startup that can survive once the research funding runs out in a year. So its important to remember R&D funds temporary jobs. • The average annual salary for that year is is $45,857 • 50 percent of final funds go to fund research, 25 percent of funds go to purchases of new research equipment, and 25 percent of funds go to building and renovating research facilities.
    18. 18. Startups from University R&D • 2008 AUTM data • $51.47B research at 191 Universities • 5,039 licenses and options executed • 595 new companies formed • 2007 AUTM data • $48.8B research at 194 Universities • 5,109 licenses and options executed • 555 new companies formed • 2006 AUTM data • $45B research at 189 Universities • 553 new companies formed Speaking of startups, how many startups are created out of this R&D money? Must be a huge startup engine with all that innovation investment, all those smart researchers, innovative universities, entrepreneurial students, etc….
    19. 19. R&D output to Startups $116,568,000,000$116,568,000,000 (NSF)(NSF) 1,3671,367 NEWCOSNEWCOS Federal R&D investment spins off over a thousand startups…. that's awesome. Right?
    20. 20. R&D output to Startups Think about this number That means for every 1 startup created, the federal government spent over $85,000,000,000 in R&D. Now before the academics and researchers have an embolism, we are not suggesting this is not important and basic research that does not lead to a startup frequently shines a light on a path not to take, which is a valuable outcome and may also be of value in some other research in the future. But as a taxpayer and an entrepreneur, that seems like a HUGE amount of money spent before creation of even one startup that could take the technology to market.
    21. 21. Translational Research Clearly investing on translational research with a specific problem or solution in mind will be more effective as a job creator than basic R&D….right?
    22. 22. Translational Research – $1M = 36 jobs* – Jobs were temporary- one year jobs – external research labs, – engineering, and scientific services, – equipment, etc. – Some of the jobs are placed significantly down the line such as food service – Cost to create each temporary job- $27K per job creation * Our apologies, when updating this deck we accidently deleted the specific source of this information. We believe it was another ITIF research report (fabulous organization)
    23. 23. Early Stage Capital Recap: as a net job creation source, R&D creates roughly 20 temporary one year jobs and translational funding almost twice that at 36 one year jobs per $1M of funding. Of these two, translational funding clearly a better job creator, albeit temporary jobs. How does early stage investing, specifically venture capital stack up against these as a net job creator?
    24. 24. • 12% private sector employees and 21% GDP • Recession proof • 2000-2003 national employment shrank -2.3% but 6.5% jobs growth for VC companies- recession proof • job growth 1.6% v. .2% (2006-2008) • Job Creation engine • 1 job for every $12.3K (80 jobs per 1M) • 1 job for every $37,702 (26 jobs per 1M) • Average base salary $85k v. national salary average $32k • Sustainability • 31% of all startups in business after 7 years • 78% of companies formed in 1999 still in business U.S. Economy 101 Venture Capital
    25. 25. 0% 10% 20% 30% 40% 50% 60% 70% 80% Startups after 2 Years Startups after 5 Years All Startups After 7 Years VC Backed Startups After 10 Years 69% 50% 31% 78% Startup Sustainability 1999-present
    26. 26. U.S. Employment 2000-2003 U.S. Employment 2006-2008 VC backed Job Growth Recession Proof
    27. 27. Disproportionate GDP input from VC backed companies 12% private sector employees and 21% GDP VC Backed Impact on GDP
    28. 28. VC backed R&D generated startups $116,568,000,000$116,568,000,000 (NSF)(NSF) 1,3671,367 NEWCOSNEWCOS NOTE: out of the startups spun-outNOTE: out of the startups spun-out of federal R&D investment, only 13of federal R&D investment, only 13 would be venture backablewould be venture backable (1 out of 100)(1 out of 100)
    29. 29. Start-ups created Permanent Job High Paying Time To Create Small Business Job Cost To Create Each Job Research & infrastructure 2-5 years $49,000 Translational research 1-3 years $27,778 Early stage capital    Now-2 years $25,001 Net job creation engine comparison
    30. 30. Conclusion re net job creation? So if you were the federal government, and you wanted to add another 1,000,000 quality technology jobs, you could… * Not to forget, $50B will also create a little more than half of one spinout startup. • Spend $50B on R&D and within 3-5 years create 1M temporary one year jobs with average salary of $45k.* • Spend $27B on Translational Research and within 1-3 years create 1M temporary one year jobs (salary unknown), • Spend $25B and within 1-2 years create 1M jobs with average salary of 87k that have 78% chance of lasting 10 years. Hmmm, let me think……
    31. 31. How in the world can the feds put dollars into venture capital? Operationalizing this strategy will be just as hard as getting decision makers to agree with the strategy in the first place. Organizations who are embedded and in some cases whose very existence is tied to this R&D funding will violently argue the logic. Without getting into source of funds (is this new money, reallocated money or a combination) much less the FAR, GSA, “fair and open” and other procurement and contracting quicksand, we recommend spreading that investment capital over the top 150 venture funds. Here comes the most important but hardest part to implement…make investments without regard to fund size, ownership, diversity, sector, location, or any other discriminator…..just select the ones who have realized the highest ROI returns investing in “young companies “over the last 10 years and make an LP investment proportionate to the size of the fund. The only prerequisite of course is that the investments are into U.S companies for activities and employees to be located in the U.S. •
    32. 32. BONUS 10 Quickest Commercialization Tools 1. Government Venture Fund (GVF) targeting early stage investment 2. Leverage huge customer buying power 3. Create Rapid Fielding Pilot programs 4. Promote smart money alumni angel groups 5. Co-invest federal funds with angels and VCs to stimulate more investment 6. Allocate 1% reserve of federal R&D to tech transfer and startup working capital 7. Revise SBIR to shift investment away from research addiction to commercialization activities 8. Create MBA Startup Seed Funds to distribute thru existing university channels 9. Create “floorplan” financing for government contractors 10. Fund best practices of tech transfer See “Top 10 Federal Investment Strategies for Maximizing Proven Net Job Creation Engine: Young Companies” at Roger London LinkedIn profile page
    33. 33. Roger London Chairman American Security Challenge Moving Innovation to Market 6031 University Blvd. Suite 180 Ellicott City, Maryland 21043 410-340-5335 Email: LinkedIn Profile: Thank You