Wednesday, July 22, 2009

A bunch of fools

SBIR reauthorization has moved into high-gear negotiations between the principals of the Senate Committee on Small Business & Entrepreneurship, the House Large Venture Capital Small Business Committee, the House Only-Universities-Do Science & Technology Commitee. The aim is to reconcile the disparate legislation represented by H.R. 2965 and S. 1233.

Apparently, both sides are "negotiating in good faith." Though, from this blogger's perspective, the proof will be in the pudding. Compromise is the only game we have to play at this point. Rather, it's the only game we have to observe from the sidelines, rooting, cheering, and booing as we see fit.

Looking ahead, the issue remains: how can we as a nation, as a people, best support and sustain innovation? I worry at a closed system that sets up unnecessary and counterproductive hurdles to new ideas, shutting out the outsider rather than establishing a meritocracy of ideas. There is a dangerous set of assumptions out there that: the best (indeed the only quality) science is conducted at universities and guided by peer-review; and that investment from large Venture Capital firms can serve as a meaningful proxy for the value of innovative ideas. Both assumptions are verifiably and patently false!

Let me illustrate from the world of science:

  • If you want to go into research, you need to get into the best school as an undergraduate, serving under the best adviser.
  • If you fail at that--when you're eighteen and fresh out of high school--you'll have greater difficulty getting accepted at a top ranked graduate school to serve under a big-name researcher in the field.
  • If you fail at that, you'll be hard pressed to obtain a high-quality post-doc.
  • Without a high-profile post-doctoral appointment, you'll have trouble getting a respectable research appointment... etc. etc.

Every step of the way, it is easier to move further from the goal. And funny that, because the goal is not (or at least ought not to be) getting into the right school, or serving under the right person, but rather conducting high-quality research, to achieve a breakthrough.

The Wright brothers weren't established ornithologists. They didn't study under the biggest names in aeronautics. They made and repaired bicycles! But they had a dream, and a vision, and the dedication to see it through. Innovation comes from great ideas, being pursued to their logical extremes, often against all odds, and subject to an enormous amount of persistence and perseverance on the part of the innovators.

It does not spring miraculously from following all the rules, fitting in, standing in line! "Innovation has no peers--by definition!" Which leads us to the question: how best can we stimulate and sustain innovation?

A year and a half ago, I attended a workshop at the University of Wisconsin-Madison on starting a high-tech business. It was there that I first learned about SBIR. But it was also there that I first heard a description of the "four Fs" of startup investing:

  • Founders
  • Family
  • Friends
  • and Fools

This, coming from an Angel Investor who was lead instructor. Fools? There's that aphorism: A fool and his money are easily parted.

Perhaps the biggest hurdle faced by research entrepreneurs is the view that early-stage investment in the form of seed-capital is a fool's errand. Indeed, the three decades of SBIR success, the tens of thousands of patents, the hundreds of thousands of jobs created, the thousands of companies that got their start from SBIR alone, all attest to the wisdom of seed-stage investing (when done well, which SBIR does).

The question is: if we weaken the ability of SBIR to provide seed capital to sprout a field of ideas (Phase I), remove the wilted seedlings and prune back the weaker branches (Phase II), then transition to harvest (Phase III), what will replace the resource? Will those large venture capital firms that have spent millions of dollars lobbying for nearly unfettered access to ownership and control of SBIR-eligible firms step up to the plate and prove the wisdom of folly? And if they did, would that be the best resource for research entrepreneurs?

It's funny that the argument most popular among those Representatives railroading through a change in eligibility rules has it that the proposed change is intended to make it easier for small businesses to obtain funding, and to allow small businesses rather than Washington bureaucrats to make decisions regarding the source of their funding, whereas the opposite is the likely result. Reality is, if the changes pass into law--furthering the trend toward later stage growth businesses, rather than continuing to support early-stage ideas--fewer high-tech small businesses will have any chance whatsoever, and those that do will more often be forced to take venture capital investment (which has been described as the most expensive money you will ever take, because of the hefty equity stake VCs require for their investments).

What a pity that would be!

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