May 21, 2021Liked by Matt Clancy

Great piece, learned a lot!

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This is a great summary and interesting research. As a small firm that has been a recipient of a few SBIR grants in the past (both Phase I and Phase II), I'd like to outline a few thoughts on the relevance of patents as a metric for innovation.

The federal agencies persistently ask about patent filings as a way to measure long term innovation impact. But they also ask about revenue generated from the product, additional investment made by the small business in the product, 3rd party investments in the firm, employee count, asset sales (product was developed by the small business and then sold to another firm to develop further), and other metrics. Many of the agencies also ask for stories about the impact of the funding on developing new products and services. I think this attempt to gather a broad set of data about impacts is important, and, at least for us, patents wouldn't tell the story.

There is a lot of innovation for which a patent application is a poor match, and there are some firms that may prefer not to file a patent for a variety of reasons. As a software company, we have generally avoided filing for patents for a few reasons: 1) proving there is no prior art for a software invention has become more difficult over time (I think this is generally a positive change in the software ecosystem); 2) we have been advised by our IP attorneys that if we are going to file for a patent, we need to have the financial resources to defend the patent. Defending a patent in the United States is an extraordinarily expensive endeavor, and as a small privately held firm, we don't have the resources. Rather, we have put our resources into engineering, design, sales, and marketing.

Second, I think there is another nuance in the SBIR program that bears consideration. The federal agencies appear to genuinely and sincerely think of the SBIR program as an investment. However, they consider a broader definition of return on investment - similar, perhaps, to a social impact investor that may consider a continuum of returns that include financial as well community and societal impact. The private sector tends to be concentrated in a few technology domains that have a chance at disproportionate returns on capital within a limited period of time (5-10 years max). But the economy is broader than that, and there are lots of other potential innovations that would make our economy and society stronger and healthier that would not be seen as attractive to most private sector investors. These may include innovations in services, ecosystem management, reduction in pollution (often a market externality), and inventions with long timelines that exceed the patience or risk that exceeds the appetite of a private sector investor. In short even if it didn't return as many patents as other investment approaches, I think the SBIR program remains a powerful mechanism for the federal government to encourage an innovative and dynamic economy.

Finally, I think it's helpful to note that the SBIR program is a tiny program carved out of very large federal extramural research budgets that go predominantly to universities and other large institutions. It might be helpful to compare the return on investment from small firms with the 2.5% or so in SBIR budgets versus the return on investment from the other 97.5% that goes to large institutions. I suspect the relatively small investment in small firms would turn out to have outsized impacts when compared to the total extramural federal research budget.

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In general, patents are a natural metric to apply to research - it is a poor one in my experience. Getting a patent is primarily a function of ones budget and knowing all the avenues of getting around a rejection. How much are you willing to spend. Many successful companies had a rather small patent portfolio until they attracted patent law suits and then generated or acquired patents. Know-how and trade secrets are probably more valuable (drugs IP is an exception). SBIRs have been around for awhile would be more interesting to look at add-on funding, revenue as metrics for how effective SBIRs are at picking/enabling winners. Similar to a VCs portfolio 10-year return.

"High return" - relative to what?

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Thank you for this informative piece! What I'm struggling to get is why governments are not offering an exit option for startups. Governments give capital, research labs and other investments in the critical early phases but don't get the financial return that a VC would when they invest a 10th of that at later stages.

Here's how it looks in the EU for example: https://shiftprint.writeas.com/european-technology-acquisition

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