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Big Ideas for Small Business: Target Government Assistance Toward Innovative Startups

SOURCE: AP/Charles Dharapak

President Barack Obama, joined by small business owners, walks back to the White house after giving a speech on his small business initiatives in June 2010.

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This is the latest installment of a new CAP series called “Big Ideas for Small Business.” The weekly series aims to offer a collection of bold proposals that taken together will form a progressive pro-business agenda for the small- and medium-sized companies—and future big companies—our economic competitiveness depends on.

In this space CAP’s economic policy team will offer a weekly pro-growth alternative to the simplistic conservative advocacy for irresponsible tax policy and unaccountable government that are hardly the real priorities of small businesses—and that will do nothing to boost economic growth and ensure widely shared prosperity.

The problem: Federal government assistance for innovative startup companies too often misses the mark

High-growth startup companies are one of the most important drivers of job creation in the economy today. They are also vital to tackling some of our most pressing long-term societal challenges such as improving our health care, education, and energy systems. It’s clearly in our national and economic interest to help entrepreneurs and innovators succeed.

Unfortunately, many existing small-business loan and assistance programs are not optimized to help the innovative startup firms reach their job-creation potential. The reason: Fledgling startup companies—those with great a idea but without a clear path from proof-of-concept to commercialization—face unique financing challenges that the federal government’s small-business policies are not tailored to solve.

Fully unlocking the power of America’s innovators to create jobs will require Congress to act to support high-potential startup companies at their earliest stages of growth.

The solution: Revamp small-business financing programs to get companies with high growth potential through the crucial proof-of-concept phase

Here’s a solution: Revamp small-business financial assistance programs to better serve the needs of innovative, high-growth potential startup firms.

The Obama administration has already taken some encouraging steps toward this end. In October 2011, the president issued a presidential memorandum asking agency heads and federal lab directors to review current technology transfer priorities and develop plans for improvement. And just last week the president announced the creation of a $1 billion early stage innovation fund using money already appropriated by Congress. This fund will provide matching capital to private loans already made through the existing Small Business Investment Company program. To help with this, the Startup America Partnership, a public-private partnership between the White House and more than 50 corporate partners, pledged an additional $1 billion in donated services geared toward helping 100,000 entrepreneurs and innovators get businesses off the ground over the next three years.

The 50 companies involved will provide free software, consulting, and legal services to the innovative startups with the most job-creating potential. And not a dime of this $1 billion commitment comes from taxpayers.

But the federal government can do more to help bridge the gap between early-stage research and the marketplace. It needs policies and programs that:

  • Increase mutually beneficial flows of knowledge and intellectual property between academia and industry
  • Support university technology-based spinoff companies
  • Encourage public-private partnerships that support translational research and proof-of-concept projects that demonstrate to private investors the viability of new ideas in the marketplace

Here are the avenues to achieve these ends: The Small Business Innovation Research, or SBIR, and Small Business Technology Transfer, or STTR, programs administered by the U.S. Small Business Administration allocate 2.5 percent of federal agency grants for small businesses. That’s a key resource for some small companies seeking to bring early-stage innovations to market. Yet many university innovations are created too early to spin out into a company, so this program does not fully address the need for earlier-stage proof-of-concept funding.

Although some universities have managed to secure donor and private-sector funding to cover some of the costs of proof-of-concept programs, even the most successful programs struggle to become sustainable on these sources alone. That’s why the federal government should encourage other funding sources such as industry and donor support to extend the impact of the federal funding. Given the importance of transitioning between early-stage research and spinout startup companies, funding proof-of-concept projects is an appropriate role for the federal government to play.

Next steps: Reauthorize SBIR and STTR programs and set aside money to fund proof-of-concept centers

The chairs of the Republican-controlled House Small Business Committee and House Science, Space, and Technology Committee announced on Monday they had reached a deal with congressional democrats to reauthorize the SBIR and STTR programs through 2017. While the deal contains progress on many important fronts—including increasing program funding levels and maximum award amounts, increasing eligibility for companies with more diverse investment profiles, and setting new standards and oversight—it could go further to support the journey of innovative technologies from lab bench to assembly line.

One important way to do this would be to enhance the program by setting aside a portion of funding for proof-of-concept centers. Krisztina “Z” Holly, the vice provost for innovation at the University of Southern California and executive director for the USC Stevens Institute for Innovation, first proposed this idea in a 2009 policy paper called “Innovation Model Program for Accelerating the Commercialization of Technology.”

In a forthcoming paper by Holly from the Center’s Doing What Works project and online magazine Science Progress, she elaborates on this idea, noting that “the need is now acute. If past experience can be a guide, even a modest investment of $80 million could potentially stimulate $1 billion in private-sector investment in ideas that would otherwise be too early and risky for investors to currently bet on.”

That’s an effective, efficient way to bring federal money to bear in helping the private sector create more innovative small businesses that contribute so much to job creation in our country.

Ed Paisley is Vice President for Editorial at the Center for American Progress. Sean Pool is Assistant Editor in charge of the Center’s Science Progress online magazine. Paisley and Pool are the project coordinators and lead editors for the forthcoming series of papers on U.S. science and economic competitiveness.

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