The US SBIR and its relevance to the UK

Following publication of the Speakers Corner article “Why the UK could imitate the US SBIR program” in The Chilli, we have had a number of comments in support of the observations made. One in particular, from Robert Sansom, chairman of Cambridge Angels, pointed to a paper published by David Connell of TTP Ventures, which some of our readers may find of great interest. Sansom commented, “I support Adrian Horne's message about how the UK could emulate the US SBIR (Small Business Innovation and Research program). As the recipient of several SBIR awards when I was an entrepreneur in the US, I think one of the key differences is that not only does a start-up get a grant but also it gets a potential early-adopter customer. This is very different from the UK where there is no notion of an early-adopter customer when the grant comes from the DTI or a RDA.”

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Here we summarise the key sentiments expressed in David Connell’s white paper, entitled, ‘Exploiting the UK’s science and technology base: how to fill the gaping hole in UK government policy’.

In the foreword by Anne Campbell, the former MP for Cambridge, she highlights the key essence of the paper: “Although we [the British] are acknowledged to be amongst the world’s best in intellectual creativity we often fail to capitalise on our ideas and ingenuity. We have had great success in recent years in small companies which have thrived on intellectual capital. However, small firms often fail to become large firms and do not achieve their true potential in wealth creation. This is a wasted opportunity and one which we cannot ignore.”

She continues, “This paper examines the business strategies that have been adopted by successful UK technology companies and highlights the important role played by customer funding during the early, exploratory stages of commercialisation. It shows how these ‘soft’ strategies have been used to build critical mass teams which are then able to grow their businesses rapidly to exploit world markets. US Government agencies have long played a significant role in funding technology development, particularly by placing R&D contracts with small companies that can help them achieve agency goals. The paper discusses how this process works and contrasts it with experience in the UK.”

The paper by Connell proposes the means by which Government can assist small firms to grow: a small fixed proportion of all Government expenditure on research and development should be used to fund innovative technology developments in small businesses – not through grants or subsidies, but by tapping into departments’ future requirements for new technology as informed customers. The approach proposed is to run regular open competitions for small companies to carry out specific research and technical feasibility studies, and supply prototype solutions. It is similar to a scheme that has been operated successfully by the US Federal Government for over 20 years.

Campbell adds, “This paper should be read by everyone who wishes to understand better the business models for industrial growth and the ways in which Government can help stimulate and nurture our industrial base. The information in this paper will be valuable to policy makers in understanding the case for change. It will be useful to others who want to use many of the interesting examples to illustrate why we should change. I hope it will stimulate a much-needed debate on the means of assisting small businesses to grow and will be heeded by all those with an interest in the healthy economic future of the UK.”

In Connell’s introduction he questions whether the Science Policy Review published in July 2004 underscoring the level of commitment of the current Government to the notion of a science and technology based economy will work. He asks whether it will really lead to the kind of strong science and technology based industries that the UK must develop if we are to remain competitive with the Chinese and the Indians. He says, “Because the reality is that over at least 25 years of trying, the UK has singularly failed to turn its entrepreneurial start-ups into companies of the scale of Cisco, Sun, Google or Amgen. Perhaps our best known technology success story, ARM, only employs around 750 people, 14 years after its formation.”

Cambridge, the UK’s leading technology cluster, has become renowned for growing acquisition fodder for the big American companies to buy. This is fine for the venture capital investors involved, but hardly the best route to building a strong 21st century UK economy. The cry that ‘we are good at doing great science, but not at exploiting it’ is as pertinent today as it was in Harold Wilson’s time.

So what is the key ingredient for big time success on the global technology stage? And what is it that leads to so many strong new technology companies being created in the US and so few in the UK and the rest of Europe? Is it the larger US market, more experienced CEOs, greater availability of investment, better VCs, or maybe all of them? What can the Government do to help?

Whatever the precise mix, two facts are indisputable. First, the US is by far the world’s largest market for technology products. This gives all non-US technology start-ups an inherent disadvantage and, whilst a strong product, careful targeting of key customers and an early US marketing presence can compensate to some degree, it is inevitably more difficult for UK based start-ups to win US customers and build US market share.

Second, the US Federal Government uses its powers as a buyer of advanced technology and R&D programmes to give much more support to its science and engineering based companies during their formative years than is available in the UK. ‘Soft’, contract R&D orientated start-up strategies play a crucial role in the exploitation of new technologies. It is the business model on which most of the UK’s technology success stories have been based. By supporting these kinds of strategies, US Federal Government procurement policies have for many years played a key role in developing its technology based industries. This is not the case in the UK, and the lack of appropriate UK Government policies and programmes for R&D procurement means that small, innovative UK technology companies are significantly disadvantaged compared with their US competitors.

Connell examines why remedying this deficiency is probably the most important step the UK Government can take to ensure our public investment in science is exploited effectively, and concludes that the situation will only be remedied by legislation.

Soft start-up strategies are about developing applications of a company’s technology or expertise in collaboration with customers, so they play a crucial role in the commercial exploitation of emerging technologies and new scientific discoveries and techniques. Getting customers to pay for developing a new technology to solve their problems is the best market research a company can have. If a particular customer’s requirements are typical of other organisations, the bespoke ‘solution’ can turn into a standard ‘product’ and the soft business can make the transition to a faster growing, hard business.

Many new technologies start by being exploited through companies adopting a soft strategy, with a ‘harder’ strategy taking over once a scaleable business around key commercial applications has been defined.

Cambridge Silicon Radio plc, which successfully IPO’d on the London Stock Market in February 2004, was built around a team that had carried out a succession of customer funded chip development projects within Cambridge Consultants Limited (CCL). The core team which founded CSR as a spin-out company in 1999 had worked together at CCL for over 10 years. Other success stories are discussed by Connell such as Autonomy Corporation plc, spun out of Neurodynamics, a business set up to develop customer applications of neural networks and Baysian probability theory by Dr Mike Lynch, an ex Cambridge University academic.

The paper then discusses in detail the US government approach to procurement of innovation. For over 20 years the US Government has had as a major policy objective the use of Federal Government R&D programmes to support smaller businesses, and the key policy instrument for this is the Small Business Innovation Research Program (SBIR), established by President Ronald Reagan under the Small Business Innovation Development Act of 1982.

In his section on what needs to be done in the UK, Connell highlights why the UK failed to produce major new technology companies on a scale to match the US; and how the UK and European venture capital industries have also consistently struggled to produce returns to match those of either the UK buyout sector or US venture capital industry. “Early stage technology has probably been the worst performer of all,” he says. He also comments on why the difference between the US approach and the UK approach is simple. In the US, participation in the SBIR programme is compulsory for all larger Federal Government agencies. And the user-friendly way in which it is operated is largely defined by legislation. Government agencies are required to report regularly on progress.

The UK approach is one of inter-departmental consultation and persuasion. There is no obligation to participate in the SBRI programme and no ‘template’ to which departments are required to design their approach. “Anyone with any experience of Government or the Civil Service knows that this is a recipe for inaction. Compared with other priorities, it is just too small an issue to grab the attention of senior officials,” Connell comments.

David Connell has been closely involved with the UK technology sector for over twenty years. He was founder of TTP Venture Managers Ltd and its CEO and executive chairman until 2004. He continues to be an advisor to the company and works closely with many of its portfolio companies.

The full paper can be viewed by clicking on the following link: http://www.ttpventures.com/docs/Filling%20The%20Gap.pdf

Editor’s note: The Chancellor, Gordon Brown, had announced in his last budget the intention of introducing a requirement that 2.5% of all extra mural research, (i.e. that is externally contracted out) will be reserved for SMEs (small and medium sized enterprises). We await further details on exactly how this will work and whether the procurement policy for this will be as simple, or if it will be riddled with so much bureaucracy that SMEs won’t be able to access it because they don’t necessarily have the resources to go through both the red tape and the costs of consultants fees to get them the contract.

© Chilli Publishing Ltd 2005

02JUN2005