Venture capital can boost the supply of quality R&D: Andrew Powell

The government wants to make quality investments in research and development, and the venture capital industry can help.

Unfortunately, current law limits their ability to help because venture capital investment is not allowed to be an award criteria for Small Business Innovation Research (SBIR) contracts.

Yet venture capital investment is a signal that an investor or company is considering a company’s business potential. It’s also an indicator that a startup has some level of financial backing, which can be helpful as the company looks to take on the infamous Department of Defense.”death valley“…a metaphor for the tendency of companies to die because they run out of money while waiting for a DOD contract to be awarded.

There is usually a long lead time between early-stage R&D assignments and long-term DOD contracts. That makes defense a particularly tough market for high-growth tech startups, which tend to have negative cash flow in their early years.

Given the challenges of taking a research idea to the real world, wouldn’t the government benefit from considering corporate support when deciding which investments in small businesses could turn into tech companies? scalable for national security purposes?

How Venture Capital and Procurement Intersect

My company learn to win recently applied for an SBIR contract. The irony we found in completing our application was how focused it was on explaining the “marketability” of our product. There was a long list of prompts asking questions such as “How much revenue do you expect to generate in five years?” and “Does the company have marketing expertise?”

These questions themselves were not bad in themselves. In fact, many were the same ones I was asked dozens of times in business pitch meetings and due diligence discussions as various companies chose to invest in my business.

More than a third of our 15-page government white paper was devoted to our commercialization case.

As I wrote each response, I couldn’t help but think that these prompts only scratched the surface of what constitutes a high-potential business venture. The questions were only a tiny part of the due diligence and assessment an institutional investor would engage in before committing to a startup.

I also wondered if the government reviewer – reading a white paper, with no opportunity to ask follow-up questions or conduct a due diligence call – would be well equipped to make a good decision about our potential.

How VC does it

This is not an area where the DOD needs to reinvent the wheel.

There are people who do this marketability assessment for a living. They are called venture capitalists. They’re by no means perfect, but the good ones are actually incredibly good at picking high-potential businesses. According to a study by Stanford University’s Venture Capital Initiative, the wealthiest 10% of venture capitalists create almost 90% of the overall economic value of venture capital. Funds like Sequoia Capital often generate returns close to 1,000%, significantly outperforming the market, according to analysts.

They are really smart people who spend all day, every day, often for decades, evaluating and betting on the trading technologies with the greatest market potential. The good guys get really really good at it.

It’s really hard to do well. According to a Stanford University analysis, average venture capital funds are not outperforming the market and many are actually losing money.

A trusted VC network?

The US government would be well served if VC’s opinion could be incorporated into its own thinking about the companies’ business potential. They might even outsource most of that assessment of business potential to those who do it best, with venture capitalists having a proven track record of picking winners.

Just as the Pentagon established the Trusted Capital Network to try to protect the industrial base from adverse foreign investment, the DOD should also establish relationships with the most successful investors as a pipeline for promising defense startups and integrate their prospects into their own evaluation processes. .

If the SBIR program truly wants to be “America’s seed fund,” it should at least be able to incorporate the opinions of people who do this difficult job for a living.

Subscribers can find related information at Bloomberg Government.

Author Information

Andrew Powell is the co-founder and CEO of learn to win , a learning technology company serving professional sports teams, the U.S. Department of Defense and Fortune 500 companies. Andrew holds an MBA from the Stanford University Graduate School of Business, where he helped launch a new course called Technology, Innovation and Modern Warfare, as well as a BA from the University of North Carolina at Chapel Hill, where he was a Morehead-Cain Fellow. and student body president.

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