Appendix E: The Effect of Phase 2 Grants

Transcription

1 Appendx E: The Effect of Phase 2 Grants Roughly a year after recevng a $150,000 Phase 1 award, a frm may apply for a $1 mllon Phase 2 grant. Successful applcants typcally receve ther Phase 2 money nearly two years after the Phase 1 award. Fgure 1 shows all applcants by offce and award status for Phase 2, whch s much less compettve. Approxmately 45% of applcants receve fundng. The short term nature of the Phase 1 effect on VC - recall that well over half the long term effect occurs wthn two years - suggests that Phase 2 does not cause the Phase 1 effect. In fact, I fnd that the Phase 2 grant has no consstently postve effect on subsequent VC. The frst column of Table 1 uses the same specfcaton as n the Phase 1 analyss, but estmates the Phase 2 treatment effect. Columns II and III use topc and year nstead of competton fxed effects. The coeffcents are small and postve, but mprecse. For example, the 95% confdence nterval from the column III the coeffcent of 4.4 pp ranges from -3 pp to 12 pp. I fnd smaller coeffcents when the dependent varable s all prvate fnance (Table 2). I also estmate the effects of Phase 1 and 2 together by ncludng an ndcator for whether a frm won a Phase 2 award n my prmary Phase 1 specfcaton (Table 3). Across bandwdths and fxed effects, I fnd the same robust Phase 1 effects. Coeffcents on Phase 2 range from -3.2 pp to -.1 pp, but have only slghtly smaller standard errors than when I estmate Phase 2 alone. The narrowest 95% confdence nterval ranges from -7.8 pp to 5.6 pp. I conclude that n contrast to Phase 1, any effect of Phase 2 s not consstently postve. That s, t may be useful for some frms, but s not for others. As wth fnancng, I fnd no mpact of the Phase 2 grant on revenue, survval, or ext, shown n Tables 4-6. The coeffcents are small, often negatve, and nsgnfcant. One reason for the absence of a strong measurable Phase 2 effect s adverse selecton among Phase 1 wnners n the decson to apply to Phase 2. Among Phase 1 wnners, 37% dd not apply for Phase 2. Whle 19% of the non-applyers receved VC nvestment wthn two years of ther ntal award (column I), only 9%(8%) of frms who appled and lost(won) Phase 2 dd (see Table 7). A t-test of the dfference of means strongly rejects the hypothess that non-applers and applers have the same mean probablty of VC nvestment wthn two years, wth a t-statstc of In ntervews, grantees told me that the grant applcaton and reportng processes are so onerous that once they receve external prvate fnance, t s often not worthwhle to apply for addtonal government fundng. Smlarly, Gans and Stern (2003) hypothesze that prvate fundng s preferred to SBIR fundng. For startup Osclla Appendx E 1

2 Power (ntroduced above), the Phase 2 grant of $1 mllon was sgnfcant n relaton to what the frm sought to rase from prvate sources. Had Osclla rased a $10 mllon VC round, CEO Shendure sad, applyng to Phase 2 would not have been worthwhle. Now I turn to the set of frms that dd apply to Phase 2. In the Standard Sample regressons (columns I-III of Table 1), there are only 410 observatons, whch s roughly half the total number of Phase 2 applcants. The other half are omtted because they are not frst-tme Phase 1 wnners. The SBIR mlls always apply to Phase 2, whch s why the sample wth only frst-tme wnners s small. Column IV expands the sample to all frms, and fnds a statstcally nsgnfcant effect of 0.2 pp. Column V consders only frms wth more than one prevous wn, and fnds a large negatve coeffcent, also nsgnfcant. The concentraton of SBIR mlls n the Phase 2 applcant sample may help explan the absence of a strong Phase 2 mpact, but t does not cause the mprecson. The fracton of Phase 2 wnners and losers who receve VC are qute smlar, at 22% and 24% (columns II and IV of Table 7). These percentages are large; despte the SBIR mlls, the Phase 2 applcants more broadly are only adversely selected relatve to the populaton of Phase 1 wnners. 1 It seems that the Phase 1 grant enables venture fundng for hgh-qualty frms whose prototypng reveals postve nformaton. There s suffcent nformaton about the frms at the Phase 2 stage that the grant no longer serves to mtgate nformaton asymmetres. It s natural to magne that the very small Phase 1 grant enables access to VC fnance because of the expected value of the Phase 2 effect. To the contrary, Table 8 shows that the Phase 1 grant effect on subsequent VC s stronger than n the whole sample both for Phase 1 wnners who choose not to apply (Panel A), and for Phase 1 wnners who lose Phase 2 or choose not to apply (Panel B). For frms who opt not to apply (Panel A), the long term effect of Phase 1 on VC s twce as large as n the whole sample wthn two years of wnnng the grant (.e. before the frm could n theory have gotten a Phase 2 had they appled) and n the long term. Specfcally, column II shows that the effect wthn two years s 14 pp, sgnfcant at the 1% level, whereas the effect n the whole sample from Table 7 n the man text s 7.5 pp. In the long term, column IV reveals an effect of 16.2 pp, also sgnfcant at the 1% level. Ths agan s roughly twce the whole sample effect from Table 3 n the man 1 One example of such a frm s FloDesgn Wnd Turbne, whch receved a Phase 2 award n 2010, and over the followng two years rased money from Klener, Perkns Caufeld and Byers, Goldman Sachs, Technology Partners and VantagePont Venture Partners. A second example s Amercan Superconductor, whch receved aphase2awardn1996aftermanyroundsofvcnvestmentfromthelkesofbessemerventurepartnersand Venrock Assocates. After the award, t receved fundng n 2012 from Hercules Technology Growth Captal. These two companes were at qute dfferent stages when they won ther Phase 2 grants and llustrate the varety underlyng a success (VC Post =1)nmydata. Appendx E 2

3 text. In contrast to the results thus far, I do fnd a postve effect of the Phase 2 grant on patentng and ctatons. The effect on patents s, however, much smaller than the Phase 1 effect. The Phase 2 award leads a frm to generate 1.5 tmes the patents t would otherwse (Table 9), about half the Phase 1 effect. The average patents for ths sample s 2.2. Includng applcants wth prevous DOE SBIR wns, I fnd the effect declnes (columns II and III), suggestng decreasng returns n the number of Phase 2 grants to a frm. The same pattern occurs wth ctatons (Table 10). The frst stage ndcates that for frst-tme wnners (column Ia) the odds of postve ctatons for grantees are 85% hgher than the odds for non-grantees, sgnfcant at the 5% level. 2 Among the Phase 2 applcants, the probablty of postve subsequent ctatons s 0.31, so the populaton odds are The second stage (regresson wthn observatons wth postve ctatons, column Ib) fnds small and nsgnfcant coeffcents. As wth patents, the frst stage effect declnes substantally and becomes nsgnfcant when frms have more than one prevous wn (column III). Thus the Phase 2 grant acts on the extensve margn of nnovaton qualty, but not the ntensve margn. That s, among frms wth postve ctatons and among frms wth at least one prevous wn, the grant has no measurable effect. A polcy mplcaton s that f the government s objectve s to generate R&D (measured by patents and more hghly cted patents) rather than leverage prvate fnancng, then Phase 2 awards are benefcal when awarded to frms wthout prevous patentng or ctaton hstores. The prncpal research underlyng the technology at the Phase 1 stage may have occurred before the frm appled for a grant. The Phase 1 award generates testng and demonstraton (prototypng) whch sometmes yelds addtonal patents but generally does not represent a fundamental change to the frm s technology (thus no effect on ctatons). The Phase 2 grant, n contrast, allows the frm to undertake new nventve actvty. Ths nterpretaton s consstent wth prevous lterature that has found nvestment n R&D and patentng to occur smultaneously (Pakes 1985, Hall, Grlches and Hausman 1986; Gurmu and Pérez-Sebastán 2008). The large effect of Phase 2 on ctatons suggests that Phase 2 may affect the entrepreneur s technology qualty ( T 2 ). Ths Phase 2 R&D work does not, however, lkely generate the Phase 1 fnancng result, because (a) the mpact of the award on VC s short term, mostly occurrng between two and four years after the award; and (b) 2 Logt coeffcents gve the change n the log odds of the outcome for a one unt ncrease n the predctor varable. Ths odds rato s calculates as OR = e, where s the logt coeffcent. Odds are the probablty of success dvded by probablty of falure. Appendx E 3

4 many frms who wn Phase 1 and receve VC do not apply to Phase 2. Snce the SBIR program spends vastly more on Phase 2 than Phase 1, the absence of a consstently postve Phase 2 effect s mportant from a polcy perspectve. At the hgh end of the confdence ntervals, the mpact of Phase 2 s stll much weaker per publc dollar than Phase 1. For example, suppose that the true effect of Phase 2 on the lkelhood of subsequent VC s 12 pp. Then the effect of Phase 1 per grant dollar s sx tmes that of Phase 2. 3 Consder the followng thought experment. In 2012 DOE spent $111.9 mllon on 111 Phase 2 grants and $38.3 mllon on 257 Phase 1 grants. If all the Phase 2 money were reallocated to Phase 1, DOE could have provded 750 addtonal frms wth Phase 1 grants, ncreasng by a factor of 2.5 the return n addtonal VC fundng probablty. 4 Fgure 1: 3 Specfcally, at ths hgh end of the confdence nterval, the effect of Phase 2 per $100,000 n grant money s 1.2 pp. My preferred estmate of 9 pp for Phase 1 corresponds to 6 pp per $100, The calculaton s as follows, where all numbers are per $100,000 of grant spendng: The effect of Phase 2s1.2pp,andtheeffectofPhase1s6pp. ActualPhase22012spendngwas111.9,andactualPhase 1 spendng was 383. The return n percentage ponts of ncreased VC fundng probablty was 3,640. If nstead Phase 2 spendng were 0, and Phase 1 spendng were 1,502, then the counterfactual return would be 9,011, whch s 2.48 tmes the actual return. Appendx E 4

5 Table 1: Impact of Phase 2 Grant on Subsequent VC Dependent Varable: VC Post Standard sample 1 prevous Ph. 1 Wns I. II. III IV. V > 1 prevous Ph. 1 wns 1 R Ph2 > (0.141) (0.0584) (0.0363) (0.0848) (0.234) 0.679*** 0.505*** 0.461*** 0.396*** (0.217) (0.128) (0.0756) (0.132) (0.304) ( ) ( ) ( ) ( ) ( ) Competton f.e. Y N N Y Y Topc f.e. N Y N N N Year f.e. N N Y N N N R Note: Ths table s an RD estmatng va OLS the mpact of the Phase 2 grant (1 R > 0) on subsequent VC usng BW=1. Columns I-III use the sample from the Phase 1 analyss, where no prevous DOE wnners are ncluded (only the Phase 1 wn that made the frm elgble to apply for Phase 2 s allowed). Column IV ncludes all Phase 2 applcants, whle column V ncludes only frms wth more multple DOE Phase 1 wns. Standard errors robust and clustered at topc-year level. *** p<.01. Year 1995 Appendx E 5

6 Table 2: Impact of Phase 2 Grant on Subsequent Prvate Fnancng Standard sample 1 prevous Ph. 1Wns > 1 prevous Ph. 1 wns Dep Var: I. II. III IV. V PF Post ; BW=1 1 R > (0.174) (0.0730) (0.0403) (0.0922) (0.232) PF Prev 0.621*** 0.484*** 0.422*** 0.401*** (0.173) (0.121) (0.0712) (0.113) (0.270) ( ) ( ) ( ) ( ) ( ) Competton Y N N Y Y f.e. Topc f.e. N Y N N N Year f.e. N N Y N N N R Note: Ths table s an RD estmatng va OLS the mpact of the Phase 2 grant (1 R > 0) onall subsequent prvate fnance. Columns I-III use the sample from the Phase 1 analyss, where no prevous DOE wnners are ncluded (only the Phase 1 wn that made the frm elgble to apply for Phase 2 s allowed). Column IV ncludes all Phase 2 applcants, whle column V ncludes only frms wth more multple DOE Phase 1 wns. Standard errors robust and clustered at topc-year level. *** p<.01. Year 1995 Table 3: Impact of both Phase 1 and Phase 2 Grants on Subsquent Venture Captal Fnancng wth No Rank Control and Varyng Fxed Effects Dependent Varable : VC Post I. BW=1 II. BW=2 Topc f.e. Competton f.e. Year f.e. III. IV. V. VI. VII. BW=3 BW=all BW=3 BW=all BW=3 VIII. BW=all 1 R Ph1 > *** 0.103*** 0.113*** 0.114*** 0.110*** 0.114*** 0.111*** 0.106*** (0.0272) (0.0233) (0.0236) (0.0230) (0.0274) (0.0254) (0.0213) (0.0214) 1 R Ph2 > (0.0495) (0.0399) (0.0380) (0.0369) (0.0475) (0.0428) (0.0343) (0.0342) 0.305*** 0.337*** 0.322*** 0.332*** 0.307*** 0.324*** 0.335*** 0.338*** (0.0472) (0.0335) (0.0312) (0.0269) (0.0363) (0.0290) (0.0283) (0.0249) *** *** *** *** *** *** *** *** ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) N R Note: Ths table s an RD estmatng va OLS the both mpact of the Phase 1 grant (1 R Ph1 > 0) and Phase 2 grant (1 R Ph2 > 0) on subsequent VC wth no rank controls. Standard errors robust and clustered at topc-year level. *** p<.01. Year 1995 Appendx E 6

7 Table 4: Impact of Phase 2 Grant on Revenue Dependent Varable: Revenue Standard sample 1 prevous > 1 prevous Ph. 1 Wns Ph. 1 wns I. II. III IV. V 1 R Ph2 > (0.165) (0.0834) (0.0464) (0.0737) (0.219) *** 0.164* (0.200) (0.0895) (0.0543) (0.0923) (0.242) *** *** *** ( ) ( ) ( ) ( ) ( ) Competton f.e. Y N N Y Y Topc f.e. N Y N N N Year f.e. N N Y N N N R Note: Ths table s an RD estmatng va OLS the mpact of the Phase 2 grant (1 R > 0) on reachng revenue usng BW=1. Columns I-III use the sample from the Phase 1 analyss, where no prevous DOE wnners are ncluded (only the Phase 1 wn that made the frm elgble to apply for Phase 2 s allowed). Column IV ncludes all Phase 2 applcants, whle column V ncludes only frms wth more multple DOE Phase 1 wns. Standard errors robust and clustered at topc-year level. *** p<.01. Year 1995 Appendx E 7

8 Table 5: Impact of Phase 2 Grant on Survval Dependent Varable: Survval Standard sample 1 prevous Ph. 1 Wns I. II. III IV. V > 1 prevous Ph. 1 wns 1 R Ph2 > * (0.139) (0.0702) (0.0372) (0.0735) (0.180) ** (0.149) (0.0714) (0.0430) (0.101) (0.226) ** ( ) ( ) ( ) ( ) ( ) Competton f.e. Y N N Y Y Topc f.e. N Y N N N Year f.e. N N Y N N N R Note: Ths table s an RD estmatng va OLS the mpact of the Phase 2 grant (1 R > 0) onfrm survval usng BW=1. Columns I-III use the sample from the Phase 1 analyss, where no prevous DOE wnners are ncluded (only the Phase 1 wn that made the frm elgble to apply for Phase 2 s allowed). Column IV ncludes all Phase 2 applcants, whle column V ncludes only frms wth more multple DOE Phase 1 wns. Standard errors robust and clustered at topc-year level. *** p<.01. Year 1995 Appendx E 8

9 Table 6: Impact of Phase 2 Grant on Ext (IPO or Acquston) Dependent Varable: Ext Post Standard sample 1 prevous Ph. 1 Wns I. II. III IV. V > 1 prevous Ph. 1 wns 1 R Ph2 > (0.123) (0.0519) (0.0259) (0.0526) (0.106) *** (0.172) (0.0719) (0.0416) (0.0872) (0.312) ** 0.241** 0.314* (0.191) (0.0719) (0.0560) (0.102) (0.184) Competton f.e Topc f.e. ( ) ( ) ( ) ( ) ( ) Year f.e. Y N N Y Y N N Y N N N R 2 N N Y N N Note: Ths table s an RD estmatng va OLS the mpact of the Phase 2 grant (1 R > 0) onext usng BW=1. Columns I-III use the sample from the Phase 1 analyss, where no prevous DOE wnners are ncluded (only the Phase 1 wn that made the frm elgble to apply for Phase 2 s allowed). Column IV ncludes all Phase 2 applcants, whle column V ncludes only frms wth more multple DOE Phase 1 wns. Standard errors robust and clustered at topc-year level. *** p<.01. Year 1995 Table 7: Relatonshp between Phase 2 applcaton and subsequent VC fnancng Phase 2 Status: I. Dd not apply Number of Phase 1 wnners (% of column) II. Appled III. Appled IV. Appled and won (VC and lost and won from tme of Ph 2 award) VC Post =0 366 (69%) 400 (78%) 297 (73%) 308 (76%) VC Post =1 164 (31%) 111 (22%) 111 (27%) 100 (24%) 0-2 yr Post VC =1 102 (19%) 50 (9%) 33 (8%) 44 (11%) Note: Ths table uses all Phase 1 wnners and analyzes the relatonshp between whether a frm dd or dd not apply for Phase 2 and VC fnancng status. Year 1995 Appendx E 9

10 Table 8: Impact of Grant on VC for Frms who dd not Apply to or dd not Wn Phase 2 Panel A: Frms who dd not apply to Phase 2 Dependent Varable: 0-2 yr Post VC VC Post I. BW=2 II. BW=3 III. BW=2 IV. BW=3 1 R > *** 0.140*** 0.142*** 0.162*** (0.0334) (0.0373) (0.0417) (0.0422) 0.269*** 0.273*** 0.285*** 0.281*** (0.0406) (0.0371) (0.0417) (0.0398) *** *** ( ) ( ) ( ) ( ) Competton f.e. Y Y Y Y N R Panel B: Frms who lost Phase 2 or dd not apply Dependent Varable: 0-2 yr Post VC VC Post V. BW=2 VI. BW=3 VII. BW=2 VIII. BW=3 1 R > *** *** 0.103*** 0.114*** (0.0225) (0.0235) (0.0279) (0.0276) 0.300*** 0.294*** 0.310*** 0.292*** (0.0387) (0.0351) (0.0399) (0.0381) *** *** ( ) ( ) ( ) ( ) Competton f.e. Y Y Y Y N R Note: Ths table s an RD estmatng va OLS the mpact of the Phase 1 grant (1 R > 0) on VC, where dependent varable VC Post =1f the company ever receved VC after the award. The bandwdth around the cutoff vares. Standard errors robust and clustered at topc-year level. *** p<.01. Year 1995 Appendx E 10

11 Table 9: Impact of Phase 2 Grant on Patentng (Negatve Bnomal) Dependent Varable:#Patent Post I. Standard sample II. 1 prevous Ph. 1Wns III. > 1 prevous Ph. 1 wns 1 R > ** 0.303** (0.200) (0.130) (0.135) #Patent Prev 0.735*** 0.614*** 0.666*** (0.110) (0.0608) (0.0654) 0.689** 0.576*** (0.333) (0.219) (0.211) *** ** ** ( ) ( ) ( ) Year f.e. Y Y Y N Pseudo-R Log Lkelhood Ths table s an RD estmatng va a negatve bnomal model the mpact of the Phase 2 grant (1 R > 0) on the frm s patent count after award usng BW=1. Columns I-III use the sample from the Phase 1 analyss, where no prevous DOE wnners are ncluded (only the Phase 1 wn that made the frm elgble to apply for Phase 2 s allowed). Column IV ncludes all Phase 2 applcants, whle column V ncludes only frms wth more multple DOE Phase 1 wns. Note: Standard errors robust. *** p<.01. Year 1995 Appendx E 11

12 Table 10: Impact of Phase 2 Grant on Normalzed Ctatons (Two-Part) Dependent Varable: Ctaton Post I. Standard sample II. 1 prevous Ph. 1 wns III. > 1 prevous Ph. 1 wns Ia. Logt Ib. Regress IIa. Logt IIb. Regress IIIa. Logt IIIb. Regress 1 R > ** *** (0.260) (15.09) (0.147) (5.828) (0.245) (5.863) Ctaton Prev *** 0.400*** *** 0.393*** (0.0485) (1.155) ( ) (0.0845) ( ) (0.0743) (0.470) (29.69) (0.319) (12.73) (0.415) (11.14) * *** *** ( ) (0.0340) ( ) (0.0135) ( ) (0.0127) Year f.e. Y Y Y Y Y Y N Pseudo-R 2 Logt R 2 Regress Log lk Note: Ths table s an RD estmatng va a two-part (logt plus regresson) model the mpact of the Phase 2 grant (1 R > 0) on the frm s normalzed ctaton count after award usng BW=1. The logt porton of estmates zero vs. postve ctatons (extensve margn), and then the regress part estmates the mpact of the grant on observatons wth postve ctatons (ntensve margn). Column I uses the sample from the Phase 1 analyss, where no prevous DOE wnners are ncluded (only the Phase 1 wn that made the frm elgble to apply for Phase 2 s allowed). Column II ncludes all Phase 2 applcants, whle column III ncludes only frms wth more multple DOE Phase 1 wns. Standard errors robust. *** p<.01. Year 1995 Appendx E 12