Tuesday, July 22, 2014

Public funding is essential for new technologies

I was recently driving through the Sierra Nevada range in California, and the references to the gold rush reminded me of a related concept I've been thinking about lately: early stage technology advances require government funding. In fact, I've come to believe public funding is not only important to accelerate technology, but without it, there would be no noticeable progress. This is highly relevant to the current state of life sciences funding given the challenges with NIH and NSF budgets. To illustrate that point, think about the following 3 steps required to strike it rich in the gold rush.

1. Explore and discover. This is the well established activity of academic basic research institutions. Often characterized by mavericks or small groups wandering in uncharted territory where no 'sane' person would spend their time or money. Public funds are an efficient and equitable way to fund such endeavors (by supporting a relatively large number of investigators with relatively small awards). Just like the early days of gold mining, this works because if the search is spread wide enough, there are bound to be a lucky few that find gold.

2. Dig holes and build roads. The reality is that discovering gold is only the beginning of the process to creating wealth. The next steps can be described as two-fold: a) high risk/reward ventures often led by startup companies (dig holes), and b) support of basic infrastructure to increase the flow of progress (build roads). It's reasonably intuitive that road building falls in the realm of government funding. In life sciences, this is served by advisory/regulatory agencies, a trained workforce, the healthcare system, and related laws. What is often less appreciated is the role of public funding for hole digging. In earlier days, a lot of this was funded by venture capital and corporate research, but the burden is now heavily carried by programs such as SBIR grants and funding from non-profit endowments (Gates Foundation being the most famous). 

3. Bring in the heavy machinery. Once the vein of gold is located, big business is ready to move in. Since this task requires a lot of capital, lots of people, countless transactions to execute, and generally longer timescales, corporate entities can easily out-compete the smaller players. It is not a coincidence that this is also where all the big money is made.

I was lucky enough to have been able to follow this trajectory (from 1 to 2 to 3) with a technology that originated in graduate school, led to a startup, and was later absorbed into a large corporation. From this experience, I have gained an appreciation of how the loop gets closed.

The forward direction is fairly intuitive to most of us living in a capitalistic society. On this path, business decisions are driven by net present value (NPV)-- essentially a measure of how much money a company can make. The practical implication is that big money tends to chase easy money. In the example above, most disciplined investors no longer believe the NPV is sufficiently attractive in step 2, and will wait until step 3. It should also be fairly apparent that government funding creates more positive NPVs for businesses to take advantage of and make more money. In most cases, without the initial injection of "free money" by public sources, business would substantially slow down.

The arrow that transfers wealth back is less intuitive-- but comes in the form of taxes. Government funding is not (and should not) be based on NPV, and instead tries to maximize other values such as westward expansion, education, and job creation. Given that public funding is helping companies make money, it is only fair that some of this is fed back to governments to continue funding the early innovation pipeline. In the current capitalist system, this occurs "naturally" through income and employment taxes. Without debating the politics of tax structure, suffice it to say that this transfer of wealth is necessary for proper function of the innovation engine.

I have been able to see both sides of this cycle-- the elation of receiving "no strings attached" funding to launch an early stage idea, as well as forking over eye-popping amounts of money in the form of taxes. The correct balance of these two forces are crucial for proper support of technology innovation.

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