Although much of this information has been addressed in numerous diaries before,
MIT Technology Review had a short but comprehensive article in their March issue detailing investment in startup ventures and research and development. Although there are some promising developments in funding for hi tech startups, there are far too many gaps from one industry to the next which may have a profound impact on our economy and security over the next few decades.
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For many in the technology community, the threat of crisis became much more vivid in early December when President Bush signed off on the fiscal year 2005 U.S. federal budget. While this years budget increases spending for research and development by 4.8 percent to $132.2 billion, most of that increase, 80 percent, goes to defense R&D, and most of that to new weapons development, according to the American Association for the Advancement of Science (AAAS). In fact, defense-related R&D reached a record high $75 billion this year. One winner was the U.S. Department of Homeland Security, which gets a 19.9 percent increase in its R&D budget, to $1.2 billion. The big loser is the National Science Foundation (NSF), which had its R&D budget cut by 0.3 percent, to $4.1 billion; it was the first cut in NSF's budget since 1996. Meanwhile, R&D funding for the National Institutes of Health (NIH) increased by just 1.8 percent to $27.5 billion; it was NIH's smallest percentage increase in years, and well below the rate of inflation.
"Defense and homeland security are very important. I can't criticize funding increases per se in those areas," says Shirley Ann Jackson, president of Rensselaer Polytechnic Institute in New York and the 2004 AAAS president. "But the bigger issue is sustaining focus and support for funding of basic research across broad fronts. We have to have a robust base of basic research. Were talking about potentially eroding that base." Jackson adds, "Other places will innovate. The question is, are we going to be a leader? If we don't pay attention to the warning signs, 15, 20 years from now, we could find ourselves in a relatively disadvantageous position in terms of global leadership."
Experts also worry that the federal R&D budget has become too skewed toward relatively mature technologies. "A lot of the federal funding has gotten a little more conservative and risk averse. The government needs to put a bigger percentage in radical innovation and more-exploratory research technology that's going to be transformational," says Deborah Wince-Smith, president of the Council on Competitiveness, a group of industry, university, and labor leaders based in Washington, DC. Amar Bose, professor emeritus at MIT and founder of the Bose audio company in Framingham, MA, puts it more bluntly: "Research funding is going downhill, and I don't see it turning around. We're going to have trouble."
The cutbacks in the federal budget are further exacerbated by the continuing trepidation of many venture capitalists. While valuations of later-stage venture-backed startups have begun to bounce back this year, valuations for younger startups have not. In addition, say experts, some venture capitalists are focusing on certain pockets of technology, such as those relevant to homeland security and biodefense, where the focus is more on developing and deploying existing, well-established technologies than on inventing innovative new ones. All of which could have dire consequences for innovative startup companies.
There are some encouraging signs in certain areas. Biotech, IT Security, Internet, and Mobile and Wireless applications are seeing some increase in venture capital. Also, some lower grade technology, RFID for example are also receiving interest, in large part because of Wal Mart's push to have RFID tags and readers in place in their store with in the next few years.
Initial Public Offerings are also making something of a comeback. Google was very successful in bringing their stock to the public. Biotech and Pharmaceutical companies also had numerous successful IPO's last year and into this year. Other companies such as Alnylam Pharmaceuticals had disappointing IPO and Nanosys withdrew their IPO before it ever occurred. For the most part, companies with successful IPO's need to have a product either ready or nearly ready for market. It also appears that investors are looking for good business plans as well. Given that anything with a dotcom going public in the 90's was bought like crazy, this tightening of standards for investing is probably a good development.
While business and public investments have been showing some signs of improvement, the area of greatest concern is with government investment. Virtually all funds going toward research and development are being spent in defense and security. Cutbacks in other government agencies such as the National Science Foundation and NASA are likely to have a profound impact on our ability to compete in a global market. In addition, since so much of our development depends on research done in an unrelated field, the cutbacks could also affect our ability to protect ourselves in the event of another attack.
What the politicians are forgetting, say some technology experts, is that investing in basic research across a wide range of fields is also critically important to national security. "Our ability to respond [to an attack] is related to our innovative and technological capacity, and that depends mightily on the funding of basic research," says RIP's Jackson. She says she is most concerned about the cuts to the budget of NSF, because "its the personification of support for basic research. It supports research across the broadest front, its not specifically tied to a mission, and it supports education." Indeed, 80 percent of NFS'S R&D money goes to colleges and universities, the highest percentage among all federal funding agencies.
There are signs that cutbacks in non-defense-related research over recent years are already having an impact. Take robotics, a field in which the United States has traditionally been strong. "NSF really doesn't fund robotics anymore," says Alan Peters, a professor of electrical engineering at Vanderbilt University. The situation is worrisome enough that U.S. government agencies have formed a coalition of scientists to report to Congress on the state of American robotics research and funding this spring.
NIH, which over the last few years was the darling of Congressional appropriations committees (enjoying 15 percent annual increases from 1998 to 2003), has had its funding growth grind almost to a halt. In 2004, the total NIH budget increased by 2 percent, the smallest increase in decades, and much of that was allocated to research on biodefense, where spending rose by 3.8 percent to $1.7 billion. As recently as three years ago, NIH funding for biodefense was $162 million. Another notable casualty of the 2005 federal budget was the Advanced Technology Program (ATP) at the National Institute of Standards and Technology. Established to help support startup companies developing innovative but early-stage technologies, the ATP program has long been the target of the Republican administration. And while President Bush failed in his attempt to axe the program this year, the final 2005 budget did slash ATP's funding to $136 million, a 24 percent decrease from 2004.
Consider the situation with robotics described above. Properly designed, robots could be used to check for explosive weapons in buildings, dams, bridges or subway tunnels and defuse them, all without sending humans into harm's way. There are many areas where basic research and later development could have a more significant impact in protecting our nation.
Additionally, while we cut our funding, other nations will move ahead of us. Already, we are far behind in stem cell research and high speed internet access. Ideology, risk aversion and genuine security concerns appear to be the main reasons for the downturn in basic research funding in certain areas. The cutbacks will have cascade effects for many years to come as researchers and businesses move to more profitable areas. The infrastructure itself will be dismantled and reallocated. Once this happens across enough industries and areas of research, our ability to recover will be especially limited in a globally competitive environment.
It is not necessarily a bad thing for businesses and individuals to more careful in their investments. After the internet bubble burst a few years ago, we are only now seeing new investments in internet stocks, and only in companies which have a more established track record, such as Google. I do think it should be more broadly based to include more areas of technology and allow more early startups to have a chance to grow.
The role government takes must be expanded. As things stand now, if you design a better widget, your best option is to go to the ACME Widget Company and hope they will buy it from you. Or at the very least offer you a job at their company. While some states are leading the way (California spending 3 billion for stem cell research, for example), it is not sufficient. Several areas present themselves as strong possibilities for new investment in R&D. Clean energy does have a strong appeal. Both India and China are growing rapidly and need more energy than they have available. It would also cover many areas of research that are now languishing.
I would also favor a renewed effort in space. At one point during the 60's, there were approximately 500,000 people working on some aspect of going to the moon. From design of the Saturn V rocket to the manufacture of the astronauts spacesuit mission patch, it created a large enough community so that it had broad popular support. The spinoffs from the space program cross almost all scientific fields today.
Ultimately, our nation will survive in one form or another. In the coming decades, whether we are a leader of the world or a follower or a backwater third world country depends on the decisions made now.