virtual mode with a small group of key managers by simply continuing to fund the PSPs. Hence the vast majority of investment in this model is focused solely on advancing the product (or technology) rather than on inefficient infrastructure and the associated operating and maintenance costs.
To increase the level of investment in this critical space of product development, we have called on the federal government to consider investing as a limited partner (LP), matching the PDC’s private sector investment with federal dollars. Termed the American Innovation Investment Fund (AIIF), the government would share the fund’s profits as any other LP (typically in the VC model, the LPs receive 80 percent of the profits and the management receives 20 percent). This would allow the federal government an opportunity to earn a significant return and recycle its investments in the next wave of innovations. Government investment criteria could require that a high percentage (~80 percent) of the investments be tied to federal or state funded research and that all investments are pre-VC.
As the PDCs would not require legions of experienced entrepreneurs, this model could work equally well in existing innovation hubs as well as Michigan, Florida, Iowa, or any other region that has high quality research centers funded by the federal or state government. The AIIF could be an economic development activity that truly benefits the entire country.
Why should Government favor investment in early stage science and technology innovation?
The federal government, through its many science and technology related agencies, is already the largest single investor in basic research in the United States. From this research, discoveries are made that lead to better health, increased security and defense, more nutritious food, a cleaner environment, and better communications.
The world’s biggest challenges require technological breakthroughs in these sectors. As a result, these are the areas that should attract the largest investments. By focusing on early stage technology investing we will see major global benefits and economic impact in addition to significant investor returns and significant new job creation. Furthermore, the US is currently the world leader in innovation and our future leadership will increasingly depend on our ability to more efficiently transfer discoveries from research through commercialization.
While modifications of the previous innovation models (fully integrated and VC start-ups) will certainly continue, we believe that the Distributed Partnering Model offers a rational framework for a new approach to risk-adjusted financing of innovation. There are many potential modifications and hybrids of the proposed new model and we have faith that entrepreneurs will certainly add creative dimensions over time.
Our concept of a distributed partnership model is further supported by two very recent articles: In Sunday’s New York Times, op-ed columnist Friedman calls on President Obama to make 2010 the year of “Start-Up America;” and last week, Morgan Stanley analyst Simon Varcoe called on large Pharma to downsize internal research programs in favor of in-licensing.
