NVCA: Government Must Increase Basic R&D Spending –

During the late 90s some feared that the long-term pipeline for innovation might dry up, because venture investing began to outpace federal investments in research and development. Today, the trend lines seem to be reversed, with venture capitalists investing only $21.1 billion in 2002 compared to a $117.3 billion federal R&D budget for fiscal year 2003.

A closer look at the details of the Bush administration’s fiscal 2004 R&D budget request may mean some good news for those venture capitalists looking to the government as an R&D partner or as a customer for finished products. However, the budget does little to alleviate the concern about declining federal investment in basic research that has historically fueled the long-term pipeline for innovation.

In the budget presented to Congress, President Bush understandably emphasized defense and homeland security, along with measures intended to bolster the economy. To add money to those key areas, the president held overall discretionary spending to a 2.5% increase over fiscal 2003. Even under those constraints, the president’s request for total federal R&D in fiscal 2004 is a record $122.5 billion.

The preliminary numbers show that defense is king. Of the total R&D request, $67.5 billion was earmarked for defense-related R&D, with the Defense Department receiving $63 billion. Within that budget, however, basic science and technology research would drop by 8.3%, with all other Pentagon programs rising 10.8%.

Congressional proponents of increased science funding are preparing for battle over the coming months in several areas. The president’s budget proposes $5.5 billion for the National Science Foundation (NSF), which would be less than a 3% increase over the amount that Congress approved for fiscal 2003. Moreover, Congress boosted NSF funding by 10.1% from fiscal 2002 to fiscal 2003, for a total budget of $5.3 billion. The presidents had requested $5 billion.

In fiscal 2003 lawmakers also restored funding for the Advanced Technology Program (ATP) and for the Manufacturing Extension Program, which were zeroed out in the president’s budget. Both programs are again marked for elimination in fiscal 2004, and members of Congress have begun making noise about restoring funding for them despite Bush’s wishes.

Similar to fiscal 2003, the budget proposal for fiscal 2004 focuses considerable attention on bioterrorism countermeasures. Many of the countermeasures are bundled into the 10-year, $6 billion BioShield initiative, which includes the authority to permit the use of emerging treatments, even if not yet formally approved by the FDA.

The fiscal 2004 budget and BioShield proposals also seek authority for the Department of Homeland Security to purchase vaccines and medicines for the national stockpile, allotting $900 million for that purpose. This program will “serve to assure potential manufacturers that if they can create a safe and effective product needed to counter bioterrorism threats, the government can purchase it,” thus providing the private sector with a guaranteed client for products with otherwise uncertain marketability.

So what does it all mean for the venture capital community? As everyone knows, VCs don’t invest in basic R&D; they invest in applied R&D. But it is critical to realize that applied R&D is a product of years of seeding of basic R&D across the gamut of sciences. Biotech investing, for instance, is a long-term exercise, with most ideas emerging out of a university using federal research grants. Likewise, tech transfer from universities to the private sector will not occur at the speed needed without federal R&D. And, it is the federal government that has been a critical investor in those seeds. Decreases in basic R&D in the long run mean fewer new ideas for VCs to look at down the road, which translates to less innovation, fewer new high-tech jobs and fewer lives saved from new drugs and defense-related items.

This year’s proposed budget should be viewed more as a floor than a ceiling. Programs like ATP will not stay on the cutting block long and the NSF and National Institutes of Health budgets are sure to increase. Recognizing the importance of basic R&D, the NVCA will continue push for increased federal spending to ensure that the innovation pipeline remains full.

Mark Heesen is the president of the National Venture Capital Association.