Research makes case for larger publicly-backed pre-seed/innovation funds as pandemic persists

Key findings from two independent research projects reveal the pandemic’s corrosive effect on the nation’s innovation commercialization capacity. The projects separately explored how two related innovation financing components — angel investment and venture capital — were reacting to the coronavirus-caused slowdown. Individually, the results might appear simply as yet more interesting curiosities about the pandemic. Considered together, however, and one begins to see the potential unraveling of the broader U.S. innovation tapestry required to support long-term economic prosperity. The impact is likely to be felt most strongly in those states and metropolitan areas with fragile regional innovation systems.

The evidence. First, last week’s issue of the Digest included a story presenting the results of the Angel Capital Association’s survey of its members. The survey found responding angel investors were more likely to concentrate any additional investments into their existing portfolios and only 15 percent were considering new deals. Nearly one-third of respondents were disinterested in making any additional investments at this time.

The second paper, presenting the results of a survey of over 1,000 institutional and corporate venture capitalists led by Paul Gompers of the Harvard Business School, suggests VCs have slowed their pace of investing by 29 percent this year and hope to be at 81 percent of normal next year. The VCs also said 38 percent of their portfolio companies had been negatively affected by the pandemic. (Note: the survey was conducted during the summer, before the larger, second wave of infections appeared.)

Plumbing metaphors are often used to describe how innovation flows from scientific discovery through to commercial exploitation or technological adoption. While overly simplistic, graphic depictions of the flow of capital required for R&D to move from lab to proving commercial viability then to profitability, often involve funnels and pipelines. The results of these two surveys suggests the funnels are shrinking and the pipeline is clogged.

From a purely economic perspective, such challenges are a normal part of the investment cycle. From regional prosperity and national competitiveness perspectives, however, the pipeline issues are made more challenging amidst academic research pointing to decreased corporate R&D already seen in periods of economic uncertainty, growing market concentration, and expanding international R&D capacity, competencies and competition.

Additionally, neither the angel investors nor venture capitalists participating in either surveys expected to suffer greatly financially from the pandemic-induced slow down.

Interpreting the survey results instead suggest there is a growing need for greater public innovation investments into smart pre-seed and seed funds managed by nonprofit venture development organizations and university commercialization offices.

“Injecting greater funding into these public-private efforts that couple strategic equity investments with proven entrepreneurial expertise — when working toward regional economic objectives — will play vital roles for maintaining pipelines of promising innovation opportunities for sustaining pathways of growth coming out of the pandemic,” Mark Skinner, SSTI vice president, says.

“Policymaking often is late to recognize and react to important trends involving long term issues. But as the federal and state governments begin their budgeting processes for needed economic stimulus and the coming fiscal year, timing is ripe for taking aggressive action to sustain our collective innovation capacity.”