Thursday, 18 April 2013

The Proof of the Pudding - why the £200 million a year Small Business Research Initiative needs transparent implementation

By David Connell, Senior Research Fellow at CBR, Chairman, Archipelago Technology Group Ltd.

If you run a small business and need that all important first customer to help you develop and trial your innovative new product, then the Chancellor George Osborne's Budget has some good news for you.

The Small Business Research Initiative which uses government procurement practices to drive through innovation, is to be increased by nearly ten times to around £200 million per annum during this Parliamentary session.

This is excellent news and one that I and others have been campaigning for over the last ten years. But the SBRI will only be successful if it is implemented in a totally transparent and accountable way.

The SBRI is based on a successful and long running US programme called The Small Business Innovation Research Programme. This Programme uses Federal Government procurement expenditure, to give contracts to small businesses so that they can develop technology and products that the US government believes it needs in order to increase the effectiveness of its own departments like Defence and NASA . It also covers projects relating to broader policyobjectives, for instance in the case of the National Institutes for Health. In the US the programme is worth 2.5 billion dollars a year, and it is more important than venture capital in funding the early stages of new science and technology businesses.

In the UK the SBRI is important because it represents a sea-change in the kind of innovation support that the government is giving small businesses. This is because it doesn't focus on "technology push" to exploit our science base, but instead SBRI is much more about stimulating "demand pull". In particular it allows the public sector to play the role of "Lead Customer".

A Lead Customer in the science and technology sector is an organisation that is prepared to fund the development and trialling of new products and technology that then lead onto the purchase of prototypes and their subsequent first use within that organisation. Any organisation that goes first as a customer is taking a risk. For example, if a new UK business sets out to sell a product to a potential customer in the US or Germany virtually the first question they are going to be asked is – "Can you show me one operating in your home market?"

Lead Customers provide product endorsement for further customers and indeed for additional investment if needed. It is commonly thought that the most important source of innovation for science based companies is academic science , withventure capital the primary source of start up funds. But the reality is that for the most successful companies it is nearly always Lead Customers that play both of these roles.

If we look to the US, we know that Microsoft had no venture capital to start with and that Bill Gates was probably unbackable when he started his business! Gates began with a series of paid development contracts for his software and after a time he hit lucky and IBM allowed him, probably by accident, to sell the operating system that he developed for the first IBM PC to other companies. The rest, as they say, is history.

Intel is another example. It was venture capital based at the start, but development of the single chip processor, which has been the key to its success, was actually financed under a contract for a Japanese calculator company. We see this process repeated virtually everywhere. In Cambridge the most successful companies in terms of jobs are based very largely on technology developed for individual Lead Customers and financed by them. So Lead Customers are hugely important if we want to grow our science and technology based sectors.

In 2004 I launched a campaign with the then MP for Cambridge, Anne Campbell, precisely because I became aware as a CEO of a Cambridge Venture Capital Fund of how appalling irrelevant government support for small businesses was in the UK. We achieved success in 2009 when the current UK Small Business Research Initiative was introduced. This operates in a very similar way to the US programme and although it has been up until now quite small scale, about £20 million pounds a year, it has funded some very interesting technology developments in small businesses.

One of the best known SBRI programmes is operated by the NHS. It has, for instance, funded new technology in the area of wound care for individuals suffering from burns or diabetic ulcers. It has also funded a possible cure for macular degeneration which is a major cause of loss of eyesight in older people. A number of these developments look very promising, and some companies have already launched their products onto the market.

Osborne's ten-fold increase in his March 2013 Budget is most welcome but it will however, be quite challenging to achieve that level of growth and there will be some important dangers.

The first danger is that because of the pressure to increase spending government departments will deviate from the model that we know works best. This is precisely what happened in 2005 when Gordon Brown announced a £100 million programme. That programme was implemented through a series of departmental targets with departments reporting expenditure against those targets. The result was that they all reported that they had already achieved their targets without indicating what the figures covered! It will therefore be very important for Osborne's increased programme to be run in a very transparent way. As in the long established US programme, we will need to know what the exact competitions that are being run are and what funding has been provided through those competitions to each company.

But that said, the new £200 million per annum SBRI really is fantastic news for small businesses. It combines both customer demand, allowing businesses to see how potential customers might want to use their new product – and therefore how it should be designed, with funding in a form which is appropriate for them. The traditional mechanism by which government helps small businesses fund R & D is through grants and tax credits and in truth the amounts involved are very small. Unlike these, SBRI contracts provide 100% of project costs and do not require artificial collaborations just to get the money.

It is a myth to think of most new science and technology businesses starting out with bucket loads of venture capital and they are unlikely to achieve the kind of profitability that will enable them to spend significantly on R & D for many years. So what SBRI does for the first time in this Country is give start ups and small companies sufficient funding to make a real difference, increasing their chances of success and accelerating their sales growth. This has to be fantastic news for the UK economy, and for our growth prospects.

Of course, like Oliver Twist, we could always ask for more!

Centre for Business Research, Top Floor, Cambridge Judge Business School, University of Cambridge, Trumpington St, Cambridge CB2 1AG
Tel: 01223 765320 .