Legislation seeks to spur states’ nano development


By Richard Acello

Initiatives designed to jump start nano-technology investment received a shot in the arm when the U.S. Senate Commerce Committee’s Subcommittee on Trade, Tourism, and Economic Development held a Capitol Hill hearing on May 4 spotlighting public-private programs in rural states that have paid dividends for companies like Hewlett-Packard.

The panel seemed particularly interested in testimony from representatives of universities and the nanotechnology industry suggesting that the U.S. might be falling behind Europe and Asia in what is becoming a race to develop nanotechnology research and commercial products. Sen. George Allen (R-VA) expressed a desire to have the U.S. at the forefront of what he called “the next great economic revolution.”

Experts agreed that nanotechnology product development has been hindered by companies that can’t bridge the valley of death - the period before a company reaches product revenues or profitability. Bridge funding lags because venture capital firms are wary of the siren song of “the next big thing.”

U.S. venture capital funding of nanotechnology companies has increased steadily over the past few years, but not as quickly as some people want. Proposed legislation could grease the wheels of nano funding but critics say pork barrel politics could undermine the effort. Source: A Small Times analysis of the MoneyTree survey by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association.
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To stimulate investment, Sen. Max Baucus (D-MT), ranking Democratic member of the Senate Finance Committee, has introduced the Research Competitiveness Act of 2006. “Innovation kept America economically preeminent in the last century,” Baucus said. “We need to redouble our commitment to research and experimentation, or we risk losing both our innovative edge and our economic leadership in the world.”

The bill proposes a variety of measures designed to mitigate taxes. A Baucus spokesperson said the hope is that investment would increase from the private sector seeing that the government is supporting technology, and that the financial incentives for banks and venture capitalists would spur investment. However, James Smith, an associate professor of accounting at the University of San Diego, said state and local tax incentive packages are sometimes more helpful to emerging industries than federal research credits because they provide relief from sales or property taxes.

Also in the Congressional hopper is the Nanoscience to Commercialization Institutes Act. Introduced in October by Sen. Gordon Smith (R-OR), the bill provides $24 million to establish up to eight nanoscience institutes across the country. The Smith bill would benefit public-private, research-to-commercialization programs located in rural states, and was supported at the Senate hearing by the town manager of Danville, Va., an area hit hard by setbacks in the tobacco and textile industries.

“We need to redouble our commitment to research and experimentation, or we risk losing both our innovative edge and our economic leadership in the world,” said Sen. Max Baucus (D-MT). Baucus recently introduced the Research Competitiveness Act of 2006, which is intended to stimulate investment in nanotech and other emerging technology areas.
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An advocate of technology commercialization programs voiced support for the nano institutes in the Smith bill. “The institutes seem to be a valuable approach,” said Tyler Orion, chief operating officer of the Connect program at the University of California San Diego (UCSD). “If we can co-locate the many scientific disciplines that contribute to nano-scale product development, I would imagine that should help create synergies that would spur innovation. I’m not sure whether tax incentives are an effective incentive for investment, but anything that encourages investment in the gap between concept and execution (post-grant and pre-venture capital) should be explored.”

A venture capitalist offered a less enthusiastic view of Congressional attempts to drive private sector investment. “It’s kind of putting the cart before the horse, since we always look at the funding investment thesis,” says Joel Martin, a partner at Forward Ventures. “What we want to know is whether the company is going to make money for us. If not, then tax isn’t really much of an issue.”

Martin was also skeptical about the usefulness of Smith’s nano institutes. “In general it’s good to see the government funding gap financing, but the worry one always has is, what’s the criteria for funding the work? Is it pork barrel?” Martin wondered. “If it’s financing to somebody’s home constituencies it will get handed out to employ some people but in the end doesn’t result in a groundswell of momentum in advancing these companies.” Martin suggested increasing funds for National Science Foundation grants might be a more efficient use of federal funds.

What’s keeping funding from nanotechnology companies isn’t a lack of funds, Martin said. “There’s lots and lots of cash out there,” he explained. “The funding problem with many nanotech companies is they have cool science but no real, clear concept of a product or business model. There’s nothing worse than technology in search of an application.”

Long lead times for research to commercialization means venture capitalists don’t know how long they’re going to have to fund a company, and VCs’ attention spans have been shortened further by the dotcom bust, Martin said.

“If the market gets superheated around a certain technology, (investors) might jump in to (try to) get a quick turn on their investment like with the Internet,” Martin said. “But you saw very clearly after the Internet bubble burst that VCs were not just randomly funding anything with a dotcom on the end.”

When it comes to funding nanotech companies, Martin says venture capitalists are focused on a timeline to product rather than technology for technology’s sake. “If someone comes to me and says I’m developing a new drug delivery technology, it’s going to revolutionize cancer therapy and by the way, it’s nanotechnology, I’m delighted to look at it,” Martin said.

Research Competitiveness Act of 2006

Specifically, the bill:

  • makes permanent the tax credit for applied research, commonly known as the R&D credit. Currently, the tax credit expires and must be renewed regularly by Congress.
  • creates a 20 percent tax credit for qualifying expenses that exceed half the average of the prior three years, and a 10 percent credit if the company had no prior expenses.
  • increases the percentage of contract research qualifying for the tax credit.
  • streamlines and makes permanent the tax credit for basic research. One hundred percent of funds put toward basic research will qualify for the credit.
  • allows tax-exempt bond authority for state and local governments to establish or update research parks.
  • creates a tax credit to help start-up companies access inexpensive capital by allocating tax credits to qualifying research entities which will raise capital to fund small businesses with promising technologies.