Every year the National Science Foundation (NSF) invests over $200 million to help launch hard-tech startups. The government agency is often the “first money in.” With a deep bench of academics and researchers to aid their evaluation, the NSF is able to evaluate cutting edge technologies to promote and support.
This episode features Ben Schrag, Senior Program Director for the SBIR/STTR programs. We discuss how the NSF looks for technology risk, and what steps the agency takes in supporting early commercialization for deeptech startups.
Transcript
America’s Biggest Deeptech Seed Fund – An Interview with Ben Schrag from the National Science Foundation (NSF)
*Andy Reed: *[00:00:00] In this episode of the Propelx podcast, I speak with Ben Schrag, who’s a Program Director and Policy Liaison at the National Science Foundation.
[00:00:08]The NSF builds itself as America’s seed fund, but really they’re America’s pre-seed fund. On an annual basis, the agency provides just about $200 million in non-dilutive grant funding to deeptech startups. In that way, the National Science Foundation is an enabler in the deeptech ecosystem, they target companies with massive technology risk and support them through the first stages of the development in establishing product market fit, and getting to private funding. From artificial intelligence to synthetic biology and everything in between, the NSF helps launch more companies than any other entity I can think of.
[00:00:41]Squishy Robotics, Gingko Bioworks, Bolt Threads, Camra’s Vision, Opus 12, Aperiomics, Weav3d, Teselagen, Novuson Surgical – all receive support from the National Science Foundation. I wanted to speak with Ben to learn more, from his perspective, on working with deeptech companies for over a decade.
[00:00:58]For anyone who is interested in learning how to invest in deep tech startups, or more specifically for gaining perspective from someone who’s been in the trenches. And seen the ups and downs over a long investment cycle on how to think about early stage. This is the conversation for you. For investors, I hope this gives you some context for what it means to be a company that receives National Science Foundation funding, as many of the companies at Propelx do. And incidentally for founders, I hope this conversation’s sheds new light on the value of working with the NSF and helped you better understand where to start applying for grant funding. Without further ado let’s get started.
[00:01:31]*Disclaimer: *[00:01:31] This is the Propelx podcast, a discussion on investing and all things startups. Startup investing is highly risky. Please listen carefully to the disclosures at the end of this podcast.
[00:01:48] *Andy Reed: *[00:01:48] Thanks for coming to the Propelx podcast. I was hoping you could just start by introducing yourself and talking a little bit about the NSF.
[00:01:55]*Ben Schrag: *[00:01:55] Sure, thank you so much for the opportunity. My name is Ben Schrag and I am a Program Director, and I’m also the Policy Liaison for the small business programs at the National Science Foundation.I’ve been at NSF in this role for about a decade. And prior to coming to NSF, I was actually, at a startup working on a new semiconductor metrology equipment.
[00:02:15]*Andy Reed: *[00:02:15] Right. Can you talk a little bit about the scale of operations that you guys go through every year and what that means in terms of the number of companies and the amount of money that you’re funding?
[00:02:24]*Ben Schrag: *[00:02:24] We run a couple of programs your listeners may be familiar with them. The two names that they may have heard of are the Small Business Innovation Research Program, which is SBIR, and the Small Business Technology Transfer program, which is STTR. We work those two programs for the National Science Foundation. The scale of it is pretty significant. We are a part of the federal government. We like to do things pretty big. So our budget, the amount of money that we put out into the community, each year is about $200 million. We do that in chunks of a quarter million to maybe a million dollars. Each year we issue about 400 awards to different small businesses and startups. And at any given time about 700 or so companies are being actively funded in our portfolio.
[00:03:06] *Andy Reed: *[00:03:06] Awesome. And just to clarify, I think your definition of a small business is companies with less than 500 employees, is that right?
[00:03:13]*Ben Schrag: *[00:03:13] That is the congressional definition of a small business. The Small Business Administration sets that definition for us.
[00:03:18]*Andy Reed: *[00:03:18] That really does cover the scope of what many people would consider a startup. And you also do fund revenue positive small businesses so companies could get a NSF grant and just not take on additional capital. It’s not a requirement, but generally speaking, any company that’s receiving SBIR NSF funding then gets additional capital is what most people would consider a startup.
[00:03:40]*Ben Schrag: *[00:03:40] The mandate that we have allows us to fund any company that is US-based and has 500 or fewer employees, as you mentioned. The way that we viewed the program is that we focus most of our funding on startups, and so the median employment of the company that we fund with our first phase of funding last year was two employees. The vast majority of companies we fund are well below the 500 employee limit.
[00:04:01]*Andy Reed: *[00:04:01] And can you talk a little bit about what is your mandate.
[00:04:04]*Ben Schrag: *[00:04:04] The program that we run, these two programs are both, mandated by Congress and they’re mandated at various different federal agencies. You’ll see that they exist, at a number of different agencies.
[00:04:12] At the National Science Foundation we really feel like our mandate is to try to provide really early stage almost seed capital. Although we’re not taking an equity stake where this is a grant program we’re providing non-dilutive funding. But our goal is really to try to help unproven risky technology that is in the hands of a startup to try to help that startup prove out the technology so that they can then get to the the next stage of support. Whether that’d be private financing or sales or bootstrapping, to basically bridge that very early valley of death.
[00:04:41]*Andy Reed: *[00:04:41] You’re talking about funding early technology development so that it’s at the point it can be commercially viable. How do you choose between different technologies?
[00:04:49]*Ben Schrag: *[00:04:49] We have a couple of things you look at as really critical criteria for the program. The first one is very largely what most people who are entrepreneurs or investors are probably used to. We’re looking for a team and a market that’s got a problem to be solved, some validation of customer traction, or at least problem solution fit if not product market fit. We’re looking for a team, that’s got the right stuff that’s organized and aggressive and passionate and works hard and is coachable to take the technology to market. So those are all kinds of commercial aspects that I think are pretty common to all startups.
[00:05:20] The other thing we look at is because we are really focusing on companies with risky, disruptive, unproven technology is we do it pretty deep technical diligence. We are the National Science Foundation. We have access to a pretty deep reservoir of technical experts, scientists and engineers, people in academia, people in industry who know the science, who know the technology. We really try to bring those folks in to give us advice to offer perspective on whether the technology is sound, whether the science is sound, what the risks are and to give us that technical diligence as well. Those are the two big criteria that we typically bring to bear.
[00:05:53]*Andy Reed: *[00:05:53] Can you talk a little bit about how your team is structured? I know you have different portfolio managers or an equivalent thereof. How does the review process work? Especially with different members of the team.
[00:06:05]*Ben Schrag: *[00:06:05] The main lines of the program are between 10 and 12 Program Directors. And they are hired exclusively to have this function of trying to make funding recommendations and trying to work with portfolio companies. It’s similar in some sense to what you would see in a venture capital firm where we’re obviously not a venture capital firm, but our main role as Program Directors is to evaluate companies and then to try to help those companies to understand how to get the most out of their award.
[00:06:30]Each program director has a very broad technology area, or maybe in some cases, a number of technology areas. And we fund a very broad. We try to basically cast a net as wide as possible in terms of different technologies. A given Program Director may have a technology area as wide as say chemical technologies or, robotics or advanced materials. The Program Directors within that, that area of technology, they’re really the point of contact for pretty much the entire process. We do have a great staff to support us, but in general, if you apply to the program, pretty early on, and you’ll know who that Program Director is, and there’ll be the person who’s reviewing your application, who’s giving you feedback. And if you’re given an award, and you’re in the portfolio, then that Program Director will also be a person who’s advising you. And your point of contact for any questions and for any, follow on opportunities.
[00:07:18] The other thing I’ll say about our team is that, we all combine both, technical backgrounds. All the Program Directors have advanced degrees in relevant scientific and engineering fields. And we also all have experience as either startup founders or startup investors or otherwise in the private sector and trying to take new technology to market. We bring that dual technical and commercial experience.
[00:07:37]*Andy Reed: *[00:07:37] Could you break down the difference between the types of awards that you give?
[00:07:41]*Ben Schrag: *[00:07:41] The phases of this program are also mandated by Congress and depending on the agency, there’s either two or three phases of funding and they’re usually sequential you most of the time have to get phase one and then you can apply for phase two and so on.
[00:07:55] Typically speaking that the crude generalization is that phase one is the shortest, the smallest award. It’s between a hundred thousand dollars to about a quarter million, depending on the agency. And the goal of the phase one is typically to really prove feasibility of a new technology, so that really to show that something that has a new technology for a new product or service that has a lot of risk. You know that the highest risk technical show-stopping issues can be overcome. So that’s the first phase of funding.
[00:08:23]Every agency has a phase two, which ranges from I believe 300,000 up to a million and a half. And that is really building towards a prototype. In some cases, building beyond a prototype, as you can imagine, depending on the technology area, some technology areas move faster and in some cases the million million and a half would be enough to get you get your product on the market. In some cases you’re still multiple VC rounds away from having something on the market. But the goal, the goal for all these phases is to push from concept or an idea to a working product.
[00:08:53] There is a third phase, that varies across agencies, for our program at the National Science Foundation the third phase is really, there’s a number of supplemental opportunities of funding that you can, that you can add on top of your base phase two award, which is a million dollars that is mostly unlocked by having commercial success and commercial traction. In our case, most of our companies that do really well, they start with a million dollars, but by the end of the program, their phase two award is closer to a million and a half.
[00:09:20] *Andy Reed: *[00:09:20] Do you have a sense of the time between typically when companies get their first phase one and then receive private capital? Do you have any sense of what’s the variation on that?
[00:09:31]*Ben Schrag: *[00:09:31] Some companies even come into phase one with some private capital it’s usually pre-seed or seed stage funding. The majority of them don’t have any other outside capital in when they received their phase one. I would say it could vary from, receiving that seed stage funding during the phase one award, versus some companies may not raise a true seed stage or certainly a Series A until maybe a couple of years after the phase two ends. It really depends on the scale of development of the specific technology or they’re working in. You can imagine new medical devices have different regulatory requirements versus saying new AI packages. It varies a lot, but it’s almost always during our award or after our award that that significant private capital starts to come in.
[00:10:13]*Andy Reed: *[00:10:13] I’ve seen Propelx on a casual basis tends to be between two and four years, depending on the technology area. So some, and just the timing of when the company needs financing, versus when the awards are actually distributed. One of the questions I had for you with that was have the nature of the awards or the non-technology aspects of the awards changed over time? Are there things that when you first started with the NSF, you were maybe more strict and I guess the bigger question I’m trying to ask is beyond funding, how does the NSF support the companies.
[00:10:45]*Ben Schrag: *[00:10:45] We have tried to, to learn from discoveries and new advancements in the broader understanding of how startups work. So, the customer discovery, lean launchpad revolution, that was just starting when I came to NSF. And one of the programs that we’ve created that is now, Congressionally required across the government is called the Innovation Corps, the NSF ICorps program. And that program is following very closely on the best practices about getting entrepreneurs, to try to talk to their customers even before they go into the lab and build something. The ICorps is a program NSF offers to researchers at universities to even before they started a company to try to understand if what they’re working on in the lab has a commercial impact by talking to potential customers based on the business model canvas and those best practices. We’ve also adapted the ICorps and the Lean Launchpad as a program that all of our phase one portfolio companies go through. And, the ICorps is also an option to those who want to apply for it, for most of our portfolio companies. So that’s, that’s one big piece. Obviously we’ve also tried to learn from the understanding of deep technology companies, which, are different than a lot of traditional, Silicon Valley type companies where maybe their, the product is mostly software. So we’ve also tried to, as we work with lots and lots of companies use our pattern matching engines in our brains to understand, how to evaluate deep technology companies differently and how to support them differently.
[00:12:03]*Andy Reed: *[00:12:03] Could you elaborate a little bit more on that?
[00:12:05]*Ben Schrag: *[00:12:05] I think everyone knows that for one thing, companies with, new, oil and gas technologies, new robotics, those sorts of things, they have higher capital requirements and they have longer times to market. The biotechnology areas, I think one area where, there is significance. We’ve fund companies in that area. And I think people understand that if you’re going to have to take something through clinical trials, it takes, many years and there’s a lot of risk.
[00:12:25]I think part of it is for us to, try to start understanding that ecosystem that is willing to be more patient, and support companies of this type. That ecosystem is actually been seen as like growing and getting stronger every year. There’s a lot of VC firms now that even explicitly say in their investment thesis that they want to support deep technology, which was not very common when I started. I think understanding, trying to try and understand that ecosystem and how our companies can access it and how it differs from maybe the ecosystem that’s available to companies that have pure software products without as much technical risk. That piece is very important.
[00:12:56]The other thing is I think, just the type of talent is different. A lot of times the folks that start these kinds of deep technology companies are the inventors or they’re doing the technical work. When the invention was made, they’re very much less likely to be repeat entrepreneurs. Usually five years ago, five years before the company started, they were either at a university or in a graduate program or something, and so trying to support, founders who haven’t done it before is something that is especially important for these companies.
[00:13:24]*Andy Reed: *[00:13:24] So, how do you measure success when you go and you look back at a given year, are you looking on a year, over year basis or is it a fresh set of eyes every year?
[00:13:33]*Ben Schrag: *[00:13:33] I think it’s important for, because our companies are also different and because you have to be careful about applying the same metrics to these kinds of companies, we try to be very, flexible and, patient with our metrics. If you were going to measure, if you’re going to try to measure these companies by say how many had exited and returned, how much capital in five to seven years, the way that maybe a traditional investor would, you would be naturally drawn to try to fund companies with less risk and with smaller times to market. We try not to be super dogmatic about, using any one metric as the scorecard, right?
[00:14:06] So the way, the way that I at least think about it is that success for us is getting a company with a really big technology risk and a really long time to market. Where they have secured follow on support, and there is a next step beyond our funding, so they can graduate from our grant and they can be supported by, the more traditional funding ecosystem.
[00:14:24] Now that doesn’t mean that they’ll be successful, but it means that our program who’s I guess I mentioned our focus is trying to bridge that gap when the technology is so early that it’s too risky. Once we’ve had a company bridge that gap and then get the company, get the technology to a point where it’s de-risked, that’s a win for us now, obviously we hope that company then gets to be a big economic outcome. We hope their product is widely adopted and that it changes the market disrupts the market, but the real win for us is then getting to the next stage of a more traditional support. Cause a lot of these deep technology companies, there’s not a lot of traditional private sector investors willing to take on that early stage technical risk.
[00:15:01]As far as metrics go, we measure our portfolio the same way in some sense that I think a lot of investors should we measure follow on investment, we measure exits, we measure number of patents, laboring, cause that’s a measure of intellectual output and, if we can measure, employment, jobs created, and also revenues, although those are obviously a little bit harder to get data for.
[00:15:18]*Andy Reed: *[00:15:18] And do you have statistics on some of those metrics that you’d be willing to share?
[00:15:23]*Ben Schrag: *[00:15:23] The public data that I can share is mostly around things that are based on public data sources, things that are inside, that are based on our unique access to these companies are a little bit harder to share. But I can say that, over the last six years, our portfolio companies have had, I think it’s 130 exits that are documented. There’s probably more than that, but 130 at that you can get back to ground truth on. And then, versus, during those last six years, our program has put around a billion dollars total and to all of our portfolio companies. And over that same time period, that set of portfolio companies has raised about 9 billion in follow on investment. About a nine to one, follow on funding ratio, which, for deep technology companies, we think is, we’re pretty happy with.
[00:16:00]*Andy Reed: *[00:16:00] That’s really cool. There’s this arc that entrepreneurs take where a lot of the deep tech founders will start in an academic program. They’ll go through a lab, the graduate from that, with a novel technology idea. They may do some early customer validation and at some point decide to form a company and apply for a NSF funding. And then that funding is really to validate the deep technology or highly risky technology. Then there’s still another lag until it starts to be funded by private capital and eventually hit the market. So that could be in a given area anywhere from two to five to 10 years from that original academic experience to the point where that technology is hitting the market. Given your position in that journey are there any technology areas where you’re seeing or starting to see a lot of change in the innovation of what’s not out there yet, but there’s a lot of new maybe patent interests or intellectual interests that hasn’t yet hit the market.
[00:17:03]*Ben Schrag: *[00:17:03] I think, it’s a good sign that I think thetraditional funding, traditional funders, there’s more, there’s more of a footprint of, relatively early stage, willingness to take on deep technology startups earlier. Right? There’s like, I’ve mentioned there’s some companies who do that as part of their thesis. And some companies have the thesis dedicated to taking on a deals that are, that have technical risk. I think the gap between maybe, where we’re funding a company, we’re funding an area of technology and where you’ll see a VC report, showing an investment that’s narrowed, I believe. I think that, we see waves, we try to be open to, all these areas. We try not to like a top-down mandate as to what, in the area of technology we’re going to support. Partly because, that’s a great way to be humbled. It’s a great way to guess wrong.It’s a little hard to be smarter than the collective intelligence of all the PhD students you mentioned, but also because we think that it’s a really important feature of our program that we give that freedom back to the entrepreneur. And if we told them we’re more interested in artificial intelligence, then distributed ledger, then there’s this natural pressure for them to work on what we want versus what they want and what we really want to do is align our funding with what they want to do with their company. That’s how you get the best entrepreneurs to apply.
[00:18:10]To answer your question about, that the area’s coming down the pike, there are these kinds of, surges of, of companies where these folks want to start all of a sudden. About eight or 10 years ago, every synthetic biology PhD was starting a company in synthetic biology and many of those companies now are quite, quite successful. More recently there was artificial intelligence. We’re seeing a whole lot of companies in that area, in digital health as well. I think those areas, I think quantum computing is something that’s starting to come out.But in general, I think just given there’s such a better ecosystem for early stage technology companies. I don’t think there’s really any secret technology. Is that a, you haven’t heard about that we’re seeing, I think, I think a lot of these companies go and show up in a lot of different places, right. When they’re founded these days. I think, I think there’s a little more visibility. And the first year of a company, if you just search the internet than there used to be.
[00:18:54]*Andy Reed: *[00:18:54] I’ll do an internet search. That sounds good. I think that that, that is really heartening to hear that that gap between what you fund and what’s being funded in the private market is narrowing a little bit. Looking back at your tenure on with the NSF. Are there any, companies that have been, a real breakout success?
[00:19:12]*Ben Schrag: *[00:19:12] Think one of the, one of the great things about our program and that about this role is that we can take success in a lot of different forms. I don’t want to, I don’t want to claim there’s any one success that’s any more important, but I think I could, I could name a few companies that I think have been successful in different ways.
[00:19:26]If you want to think about, a company that’s successful in the sense of having a quite big, commercial value like there’s a company called Gingko Bioworks that spun out of MIT in 2008 and the company is a multi-billion dollar company that is really on the forefront of process sizing, the, synthetic biology revolution to the ability to customize organisms to do your work, to do your engineering for you. They’re also really involved in COVID support right now. They’re doing a lot of great things on that front .
[00:19:51] When it comes to, things like climate change and we have a lot of great companies who I think have a really good chance to make an impact on climate change. From companies that are figuring out a way to take CO2 and turn them into useful chemicals. Like Opus 12, a company on the West coast. Companies trying to do new things around detecting making oil and gas safer and cleaner, things around biofuels.All kinds of things around energy, cleaner engines. I think in that sense, we have a lot of irons in the fire that any one of which could become disruptive to something important for our energy future.
[00:20:21] Also, as another example of the different outcome that we’re really proud of is, there’s a company called Marinus Analytics that has developed a new AI platform that is sold to law enforcement that actually uses AI to help find and catch human traffickers. And that company just came out with a press release, basically saying they’ve saved I think it’s over a hundred women, girls from human trafficking. That’s not something that’s going to show up on your IRR, but it’s, it’s incredibly important impact of, this technology. We have a lot of great, fantastic companies that are using amazing technology to have really important impacts.
[00:20:53]*Andy Reed: *[00:20:53] That’s pretty incredible. One of the things I am, I’m curious about your experience and how your perspective has evolved over the time that you’ve been with the NSF. And I’m curious to know in particular, if you have a different sense of, or different perspective on what distinguishes a promising technology versus a successful technology company.
[00:21:14]*Ben Schrag: *[00:21:14] From my personal point of view, over time, I think the natural trend for me has been to understand the, the importance of all the non-technology things more and more, not just the team, right? I think most people who are trying to evaluate these sorts of things can tell you, okay, well, the team is the most important thing A team in VP technology or B market is better than vice versa.
[00:21:32] I think that’s true, but I think the thing that I’ve really come to learn more about is really around the company structure, especially early on the way that the founders work together. If there are multiple founders, if there’s one founder, how they get support? Just trying to really, not just what appears on the CV of the founders, their resume, the experience, but really like the intangibles and the importance of that, the importance of how you allocate the equity of the company when you start. How the decisions are made.
[00:21:58] The day to day working of the founders and how that happens and how that comes together it’s just so important. It’s hard to capture that, in a pitch deck, it’s hard to capture that in a resume or a grant proposal for that matter, but it’s just incredibly important that the founding team works a certain way. I’ve become more and more aware of that and to understand the importance of that the culture of the team, the structure, the, the intentions of the team. What gets them fired up? How they respond to crises, how they respond to adversity? All those intangibles are really, really important. and, every day I think they’ve become more important in my brain as I do the job.
[00:22:34] *Andy Reed: *[00:22:34] So, I know the NSF typically goes on a roadshow. You have regional meetings. There’s for the ICorps, there are nodes at major research universities. You also have conferences every year, at least once or twice a year. How do you assess things like those intangibles now that everyone’s working remotely?
[00:22:51]*Ben Schrag: *[00:22:51] The best thing we do is I think what we’ve always done. We’re not traveling. I mean like most people, I think we’re not traveling. We did travel some, but we have a very high number of applications and so I don’t think we have as much time to get out into the community. It’s especially important that I think we have other ways to engage.
[00:23:06] I think a lot of this is basically trying to create, a dialogue, trying to have a chance to just, maybe it’s just an email exchange, before, or during the process of reviewing an application. Whenever we’re looking at potentially funding, a particular award. We do reach out to the PI and the CEO of the company that the PI is the principal investigator, the person who’s running the project. We try to reach out to the company leadership and just try to ask questions, but it also gives us a chance to see how that responds when someone is giving them hard truths back to themselves or asking them, “Hey, this there’s this big risk you have, like, what are you gonna do about that?”
[00:23:39] I think having a process that combines a document that we can review with, a direct back and forth, is really valuable.
[00:23:45] The other thing that we’ve done is that, last year we created a new step in our process, which is like a very quick pitch. It’s called the project pitch and it happens before a full grant application, and it’s just a two pager it’s submitted on our website. So it’s a pretty light lift and it gives us a chance to have people who might not know if they’re a good fit send us a little bit of information before they have to go through all the bureaucracy of applying for government funding to create a dialogue because that project pitch will then be routed to the Program Director, who is the decision-maker and that allow them toopen that line of communication and give feedback earlier in the process. For us, it’s really about creating a few more points where we can engage directly with these entrepreneurs. In addition to the documentation, which you can imagine is pretty extensive for our formal process.
[00:24:29]*Andy Reed: *[00:24:29] It sounds though that that’s at least an effort to lower the barriers, and make the program a little bit more accessible. Could you talk a little bit about, what else the NSF is doing to increase the pie or broaden the scope of who’s being considered for a grant?
[00:24:45] *Ben Schrag: *[00:24:45] We’ve always done a lot of outreach. Things like what I’m doing now, like the Program Directors, we attend, well over a hundred different events per year, where there are, some combination of startups and technology and underserved groups, whether that be parts of the country where there’s less of an ecosystem for technology or a particular populations of entrepreneurs who are underserved by both the government and a traditional capital.
[00:25:07] So we have that and for specific types of groups. We have ability to sponsor organizations to try to get our message out and to form partnerships with organizations where there might have a critical mass of say underrepresented entrepreneurs, female entrepreneurs, entrepreneurs from States that are rural, for example.
[00:25:25]We have the ability to create those partnerships and we have the ability to support those events and again, the project pitches, the other way that we try to do that, to try to make it a little more friendly to first-timers because a lot of our ability to broaden participation is just making the process less difficult for new timers. If you make it so hard that people can never do this for the first time, you’re never going to change the pool of entrepreneurs you’re supporting.
[00:25:46]The other goal that we have is to try to make this process something that we’re really, making it relatively painless and relatively forgiving for people who’ve never worked with the government before. That’s really important.
[00:25:57]*Andy Reed: *[00:25:57] That’s great. Looking ahead, either at 2021, or maybe even longer, are there any aspirations that you have, particularly for the NSF or as it relates to high-risk early stage technology are there any new things that you’re really hoping to achieve in that next investment cycle?
[00:26:15] *Ben Schrag: *[00:26:15] We have ongoing goals that are really important to us. We don’t typically set goals per investment cycle. I think we try tohave continuous improvement. I think the aspect you just mentioned is pretty high on the list we called and said, NSF, we collect broadening participation. And as you know, it’s somethingthat is really important, both for thescientific community the STEM community that we serve and also for the investment community, both of those, enterprises, have work to do on this front. Continuing to try to figure out how to get great diverse entrepreneurs, to get us on their radar, to get them to apply, to make them feel that they’re welcomed. I think that’s, that’s a really important piece.
[00:26:50]The other thing is to continue to try to… to get new startups, one of the continuous challenges. And this is related to what I just mentioned, but one of the challenges as of startups is that it’s much easier to keep our existing customer, than to get a new customer. Right. I think that it’s like 10 times easier there’s data about that, but if you’re going to fund startups and then eventually, pretty quickly, they’re going to graduate, quote, unquote, graduate to private capital. You have to keep having new customers. You don’t necessarily have a lot of repeat customers. One of our challenges is to continually refreshing the entire pipeline of companies every couple of years, so that we can continue to find the new startups. Because as you know, if we have a startup apply and we support them and they go through these phases that I talked about after five years, when they finished, they’re not a startup anymore, they’re either a successful company, or they’re an unsuccessful company, but they’re not a startup. And so the idea of trying to get all new customers and continuing to refresh that pipeline is one of the things that is hard for, I think, any entity and it’s especially difficult for the government, just because of the inertia and the amount of layers of complexity that exists around government funding.
[00:27:48] *Andy Reed: *[00:27:48] But at the same time, it seems like it’s easier and easier to start a company and there’s more and more interests from certain labs at universities in promoting fellows or other research candidates into taking their technology and bringing it to market.
[00:28:03] *Ben Schrag: *[00:28:03] Yes, that’s true.
[00:28:05] *Andy Reed: *[00:28:05] Yeah.
[00:28:06] *Ben Schrag: *[00:28:06] Oh, yeah. I think that’s right. And that’s, that’s an advantage for us. That’s the type that’s that helps our cause. The university ecosystem and the broader ecosystem, that’s not just startups, but for deep tech startups has never been better than at least as far as I can tell, as it is now. And hopefully that trend will continue, you know, I suspect the other thing that, may happen is if, again, if we get what I’m hoping has started to happen, which is that investors and accelerators are starting to focus more on not just startups, but deep technology startups that competition for the best startups will start to be a problem for us. Right? We’ll have to start competing and being more, more competitive because there will be more other options for these kinds of companies that maybe didn’t exist five years ago and then being willing to go through our process which is fairly time consuming and it takes a fair amount of effort. The best teams we want them to apply, we want to support them . Competition is something that – it’s a double-edged sword, but eventually we’ll have to probably continue to step up our game to stay on top of that, that competition.
[00:29:00]*Andy Reed: *[00:29:00] That does get to, I think, a deeper philosophical question I was maybe a little bit reluctant to ask you about it first, but since we’re there, I might as well. Why should the government at all be involved in this type of fundamental de-risking of technology?
[00:29:16]*Ben Schrag: *[00:29:16] I think in general, the government should be involved in this sort of thing, the same way that government should be funding, basic research because, some things, the private economy is not as well set up to support some things, especially when the timelines are longer and the direct economic impact is a little more unclear. I think everyone agrees, hopefully that basic research is important for the world, for the economy, for society. And I think everyone, agrees that, the government funding, basic research is a good thing. I think this is another version of that. Basic startups really bringing technology to market are different from basic research, but they share a lot of the same traits in the sense that there’s a lot of risks, there’s a long timeline and the benefits that you could see for society are not captured necessarily by the investor, that’s going to put money into that company. In order to capture those kinds of intangible, like externalities, what an economist would call it positive externalities for the entire world and the entire economy that government needs to play a role. And so I think I view that question the same way as I view the question of basic research. Which is that even if we don’t know necessarily how things will turn out, economically and there’s a lot of risk that, supporting the development of new products and services that the world’s never seen before is in general, a positive endeavor and will create long-term benefits for society. It is a little bit of a, ” there’s not a guarantee that always happens.” But in the long run and based on the history of the government funding,I think you can point to a lot of examples to show that that is the case.
[00:30:35] *Andy Reed: *[00:30:35] And then the opposite question of that is why not keep these technologies in national labs or in other government run organizations that they’re so beneficial for? If there’s so many positive externalities, why not keep these technologies something that’s more supported by the government and keep them public for longer.
[00:30:52] *Ben Schrag: *[00:30:52] Again, that’s a question above my pay grade, but I will say that, Congress legislated this in 1982, they passed something called the Bayh-Dole act, which changed the way that intellectual property that the government had funded through a grant or through a contract changed the way at that IP was signed. It basically said that instead of the government, keeping that IP, that the entity that we had funded to do their work to do the research would actually, keep the IP. Congress did that because they realized that, the government is not necessarily built to bring products, to market, to services, to market, to bring new technology to market. That’s just not what it’s built for and so the ability for us to support an entity that is more engineered and designed to, to create that market impact is more appropriate in that sense. The reason that we choose to fund a lot of startups is because we think that that’s usually the best way to really get technology to market aggressively and the same way that is the case. We think it’s the case that, private enterprise, small businesses, that have, all the normal capitalistic motives to be successful are very powerful for us to actually bring technology into the world. That’s the goal. As I mentioned, the government had historically owned all that IP that you mentioned. And the track record was such that Congress felt like that the change needed to be made. I think there’s a good track record there to show that the government is not necessarily the best entity to do that. Although obviously, these are all things that I’m trying to paraphrase, what Congress is trying to do. So I’ll leave my own opinions out of it.
[00:32:13]*Andy Reed: *[00:32:13] Fair enough. All right Ben. Well, thank you so much for joining us for this podcast episode. What you’re doing is really interesting and it is really important, and I really appreciate you taking time to explain that to our listeners. And, I’m really looking forward to seeing the next batch of NSF startups that come out. So thank you so much.
[00:32:31] *Ben Schrag: *[00:32:31] Thanks, Andy.
[00:32:32]*Andy Reed: *[00:32:32] All right. For anyone who’s a founder who is listening to this podcast, what would be the best way to learn more about the NSF?
[00:32:40]*Ben Schrag: *[00:32:40] Absolutely. Visit our website at seedfund.nsf.gov. That’s seed as an a plant seed, fund, all one word .nsf.gov, read about it and then if you’re interested in taking the next step there’s a section there about how to apply and you would submit a what we call a project pitch and we’ll take it from there.
[00:32:58] *Andy Reed: *[00:32:58] Cool. All right.
[00:33:00]I highly recommend checking out the National Science Foundation website for more information about emerging technologies. Ben was very generous to share his time with us and to walk us through the overview of the NSF.
[00:33:12] It’s interesting to hear his view that the deep tech ecosystem is developing and that more and more private investors are joining at the earliest of stages.
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