Growing Innovative Companies to Scale: A Listening Session with Startups in Critical Industries
On September 16th, 2021, the Day One Project convened a closed-door listening session for interagency government leaders to hear from co-founders and supply-chain leaders of 10 startups in critical industries — bioeconomy, cleantech, semiconductor — about challenges and opportunities to scale their operations and improve resilience in the United States. The panel was moderated by Elisabeth Reynolds, Special Assistant to the President for Manufacturing and Economic Development. The overarching theme is that for innovative companies in critical industries, the path of least resistance for scaling production is not in the United States — but it could be.
Unlike many startups that are purely software based and can scale quickly with little capital expenditure, these companies produce a product that requires manufacturing expertise and can take longer and more capital to grow to scale. Capital markets and government programs are often not well aligned with the needs of these companies, leaving the country at risk that many of the most cutting-edge technologies are invented here, but made elsewhere. As there is a tight relationship between the learning-by-building phase of scale up and innovation capacity, outsourcing production poses a threat to U.S. competitiveness. The country also risks losing the downstream quality manufacturing jobs that could stimulate economic growth in regions across the country.
Key Takeaways:
Challenges
- Overseas government incentives and manufacturing ecosystems, like intellectual property support, subsidies, and more available advanced manufacturing technology options, are more attractive than U.S. offerings.
- Shortcomings with existing federal programs and funding include a lack of government outreach to navigate the complexity of opportunities, regulations that delay access to funding on appropriate timelines, and misplaced emphasis away from commercialization.
- Supply chain gaps and opportunities for sustainable manufacturing in the United States were identified in quantum and bioindustry sectors.
Solutions
- Additional government financing mechanisms, like tax-credits for R&D and renewable tech and government co-investment opportunities through an expanded EXIM Bank, In-Q-Tel, J2 Ventures, and programs like the Development Finance Corporation (DFC) were highly encouraged.
- Improving government processes and regulations through reducing funding application timelines in the Department of Energy’s Loan Program Office or providing better guidance over The Committee on Foreign Investment in the United States (CFIUS) restrictions on quantum companies’ foreign acquisitions.
- Government demand-pull incentives were the most important solution recommended by startups in order to guide the development of technology from basic science to commercialization.
Challenges
There are significant challenges to taking advanced technology from earlier R&D phases to manufacturing products that demonstrate viability at scale. Available financing opportunities do not adequately support longer time horizons or larger capital requirements. A lack of manufacturing and engineering skills pose another barrier to scaling a product from prototype to pilot to commercial production. After many decades of disinvestment in the country’s manufacturing base, overcoming these challenges will be difficult but essential if we are to grow and benefit from our most innovative, emerging companies. As two of the bioeconomy startups stated:
“The USG knows how to fund research and purchase finished products. There is not enough money, and far more problematically, not nearly enough skilled Sherpas to fill the gap in between.”
“Manufacturing … has been considered as a “cost center,” … reducing cost of manufacturing (e.g., moving manufacturing sites offshore) is one of the major themes … Rarely there are investments or financing opportunities coming to the sector to develop new technologies that can drive innovation…the types of investment are usually very large (e.g., capex for building a manufacturing plant). As a result, it has been very hard for startups which dedicate themselves to novel, next generation manufacturing technologies to raise or secure sufficient funding.”
During the conversation, three specific challenges were identified that speak to key factors that contribute to this manufacturing gap in the United States:
1) Overseas Government Incentives and Manufacturing Ecosystems
The startups largely agreed that overseas governments provide more incentives to manufacture than the United States. Often, these countries have developed “manufacturing-led” ecosystems of private companies and other institutions that can reliably deliver critical inputs, whether as part of their value chain, or in terms of their broader development needs. Some examples from the companies include:
- “A Dutch-owned manufacturing plant in Brazil was designed to produce 30 million gallons of oil from algae; the favorable rates for such an endeavor were only made possible by the financing provided by the Brazilian Development Bank to bridge the gap of scale.” —Bioeconomy startup.
- “Currently, with a lack of biomanufacturing capacity in the US, there is a scramble for companies trying to secure capacity at contract manufacturing facilities, which are usually filled. Many are looking to other countries for scale up.” — Bioeconomy startup.
- “There are far more off-shore companies that support semiconductor packaging, manufacturing, and testing … given the volumes of these companies, it is much cheaper to do this off-shore…as foreign fabrication facilities have more technically advanced semiconductor manufacturing processes.” —Semiconductor startup.
- “The Taiwan Semiconductor Manufacturing Corporation (TSMC) also offers a much wider variety of IP support in their process libraries for semiconductors—much of this IP is production proven with a roadmap for support on future technology nodes.” —Semiconductor startup.
2) Shortcomings with Existing Federal Programs and Funding
The U.S. government has a wide range of programs that focus on supporting innovation and manufacturing. However, these programs are either targeted at the earlier stages of R&D and less on manufacturing scale up, are relatively small in scope, or involve time consuming and complicated processes to access them.
- “National Quantum Initiative allocates $1.4B towards the growth of the quantum industry and workforce, but most of this funding is going to National Labs. Larger contracts and grants to small businesses are needed.” —Semiconductor startup.
- “[Obtaining federal funding] is more complicated than going for venture backing or going to other countries.” —Semiconductor startup.
- “Regarding our knowledge of financing or other government support options currently available, I would say that any additional awareness, education or direction you can provide us with would be welcomed … even just making a single connection could prove beneficial and lower the burden [of figuring out how to access federal programs].” —Bioeconomy startup.
- “As we grew, we ran into early challenges convincing capital providers about the market drivers and perceptions about the waste industry and infrastructure …The time/timing of Department of Energy Loan Program Office funding has been a challenge taking over a year from review to award to project funding. Process doesn’t always match up with the speed of technology development and market need for commercialization.” —Cleantech startup.
- “Key U.S. federal agencies, most notably the National Security Agency (NSA), have publicly indicated a non-embrace of emerging quantum secure communication technology … The NSA position (which prefers new algorithm development) is greatly hampering VC investment in quantum component suppliers.” — Semiconductor startup.
3) Supply Chain Gaps and Opportunities for Sustainable Manufacturing in the U.S.
A few specific instances were described where the United States lacks access to critical inputs for bioeconomy and quantum development, as key suppliers are located abroad. However, as these emerging fields develop, critical inputs will change and present an opportunity to course correct. Therefore, improving our domestic manufacturing base now is vital for driving demand and establishing innovation ecosystems for industries of the future.
- “Quantum tech is going to be critical to the next century of product and tech development…The quantum supply chain currently has significant choke points for US suppliers. Many critical components (such as single frequency lasers, non-linear crystals, and InGaAs single photon detectors) are not available through US vendors.” —Semiconductor startup.
- “A lack of current capacity in the U.S. is also the opportunity for the industry as well to develop more sustainable processes, as new material inputs are developed and created, there will need to be new processes and new ways of manufacturing … With new bio inputs there is an opportunity to build up our biomanufacturing ability, produce on demand and rebuild that converter level, train a new workforce and create the building blocks for new materials that we need here to make products.“ —Bioeconomy startup.
Solutions
Startups commented on the importance of expanding funding opportunities, such as co- investment and tax credit solutions, as well as key process and regulatory changes. Most importantly, startups highlighted the importance of demand-pull mechanisms to help commercialize new technologies and create new markets.
1) Additional Government Financing Mechanisms
Several companies commented on the need to provide additional financing to support manufacturers, as equipment is often too expensive for venture avenues and other forms of capital are not readily available. These solutions include expanding government co- investment and leveraging tax credits.
- “Expanding the scope of the EXIM to support manufacturers looking to export materials and products abroad would be of interest. In the case of new, advanced biomaterials we have found that the EU is driving a great deal of demand interest as well as early adoption. Helping smaller companies with new materials developed in the US navigate this might benefit the speed of commercialization.” — Bioeconomy startup.
- “Two specific financing mechanisms to be expanded are 1) Increased funding for accelerator programs that support emerging US-based manufacturing companies and 2) government funding of venture capital companies like In-Q-Tel and J2 Ventures that can help support early-stage technology companies.” — Semiconductor startup.
- “Policymakers should support, maintain, and expand programs like the recent Development Finance Corporation’s investments [under Defense Production Act authority] to accelerate the domestic production of pharmaceuticals and active ingredients, particularly for essential medicines that are in short supply and often needed in response to public health emergencies.” —Bioeconomy startup.
- “The R&D Tax Credit is one of the most effective and efficient federal tax incentives for driving innovation across a variety of industries…an enhanced R&D tax credit for companies investing in research and development of technology to enable the domestic production of active pharmaceutical ingredients … would fully unlock the potential of synthetic biology and result in meaningful and immediate changes to the U.S. pharmaceutical supply chain.” —Bioeconomy startup.
- “Provided the incentives are set at adequate levels, incentives such as renewable energy and storage tax credits could be structured with bonuses to support domestic manufacturing in our selection of suppliers.” —Cleantech startup.
2) Improving Government Processes and Regulations
A few of the startups identified specific government processes or regulations that could be improved upon, such as application times for funding in energy sectors or restrictions in procurement or foreign acquisitions.
- “Department of Energy loan mechanisms appear to be developing positively, but for them to be effectively utilized, there needs to be a simple and swift process for application and decision making. We hear horror stories of 9 months to 3 years for this process currently.” —Bioeconomy startup.
- “In-Q-Tel is an excellent funding vehicle … However, they require a Department of Defense (DoD) sponsor. Given the stance of NSA, DoD sponsors are unwilling to support an investment in a non-NSA desired technology. This eliminates a critical government financing mechanism.” —Semiconductor startup.
- “Securing the US supply chain in quantum is going to require the acquisition of key foreign owned companies and processes. For small companies, these acquisitions are only possible when equity sharing is included in the negotiations. The Committee on Foreign Investment in the United States (CFIUS) restrictions greatly complicate these negotiations since foreign ownership in a US company that is producing products with national security implications is restricted. Although these restrictions are still needed, it would be helpful if CFIUS could provide more direct guidance to US companies negotiating the acquisition and transfer of foreign manufacturing capabilities.” —Semiconductor startup.
3) Government Demand-pull Incentives:
Most, if not all, startups felt that the best role for the government is in creating demand- pull incentives to support the development of technology from basic science to commercialization and help create new markets for leading-edge products. This can range from procurement contracts to new regulatory standards and requirements that can incent higher quality, domestic production.
- “The best role that the Department of Defense or other agencies can play is that they can help drive the demand for these technologies.” —Cleantech startup.
- “The most important thing that the Government can do to help speed the financing and adoption of new advanced materials is to help to build the pull through from research and new materials development to the final product … We believe that we have a once in a generation opportunity to re-imagine how we manufacture goods and products here in the US. We need to look at the whole of the supply chain from molecule and material inputs to final products. There has been a hollowing out of the middle of the supply chain for manufacturing here in the United States.” — Bioeconomy startup.
- “Policymakers should continue to invest in public-private partnerships like the Manufacturing USA Institutes, which brings together experts from government, academia, and industry to support projects from the research phase through the commercialization of innovative technologies.” —Bioeconomy startup.
- Examples:
- “If there were a mechanism to incent companies and early adopters to reducetheir petroleum inputs and bridge the gap all the way to the domestically sourced chemical inputs to their domestic manufacturing it could help to create more secure supply chains.” —Bioeconomy startup.
- “Domestic procurement requirements … could stimulate investment in domestic pharmaceutical supply chain[s] … Policymakers should consider maintaining a list of essential medicines and give preference to domestically sourced pharmaceuticals (and active ingredients) in any federal procurement programs” —Bioeconomy startup.
- “Policymakers should consider directing the Food and Drug Administration to create a priority review designation for domestically sourced pharmaceutical products and active ingredients. By moving these products to the top of the priority list, manufacturers would have another incentive to change supply chain practices and shift production back to the United States.” —Bioeconomy startup.
Conclusion
These anecdotes provide a small window into some of the challenges startups face scaling their innovative technologies in the United States. Fixing our scale up ecosystem to support more investment in the later-stage manufacturing and growth of these companies is essential for U.S. leadership in emerging technologies and industries. The fixes are many — large and small, financial and regulatory, product and process-oriented — but now is a moment of opportunity to change pace from the past several decades. By addressing these challenges, the United States can build the next generation of U.S.-based advanced manufacturing companies that create good quality, middle-skill jobs in regions across the country. The Biden-Harris Administration has outlined a new industrial strategy that seeks to realize this vision and ensure U.S. global technological and economic leadership, but it’s success will require informing policy efforts with on-the-ground perspectives from small- and medium-sized private enterprises.
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