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America’s Biggest Biotech Angel

The NIH’s Billion Dollar Annual Boost to US Biotech Ecosystems

The US National Institutes of Health (NIH) are the largest public supporter of basic life science in the world.

With an FY2020 budget of $42 billion, most of their expenditures are university grants supporting either new discoveries or early-state clinical studies of promising treatments and diagnostic tests.

Since 1982, Congress has mandated that a fraction of the total annual NIH budget be put to work via grants or contracts to small life science and biotech companies rather than academic institutions.

Usually referred to as the SBIR/STTR (Small Business Innovation Research / Small Business Technology Transfer) program, these competitive funds are a tool many start-ups use to aid in crossing the ‘Valley of Death.’ The Valley is the risky early phase of company development known for at least these hazards:

  • An experienced business team has not yet been assembled;
  • Value propositions remain incompletely investigated and stated;
  • Key technical work remains (e.g., device engineering, drug compound solubilization);
  • Institutional investors are reluctant to back the effort in light of its risks.
Photo by National Cancer Institute on Unsplash

In the universe of funding sources, the SBIR/STTR program occupies a financing niche with angel investors.

Angel investors are most often high-net-worth individuals who bring capital, business expertise, and network connections to new start-ups. Called angels because they are often prepared to support a company earlier than other investors, they exchange their money and effort for an ownership stake in the start-up, often in the form of convertible notes or SAFE agreements. These instruments ‘convert’ into shares of stock in the company later in its evolution. In short, angel investors take partial ownership of the new enterprise and ‘dilute’ the founders’ ownership stake.

SBIR/STTR support to a company is of similar magnitude to many Angel Investments (usually $250k — $1m), with a couple of key differences.

Firstly, NIH funds are nondilutive. The government does not want a share of the company, and it does not expect to be paid back. As a result, companies can use this cash to undertake the important de-risking, often technical, that investors need before providing early venture capital.

Secondly, angel investors will typically not be comfortable with key team members, or the entire company, remaining ensconced within a university. Early investments by angels often come (and did, in my first start-up) with a contingency that the founders put ‘skin in the game’ by leaving their home university and joining the company full time. For many academics, this seems extreme. From personal experience on both sides of the table, it is an enormous step and also the correct path. It’s also uncommon — the mere fact that I left my academic position warranted a mention in the journal Science that year.

However, the total amount invested annually in the US life science ecosystem by the NIH swamps the total invested by all other Angels combined.

The entire NIH small business spend is substantial. In FY2020, the total NIH SBIR/STTR budget was $1.2bn. To place this in context, it’s estimated that during those same 4 quarters, approximately $8.7bn flowed into early-stage life science and biotech start-ups via angel investors and very early (pre-Series-A) venture funds. That suggests that the NIH provided more than 10% of the capital in this space last year.

I argue that this magnitude of investment makes the NIH the largest life science angel in the country and likely the world.

SBIR and STTR awards are often considered in the context of the individual companies to which they’re provided, but there’s more to the story.

Because these funds are put towards making hires, engaging professional services, and paying rent, they are also an investment into communities and broader ecosystems. As such, they provide an important and readily obtainable metric for evaluating the health of the biotech industry in a region. We use NIH funding patterns as part of a broader analysis to better advise service providers, investors, and developers how deeply to commit to a local ecosystem. For businesses that are key to a biotech start-ups success, a city that generates and sustains a pipeline of new biotech companies as measured by NIH support is a city that should be ‘on radar’ as an opportunity for growth.

In this note, I’ll provide an overview of where the NIH distributes its small business funding and describe how we at ArgoPond use these trends to better understand regional opportunities in biotechnology development.

Over the past 5 years NIH funds have gone to 3,314 companies in 943 municipalities from Agoura Hills CA to Zionsville IN. While all 50 states receive some level of funding, the state-to-state variation in support is enormous.

Figure 1 breaks out the dollars invested by region. While total dollars per geographic domain (Left Panel) reorders a bit when corrected for population (Right Panel), coastal regions clearly dominate the portfolio.

Figure 1. Distribution of NIH small business funding by region.

Placing all of those investments on a map reinforces how clustered the cradles of new life science and biotech companies are within the United States. Figure 2 displays all of the municipalities hosting companies that received NIH support over the past 5 years. Ten cities, across 6 states, received 21% of all funding.

Figure 2. Geocoded plot of NIH small business funding allocation. Circle area is proportional to the amount of capital received by companies in each municipality.

As NIH small business awards are competitive (that is, not every company that seeks funding receives it), it’s reasonable to ask how much the geographic variation in support reflects competitiveness or the number of applications being submitted.

I spoke with a long-time colleague Richard Aragon, the Director of the Division of Data Integration, Modeling, and Analytics at NIGMS (one of the largest of the NIH institutes). His team has published extensively on the nature and effectiveness of SBIR/STTR funding. Across the US, he notes that ~ 16% of submitted applications to NIGMS are ultimately funded, with little regional variability in acceptance rate. The distribution of funds is therefore primarily a reflection of the geographic distribution of the formation of new companies engaged in R&D. (See the two references by Onken, et al., in the footer of this report for much more detail.)

What drives the spatial clustering? Proximity to new ideas and new talent.

A review of the literature highlights how important universities are to driving the geographic patterns of early-stage life science investment. Using some data kindly provided by the NIGMS data group, Figure 4 plots the likelihood of finding an NIH-supported small business as a function of its distance from a university.

There’s no overstating the power of this trend: companies receiving NIH small business support are overwhelmingly within 20 miles of a research institution.

Figure 3. Relationship between likelihood of NIH small business funding and a business’s distance to an institute of higher education.

Our firm believes that NIH funding trends, when coupled with other financial indicators such as early-stage investment, reveal much about local life science and biotech ecosystems.

It is common for large centers of innovation, for example, Boston and San Francisco, to be described as ‘points’ of start-up activity. Looking more closely at available data shows a more interesting picture. Figure 4 depicts the broader surroundings of San Francisco and Boston to make this point. While the ‘top line’ cities themselves concentrate NIH support, these maps show that there are dozens of smaller satellite communities that NIH-funded companies call home.

Figure 4. Detailed geocoded NIH support for small businesses in the Bay Area (left) and Greater Boston (right).

There are a number of reasons why this regional diffusion is important:

  • Companies that locate in the periphery of major biotech economic centers enjoy many economies of agglomeration but with lower operating and cost-of-living expenses for the enterprise and its employees. Lower costs mean that invested capital goes further than it could in the heart of a region’s activity.
  • Extended networks of small companies provide an effective sink for newly-minted scientists coming from academic cores;
  • Professional service providers can engage companies in the life sciences and biotech space without needing to operate in the regional ‘white-hot center’ of these industries;
  • Real estate developers interested in providing space for life science and biotech companies have opportunities to do so without the very large capital outlays required by premium sites in urban centers.

As with any analysis of trends in capital flow over time, it’s important to understand both magnitude and volatility in NIH investment.

Table 1

NIH SBIR/STTR grants are typically 2 years in duration. While some companies receiving longer-term contracts from the NIH, most funding comes in short bursts to new companies. Year-over-year, there can be relatively high volatility in the total amount of support a region receives from the NIH mechanism. In Table 1, I highlight the ten cities with the greatest amount of funding over the past five years and the year-over-year volatility (here, as the standard deviation of annual investment) of NIH support into those cities. Even within these ‘blockbuster’ cities, annual small business support varies as much as 35%. While that type of swing in funding doesn’t rise to the level of ‘feast or famine,’ it does suggest that there may be stronger and weaker years in this space. For cities outside of the top performers, annual variation in funding is even larger.

Geographically, NIH activity correlates very strongly with the broader and much larger Venture Capital market.

We believe that SBIR/STTR support into a region is a strong leading indicator of economic activity in the life science and biotech sector. Far and away the most granular data in support of this hypothesis come from the extensive public records provided by the NIH. High-reliability spatial and temporal trend data from early-stage investment is more difficult to identify. Nevertheless, there are strong regional correlates between NIH business investment and early-stage angel and venture capital activity. Figure 5 shows the relationship, in 2020, between NIH small business support and all-sector, all-stage investment by state. I’d highlight a couple of technical points in this plot:

  • First, please note that both axes are log-scale, and that NIH funding is plotted as $ millions and the VC funding as $ billions.
  • Second, a key takeaway from this log-scale plot is that the difference between most- and least- NIH-funded states (California, Alaska) is more than 1,000-fold. The difference between the states receiving the largest and smallest share of all-sector VC (California, West Virginia) is more than 10,000-fold.
Figure 5. Assocation between NIH small business funding and total US venture capital activity, by state, in 2020.

Looking forward, we’re tracking the following trends:

  • The NIH increasingly is supporting small businesses in less-well-funded states through a mechanism called the IDeA (Institutional Development Award) program. Among other things, the IDeA program is working to build research innovation capacity in the central US. To what degree this effort can ignite new life hubs remains to be seen.
  • The egress from major cities of scientists and other professionals and the transition to remote working following the pandemic bears close attention. New epicenters of life science R&D may arise in new areas such as the Mountain West and bring with them fresh opportunities for all types of businesses. Within the next 12 months, it is possible that new companies will start to appear on the NIH’s roster in areas that were previously underrepresented.
  • A new early-stage investment partnership between the Biomedical Advanced Research Authority (BARDA) and the Global Health Investment Corporation, known collectively as BARDA Ventures, will bring a new type of early-stage private-public capital into play this year. How that tracks with NIH and venture activity remains to be seen.

Questions? Comments?

ArgoPond is forever upping its game, and our team is interested in questions that arise among readers and what types of analysis you’d like to see in future research notes. Get the conversation started and leave comments below. You can also reach out to us directly via

Notes on data sources and modeling, and some great additional reads.

The data used here were retrieved in May 2021 from the NIH’s Reporter site. It’s extensively curated, and contains much more information than what I’ve presented here. Annual nominal dollar figures were inflation-corrected using the biomedical R&D price index (BRDPI) rather than the more familiar consumer price index. Reflecting faster inflation in life science research and dveloment than in everyday life, the BRDPI is about twice CPI in any year.

State-level venture investments were pulled from the supplemental data of the 2021 Q1 Pitchbook/NVCA Venture Monitor. GIS data were pulled using the Google maps API implemented in googleway package in R.

For the NIH’s omnibus solitation for the SBIR/STTR program, click here.

To learn more of the NIH’s own analysis of the SBIR/STTR program, start with these two reports:

About the Author

A physician-scientist by training, John Younger is the Managing Director at ArgoPond, LLC, a life science advisory and investment company that provides analytics and diligence services to companies and funds engaging the life science space. In 2015, ArgoPond joined its first cap table, and continues to expand its investment portfolio in early-stage life science and biotech companies and in companies that are essential for ecosystem success.

John currently sits on the national advisory council for NIGMS, one of the largest NIH institutes, and has previously provided congressional testimony on how best to support early-stage biotech companies. That testimony can be seen here. He represents ArgoPond as a member of the Life Science Committee of New York Angels, one of the largest angel investment programs in the world.

John’s LinkedIn profile, and contact information are here.

Follow Bioeconomy.XYZ, in order to learn more about all the ways biotech, is shaping the world around us.



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