What worked after the last two recessions, however, may not work so well today given the fragile nature of our financial markets, which is why we need a national innovation framework to help ensure this commercialization process runs more smoothly and efficiently. In fact, the already massive funding gap for young innovative companies—the other Achilles’ heel of our innovation-led economy—has only grown wider over the past decade. The so-called “valley of death”—the early-stage funding gap for young entrepreneurial companies (see Figure 4)—has always existed for early-stage innovation and entrepreneurs, but it has widened because of the current national economic crisis.
Venture capitalists are husbanding their financial resources to keep their current portfolios of startup companies alive and have already moved further up the financial cycle. The average investment by venture firms last year was $8.3 million per investment and only about 4 percent of the capital went to early-stage companies. Angel investors—individual investors with a keen eye for technology—who previously had filled the role of assisting some startups cross this valley of death reduced their investments by over 26 percent in 2008, and the availability of investment capital among angels decreased dramatically by 40 percent over the same period.