Wanted: New Instruments to Fund BBNs

A guest post by Alex Obadia

Today’s piece is a guest post by Alex Obadia. Alex is a new program director at the UK’s Advanced Research and Invention Agency (ARIA). As Alex puts it, his focus is “currently on designing new enabling trust primitives for a world where many more substrates (e.g. DNA, materials, thoughts) are programmable.”

I met Alex last month at the ARIA Summit. At the Summit, I got to spend several days talking with ARIA staff, incoming PDs, and ARIA ‘Creators’ — ARIA’s word for R&D contractors. My discussions with the ARIA creators and incoming PDs who read FreakTakes were particularly informative. In these discussions, we were able to quickly get into the weeds on ideas explored on FreakTakes that these researchers had already read, considered, and about which they had practical thoughts they wanted to discuss.

My brief interaction with Alex was one example. Alex attended a session at the Summit in which we discussed not just the possibilities for BBNs in the ARIA ecosystem, but the practical financial problems BBNs might encounter. Several days after the session, Alex reached out because he had drafted a blog post outlining his understanding of the financial problems and several concrete ways they might be overcome.

I loved Alex’s framing of the problem and shared his excitement to move the brainstorm into a public forum. I quickly shared a summary of Tom Kalil’s thoughts on the four biggest financial hurdles great BBN founders would need to deal with, and, with that, told Alex I’d be happy to hand over the reins to FreakTakes for the day.

I’ll let Alex take it from here!

Clerk updating the “Market Score” at the Chicago Board of Trade, 1949. Photo by a 21-year-old Stanley Kubrick. | Photo courtesy of Library of Congress, LOOK Magazine Photo Collection

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Wanted: New Instruments to Fund BBNs

By: Alex Obadia

BBNs are entities that provide services critical to R&D breakthroughs. The acronym ‘BBN’ (coined in this blog!) comes from a famous example — Bolt, Beranek, & Newman, which was instrumental to the creation of ARPAnet. BBNs are often compared to Focused Research Organizations (FROs) because they’d attract similar people. But while FROs require significant funding, BBNs would be the consulting-ish approach to FROs, contributing to R&D by servicing others in need of R&D support.

Like FROs, BBNs do not fit into purely the academic funding bucket, nor do they fit into the VC funding bucket as they’re not aiming to make heaps and heaps of money. Rather, they want to do impactful R&D in an organization that can stand on its own. The closest type of org that I use to conceptualize BBNs is simply a traditional business, but with a focus on frontier tech and R&D, which is not traditional — hence the need for a new name for them!

In a sense, BBNs are a more realistic FRO — one where someone can get started building ~today instead of looking for altruistic funding. One (imperfect) analogy to think of them: FROs are like venture-backed startups, BBNs are bootstrapped startups.

At last week’s ARIA Summit, I attended a workshop on the topic of BBNs led by Eric. While the conversation was initially focused on unearthing what BBN-shaped problems exist out there, it quickly moved to a more “horizontal” focus on whether there are any organizational or coordination innovations that could enable more BBNs — much like the YC SAFE was a coordination technology that allowed early stage startups to raise unpriced rounds easily on standardized founder friendly~ish terms. (And similarly, their series A template).

A few ideas flew around, such as the possibilities of new legal entities like Asterisk Labs’ cooperative model or a standardized university grant contract to make it easier to fund academic researchers rather than the lengthy back & forth with universities on terms — sometimes creating a period of multiple months between getting the “yes” on funding to getting any money.

One idea that stuck with me — and hence why I am writing this post — is the idea of an R&D lending facility [1]. While BBNs seek sustainability (i.e., to make more money than they spend), just like other businesses, they have capital needs that sometimes do not match their inflows from contracts and grants. Four foreseeable categories of problem that might stand between exciting BBNs being founded or continuing to exist include:

• (Temporary) Cash Flow Problems. The BBN has won some contracts/grants, but will have a cash flow problem for at least several months.

• Startup Capital Needs. Some BBNs might be very solid operations if somebody could buy them some expensive equipment they need to get started. E.g., a BBN that brings in contracts via a CRO-style service might need a $500k mass spectrometer to get going.

• Rainy Day Fund. Many BBNs might require rainy day funds in the case that contracts or grants in some area temporarily dry up, for one reason or another.

• Risk Capital Needs. Just about all BBN founders could use a more robust risk capital budget to pursue their ambitious technical visions. For a large percentage of existing BBNs, something like ~30% of their budget existing as undirected funds for ambitious investigations or core technology development could make them something like twice as ambitious. [2]

I can already hear you say, “We have SME loans already.” That’s true. Yet it turns out that today’s system may not be fully equipped to lend to this type of org. [3]

And so the question becomes: Do there exist 3-4 key financial products that are widely needed among budding BBNs and require an R&D-knowledgeable lender to price risk (and therefore premiums) appropriately? [4] If the answer is yes, and if we can spec out those products, it could allow us to fund BBNs outside of solely philanthropy, and to potentially create a set of new financial products (R&D bonds anyone?), that can be bought by the public, allowing a thousand BBNs to bloom.

Once upon a time, dividend-style arrangements fueled the ambitious building and expansion of things like canals and electric utilities in early America. While times and the state of finance have changed, the lessons of these groups in financing work that was ambitious might be evergreen.

To get the brainstorm started, Eric and I put together some concrete ideas, past experiments, and additional context in the footnotes. Have a look! Eric is hoping to figure out what it might look like to raise funds and pilot solutions to each of these problems, and he's eager for your input.

If you’re a would-be BBN who could use some of this funding, a BBN who wishes these products had existed when it started, a funder interested in piloting solutions to these problems, a lender who groks deep-tech risk and has a good idea of what these products could look like, or are simply enthusiastic about the topic, Eric and I would love to hear from you! Reach out at gilliam@renphil.org or on Twitter.

Thanks to Eric for letting me guest post on his blog and helping shape the post, and to Tom Kalil, Ilan Gur, and Tom Milton for their suggestions and reviews!

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Notes

[1] From Ilan Gur, the CEO of ARIA, founding PM at ARPA-E, and founder of Activate:

We prototyped this at Activate — we called it a “working capital fund” for early science-based startups. The implication for this sort of working capital fund is much bigger than BBNs — it’s any research based startup that is pre-venture or not venture aligned, and especially low risk capital for those that have been awarded a grant from a reputable org (that pays in arrears) — that’s one of the big reasons we did this at Activate i.e. because our fellows were winning lots of grants but didn’t have working capital because they hadn’t raised yet.

[2] From Tom Milton, CEO of Amodo Design. Amodo is a BBN-style org doing exceptional bioengineering and electrical engineering work for ARIA. Tom says:

Today, the paths for this are A) retained earnings/profits, B) traditional external funding, and C) sometimes raising VC funds. Some examples: A) Argon&Co used its retained earnings to develop its own IP and spends ~30% of their time running their own projects, B) applying to an ARIA funding call, C) Cambridge Consultants launching a $10m spinout fund that invests exclusively in the technologies they’ve developed in-house

[3] From Eric, purveyor of FreakTakes:

I view the question of whether SME loans can be used to found new BBNs to be a hole in our knowledge; it’s the kind of hole we hope this piece might help fill. To this point, no BBN founders I’ve come across (that I can recall) have leaned on SME loans. Whether this has been because a founder did not wish to put personal assets at risk or there did not exist a lender technically savvy enough to price the deal appropriately, these instruments have simply not yet been an enabler of new BBNs thus far. If there’s someone out there eager to help us figure out how to use existing instruments/loans differently to act as enablers for BBNs, that’s great! E.g. I can imagine some Will Manidis-type, obsessed with bespoke banking stuff, maybe having an idea.

[4] From Tom Kalil, CEO of Renaissance Philanthropy. The following are some of Tom’s (paraphrased) suggestions to the problems listed above, to get your creative juices flowing:

• Revenue-Based Finance. Instead of fixed payments that may hamper a young BBN or prove too risky, loans are repaid as a small percentage of monthly revenue. This aligns the incentives of the lender and the BBN — the lender obtains revenue if the BBN does. These loans would often include a grace period to allow the BBN to find its footing. There may also be some reasonable repayment cap (e.g. 5X the principal) or time horizon in which payments are no longer owed (e.g. 8 years), depending on what is desirable for both founders and investors.

• Low-Interest Loan. A below-market rate, low-interest loan from a philanthropy or government agency. The purpose of the loan would be to help fund one-time, start-up costs involved in creating a new BBN or a new R&D capability within a BBN. While this pool of capital would not achieve the financial returns a private market investor might look for, it’s an exciting way to stretch a pool of philanthropic capital much further than it might go as individual grants. Given a BBN’s goal to both pursue ambitious work and substantially offset their costs in the process, low or no-interest loans from philanthropic entities might be a natural, capital-efficient instrument to catalyze new BBNs.

• Revolving Door Loan Fund. This instrument would help solve the 'grant-to-cash' gap. A BBN may win a major grant, but the first payment is months away. This fund provides immediate access to capital to cover salaries, equipment, a lease, and other expenses. When the grant money arrives, the BBN repays the loan, and that capital is “revolved” back into the fund for the next BBN facing a similar problem. This instrument acts as a crucial liquidity bridge, smoothing out the lumpy reality of R&D funding.