Venture Capital’s Increasing Role Despite Decreasing Federal R&D Funding
Venture Capital’s Increasing Role Despite Decreasing Federal R&D Funding
“The principal focus of Science is the importance of basic research. Basic research leads to new knowledge. It provides scientific capital. It creates the fund from which the practical applications of knowledge must be drawn. . . . Today, it is truer than ever that basic research is the pacemaker of technological progress. … A nation which depends upon others for its new basic scientific knowledge will be slow in its industrial progress and weak in its competitive position in world trade, regardless of its mechanical skill.” (Dr. Vannevar Bush)
“We’re hearing from scientist friends that funding is cut, and people might be losing visas. It’s a multidimensional problem. This isn’t political; it’s about ensuring innovation continues.” (Josh Wolfe, co-founder of Lux Capital)
Context: A Legacy Forged in Crisis, Now at Risk
In the 1940s, the emergence of nuclear weapons, the space race, and the intensification of the Cold War profoundly reshaped American science and engineering, thrusting research into a crucial role for national security. At that time, the Army, Navy, and Air Force primarily conducted basic research, which explores fundamental scientific principles, and applied research, which utilizes existing knowledge to create new technologies and applications.
During World War II, Vannevar Bush, a significant electrical engineer who directed military research, including the atomic bomb’s development, imagined a different system beyond military dominance. In his seminal 1945 report, Science: The Endless Frontier, Bush laid out a blueprint for an American scientific powerhouse grounded in universities, envisioning a civilian-led, academically rigorous research enterprise supported by the federal government. This groundbreaking vision became reality with the creation of the National Science Foundation (NSF) in 1950, fundamentally reshaping American innovation and driving decades of economic and technological prosperity.
The legacy of scientific advancement, born from critical need and creative thought moments, is now uncertain. Substantial reductions in federal funding allocated to essential research programs spanning diverse scientific disciplines threaten the foundation upon which groundbreaking discoveries and technological leaps are built.
The contraction of public investment creates a significant void in the financial landscape of scientific exploration, forcing a notable shift in the support structure for innovation. Consequently, venture capital firms are compelled to play a more prominent role by providing the requisite financial resources to support critical research initiatives that would otherwise be severely curtailed or terminated. Scientific stagnation carries geopolitical and economic risks, prompting private investors to prioritize advancements in competitive global markets. This is particularly true in biotech, AI, and deep-tech sectors with significant future financial potential. The changing circumstances demonstrate our growing reliance on private funding to maintain scientific advancement as public funding declines.
Our article examines the decreasing federal funding and its consequences, including projected research and development deficits. It will analyze the venture capital sector’s reaction and its advantages and disadvantages in this context and provide instances of collaboration among the NSF, NIH, and VC. Finally, the article will explore potential strategic approaches and the justifications those supporting federal budget reductions offer.
Dr. Vannevar Bush
Decline of Federal Funding: A Crisis Deepens
Federal investment in R&D has consistently fallen, from nearly 1.86% of GDP in 1964 to just 0.63% by 2022 (National Science Foundation, 2024).
Recent proposed federal budgets widen this decline further, threatening severe reductions—up to 55% for NSF and 35% for the National Institutes of Health (NIH)—striking directly at America’s scientific backbone.
The NIH, a key institution for biomedical breakthroughs such as decoding the human genome, discovering hepatitis C, isolating AIDS, and foundational research behind COVID-19 vaccines, faces severe budgetary contractions. The policies have caused immediate disruptions, forcing researchers to abandon projects due to curtailed funding, risking years of scientific progress and jeopardizing critical clinical trials and research programs.
Similarly, NSF-supported initiatives, responsible for innovations in touch-screen technology, speech recognition, internet infrastructure, and resilience against natural disasters, have suffered drastic reductions, terminating over a thousand ongoing grants across education and basic research.
Ripple Effects: Scientific and Economic Damage
Funding cuts aren’t abstract—they deeply impact scientific productivity, workforce training, and economic health. The NIH and NSF funding ecosystems are extensive, supporting thousands of researchers and jobs. Indirectly, they sustain local economies across all fifty states and territories. Recent analyses suggest that proposed NIH and NSF cuts could result in multibillion-dollar GDP losses and tens of thousands of lost jobs, affecting regional economies and reducing America’s global competitiveness.
Reduced funding has caused unprecedented stress among scientists in biomedical research. This is evident at recent gatherings like the American Association for the Advancement of Science (AAAS), where topics like “When Reliable Data Disappears” reflect deep anxiety over funding stability and research integrity.
Venture Capitalists Respond: Filling the Void
Acknowledging the severity of this funding vacuum, venture capital (VC) firms (A list of 50 VC funds that invest in Biotech startups based in the United States) have stepped forward, notably firms like Lux Capital, which recently earmarked $100 million specifically to support scientists commercializing their research.
For example, Lux Capital is backing companies like eGenesis, which is transplanting gene-edited pig organs into humans; Osmo, which is pioneering digital olfaction technology; and Variant Bio, which is studying genetic outliers in Indigenous populations whose DNA could lead to life-saving medical advancements.
According to Josh Wolfe, co-founder of Lux:
“We’re hearing from scientist friends that funding is cut, and people might be losing visas. It’s a multidimensional problem. This isn’t political; it’s about ensuring innovation continues.”
VC investment surged to $170.6 billion in 2023 (NVCA, 2024), illustrating the growing reliance on private funding streams for American innovation. Companies funded by VC, such as Recursion Pharmaceuticals (biotechnology) and Physical Intelligence (robotics), exemplify successful private-sector initiatives building upon federally funded foundational research.
Strengths and Limits of VC Funding
Venture capital offers critical agility and accelerated commercialization paths. However, its inherent market-oriented focus prioritizes short-term profitability and quicker returns. This dynamic favors applied, commercially promising research over foundational scientific inquiries essential for long-term progress, such as climate studies, fundamental biomedical research, or quantum physics. NIH’s former director, Monica Bertagnolli, emphasizes this vital distinction: core research expenses, indirect infrastructure costs, and foundational studies require stable, sustained governmental support. Private capital alone, she notes, cannot reliably fulfill these broader societal and scientific obligations.
That said, venture capital firms investing in the science sector face several challenges:
Extended Funding Cycles: The time required for early-stage life science and healthcare startups to secure funding has increased, making it harder for VCs to see quick returns.
High-Risk Investments: Scientific innovation often requires long development timelines and regulatory approvals, making it difficult for VCs to predict profitability.
Limited High-Quality Investment Opportunities: With intense competition for promising startups, VCs must carefully evaluate potential investments and conduct thorough due diligence.
Market Uncertainty: Economic fluctuations and shifting investor sentiment impact funding availability, making it harder for VCs to maintain stable investment strategies.
Regulatory Complexities: Compliance with evolving regulations in biotech, healthcare, and deep-tech sectors adds another difficulty for investors.
Longer Investment Horizons: Unlike traditional tech startups, scientific ventures often require extended periods before generating returns, requiring patience and strategic portfolio management.
Trust and Credibility Issues: Startup success is unpredictable, making it challenging for VCs to build confidence among investors and entrepreneurs.
Evolving Technologies: Rapid advancements in AI, biotech, and other scientific fields require VCs to stay informed and adapt their investment strategies.
Historical and Contemporary Examples: NSF, NIH, and VC Working Together
Historically, NIH’s funding facilitated major health breakthroughs, such as the human genome project, AIDS research, and COVID-19 vaccine development. NSF’s support enabled foundational technologies now commonplace globally. Private capital, leveraging federally supported discoveries, brings innovations to market rapidly, creating a symbiotic ecosystem.
Federally Funded Innovations: foundational genetics research (NIH), earthquake resilience technologies, touch-screen technologies, and the internet (NSF).
VC-funded commercialization: biotech startups, advanced robotics, and AI technologies often directly build upon federally funded basic science.
These cases demonstrate how a combined public-private ecosystem is necessary to sustain innovation.
Visualizing the Shift: A Changing Funding Landscape
This shift in funding reveals a stark divergence: federal R&D funding’s steep downward trajectory and rising Business/private sector contributions. Visualizing this trend underscores the urgency of stabilizing federal support alongside private innovation.
Policy and Strategic Directions
To ensure sustained scientific progress and economic resilience, policymakers must pursue:
Stable Federal Investments: Protect and restore NSF and NIH funding to preserve foundational research capacity.
Public-Private Collaborations: Incentivize venture capital and federal partnerships to accelerate research commercialization while maintaining basic scientific inquiry.
Bipartisan Commitment: Emphasize science’s historically bipartisan nature, safeguard funding against short-term political cycles, and ensure long-term strategic innovation investments.
Former NIH director Bertagnolli and former NSF directors advocate for maintaining a bipartisan commitment to stable, long-term scientific funding, reinforcing the value of public research investments.
Arguments Raised by Proponents of the Federal Budget Cuts
On the other hand, the arguments for supporting budget cuts are as follows:
Reducing Government Spending and Deficit: Supporters point out that cutting funding to federal research agencies is necessary to reduce overall government spending and address the national deficit. The Trump administration’s 2026 budget proposal includes $163 billion in federal spending cuts, primarily targeting nondefense discretionary areas such as healthcare, education, and scientific research. The Washington Post+1Axios+1
Improving Efficiency and Eliminating Redundancy: Advocates for the cuts claim that agencies like the NIH and NSF have become too large and unfocused, leading to inefficiencies. They aim to streamline operations by reducing budgets and eliminating redundant or low-priority programs. For instance, the NIH's budget is proposed to be reduced by nearly half, with the administration stating that the organization has “grown too big and unfocused”. Fierce Biotech
Shifting Focus to the Private Sector and Alternative Funding: Some proponents believe that the private sector, including venture capital firms, can fill the gap of reduced federal funding. They argue that private investment can be more targeted and efficient, fostering innovation without relying heavily on taxpayer dollars. Initiatives like Lux Capital's efforts to fund basic research commercialization support this perspective.
Reallocating Resources to Other Priorities: The budget cuts are also justified by the desire to reallocate resources to areas deemed more critical by the administration, such as defense spending. The 2026 budget proposal includes a 13% increase in defense spending, totaling $1 trillion, indicating a shift in funding priorities. Science+2The Washington Post+2Fierce Biotech+2
Addressing Ideological Concerns: Some cuts are motivated by ideological stances against certain research areas. The administration has targeted climate change, diversity, equity, and inclusion programs, labeling them “woke” and arguing that federal funds should not support these initiatives. Wikipedia+1The Washington Post+1
Finally
As federal funding wanes, private capital’s role grows increasingly vital. However, this cannot supplant the foundational, long-term investments historically provided by institutions like NSF and NIH. A carefully balanced dual approach is necessary—robust federal investment sustaining basic science alongside dynamic, responsive private capital accelerating practical innovations.
America’s scientific legacy, forged through visionary leadership during global crises in the mid-20th century, remains central to its future prosperity and security. The nation must recommit itself to safeguarding and advancing this scientific and technological excellence heritage in the public and private sectors.
As Monica Bertagnolli aptly advised the scientific community amid funding adversity:
“Just keep swimming. The world needs us, and science will prevail.”
References:
National Science Foundation. (2024). U.S. R&D Expenditures. Retrieved from https://ncses.nsf.gov/pubs/nsf25334
National Venture Capital Association. (2024). Venture Capital Yearbook 2024. Retrieved from https://nvca.org/nvca-yearbook/
Drollette Jr., D. (2025). “Interview with Monica Bertagnolli, former NIH director.” Bulletin of Atomic Scientists.
Rowberg, R. (1998). Federal R&D funding: A concise history (CRS Report No. 95-1209 STM). Congressional Research Service.
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