A Real Options Methodology for Multi-Stage Project Selection: An Application to NASA's SBIR Program

Abstract

We consider an important class of portfolio management problems in public and private entities: research and development (R&D) portfolios in which the projects’ potential monetary value is not a first-order factor in selection, and the investments are staged. We present a robust real options approach that extends existing methodology to evaluate a portfolio of proposals in each stage of a staggered selection process. We apply this methodology to an analysis of the Small Business Innovation Research (SBIR) program of the National Aeronautics and Space Administration (NASA). We use the aerospace standard Technology Readiness Level (TRL) to indicate factors of interest. Here we demonstrate techniques to include non-economic strategic considerations and estimate the impact of flexibility on the portfolio construction. Moreover, we present one of the few scholarly models underpinned by data drawn directly from the program of interest. Finally, our model suggests that a public innovation program can support a dramatically higher number of small firms without significantly impacting the total portfolio value. This work has important implications for management of R&D portfolios in public and private contexts. 

Keywords: real options, TRL, SBIR, NASA

JEL Classification: C61, H50, O32, O38