[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
SMALL BUSINESS INNOVATION
RESEARCH REAUTHORIZATION ON
THE 25TH PROGRAM ANNIVERSARY
=======================================================================
HEARINGS
BEFORE THE
SUBCOMMITTEE ON TECHNOLOGY AND
INNOVATION
COMMITTEE ON SCIENCE AND TECHNOLOGY
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
APRIL 26, 2007
and
JUNE 26, 2007
__________
Serial No. 110-23
and
Serial No. 110-43
__________
Printed for the use of the Committee on Science and Technology
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______
COMMITTEE ON SCIENCE AND TECHNOLOGY
HON. BART GORDON, Tennessee, Chairman
JERRY F. COSTELLO, Illinois RALPH M. HALL, Texas
EDDIE BERNICE JOHNSON, Texas F. JAMES SENSENBRENNER JR.,
LYNN C. WOOLSEY, California Wisconsin
MARK UDALL, Colorado LAMAR S. SMITH, Texas
DAVID WU, Oregon DANA ROHRABACHER, California
BRIAN BAIRD, Washington KEN CALVERT, California
BRAD MILLER, North Carolina ROSCOE G. BARTLETT, Maryland
DANIEL LIPINSKI, Illinois VERNON J. EHLERS, Michigan
NICK LAMPSON, Texas FRANK D. LUCAS, Oklahoma
GABRIELLE GIFFORDS, Arizona JUDY BIGGERT, Illinois
JERRY MCNERNEY, California W. TODD AKIN, Missouri
PAUL KANJORSKI, Pennsylvania JO BONNER, Alabama
DARLENE HOOLEY, Oregon TOM FEENEY, Florida
STEVEN R. ROTHMAN, New Jersey RANDY NEUGEBAUER, Texas
MICHAEL M. HONDA, California BOB INGLIS, South Carolina
JIM MATHESON, Utah DAVID G. REICHERT, Washington
MIKE ROSS, Arkansas MICHAEL T. MCCAUL, Texas
BEN CHANDLER, Kentucky MARIO DIAZ-BALART, Florida
RUSS CARNAHAN, Missouri PHIL GINGREY, Georgia
CHARLIE MELANCON, Louisiana BRIAN P. BILBRAY, California
BARON P. HILL, Indiana ADRIAN SMITH, Nebraska
HARRY E. MITCHELL, Arizona VACANCY
CHARLES A. WILSON, Ohio
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Subcommittee on Technology and Innovation
HON. DAVID WU, Oregon, Chairman
JIM MATHESON, Utah PHIL GINGREY, Georgia
HARRY E. MITCHELL, Arizona VERNON J. EHLERS, Michigan
CHARLIE A. WILSON, Ohio JUDY BIGGERT, Illinois
BEN CHANDLER, Kentucky JO BONNER, Alabama
MIKE ROSS, Arizona ADRIAN SMITH, Nebraska
MICHAEL M. HONDA, California
BART GORDON, Tennessee RALPH M. HALL, Texas
MIKE QUEAR Subcommittee Staff Director
RACHEL JAGODA BRUNETTE Democratic Professional Staff Member
COLIN MCCORMICK Democratic Professional Staff Member
TIND SHEPPER RYEN Republican Professional Staff Member
AMY CARROLL Republican Professional Staff Member
MEGHAN HOUSEWRIGHT Research Assistant
C O N T E N T S
April 26, 2007
Page
Witness List..................................................... 2
Hearing Charter.................................................. 3
Opening Statements
Statement by Representative David Wu, Chairman, Subcommittee on
Technology and Innovation, Committee on Science and Technology,
U.S. House of Representatives.................................. 8
Written Statement............................................ 8
Statement by Representative Phil Gingrey, Ranking Minority
Member, Subcommittee on Technology and Innovation, Committee on
Science and Technology, U.S. House of Representatives.......... 9
Written Statement............................................ 11
Witnesses:
Mr. Bruce J. Held, Director of the Force Development and
Technology Program, Rand Arroyo Center, The Rand Corporation
Oral Statement............................................... 12
Written Statement............................................ 14
Biography.................................................... 17
Mr. Jon Baron, Executive Director, Coalition for Evidence-Based
Policy, Council for Excellence in Government
Oral Statement............................................... 18
Written Statement............................................ 20
Biography.................................................... 23
Mr. Robert N. Schmidt, Founder and President, Cleveland Medical
Devices, Inc., and Orbital Research, Inc.
Oral Statement............................................... 23
Written Statement............................................ 25
Biography.................................................... 41
Dr. Gerard J. McGarrity, Executive Vice President of Scientific
and Clinical Affairs, VIRxSYS Corporation
Oral Statement............................................... 42
Written Statement............................................ 43
Biography.................................................... 49
Mr. Anthony R. Ignagni, President and CEO, Synapse Biomedical,
Inc.
Oral Statement............................................... 50
Written Statement............................................ 51
Biography.................................................... 54
Discussion....................................................... 55
Appendix 1: Answers to Post-Hearing Questions
Mr. Bruce J. Held, Director of the Force Development and
Technology Program, Rand Arroyo Center, The Rand Corporation... 76
Mr. Jon Baron, Executive Director, Coalition for Evidence-Based
Policy, Council for Excellence in Government................... 81
Mr. Robert N. Schmidt, Founder and President, Cleveland Medical
Devices, Inc., and Orbital Research, Inc....................... 83
Dr. Gerard J. McGarrity, Executive Vice President of Scientific
and Clinical Affairs, VIRxSYS Corporation...................... 90
Mr. Anthony R. Ignagni, President and CEO, Synapse Biomedical,
Inc............................................................ 98
Appendix 2: Additional Material for the Record
Statement of Ms. Linda Oliver, Acting Director, Office of Small
Business Programs, Office of the Under Secretary of Defense
(Acquisition, Technology & Logistics).......................... 102
Statement of Dr. Norka Ruiz Bravo, Deputy Director for Extramural
Research, Office of Extramural Research, National Institutes of
Health, U.S. Department of Health and Human Services........... 108
Statement of Larry James, SBIR/STTR Program Manager, U.S.
Department of Energy........................................... 112
Statement of Douglas A. Comstock, Director, Innovative
Partnerships Program Office, National Aeronautics and Space
Administration................................................. 117
Statement of Arden L. Bement, Jr., Director, National Science
Foundation..................................................... 120
Statement of the Cooperative State Research Education and
Extension Service, United States Department of Agriculture..... 122
C O N T E N T S
June 26, 2007
Page
Witness List..................................................... 126
Hearing Charter.................................................. 127
Opening Statements
Statement by Representative David Wu, Chairman, Subcommittee on
Technology and Innovation, Committee on Science and Technology,
U.S. House of Representatives.................................. 131
Written Statement............................................ 131
Statement by Representative Phil Gingrey, Ranking Minority
Member, Subcommittee on Technology and Innovation, Committee on
Science and Technology, U.S. House of Representatives.......... 132
Written Statement............................................ 133
Prepared Statement by Representative Harry E. Mitchell, Member,
Subcommittee on Technology and Innovation, Committee on Science
and Technology, U.S. House of Representatives.................. 134
Witnesses:
Mr. Michael J. Caccuitto, SBIR/STTR Program Administrator;
Assistant Director, Office of Small Business Programs,
Department of Defense
Oral Statement............................................... 134
Written Statement............................................ 135
Biography.................................................... 149
Ms. Jo Anne Goodnight, SBIR/STTR Program Coordinator, Office of
Extramural Research, National Institutes of Health, U.S.
Department of Health and Human Services
Oral Statement............................................... 149
Written Statement............................................ 151
Biography.................................................... 159
Mr. Larry S. James, SBIR and STTR Program Manager; Acting
Director for the Small Business Research Division, U.S.
Department of Energy
Oral Statement............................................... 159
Written Statement............................................ 166
Biography.................................................... 172
Mr. Douglas A. Comstock, Director, Innovative Partnerships
Program Office, National Aeronautics and Space Administration
(NASA)
Oral Statement............................................... 172
Written Statement............................................ 174
Biography.................................................... 178
Dr. Kesh S. Narayanan, Director, Division of Industrial
Innovation and Partnerships, Directorate for Engineering,
National Science Foundation
Oral Statement............................................... 179
Written Statement............................................ 180
Biography.................................................... 185
Discussion....................................................... 185
Appendix: Answers to Post-Hearing Questions
Mr. Michael J. Caccuitto, SBIR/STTR Program Administrator;
Assistant Director, Office of Small Business Programs,
Department of Defense.......................................... 222
Ms. Jo Anne Goodnight, SBIR/STTR Program Coordinator, Office of
Extramural Research, National Institutes of Health, U.S.
Department of Health and Human Services........................ 226
Mr. Larry S. James, SBIR and STTR Program Manager; Acting
Director for the Small Business Research Division, U.S.
Department of Energy........................................... 234
Mr. Doug A. Comstock, Director, Innovative Partnerships Program
Office, National Aeronautics and Space Administration (NASA)... 237
Dr. Kesh S. Narayanan, Director, Division of Industrial
Innovation and Partnerships, Directorate for Engineering,
National Science Foundation.................................... 241
SMALL BUSINESS INNOVATION RESEARCH REAUTHORIZATION ON THE 25TH PROGRAM
ANNIVERSARY
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THURSDAY, APRIL 26, 2007
House of Representatives,
Subcommittee on Technology and Innovation,
Committee on Science and Technology,
Washington, DC.
The Subcommittee met, pursuant to call, at 1:05 p.m., in
Room 2325 of the Rayburn House Office Building, Hon. David Wu
[Chairman of the Subcommittee] presiding.
hearing charter
SUBCOMMITTEE ON TECHNOLOGY AND INNOVATION
COMMITTEE ON SCIENCE AND TECHNOLOGY
U.S. HOUSE OF REPRESENTATIVES
Small Business Innovation
Research Reauthorization on
the 25th Program Anniversary
thursday, april 26, 2007
1:00 p.m.-3:00 p.m.
2325 rayburn house office building
1. Purpose
On Thursday, April 26, the Subcommittee on Technology and
Innovation of the Committee on Science and Technology will hold a
hearing to review the Small Business Innovation Research (SBIR) and
Small Business Technology Transfer Program (STTR) programs.
2. Witnesses
Mr. Bruce J. Held is the Director of the Force Development and
Technology Program at the RAND Arroyo Center, The RAND Corporation.
Mr. Jon Baron is the Executive Director of the Coalition for Evidence-
Based Policy, a program of the Council for Excellence in Government.
Mr. Robert N. Schmidt is Founder and Chairman of Cleveland Medical
Devices Inc, and Orbital Research Inc.
Dr. Gary McGarrity is Executive Vice President of Scientific and
Clinical Affairs of VIRxSYS Corporation.
Mr. Anthony R. Ignagni is President and CEO of Synapse Biomedical Inc.
3. Hearing Issues
Program Effectiveness: Are the SBIR and STTR programs
meeting program objectives to stimulate and commercialize
innovation in support of agency missions through expanded small
business participation in extramural federal R&D? How could
program efficiency and effectiveness be improved? Does
flexibility in program administration contribute to the program
effectiveness across agencies with diverse missions?
Award Levels. What are the appropriate award levels
in light of typical project costs to support agency missions,
the trends in seed and early stage financing, and the fact that
there has not been an inflationary adjustment in award levels
since 1992?
Small Business Participation. How can the programs
increase the participation of innovative small businesses in
federal R&D--the total number of small businesses, the
geographic distribution, and the participation of minority and
disadvantaged firms?
Financing and Commercialization. What common program
elements are needed across all agencies to address financing
gaps in the Phased award structure, to encourage private equity
participation, provide commercialization assistance, and
increase small business's share of federal procurement and non-
SBIR/STTR federal R&D?
Administrative Costs. How should program
administration costs be addressed in reauthorization? Today,
costs are paid out of non-SBIR/STTR program funds.
Venture Capital Majority Ownership. Should small
businesses be able to participate in the SBIR/STTR programs if
multiple venture firms hold some ownership of the firm at the
time of grant award and together hold majority ownership? How
would this incrementally support agency missions and project
commercialization? Would VCs provide additional project funding
beyond SBIR awards and commercialization assistance? Is NIH the
only agency that requires this flexibility to address the
funding requirements of the biotechnology industry?
4. Background--The SBIR/STTR Programs
SBIR was established in 1982 by the Small Business Innovation
Development Act [P.L. 97-219] to increase the participation of small,
high technology firms in federal research and development (R&D)
activities. The Act outlined four broad congressional goals:
To stimulate technological innovation
To use small business to meet federal R&D needs
To foster and encourage participation by minority and
disadvantaged persons in technological innovation
To increase the private sector commercialization of
innovations derived from federal R&D.
SBIR has been reauthorized twice in 1992\1\ and 2000, with
authorization extended through September 30, 2008.
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\1\ In 1992, Congress expanded the purposes to include to
``emphasize the program's goal of increasing private sector
commercialization developed through federal research and development
and to improve the Federal Government's dissemination of information
concerning the small business innovation, particularly with regard to
women-owned business concerns and by socially and economically
disadvantaged small business concerns.''
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Small businesses are eligible for SBIR awards if they are
independently owned and operated for-profit companies, not dominant in
the field of research proposed, and employ fewer than 500 people.
Under SBIR, departments and agencies with extramural RDT&E budgets
of $100 million or more are required to set aside 2.5 percent of these
budgets to sponsor research at small companies through the SBIR
program. The award competition is peer reviewed and highly competitive
with only 15-20 percent of Phase I (feasibility) stage applicants
winning awards. Awards are based on scientific, technical and
commercial merit.
Currently, 11 departments and agencies sponsor SBIR programs: the
Departments of Defense (DOD), Commerce, Education, Health and Human
Services, Housing and Urban Development, Homeland Security,
Transportation, Energy, and the Environmental Protection Agency, the
National Aeronautics and Space Administration, and the National Science
Foundation. DOD, HHS/NIH, DOE, NASA & NSF accounted for 96 percent of
SBIR program awards in FY05 (DOD and HHS/NIH alone, 81 percent).
Each agency runs its own SBIR program, emphasizing research areas
supporting the mission of the particular agency. There is a great deal
of diversity between programs and even within organizations of an
agency. For example, DOD has 10 participating components making SBIR
awards, and the individual programs differ in how topics are selected
and commercialization assistance offered. DOD and NASA, in particular,
integrate award winners into their procurement processes. But SBA is
supposed to establish broad policy guidelines for the SBIR program. SBA
monitors program implementation and reports award statistics to
Congress including minority and disadvantaged participation.
From its inception in 1982 to 2005, over $18.9 billion in SBIR
awards have been made for more than 88,800 research projects. In fiscal
year 2005, SBIR made 6,171 awards, totaling $1.86 billion.
The SBIR program is divided into three phases. Phase I awards (up
to $100,000) fund research projects designed to evaluate the
feasibility and the scientific and technical merit of an idea. Phase II
awards (up to $750,000) provide additional funding for Phase I projects
that have demonstrated potential for successful development. Funding
covers further development to the prototype stage. Companies are
expected to leverage SBIR funding to obtain private or non-SBIR
government funding to turn the prototype developed in Phase II into a
commercial product or service for sale to government and private sector
customers in Phase III. No SIBR funds support Phase III. Phases I and
II proposals are evaluated on the scientific and technical merit of the
proposed research, the qualification of key personnel, and the
potential for transition into a commercial product.
STTR was established in 1992 by the Small Business Research and
Development Enhancement Act (P.L. 102-564) and reauthorized again in
1997 and in 2001 through September 2009. It funds cooperative R&D
conducted jointly by small businesses and research institutions
(universities, federally funded R&D centers (FFRDCs) or domestic
nonprofit research organizations). Like SBIR, the research must support
the mission of the funding agency. For STTR the set aside is 0.3
percent for departments that spend over $1 billion per year in
extramural R&D. The Departments of Defense, Energy, Health and Human
Services, NASA and NSF participate in the STTR program. In FY 2005,
there were 832 STTR awards totaling $220.3 million.
History of SBIR Program
The SBIR program was designed to enable innovative small businesses
engage in high-risk research and development to compete successfully
with large firms and universities for federal R&D grants and contracts.
Small companies are at a disadvantage in spite of their great potential
to contribute to the Nation's science base. They are also a major
source of new jobs. STTR extends the principal to cooperative research
with research organization such as universities and federal labs.
In 2001, the most recent reauthorization of SBIR, the Small
Business Reauthorization Act [P.L. 106-554] required a study by the
National Research Council (NRC) to review of the performance of the
five largest SBIR programs and semiannual progress reports to the
Committee on Science and the House and Senate Committees on Small
Business.\2\ To date, the NRC has published three reports\3\, but
results of the individual agency SBIR program assessments and study
findings and recommendations have not been released.
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\2\ Sec, 108. National Research Council Reports.
\3\ The three reports are: Program Diversity and Assessment
Challenge, Project Methodology, and Phase III Challenge of
Commercialization.
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The Act also required SBA to establish databases of SBIR activity
to help track and assess the performance of the SBIR program, and
encouraged SBIR agencies to do a better job of partnering with states
via the creation of the Federal and State Technology Partnership (FAST)
program and Rural Outreach Program (ROP). FAST is a competitive grants
program that allows each state to receive funding in the form of a
grant to provide services to promote participation in the SBIR program.
ROP provides federal assistance to support statewide outreach to small
high-tech business located in 25 states that are under-represented in
SBIR/STTR awards.
Effective, January 3, 2005\4\, the SBA revised its eligibility
criteria for SBIR to allow a wholly-owned subsidiary to participate,
providing its parent company, with all its affiliates, still meets the
eligibility criteria.
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\4\ December 3, 2004, 13CFR121.702
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The SBA policy directive requires owners of the SBIR/STTR
participant be ``individuals'' who are ``citizens of, or permanent
resident aliens in the United States.'' The regulations do not provide
that corporations or other artificial entities may qualify as
``individuals.''
Other legislative and executive branch actions have shaped the
SBIR/STTP program. Section 252 of the National Defense Authorization
Act (NDAA) of FY 2006 [P.L. 109-163] contains elements to strengthen
the SBIR program in DOD, including a stronger focus on cutting-edge
R&D, on SBIR Phase III prime contracting and subcontracting
opportunities through creation of a Commercialization Pilot Program,
and on small high-tech manufacturing by adopting into law, Executive
Order 13329, Encouraging Innovation in Manufacturing. E.O. 13329
(February 24, 2004) encouraged federal agencies to assist the private
sector in its manufacturing innovation efforts through the SBIR and
STTR programs.
5. Background--Hearing Issues
Program Effectiveness. Section 108\5\ of the Small Business
Reauthorization Act of 2000 mandated the National Research Council
``conduct a comprehensive study of how the SBIR program has stimulated
technological innovation and uses small businesses to meet federal
research and development needs.'' In addition, DOD commissioned the
RAND Corporation to evaluate and make recommendations to improve the
DOD SBIR program. The results of this report are the subject of the
testimony by Bruce Held.
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\5\ Sec.108(a)(1) says the comprehensive study should include:
``(A) a review of the value of the federal research agencies of the
research projects being conducted under the SBIR program, and of the
quality of research being conducted by small businesses participating
under the program, including comparison of the value of projects
conducted under the SBIR program to those funded by other federal
research and development expenditures; (B) to the extent practicable,
an evaluation of the economic benefits achieved by the SBIR program,
including the economic rate of return, achieved by the SBIR program
with the economic benefits, including the economic rate of return, of
other federal research and development expenditures; (C) an evaluation
of the non-economic benefits achieved by the SBIR program over the live
of the program; (D) a comparison of the allocation for fiscal year 2000
of federal research and development funds to small businesses with such
allocation for fiscal year 1983, and an analysis of the factors that
contributed to such allocation; and (E) an analysis of whether federal
agencies, in fulfilling their procurement needs, are making sufficient
effort to use small businesses that have completed a second phase award
under the SBIR program.''
Sec. 108(a)(2) further requires NRC ``make recommendations with
respect to--(A) measures of outcomes for strategic plans submitted. .
.of each federal agency participating in the SBIR program; (B) whether
companies who can demonstrate project feasibility, but who have not
received a first phase award, should be eligible for second phase
awards on the competitive selection process of the program; (C) whether
the Federal Government should be permitted to recoup some or all of its
expenses if a controlling interest in a company receiving an SBIR award
is sold to a foreign company or to a company that is not a small
business concern; (D) how to increase the use by the Federal Government
in its programs and procurements of technology-oriented small
businesses; and (E) improvements to the SBIR program, if any are
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considered appropriate.'' (emphasis added)
Award Levels. The financing gap for seed and early stage firms, the
``valley of death,'' is still a looming business risk as venture
capital firms raise the floor of their investments to several million
dollars and focus on investment in business expansion rather than the
most risky stages of innovative firms.
Small Business Participation. Outreach programs play a vital role to
insure broad geographic distribution of awards and the participation of
minority and disadvantaged firms. But, support has not been included in
the administration budgets since FY05 for the SBA Federal and State
Technology Partnership (FAST) program and Rural Outreach Program (ROP).
Participation could broadly be increased by raising the set-aside
above the current 2.5 percent for SBIR. The initial set-aside in 1982
was 1.25 percent of extramural R&D. That was increased to 1.5 percent
in 1992 and 2.5 percent in 2000. There have already been significant
increases in SBIR funding in the last eight years as a result of the
doubling of NIH budget between FY 1999 to FY 2003, and the rise in
defense spending since 2001. In addition, the Administration's ACI
proposal doubles a portion of NSF, DOE and NIST's budget with
associated increases in SBIR program funds.
Financing and Commercialization. As the NRC notes in their study of
SBIR, ``Commercializing SBIR supported innovation is necessary if the
Nation is to capitalize on its SBIR investments. This transition is,
however, challenging because it requires a small firm with an
innovative idea to evolve quickly from a narrow focus on R&D to a much
broader understanding of the complex systems and missions of federal
agencies as well as the interrelated challenges of managing a larger
business, developing sources of finance, and competing in the
marketplace.'' \6\
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\6\ National Research Council, SBIR and the Phase III Challenge of
Commercialization, 2007, p. 5 (emphasis added).
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Since no SBIR/STTR funds support Phase III, firms must begin early
in Phase II to plan to cross the ``valley of death'' where the lack of
sufficient funds and commercialization assistance can easily trap a
firm. To assist, federal agencies have developed innovative policies to
help SBIR and STTP firms address financing gaps inherent in the award
cycles, provide incentives to attract third party funds in Phase II and
III, to match or showcase SBIR technologies with private companies and
government agencies, and encourage insertion of SBIR developed
technologies into agency procurement programs.
Administrative Costs. Existing law prohibits the use of SBIR and STTR
funds to cover the program's administrative costs, including
commercialization assistance, technical assistance beyond $4000 per
phase, program evaluation, and salaries. This forces the agencies to
pay for these costs out of non-SBIR/STTR program funds. These
administrative costs can be critical to program effectiveness.
Venture Capital Majority Ownership. There is a sharp debate in the
research and venture capital communities on whether it is appropriate
for SBIR awards to be given to small businesses that are majority-owned
by venture capital (VC) firms.
SBIR is very attractive to entrepreneurs because the awards are
either grants or contracts and do not dilute company ownership.
Moreover, companies retain rights to technical data for a four year
non-disclosure period following each award. The appeal of SBIR awards
extends to private capital when they evaluate investments. An SBIR
award provides the firm an imprimatur (a certificate or mark of
official approval through the peer review process) as an innovative
firm, reducing the due diligence required by private investors.
Proponents of changing the current rule argue that VC firms are a
major source of financing and that VC support can help a firm continue
research and commercialize products beyond the start with SBIR funding.
Opponents contend that VC firms control small business firms through
the protective covenants of their investments. Therefore, opponents
argue, small businesses that are controlled by VC firms are not
independent small businesses in need of special research funding and do
not merit SBIR support.
Why Now? The current dispute over VC funding began in 2001, when the
SBA Office of Hearings and Appeals issued a ruling against the majority
ownership of SBIR companies by VC firms in response to an appeal of a
rejection of SBIR funding by NIH based upon majority VC ownership.\7\
The ruling made by the Administrative Law Judge stated that VC firms
were not ``individuals,'' i.e., ``natural persons,'' and therefore SBIR
agencies could not give SBIR grants to companies in which VC firms had
a controlling interest. BIO and NVCA claimed this was a new
interpretation of the VC-small business relationship, but SBA said it
was simply a clarification and enforcement of eligibility standards.
VCs can take majority ownership after an award is made but the firm
would thereafter be denied further awards or enhancements.
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\7\ CBR Laboratories, Inc. of Boston Massachusetts.
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Advocates for Expanded VC Participation in SBIR-eligible Companies
The biotechnology industry is the strongest advocate for
unrestricted VC affiliation with SBIR-funded companies. Advocates argue
that the SBA rule at best creates a meaningless barrier to private-
sector investment that inhibits growth of budding companies, and at
worst blocks the translation of new discoveries into life-saving
products for numerous fatal diseases. They point out that biotechnology
R&D is capital-intensive and the involvement of VC money is critical to
bring drugs through the development phase to market. BIO and NVCA have
taken the official position that eligibility for SBIR awards should be
expanded to include small companies that are majority owned by a
consortium of VC firms.
Advocates for Limited VC Participation in SBIR
However, the biotechnology industry is not entirely united in its
opposition to SBA's policy. Some biotechnology experts and company
representatives argue that, if SBA regulations allowed more VC-backed
companies to apply for SBIR grants, they would crowd out completely
independent small research companies run or owned by individuals who
focus on opportunities that do not match VC investment criteria (e.g.,
more niche markets but are nonetheless medical needs). They also point
out that SBIR-eligible companies are currently able to attract VC
backing without giving away a majority stake, and therefore it is not
necessary to expand the role of VC.
Beyond the biotechnology industry, some companies and small
business advocates point out that many large companies, such as Intel,
have set up VC funds as a means of investing in, and ultimately buying
promising new companies that develop breakthrough technologies. They
argue that if the Federal Government funded small businesses backed by
such VC funds, the SBIR program could end up subsidizing the
acquisition of small businesses by big businesses. This, for example,
is the position held by the Small Business Technology Coalition (SBTC),
for example.
Chairman Wu. I want to welcome everyone to this afternoon's
hearing of the Technology and Innovation Subcommittee on Small
Business Innovative Research Authorization. This year
represents significant milestones in the history of SBIR as
well as the Small Business Technology Transfer Program. July
22nd will be the 25th anniversary of SBIR, and October 28 will
be the 15th anniversary of STTR. Indeed, one of our witnesses,
Mr. Baron, was counsel on the House Committee on Small Business
where he led the effort to secure enactment of legislation
establishing the STTR program in 1992.
SBIR is a highly competitive program that encourages small
businesses to explore and develop innovative, high-risk
technical projects. By including qualified small businesses in
the federal R&D arena, high-tech innovation is stimulated,
strengthening U.S. innovation and competitiveness.
SBIR and STTR were last authorized in 2000 and 2001
respectively. Today we invite our witnesses to address the
overall effectiveness and efficiency of these programs in the
intervening years and to recommend changes to improve the
programs.
In addition, we have invited federal agencies with both
SBIR and STTR Programs to submit written statements for the
record with the same objective.
I would like to highlight a few key issues we will consider
today. First, award levels. Should award levels be larger for
Phase I and Phase II? The ``Valley of Death'' for seed and
early stage companies persists as venture capital firms
continue to raise their level of investment and focus on mid-
and later-term stage investments where there is less financial
and technical risk. Moreover, the SBIR award levels have not
been adjusted since 1992.
Second, small business participation. How do we broaden the
participation of minority and disadvantaged firms as well as
expand the regional participation of innovative small
businesses and federal R&D?
Third, financing and commercialization. Agencies are
currently prohibited from using SBIR program funds to support
administrative costs. Would permitting the use of a percentage
of SBIR program funds for technical and commercialization
assistance and ongoing program evaluation improve
commercialization rates?
Finally, participation of venture capital. There has been
debate about SBIR eligibility standards and the program impact
of permitting awards to firms when multiple venture capital
firms own majority ownership of the firm.
All of these issues are on the table today for comment and
discussion with our witnesses. We look forward to hearing your
thoughts on how to improve both the effectiveness and
efficiency of these programs.
[The prepared statement of Chairman Wu follows:]
Prepared Statement of Chairman David Wu
I want to welcome everyone to this afternoon's hearing of the
Technology and Innovation Subcommittee on Small Business Innovation
Research (or SBIR) Authorization.
This year represents significant milestones in the history of SBIR
as well as the Small Business Technology Transfer Program (STTR)
program. July 22 will be the 25th anniversary of SBIR, and October 28
will be the 15th anniversary of STTR. Indeed, one of our witnesses, Mr.
Baron, was counsel on the House Committee on Small Business where he
led the effort to secure enactment of legislation establishing the STTR
program in 1992.
SBIR is a highly competitive program that encourages small business
to explore and develop innovative, high-risk technical projects. By
including qualified small businesses in the federal R&D arena, high-
tech innovation is stimulated, strengthening U.S. innovation and
competitiveness.
SBIR and STTR were last reauthorized in 2000 and 2001 respectively.
Today we invite our witnesses to address the overall effectiveness and
efficiency of these programs in the intervening years, and to recommend
changes to improve the programs. In addition we have invited federal
agencies with both SBIR and STTR programs to submit written statements
for the record with the same objective.
I would like to highlight a few key issues we will consider today:
Award Levels. Should award levels be larger for Phase
I and II of the program? The ``Valley of Death'' for seed and
early stage companies persists as venture capital firms
continue to raise their minimum level of investment and focus
on mid- and later-stage investments where there is less
technical risk. Moreover, the SBIR award levels have not been
adjusted since 1992.
Small Business Participation. How do we broaden the
participation of minority and disadvantaged firms, as well as
expand the regional participation of innovative small business
in federal R&D?
Financing/Commercialization. Agencies are currently
prohibited from using SBIR program funds to support
administrative costs. Would permitting the use of a percentage
of SBIR program funds for technical and commercialization
assistance and ongoing program evaluation improve
commercialization rates?
Venture Capital. Finally, there has been debate about
SBIR eligibility standards, and the program impact of
permitting awards to firms when multiple venture capital firms
hold majority ownership of the firm.
All these issues are on the table today for comment and discussion
with our witnesses. We look forward to hearing your thoughts on how to
improve both the effectiveness and efficiency of these programs.
Chairman Wu. Now, I would like to welcome my friend and
colleague, the Ranking Member of this subcommittee from
Georgia, Dr. Gingrey for his opening remarks.
Mr. Gingrey. Thank you, Mr. Chairman. Good afternoon,
everybody, and I want to thank all of your for attending,
especially our five witnesses for this hearing on the
Technology and Innovation Subcommittee of the Science
Committee.
Today we will be looking, as the Chairman said, at the
Small Business Innovation Research Program as it goes forward
in this, its 25th silver anniversary. This hearing precedes the
Subcommittee's markup of reauthorization language, hopefully
some time this summer.
The SBIR Program began in 1982 when our government saw a
need to increase our national investment in research and
development to specifically seek technological innovations in
emerging areas. The ultimate goal of the SBIR Program is to
bring new products and technologies to commercialization in
order to stimulate international competitiveness. This program
is an important stepping stone in the overall goal to keep
America's competitive advantage in the worldwide marketplace.
Under the SBIR Program, departments and agencies with an
R&D budget of $100 million or more are required to actually set
aside 2.5 percent of these budgets to sponsor research at small
companies. These awards are highly competitive with only the
most pioneering and innovative companies receiving any federal
money. Currently 11 departments and agencies sponsor SBIR
Programs including the Department of Defense, Education, Health
and Human Services, Homeland Security, Department of Energy, as
well as NASA, the National Aeronautics and Space
Administration, the National Science Foundation, and the
National Institutes of Health.
The SBIR Program is divided into three phases. The initial
phase, Phase I, grants awards for the maximum amount of
$100,000 for exploration of the technical merit or feasibility
of an idea or technology. Phase I awardees may then compete--
once again, highly competitive--for Phase II awards which has a
maximum award of $750,000 for research that expands upon
promising Phase I results. It is during this second phase of
the program that the developer evaluates the commercialization
potential.
Phase III is that period during which Phase II innovation
moves from the laboratory into the marketplace. This of course
is the essence of a technology transfer. It is important to
note that no SBIR funds support this final phase. The small
business must then find funding in the private sector or other
non-SBIR federal agency funding in order to complete the
technology transition to commercialization.
I am sure there are many people outside of the Federal
Government that are not familiar, Mr. Chairman, with the SBIR
Program. However, I am here to tell you, and I know you agree
with me, that it is a hidden gem. Agencies give a percentage of
their major federal R&D budget to support our country's most
ground-breaking and pioneering small businesses. I know I do
not have to convince anyone here that small businesses truly
are the engine that drives this thriving economy, and the SBIR
Program is a crucial spark that initiates this success. As a
physician five years removed from the practice of OB/GYN, I am
keenly interested in the medical breakthroughs and the
innovative research headquarters at NIH. The SBIR Program at
the Institute has helped spawn new hopes for victims of a
variety of diseases such as cancer, HIV/AIDS, Alzheimer's, and
of course, especially Type I diabetes.
Neural Signals is an example of one of the many SBIR
success stories, and it is located in my home state of Georgia.
Neural Signals allows severely paralyzed or locked-in
individuals to control their personal computers via a thought
control, eliminating completely the need for patient-initiated
movement. Amazing.
Another amazing event that's been coming out of the SBIR
program is from a company named Abiomed. AbioCor is a product
which is a result of three decades of research, development,
and testing which produced the world's first completely self-
contained replacement heart. This is an outstanding innovation
that makes real the day when heart failure, one of our biggest
killers, will not mean the end of life or the ability to enjoy
life.
We will also hear from Anthony Ignagni of the Synapse
company, Synapse Biomedical, and he will discuss their
minimally-invasive neuron stimulation devices that will replace
or assist mechanical ventilation. Synapse is conducting multi-
centered clinical trials at locations across the country,
including the Shepherd Center in Atlanta, which is the leading
center for treatment of spinal cord injuries in this country. I
was--had the opportunity at the start to speak to Mr. Ignagni
and let him know that I have a brother who volunteers there
with the feeding of the patients, and I know how important it
is to be able to help them with this kind of innovative
technology that leads to commercialization.
I am excited to hear the testimony and look forward to the
testimony of our five witnesses, as we discuss ways to improve
upon this great SBIR Program.
Mr. Chairman, I probably took a little longer than you
anticipated, but I thank you for the opportunity to be with you
on this subcommittee to serve with you on this subcommittee and
on the Science Committee overall. A hearing like this is so, so
important, and I am glad to see a good audience in attendance;
and with that, I will yield back to you, Mr. Chairman.
[The prepared statement of Mr. Gingrey follows:]
Prepared Statement of Representative Phil Gingrey
Good Afternoon. I would like to thank everyone for attending
today's hearing of the Technology and Innovation Subcommittee.
Today we will be looking at the Small Business Innovation Research
(SBIR) program as it goes forward to its Silver Anniversary. This
hearing precedes this subcommittee's markup of reauthorization language
hopefully sometime this summer.
The SBIR program began in 1982 when our government saw a need to
increase our national investment in research and development to
specifically seek technological innovations in emerging areas. The
ultimate goal of the SBIR program is to bring new products and
technologies to commercialization in order to stimulate international
competitiveness. This program is an important stepping stone in the
overall goal to keep America's competitive advantage in the worldwide
marketplace.
Under the SBIR program, departments and agencies with R&D budgets
of $100 million or more are required to set aside 2.5 percent of these
budgets to sponsor research at small companies. These awards are highly
competitive with only the most pioneering and innovative companies
receiving these federal monies.
Currently, 11 departments and agencies sponsor SBIR programs
including: the Departments of Defense, Education, Health and Human
Services, Homeland Security, and Energy, as well as the National
Aeronautics and Space Administration, the National Science Foundation
and the National Institutes of Health.
The SBIR program is divided up into three phases. The initial
phase, Phase I, grants awards with a maximum amount of $100,000 for
exploration of the technical merit or feasibility of an idea or
technology. Phase I awardees may then compete for a Phase II award
which has a maximum award of up to $750,000 for research that expands
upon promising Phase I results. It is during this second phase of the
program that the developer evaluates commercialization potential.
Phase III is the period during which Phase II innovation moves from
the laboratory into the marketplace, this of course is the essence of
technology transfer. It is important to note that no SBIR funds support
this final phase. The small business must find funding in the private
sector or other non-SBIR federal agency funding in order to complete
their technology's transition to commercialization.
I'm sure there are many people outside the Federal Government that
are not familiar with the SBIR program. However, I am here to tell you
it is a hidden gem. Agencies give a percentage of their major federal
R&D budget to support our country's most groundbreaking and pioneering
small businesses. I know I don't have to convince anyone here that
small businesses truly are the engine that drives this thriving economy
and the SBIR program is a crucial spark to initiate their success.
As a physician, I am keenly interested in the medical breakthroughs
and innovative research headquartered at the NIH. The SBIR program at
the Institute has helped spawn new hopes for the victims of a variety
of diseases such as cancer, HIV/AIDS, Alzheimer's and diabetes.
Neural Signals is an example of one of the many SBIR success
stories and is located in my home state of Georgia. Neural Signals
allows severely paralyzed or locked-in individuals to control their
personal computers via thought-control--eliminating completely the need
for patient-initiated movement.
Another amazing advancement coming out of the SBIR program is from
a company named, ABIOMed. AbioCor is a product which is the result of
three decades of research, development and testing which produced the
world's first completely self-contained replacement heart. AbioCor is
an astounding innovation that makes real the day when heart failure
will not mean the end of life or the ability to enjoy life.
We will also hear from Anthony Ignagni (pronounced IG-NA-NI, the
second ``g'' is silent) of Synapse (pronounced SIN-NAP-SIS) Biomedical,
Inc. who will discuss their minimally invasive neuron-stimulation
devices that will replace or assist mechanical ventilators.
Synapse is conducting multi-centered clinical trials at locations
around the country including the Shepherd Center in Atlanta, which is
the leading center for treatment of spinal cord injuries in the
country.
I am excited to hear the testimony from all of our witnesses here
today to discuss ways to improve upon the SBIR program. Mr. Chairman, I
am looking forward to working with you as we move forward with
reauthorization legislation.
Chairman Wu. Thank you very much, Dr. Gingrey. And all the
time was very well spent.
And now we turn to our witnesses. As each of you know, oral
testimony, we request you keep your oral testimony at
approximately five minutes; and if you can, please summarize
your written testimony which we will place into the record. Let
me provide a brief introduction for the witnesses.
Mr. Bruce Held is the Director of the Force Development and
Technology Program at the RAND Arroyo Center, The RAND
Corporation. His research is focused on defense acquisition,
industrial base, and R&D policy.
Mr. Jon Baron is the Executive Director of the Coalition
for Evidenced-Based Policy. That would be a wonderful thing in
this institution. He has served as counsel to the House of
Representatives' Committee on Small Business and subsequently
as Program Manager of the Defense Department's SBIR Program.
Mr. Robert Schmidt is Founder and Chairman of Cleveland
Medical Devices, Inc., and Orbital Research. Mr. Schmidt is
also on the Board of Directors of the Small Business Technology
Council, a council organization of the National Small Business
Association.
Dr. Gary McGarrity is Executive Vice-President of
Scientific and Clinical Affairs at VIRxSYS Corporation. Prior
to joining VIRxSYS, he was CEO of Intronn.
And Dr. Anthony Ignagni is President and CEO of Synapse
Biomedical and is responsible for the strategic planning of the
company. Tony has developed and commercialized medical devices
for over 20 years.
And we will begin with you, Mr. Held.
STATEMENT OF MR. BRUCE J. HELD, DIRECTOR OF THE FORCE
DEVELOPMENT AND TECHNOLOGY PROGRAM, RAND ARROYO CENTER, THE
RAND CORPORATION
Mr. Held. Mr. Chairman and Members of the Subcommittee,
thank you for the invitation to testify before you today. My
testimony today is limited to the Department of Defense's SBIR
Program and primarily draws on research that I led in 2004 what
is now the DOD's Office of Small Business Programs. While the
DOD's SBIR Program is generally accomplishing its broad
legislative goal, it is not particularly effective in
generating technology and products that are utilized by the
Armed Forces. As a result, the DOD may not be taking the best
advantage of the program's research result, and the small
businesses may not be getting the commercialization
opportunities that would turn their innovations into sales and
other sources of revenue.
There appear to be two primary reasons for this. First, the
DOD's acquisition and R&D leadership emphasis for the program
has been on administrative efficiency and process issues
associated with executing the thousands of annual SBIR awards.
Second, most of the DOD's program is managed out of its
laboratories and research centers. While these centers and
organizations conduct and manage important R&D, that work tends
to be earlier-stage research that requires a long and difficult
develop and transition cycle before being incorporated into the
equipment being used by the Armed Forces.
For the program's small business participants, staying with
this lengthy and non-transparent process is exceptionally
difficult. Efforts in policies to improve the effectiveness of
the DOD's programs should therefore have two related goals:
first, to emphasize research outcomes and utilization rather
than just process efficiency, and second, to increase the
participation of the acquisition community in managing SBIR
projects.
A key to both of these is to manage the program flexibly,
so it can better meet the technology needs of the Department.
For example, most of the Armed Services and DOD agencies only
have one or two SBIR solicitations a year. More flexible
scheduling, however, would include more solicitations to allow
acquisition program managers to use SBIR technology development
projects according to their own scheduling needs. Once awarded,
SBIR project schedules should also be flexible enough to
accommodate varying program and technology development
requirements. Currently, the tendency is to work all SBIR
projects on similar schedules. But this causes delay between
phases that hurt both the potential user of the research as
well as the small businesses conducting the research.
Funding of projects also needs to be managed more flexibly,
since funding guidelines for the program have not changed in
the last 15 years; the effective award size has declined by
about a third, thus removing a portion of potential research
projects as topic candidates. At a minimum, guidelines for the
size of SBIR awards should be increased to account for
inflation. Phase I awards should be at least $150,000; Phase II
awards should be at least $1,125,000. In addition, discretion
to exceed these guidelines for important research needs needs
to continue in the reauthorization.
Making the program more flexible in terms of project timing
and funding should improve its attractiveness to DOD's
acquisition program managers, enhancing the probability that
SBIR research outcomes will transition into products and
services that the small businesses can market to the government
and to defense industries.
Another way to increase both flexibility of the program and
its attractiveness to the DOD's acquisition program managers is
to allow a portion of the SBIR set aside to be used to
administer the program. Generally the cost for managing the
DOD's programs are borne out of organizational overhead. This
not only contributes to the current process orientation of the
program, but since the projects are relatively small and are
often perceived to be risky, acquisition program managers are
not inclined to spend their limited overhead managing them. If
administrative resources come with the projects, however, they
may find these SBIR programs to be more attractive as an
additional technology source. The amount ultimately allocated
for managing the program should be based on an analysis of the
cost associated with managing similar R&D and commercialization
efforts.
Finally, a few words about increasing innovative small
business participation in the program. Since the program has
been very successful in attracting new companies to the DOD R&D
market and since Phase I competition remains high, the real
question should be about increasing the quality of the
participation. From the viewpoint of both the small businesses
and the DOD, higher quality participation is mostly about
transitioning research results into usable technology and
products. This means making the program a resource for the
DOD's acquisition managers, not just a tax on their R&D
budgets. Absent steps to do this, it is unlikely that other
commercialization and financing efforts will be very
successful. My recommendation for program enhancements thus
center around the two main issues I mentioned earlier. The
DOD's leadership must move from a process orientation to one
that is outcome utilization oriented, and the acquisition
community must have more responsibility for the program. Both
of these actions require managing the program flexibly and
suggest resourcing it in a way that reduces the incentives for
minimizing management effort at the expense of technology
transition success.
Thank you.
[The prepared statement of Mr. Held follows:]
Prepared Statement of Bruce J. Held\1\
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\1\ The opinions and conclusions expressed in this testimony are
the author's alone and should not be interpreted as representing those
of RAND or any of the sponsors of its research. This product is part of
the RAND Corporation testimony series. RAND testimonies record
testimony presented by RAND associates to federal, State, or local
legislative committees; government-appointed commissions and panels;
and private review and oversight bodies. The RAND Corporation is a
nonprofit research organization providing objective analysis and
effective solutions that address the challenges facing the public and
private sectors around the world. RAND's publications do not
necessarily reflect the opinions of its research clients and sponsors.
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Improving the Department of Defense's Small Business Innovation
Research Program\2\
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\2\ This testimony is available for free download at http://
www.rand.org/pubs/testimonies/CT280.
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Mr. Chairman and Members of the Subcommittee, thank you for the
invitation to testify before you today. My testimony today draws
primarily on research that I led in 2004 for the Department of
Defense's Small Business Technology and Industrial Base Office
(SBTIBO).\3\ The purpose of that research was to provide DOD with
insights into the current status of its Small Business Innovation
Research (SBIR) program in terms of the department's transformational
technology priorities, innovation, and the small-business defense
industrial base. Following that initial assessment, the project's
objective became the recommendation of policy options for making the
DOD SBIR program more responsive to the needs of the department.\4\
While my testimony draws on this work, today I speak as an individual.
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\3\ Now in the DOD's Office of Small Business Programs.
\4\ Held, Bruce, Thomas Edison, Shari Lawrence Pfleeger, Philip S.
Anton, John Clancy, Evaluation and Recommendations for Improvement of
the Department of Defense Small Business Innovation Research Program
(SBIR), Santa Monica, CA: RAND, DB-490-OSD, 2006.
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In my invitation to testify today I was asked to address the
following questions:
1. How could program effectiveness be improved? What are
appropriate award levels? How should administration costs be
funded?
2. How can the programs increase the participation of
innovative small businesses in federal R&D?
3. What program enhancements do you recommend to address
financing and commercialization assistance needs of
participants?
Assessing the Current DOD SBIR Program
The DOD's SBIR program appears to be accomplishing the broad goals
set out in the program's enabling legislation. The program's resources
stimulate innovation by funding R&D contracts with small businesses
and, in fact, the DOD SBIR program attracts a large number of small
businesses to the DOD R&D market; roughly 250 to 400 new contractors
each year. The DOD SBIR program also provides opportunity for minority-
and women-owned small businesses to contract with DOD, although it is
not as effective as other DOD R&D programs that specifically target
these companies. Finally, some commercialization of DOD R&D appears to
be linked to the SBIR program. However, the limited information
available indicates that commercialization as a result of SBIR-funded
research is concentrated in just a few companies.\5\
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\5\ For example, in our research we examined the DOD contracting
histories of small companies that first contracted with the DOD through
the SBIR program. In 1995 256 companies used the SBIR program as their
entree into the DOD market and in 1999 the number was 227. Of these 483
companies, only six account for 95 percent of the dollar value of
subsequent non-SBIR DOD contracts. Additionally, an examination of
self-reported commercialization data from DOD SBIR participants
indicates just one percent of the companies account for 50 percent of
all sales traceable to an SBIR project. The same data base indicates
that overall sales success from DOD SBIR projects is relatively low:
the sales to SBIR investment ratio is 1.17. This compares to commercial
sales to R&D investment ratios of about 25 to one.
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The effectiveness of the program in generating technology,
products, services and process that are utilized by the armed forces is
less clear.\6\ As a result, the DOD may not be taking the best
advantage of the research results that emerge from its SBIR program,
and the small-business participants may not be getting the
commercialization opportunities that would turn their innovations into
sales or other sources of revenue.
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\6\ This is despite an elaborate topic selection and approval
process that is designed to insure that the topics align with the DOD's
research priorities and are coordinated across the department.
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There appear to be two primary reasons that the DOD SBIR program
has had difficulty transitioning research results. First, the
leadership emphasis for the program has been on statutory compliance
rather than research outcome and utilization. The result is a
management orientation that is more focused on the process issues
associated with executing the thousands of SBIR awards than it is with
utilizing the results of those awards. Second, most of the DOD's SBIR
program is managed out of its laboratories and research centers. Though
these organizations conduct and manage important research for the DOD,
that work tends to be earlier stage research that requires a long and
difficult development and transition cycle before being incorporated
into the equipment or processes used by the armed forces. How SBIR
research results are managed through this transition process is opaque
at best. For the SBIR small business participants, staying with this
lengthy and non-transparent process is exceptionally difficult.
Improving the DOD SBIR Program
Efforts and policies to improve the effectiveness of the DOD's SBIR
program should, therefore, have two related goals:
1. To move the DOD leadership's emphasis for the program from
compliance and process issues to improving research outcomes
and utilization.
2. To increase the participation of the DOD's acquisition
community in managing SBIR projects.
Emphasizing research outcomes and utilization by the leadership
requires emphasizing SBIR program flexibility to meet the technology
needs of the DOD. For example, current practice within the DOD limits
solicitations for SBIR projects to only one or two per year.\7\ This
means that if a technology requirement arises shortly after a
solicitation has been published, the program will not be able to
address that need for six-months or a year.\8\ This kind of set
schedule is designed for process efficiency rather than for meeting the
research needs of the DOD. More frequent solicitations will require
additional effort, but are likely to be more attractive to program and
technology managers who are managing development schedules.
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\7\ Across the DOD there are three solicitations per year, but most
services and agencies in the DOD only participate in one or two per
year.
\8\ This does not take into account additional time required to
process the topic request for inclusion in the solicitation.
Additionally, even if a technology requirement is timely addressed in a
solicitation, most of the DOD's services and agencies manage the
research contracts somewhat inflexibly. Phase I contracts last six
months, putting a Phase II contract in place takes several months and
the Phase II contract will last about two years.
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Funding of DOD SBIR projects will also need to be managed more
flexibly. Funding guidelines for SBIR projects have not changed in the
last fifteen years. This means that the effective size of the award has
declined by a third, thus removing a significant portion of the
potential research projects from the SBIR program. In order to correct
this issue, guidelines for the size of SBIR awards should be increased
to account for inflation. Phase I award limits should be at least
$150,000 and Phase II award limits should be at least $1,125,000. In
addition, flexibility to exceed these guidelines needs to continue to
be maintained in the reauthorization, particularly where important DOD
technology requirements could be addressed by the SBIR program, but
where the project size exceeds the general guidelines.\9\ While smaller
awards mean that more awards are available, larger awards mean
increased flexibility to address the DOD's technology requirements
through the SBIR program. That added flexibility has the potential to
improve the probability that SBIR research outcomes will transition
into products and services that the small-business participants can
market to the DOD and to the broader defense industry.
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\9\ Under current legislation, an awarding agency may determine
that a particular SBIR award merits greater funding. Such awards
require only that, after the fact, a written justification be submitted
along with the annual SBIR report to the SBA. This flexibility seems
warranted and could even be encouraged in the reauthorization to ensure
that program managers feel empowered to make such judgments.
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Currently, the administrative costs for managing the DOD SBIR
program are generally borne out of the overhead of the organizations
within DOD charged with SBIR program responsibility.\10\ As a result,
the incentive for these organizations is to minimize the effort put
into managing the program, contributing to the process orientation that
the program exhibits. Allowing a portion of the SBIR set-aside to be
used to administer the program would help alleviate this incentive
problem.
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\10\ The Navy is an exception. It collects, in addition to the SBIR
set-aside, an amount from its R&D budget to manage the SBIR program.
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Perhaps more important, allowing administrative costs to be
recovered from the set-aside for the program would make it more
attractive to the DOD's acquisition program managers. The DOD's
acquisition program managers contribute the majority of the DOD SBIR
program's funds because they are primarily responsible for the majority
of the DOD's R&D budget from which the set-aside is applied. As noted
earlier, however, across most of DOD the SBIR program is managed by the
laboratories and research centers. There are likely a number of reasons
for this, including explicit policy decisions. However, the
disincentive for acquisition program managers to request SBIR projects
is also a factor. Program management offices are typically relatively
small offices so the resources to manage additional small projects and
contracts are at a premium. If resources are provided to manage these
projects and contracts, then it is likely that program managers will be
more inclined to request access back to some of the resources they
provided to the SBIR program. Combining earmarked SBIR administrative
resources with increased SBIR program flexibility in terms of
solicitation timing, project duration and funding amounts, the SBIR
program could be turned into a more sought after resource by DOD's
acquisition program managers.
While research is currently on-going to determine the total cost of
managing the DOD's SBIR program, previous research suggests that the
DOD invests fewer resources into managing its SBIR program than
analogous R&D efforts. To meet expectations about commercializing SBIR
program results, the amount allocated for managing the SBIR program
should be based on an analysis of the costs associated with managing
other commercial, governmental and academic R&D and commercialization
efforts. The venture capital industry, for example, charges annual
management fees of 2.5 to five percent of funds under management and
also earns a significant portion of any return on investment.\11\
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\11\ Since the venture capital management fees are assessed
annually on funds under management a direct comparison to SBIR overhead
rates understates the VC management fee.
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Increasing Small Business Participation in the DOD SBIR Program
The suggestions already made for increasing the effectiveness of
the DOD SBIR program are related to the second question I was asked to
address: How can the programs increase the participation of innovative
small businesses in federal R&D? As noted earlier, the DOD SBIR program
has been very successful in attracting new companies to the DOD R&D
market. Moreover, the DOD receives nearly six proposals for every Phase
I award it makes. The question should, therefore, be more about
increasing the quality of the participation rather than about the
overall number of companies participating.
Over the course of our research we identified four distinct
business models for DOD SBIR award winners. The entrepreneurial model
is generally a new business created specifically to develop an idea
into some product or service. The SBIR program is a source of
relatively inexpensive capital for developing these ideas. The mature
business model is a business that has been around for some time and
that uses the SBIR program as a source of low-cost capital for
research. Related to the mature business model are other established
small companies who have not previously done business with the DOD and
use the SBIR program to enter that market. Finally there is the
research house. These companies provide research as a service and use
the SBIR to provide their services to the DOD. In all of these models,
perhaps with the exception of the research house, the ultimate goal for
conducting research is to develop a marketable product or service.\12\
In our discussions with the small-business participants, however, one
theme seemed fairly constant. While these companies were successfully
competing for SBIR awards, they were not successful in marketing and
selling the results of their research projects to the DOD for
transition into products, processes or services. These interview
results reinforce the data cited earlier that any success in
transitioning DOD SBIR research is concentrated in a very few
companies. Improving the quality of the small business participation in
the DOD SBIR program must, therefore, mean improving the likelihood
that the research these companies conduct will be marketable to the
DOD's acquisition community and will transition into equipment,
services and processes used by the armed forces. Making this happen
will require much greater participation by the DOD's program managers
and program executive officers in the SBIR program. If this can be made
to happen, the attractiveness of the DOD SBIR program to the small-
business community will be increased and greater participation and
competition would result.
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\12\ Even for the research house model, gaining additional revenue
through mechanisms such as licensing fees is a goal.
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Absent steps to increase the willingness and capability of the DOD
acquisition community to participate in the SBIR program, it is
unlikely that other commercialization and financing efforts will be
very successful. My recommendations for SBIR program enhancements,
thus, center around the two main issues I mentioned earlier. The DOD
leadership must shift the process orientation of its SBIR program to
one that is more outcome and utilization oriented. This requires
managing the program's flexibly to responsively address the DOD's
technology requirements, and it means resourcing the SBIR program in a
way that reduces the incentives for minimizing the management effort at
the expense of technology transition success. In addition, policies
that require and encourage DOD's acquisition program managers to
administer SBIR projects as a resource will improve the likelihood that
SBIR research results will transition into technologies, products,
services and processes used by the soldiers, sailors, airmen and
marines of America's armed forces.
Biography for Bruce J. Held
Bruce J. Held is currently the Director of the Force Development
and Technology Program at the RAND Arroyo Center.
Since coming to RAND, Mr. Held has focused his research efforts on
defense acquisition, industrial base and R&D policy. He has led
projects that examined the use of venture capital as a source of Army
R&D, how to best organize the Army's R&D capabilities and how to manage
the Army's transformational efforts. He has also participated in a
number of other studies, most notably several dealing with improving
the efficiency and effectiveness of the defense industrial base.
Prior to joining RAND, Mr. Held worked in private industry as
market planner and as a systems engineer. He is a former Army officer,
who, in addition to combat unit command and staff positions, spent
seven years of his Army career conducting and managing R&D efforts;
first as an armor technology manager at the Army Research Laboratory
and then in a program management office developing tank guns and
ammunition.
Mr. Held holds a BS from the United States Military Academy at West
Point, an MS in aerospace engineering from Stanford University and a JD
from the University of Maryland School of Law.
Chairman Wu. Thank you, Mr. Held. Mr. Baron.
STATEMENT OF MR. JON BARON, EXECUTIVE DIRECTOR, COALITION FOR
EVIDENCE-BASED POLICY, COUNCIL FOR EXCELLENCE IN GOVERNMENT
Mr. Baron. Thank you, Chairman Wu. Mr. Chairman, Ranking
Member Gingrey, and Congressman Mitchell, I appreciate the
opportunity to testify on SBIR. My testimony draws on my
involvement in the SBIR Program since 1990 in a number of
different capacities, first as counsel to the House Small
Business Committee where I was the lead staffer for the 1992
reauthorization of SBIR, second as the Program Manager for the
Defense Department's SBIR and STTR programs where I introduced
and led reforms that were found highly effective in an
independent evaluation by the National Academy of Sciences and
received the Vice-President's Hammer Award, and third, as a
member of the steering committee for the National Academy of
Sciences' study the SBIR programs in 2003.
The views I express here are my own, and I want to mention
that my organization is not funded by SBIR. And so we have no
financial interest in the ideas I'm advocating.
Let me first briefly address the contribution of SBIR to
the American economy and then suggest a few ways consistent
with your question on how the program might be improved.
The contribution. In several instances, the SBIR has
spawned breakthrough technologies that have transformed their
field and made a major contribution to the American economy.
Let me give you two quick examples. Under SBIR, Science
Research Laboratory of Somerville, Massachusetts, developed a
set of technologies that greatly improved the performance and
reliability of excimer lasers, improvements which for the first
time made these lasers a commercially viable tool for writing
integrated circuits onto computer chips. These lasers increased
by about a third the number of circuits you can fit on a chip.
It rapidly became the state-of-the-art technology for chip
production around the world and thereby increased the competing
power of virtually every commercial and defense system that has
been developed since the 1990s. Sales of the excimer lasers now
exceed one-fourth of a billion dollars annually. It is an
enormous impact.
As a second example from biomedical sciences, Martek
Corporation under SBIR developed new technologies for producing
omega-3 fatty acids called DHA and ARA which have been approved
by the FDA for use in infant formula so that it more closely
resembles breast milk. Mark's DHA and RHA are now added to
nearly 90 percent of infant formula in the Unites States, sold
in more than 65 countries overseas, and have been consumed by
an estimated 24 million infants. Importantly, these fatty acids
have been shown in randomized clinical trials to increase the
height, weight, cognitive development, and motor development of
pre-term infants. Martek's technology has thereby contributed
in a fundamental way not only to the economy but to the life
and health of millions of children around the world.
Moving on to the second part of my testimony, there is good
reason to believe that a few modifications to the SBIR Program
could substantially increase its success in producing these
kind of breakthrough technologies.
Since the program was established 24 years ago, it spawned
perhaps 10 to 20 of these breakthroughs which have transformed
their field. In addition to these, it has produced a number of
smaller but still important technological and commercial
successes.
Then in a third category, some SBIR projects have not
produced significant technology commercialization. GAO and DOD
data suggest that over half of SBIR Phase II's fall into this
third category of no significant commercialization. And in
part, that's the nature of research and development. One can
expect only a fraction of projects will succeed and fewer still
become breakthroughs. But there is evidence to suggest that the
program could achieve substantially higher success rates in
producing such breakthroughs. Specifically the GAO and DOD data
show that some SBIR companies, perhaps as many as half of those
that have participated long enough to build a track record,
consistently are unable to convert their SBIR awards into
viable new products sold either to the government, military, or
the private sector. These are companies that usually have
strong research capabilities, therefore they win SBIR awards,
but they lack entrepreneurial capabilities and, in some cases,
the motivation to convert their research into successful new
products. Many of these companies find the commercialization
process unfamiliar, outside their skill set, and daunting. And
so modifications to the program that provide strong incentives
or assistance for SBIR awardees to strengthen their
entrepreneurial capabilities could potentially greatly increase
the program's success in spawning these kind of breakthroughs
that make an enormous contribution to the economy.
The federal agencies recognize this problem, many of them,
and have taken a lot of steps over the last 25 years to try to
address it. I'll mention a couple of those in a minute, but
what I want to mention is this, that none of these innovations
in how the program is managed have ever been evaluated in a
study rigorous enough to provide strong evidence of the
innovation has an effect on key SBIR outcomes such as
commercialization.
And so, despite the program's 24 years in existence, we
have many good hypotheses but no scientifically valid evidence
about what works in improving the program's performance. That
is the central idea I wish to convey in my testimony, that the
ideas we are discussing for SBIR improvement today are similar
to the ones that were discussed in 2000 during that
reauthorization and in the 1992 reauthorization that I
participated in. At the agency level, pilots and demonstrations
come and go, but without rigorous evaluation of them, little
has been learned about what worked.
And so, my recommendation, as a concrete way to address
this, is that Congress allocate a small percentage, perhaps one
percent of the smaller agencies, less at the larger agencies,
of their SBIR funds, to conduct rigorous evaluations of new
approaches to building their awardees' entrepreneurial
capabilities. Let me just give one quick example, and I will
wrap up--of how this might work at modest cost and burden.
In a true randomized control trial, considered the gold
standard of study designs for figuring out what works, an
agency could randomly assign half of its SBIR awardees to a
treatment group that is eligible for a larger Phase II award if
it obtains matching funds from a commercial investor (and that
is already done in a pilot basis under the National Science
Foundation's Phase II-B process) or assign its other awardees
to a control group that participates in the agency's usual SBIR
process without this matching fund incentive. And then the
evaluation would track commercialization outcomes to the two
groups over time to determine whether this Phase II-B incentive
made a difference in such outcomes. At agencies which collect
good commercialization outcome data like DOD, this kind of
rigorous study, producing scientifically valid evidence about
whether the darn thing worked, could be conducted at relatively
low cost, perhaps $250,000 per year over five years.
That is one approach, the matching funds idea, that I would
suggest merits evaluation in a rigorous evaluation. And one
other that may merit such evaluation is the idea of using a
company's commercialization track record, how well has it done
commercializing its previous SBIR awards, as a criterion for
evaluating its current SBIR proposals and deciding whether it
should get an additional award.
And with that, I conclude. Thank you.
[The prepared statement of Mr. Baron follows:]
Prepared Statement of Jon Baron
Chairman Wu, Ranking Member Gingrey, and Members of Science and
Technology Subcommittee on Technology and Innovation:
I appreciate the opportunity to testify on the reauthorization of
the SBIR program. My testimony draws on my involvement in the SBIR
program since 1990 in several different capacities--
First, as Counsel to the House Small Business
Committee, where I was the lead staffer for the 1992
reauthorization of SBIR and establishment of the STTR program;
Second, as the Program Manager for the Defense
Department's SBIR and STTR programs from 1995-2000, where I
introduced and led program reforms that were found highly
effective in an independent evaluation by the National Academy
of Sciences, and received the Vice President's Hammer Award for
reinventing government; and
Third, as a member of the Steering Committee for the
National Academy of Sciences' study the SBIR program since
2003.
However, the views expressed here are my own.
My testimony will briefly address the contribution of the SBIR
program to the American economy, and then suggest ways in which the
program might be strengthened, so as to increase that contribution.
In several instances, the SBIR program has spawned breakthrough
technologies that have transformed their field and made a major
contribution to the American economy.
Here are two illustrative examples. Under the Department of Defense
and Department of Energy SBIR programs, Science Research Laboratory of
Somerville, Massachusetts developed a set of technologies that greatly
improved the performance and reliability of ``excimer lasers''--
improvements which, for the first time, made these lasers a
commercially-viable tool for writing circuits onto computer chips. The
lasers increased, by about one-third, the number of circuits one can
fit onto a chip, rapidly became the state-of-the-art technology in chip
production worldwide, and have thereby increased the computing power of
virtually every commercial and military system developed since the late
1990s. Sales of excimer lasers now exceed $250 million annually.
As a second example, under the NIH SBIR program, Martek Biosciences
Corporation of Columbia, Maryland developed new technologies for
producing omega-3 fatty acids called DHA and ARA, which have been
approved by the Food and Drug Administration for use in infant formula,
so that it more closely resembles breast milk. Martek's DHA and RHA are
now added to nearly 90 percent of infant formula used in the United
States, and are also sold overseas in more than 65 countries. They have
been consumed by over 24 million babies worldwide. Importantly, these
fatty acids have been shown in randomized clinical trials to increase
the height, weight, cognitive development, and motor development of
pre-term infants by age two. Martek's SBIR-developed technology has
thereby contributed, in a fundamental way, not only to the American
economy, but also to the life and health of millions of children
worldwide.
There is reason to believe that a few modifications to the SBIR program
could substantially increase its success in producing such breakthrough
technologies.
Since the SBIR program was launched in 1983, it has spawned perhaps
10-20 ``breakthrough'' technologies like those I just summarized--that
is, technologies which transformed their field and became major
commercial successes. In addition to these, the program has produced a
number of smaller but still important technological and commercial
successes. And then, in a third category, some SBIR projects have not
produced significant technology commercialization in either commercial
or government markets. GAO studies of the program, as well as the
results of DOD's own studies, suggest that over half of SBIR phase II
projects fall into this category of no significant commercialization.
In part, that is the nature of high-risk R&D--one can expect that
only a fraction of projects will succeed, and fewer still will be
breakthrough successes. However, there is evidence to suggest that the
program could achieve substantially higher success in producing such
breakthroughs. Specifically, the GAO studies and DOD data show that
some SBIR companies--perhaps as many as half of those that have
participated long enough to build a track record--consistently are
unable to convert their SBIR awards into viable new products sold to
commercial or government customers. These are companies which usually
have strong research capabilities--which is why they win SBIR awards--
but lack the entrepreneurial capabilities, and in some cases the
motivation, to convert their research into successful new products.
Many of these companies find the commercialization process to be
unfamiliar, outside their skill set, and daunting.
Thus, modifications to the SBIR program that provide strong
incentives and/or assistance to SBIR awardees to strengthen their
entrepreneurial capabilities could potentially correct this source of
systematic under-performance, and greatly increase the program's
success in spawning commercially-successful technologies that make a
major contribution to U.S. economic capabilities.
Many of the federal agencies recognize this problem--that SBIR
companies often lack key entrepreneurial capabilities--and have tried
innovative approaches to address it.
Illustrative examples of approaches that agencies have tried
include:
Giving a competitive priority, and/or additional
funding, to SBIR applicants or awardees that obtain matching
funds from a third-party commercial investor;
Using a company's track record in commercializing its
prior SBIR awards as a key criterion for evaluating its current
SBIR proposals;
Providing training to SBIR awardees in
commercializing their SBIR technologies;
Requiring SBIR applicants to include a streamlined
business plan in their proposal;
Including individuals with business experience on the
SBIR proposal review panels; and
Increasing the involvement of potential customers for
SBIR products--such as DOD acquisition program offices--in the
development of SBIR solicitation topics.
However, none of these innovations in program management has ever been
evaluated in a study rigorous enough to provide strong evidence of its
effect on key SBIR outcomes--outcomes such as commercialization and
contribution to scientific understanding.
And so, even though the SBIR program has been around for nearly a
quarter-century, we have many good hypotheses but no scientifically-
valid evidence about ``what works'' in improving program performance.
That is the central idea I wish to convey in my testimony. The ideas
for SBIR program improvement that we're discussing in the current
reauthorization process are similar to the ones that were discussed in
the 2000 reauthorization, and in the 1992 reauthorization before that.
At the agency level, pilots and demonstrations come and go, but without
rigorous evaluation, little has been learned about what worked.\1\
---------------------------------------------------------------------------
\1\ The one partial exception is the National Academy of Sciences'
1999 study of the DOD ``Fast Track,'' which is the most rigorous and
impartial evaluation to date of a new approach to implementing the SBIR
program. That study compared research and commercialization outcomes
for DOD Fast Track SBIR projects to outcomes for a statistically-
matched comparison group of non-Fast Track projects. The study found
that the Fast Track projects achieved much higher levels of
commercialization and made a larger contribution to the agency's
research program than projects in the comparison group. These results,
although highly valuable, should nevertheless be interpreted with
caution because SBIR companies self-selected themselves into the Fast
Track versus the comparison group, raising the possibility that any
difference in outcomes between the two groups is due to inherent
differences in their motivation or capabilities, rather than the Fast
Track approach itself. There is consistent evidence from many different
policy areas that such comparison-group studies, although extremely
useful in generating good hypotheses about what works, may sometimes
produce erroneous conclusions about an approach's effectiveness (for a
summary of this evidence, see Office of Management and Budget, What
Constitutes Strong Evidence of Program Effectiveness, http://
www.whitehouse.gov/omb/part/
2004-program-eval.pdf, 2004, pp. 4-8).
Thus, I'd recommend that Congress direct the agencies to allocate
one percent of their SBIR funds to conduct scientifically-rigorous
evaluations of new approaches to building awardees' entrepreneurial
---------------------------------------------------------------------------
abilities.
Wherever possible, these experiments should randomly assign SBIR
program applicants, awardees, and/or research topics to the new
approach or to a control group that participates in the agency's usual
SBIR process. Such randomized experiments are recognized as the gold
standard for evaluating the effectiveness of a strategy or approach
across many diverse fields because, uniquely, they enable one to
determine to a high degree of confidence whether the new approach
itself, as opposed to other factors, causes the observed outcomes.\2\
---------------------------------------------------------------------------
\2\ See, for example, U.S. Department of Education,
``Scientifically-Based Evaluation Methods: Notice of Final Priority,''
Federal Register, vol. 70, no. 15, January 25, 2005, pp. 3586-3589; the
Food and Drug Administration's standard for assessing the effectiveness
of pharmaceutical drugs and medical devices, at 21 C.F.R. 314.12;
``The Urgent Need to Improve Health Care Quality,'' Consensus statement
of the Institute of Medicine National Roundtable on Health Care
Quality, Journal of the American Medical Association, vol. 280, no. 11,
September 16, 1998, p. 1003; ``Criteria for Evaluating Treatment
Guidelines,'' American Psychological Association, American
Psychologist, vol. 57, no. 12, December 2002, pp. 1052-1059; Standards
of Evidence: Criteria for Efficacy, Effectiveness and Dissemination,
Society for Prevention Research, April 12, 2004, at http://
www.preventionresearch.org/sofetext.php; Office of Management and
Budget, What Constitutes Strong Evidence of Program Effectiveness, op.
cit., no. 1.
---------------------------------------------------------------------------
Some SBIR approaches would readily lend themselves to such a
randomized evaluation, at modest cost and administrative burden. For
example, an agency could randomly assign half of its SBIR awardees to a
``treatment'' group that is eligible for a larger phase II award if it
obtains matching funds from a commercial investor (as is done under the
National Science Foundation's ``Phase II-B'' process), and its other
awardees to a control group that participates in the agency's usual
SBIR process, without this Phase II-B. The evaluation would then track
commercialization outcomes for the two groups over time, to determine
whether the Phase II-B incentive made a difference in such outcomes. At
agencies such as DOD that already track commercialization outcome data
for most of their SBIR awardees, this rigorous study could be conducted
at a low cost by using such data--perhaps $250,000 per year over five
years as a rough estimate.
Based on existing evidence, I'd suggest two approaches to improving the
SBIR program that may merit particular consideration for these rigorous
evaluations.
The first of these is the approach of providing a larger phase II
award, and/or a competitive priority in the phase II proposal
evaluation process, to SBIR companies that obtain at least a partial
match of funds from a third-party investor. The National Science
Foundation's ``Phase II-B'' award, and DOD's ``Fast Track'' and ``Phase
II Enhancement'' policies, are specific versions of this approach. The
rationale for this approach is that an investor's hard commitment of
matching funds is a strong endorsement of the SBIR company's
entrepreneurial capabilities and the market size (commercial or
military) for its technology. The National Academy of Sciences' study
of DOD's Fast Track provides initial evidence that this approach yields
much higher commercialization and research outcomes--evidence which,
I'd suggest, merits confirmation in a randomized evaluation.
The second approach I'd recommend testing in a rigorous evaluation
is that of using a company's track record in commercializing its prior
SBIR awards as a key criterion for evaluating its current SBIR
proposals. As noted earlier, some agencies such as DOD collect
excellent data on companies' commercialization track records. These
agencies could readily use this data in their proposal evaluation
process to focus funds on companies that either have a strong SBIR
commercialization track record or are new to the SBIR program, and away
from companies that have repeatedly won SBIR awards but not
commercialized. A rigorous evaluation could determine whether this
promising idea does in fact improve the SBIR program's overall research
and commercialization outcomes.
Conclusion: Over time, these rigorous studies could produce
scientifically-valid, actionable evidence about ``what works'' to
increase SBIR's success in spawning breakthrough technologies--evidence
which, I'd suggest, is the critical missing piece that the agencies and
Congress need to turn SBIR into a more powerful engine for American
innovation and economic growth.
Biography for Jon Baron
Jon Baron founded the nonprofit, nonpartisan Coalition for
Evidence-Based Policy in fall 2001, and currently serves as its
Executive Director. The Coalition is sponsored by the Council for
Excellence in Government. Since its founding, the Coalition has built a
strong track record of success in working with top Executive Branch and
Congressional policy-makers to advance evidence-based reforms in major
federal programs. A recent independent evaluation of the Coalition's
work, conducted for the William T. Grant Foundation, found that the
Coalition has been ``instrumental in transforming a theoretical
advocacy of evidence-based policy among certain [federal] agencies into
an operational reality.''
Based on this work, Mr. Baron was nominated by the President, and
confirmed by the Senate in 2004, to serve on the National Board for
Education Sciences, which helps set the research priorities and agenda
for the U.S. Education Department's Institute of Education Sciences.
Prior to establishing the Coalition, Mr. Baron served as the
Executive Director of the Presidential Commission on Offsets in
International Trade (2000-2001).
Experience with the Small Business Innovation Research (SBIR) and Small
Business Technology Transfer (STTR) Programs (1989-2007):
Since 2003, Mr. Baron has served as a member of the
Steering Committee for the National Academy of Sciences' study
the SBIR program.
From 1995-2000, Mr. Baron served as the Program
Manager for the Defense Department's SBIR and STTR programs,
where he spearheaded program reforms that:
-- Were found highly effective in an independent
evaluation by the National Academy of Sciences;
-- Were selected by Harvard University's Innovations
Award Program as one of the top government innovations
in the United States (2000); and
-- Received the Vice President's Hammer Award for
reinventing government (1999).
From 1989-1994, Mr. Baron served as Counsel to the
House Small Business Committee, where he was the lead staffer
for the 1992 reauthorization of the SBIR program and
establishment of the STTR program.
Chairman Wu. Thank you very much, Mr. Baron. Mr. Schmidt.
STATEMENT OF MR. ROBERT N. SCHMIDT, FOUNDER AND PRESIDENT,
CLEVELAND MEDICAL DEVICES, INC., AND ORBITAL RESEARCH, INC.
Mr. Schmidt. Chairman Wu, Representative Gingrey,
Congressmen Mitchell and Smith, thank you very much for
inviting me here today.
I am Bob Schmidt, Founder and Chairman of Cleveland Medical
Devices and Orbital Research. I am here on behalf of the Small
Business Technology Council and the National Small Business
Association. Cleveland Medical Devices makes brain monitoring
devices that we sell around the world. Orbital Research focuses
on making tiny MEMS devices and creating third generation
flight controls which we are developing for the military. My
two companies have 70 full-time employees, and we train about a
dozen college interns each semester. Harvard and Inc. Magazine
have both recognized our rapid growth.
I have four major points today. First, the United States
will have to push very hard to keep up with global
technological competition. In many respects, we are already
behind. The United States accounts for just 16 percent of the
world's high-tech imports, half of what it was in 1980. What is
worse, we went from a $30 billion trade surplus in technology
exports ten years ago to a $45 billion deficit in 2005.
Second, wealth today correlates with the ownership of
knowledge. A Federal Reserve Bank study showed the most
important factor for economic growth in the country is patents.
That is right, patents, bigger than education which was in
second place, bigger by far than industry structure, public
finance, taxation, business failure rates and a host of other
variables. Where are American patents coming from today? The
SBIR Program generates 55 percent more patents than all of our
universities combined. That is on one-twelfth as many federal
R&D dollars. 55 percent more patents for one-twelfth of the
cost.
Third, SBIR and STTR Programs are good for universities,
and we are important partners with them. SBIR researchers often
have ties to universities, and STTR research always do.
Together they help universities strengthen the
commercialization of innovations and focus the research leading
to new income streams for the schools and valuable technology
transfer for the Nation. Most important, SBIR companies provide
job opportunities that attract students into science and
technology.
Fourth, today more scientists and engineers work for small
companies than for large companies and for universities and
federal labs combined. Small companies employ 32 percent of all
the Nation's scientists and engineers, yet we receive only 4.3
percent of the federal R&D dollars, and SBIR and STTR account
for most of that. Small businesses produce 20 times more
patents per R&D dollars than universities and five times more
than large businesses. Small businesses are America's golden
goose. The very group that is most productive for wealth
creation and job creation receives only about one-eighth of its
fair share.
Federal R&D expenditures are far too concentrated. For
example, at DOD one company receives seven times more R&D
dollars than all SBIR companies combined. The top three
companies at DOD have received more R&D dollars in one year
than all SBIR companies have received government-wide in the
entire 25-year history of the program.
What should Congress do now? We believe it is time to
unleash American innovation and gradually double the SBIR and
STTR programs and make them permanent. A number of current
proposals would require SBIR to hire more consultants, give
money to large, multi-national companies, allow venture--large
venture capital companies rather than only small venture
capital companies control in SBIR companies and pay more
federal agency administrative expenses.
What all of these proposals have in common is reducing the
investment that actually goes to the small companies and
blurring SBIR's focus on developing innovations. Without
additional funds to support those proposals, we will have fewer
jobs and patents, not more in the future. The SBIR Program has
shown that it will help America catch up and stay ahead
globally. If you agree that growing new companies and jobs for
scientists and engineers and creating patents and new
technologies are crucial, then SBIR needs to be larger, not
smaller. Even the smallest cuts in dollars actually going to
the innovative small companies, however well-intentioned, will
cost us internationally. Let us build on our SBIR success.
Thank you.
[The prepared statement of Mr. Schmidt follows:]
Prepared Statement of Robert N. Schmidt
Chairman Wu, Representative Gingrey, Members of the Subcommittee,
good afternoon. Thank you for inviting me to appear here today. I am
Bob Schmidt, founder and President of Cleveland Medical Devices, Inc.
and of Orbital Research, Inc. CleveMed makes brain monitoring devices
that we sell all over the world. Orbital Research makes
microelectomechanical (MEMS) systems and is developing third-generation
flight control technologies for the U.S. military. My two companies
employ about 70 people, and we train about a dozen students each
semester. We have researched, developed, and commercialized new
technologies through the Small Business Innovation Research (SBIR)
Program.
Harvard University and Inc. Magazine, among others, have recognized
the companies' rapid growth. And we have received two Tibbetts Awards,
which are given annually to outstanding companies in the SBIR Program.
I am also here today on behalf of the Small Business Technology
Council, the Nation's largest organization of small, technology-based
companies in diverse fields. Over 250 SBTC companies have won SBIR
contract awards, from all eleven issuing agencies, making SBTC also the
largest concentration of SBIR award winners from across the government.
SBTC serves as the Technology Council of the National Small
Business Association, and I am appearing here today on NSBA's behalf as
well. NSBA is a nonprofit small business organization that serves over
150,000 companies. NSBA is the Nation's oldest small business advocacy
group and was the founder of the ``small business movement'' in the
United States. It celebrates its 70th anniversary in two weeks.
Two months ago, NSBA's biennial ``Small Business Congress''
selected the reauthorization of the SBIR Program as one of the top four
small business legislative priorities for the 110th Congress--right
behind taxes and health care.
Today, as the Subcommittee considers reauthorizing the SBIR
Program, we would like to offer our views and address the questions
that the Subcommittee posed of us.
I. THE U.S. AS A GLOBAL TECHNOLOGY COMPETITOR
This subcommittee, as well as the Full Science and Technology
Committee, have had longstanding concerns about our nation's standing
as a global leader in technology. While the U.S. currently remains the
acknowledged front-runner in technological innovation, there are a
number of indications that our global leadership is in jeopardy.
Consider the status of U.S. technology products in international
trade.\1\
---------------------------------------------------------------------------
\1\ This table is taken from Measuring the Moment: Innovation,
National Security and Economic Competitiveness, a report of the Task
Force on the Future of American Innovation, November 2006, p. 14. The
Task Force members included: Agilent Technologies, Alliance for Science
& Technology Research in America, American Chemical Society, American
Chemical Society, American Electronics Association, American Institute
of Physics, American Mathematical Society, American Physical Society,
American Society for Engineering Education, Association for Computing
Machinery, Association of American Universities, Battelle, Business
Roundtable, Computing Research Association, Computing Technology
Industry Association, Council on Competitiveness, Electronic Industries
Alliance, Google, Inc., Intel Corp., Luna Innovations, Inc., Microsoft
Corp., National Association of Manufacturers, National Association of
State Universities and Land-Grant Colleges, Northrop Grumman Corp., The
Science Coalition, Semiconductor Industry Association, Southeastern
Universities Research Association, Technology CEO Council,
Telecommunications Industry Association, Texas Instruments
Incorporated. http://futureofinnovation.org/PDF/BII-FINAL-HighRes-11-
14-06-nocover.pdf
While the overall pie has gotten bigger, the U.S. share has been
cut in half.
A parallel development has been the shift of the United States from
a technology-exporting nation to an importing one.
Ten years ago, the U.S. had about a $30 billion trade surplus in
high technology exports. By 2005, as the chart below shows, that had
fallen precipitously to a $45 billion trade deficit.\2\
---------------------------------------------------------------------------
\2\ Ibid., p. 13.
These trends are in part due to the success of some of our global
competitors in copying U.S. innovation-promotion programs like SBIR,
the Advanced Technology Program (ATP) and the Manufacturing Extension
Program (MEP). SBIR variants are now in use in at least twenty
countries. SBA reports that delegations from other countries appear
regularly to inquire about how SBIR is organized and administered.
Overall, many countries are more active than our own in targeting
and promoting innovation as a national economic strategy. So in
addition to improving and expanding the SBIR program, Congress should
consider strengthening ATP and MEP. Science and engineering studies at
our high schools and universities should be enhanced, as well.
The declining shares of technology exports--and rising technology
imports--by the U.S. also represent a threat to economic growth at the
regional and local level, where wealth creation is increasingly linked
to the ownership of knowledge.
For a striking illustration of this relationship, we can turn to a
recent economic study by Paul Bauer, Mark Schweitzer and Scott
Shane.\3\ The authors measured eight determinants of personal income
growth per capita, in the 48 contiguous states of U.S., from 1939 to
2004. (Each determinant had been highlighted in previous studies.)
Among these were: the size of private financial markets, tax burdens,
public infrastructure, business failure rates, industry structure,
climate, bank deposits, and knowledge stocks.
---------------------------------------------------------------------------
\3\ See Federal Reserve Bank of Cleveland, ``Altered States: A
Perspective on 75 Years of State Income Growth,'' Annual Report 2005.
For more detail, see Paul Bauer, Mark Schweitzer, Scott Shane, State
Growth Empirics: The Long-Term Determinants of State Income Growth,
Working Paper 06-06, Federal Reserve Bank of Cleveland, May 2006,
www.clevelandfed.org/research/Workpaper/2006/wp0606.pdf
---------------------------------------------------------------------------
By far the most important growth determinant for the 1939-2004
period proved to be knowledge stocks. For this, the authors used three
indices: high school and college attainment rates, and patents per
capita. Upon closer examination, the overwhelmingly dominant indicator
of income growth proved to be patents per capita.
The chart\4\ below shows the power of this indicator in each of the
48 states studied:
---------------------------------------------------------------------------
\4\ Ibid., p. 46
Broadly speaking, the above chart can be read from left to right.
States with lagging growth are on the left; those with higher growth,
on the right. The remarkable aspect of the patent indicator is that it
correlates strongly with both the poorer states and the wealthier
ones--and does so more than any other indicator. A lack of patents per
capita is a leading indicator of relative poverty; a profusion is
---------------------------------------------------------------------------
strongly associated with relative affluence.
Patents are more closely associated with economic growth than
education, industry structure, or any of the other variables tested.
The importance of patents is also well understood globally.\5\
---------------------------------------------------------------------------
\5\ Measuring the Moment, op. cit., p. 15.
II. CONSIDERATIONS FOR POLICY-MAKERS
All of this leads to an obvious question: what can policy-makers do
to encourage a climate conducive to patenting?
The surprising answer is that Congress has already taken two of the
most important steps possible in promoting the growth of patents:
First, by means of the Bayh-Dole Act,\6\ Congress assured innovators
that they could maintain control of the intellectual property that they
developed while working in conjunction with the Federal Government.
---------------------------------------------------------------------------
\6\ 35 USC 200-212
---------------------------------------------------------------------------
Second, and perhaps most important, Congress enacted the Small
Business Innovation Research Program in 1982, and has since
reauthorized it five times.
SBIR--and the subsequent Small Business Technology Transfer (STTR)
Program--put the creativity of technology-based small businesses to
work in supplying the Federal Government's technology innovation needs.
This was the first step in ``Unleashing American Innovation.''
Competitive, transparent, and focused, SBIR established a three-
step process for stimulating innovation that was aligned with the
natural evolution of an innovation through research and development to
commercialization.
SBIR Program explicitly recognizes the different research styles
and capabilities of large and small businesses.\7\ Phases I and II of
SBIR are reserved for small business. In the commercialization phase of
SBIR, Phase III, where large company financial support, manufacturing
expertise and marketing muscle is vital, such companies are welcomed
into the Program. Indeed, they are indispensable to its success.
---------------------------------------------------------------------------
\7\ See William J. Baumol ``Entrepreneurship, Innovation and
Growth: the David-Goliath Symbiosis,'' Journal of Entrepreneurial
Finance and Business Ventures, Vol. 7, Issue 2, Fall 2002, pp. 1-10.
---------------------------------------------------------------------------
No innovation stimulation program in our nation's history has
received such high marks from independent, third-party assessments.\8\
---------------------------------------------------------------------------
\8\ See for example the various GAO assessments: Federal Research:
Assessment of Small Business Innovation Research Programs, GAO Report
RCED89-39, January 23, 1989; Federal Research: Small Business
Innovation Research Program Shows Success But Could Be Strengthened,
GAO Report T-RCED 92-3, October 3, 1991; Federal Research: Interim
Report on the Small Business Innovation Research Program, GAO Report
95-59, March 8, 1995; Federal Research: Observations on the Small
Business Innovation Research Program, GAO Report RCED 98-32, April 17,
1998; Federal Research: Observations on the Small Business Innovation
Research Program, GAO Report GAO-05-861-T, June 28,2005. See also:
Small Business Innovation Research Program: Challenges and
Opportunities, Board on Science, Technology and Economic Policy,
National Academies of Science and Engineering, 1999, Conflict and
Cooperation in the National Competition for High Technology Industry,
National Academy of Sciences, 1996; SBIR: Assessment of the Department
of Defense Fast Track Initiative, STEP Board, National Academies of
Science and Engineering, 2000. Another National Academy of Sciences
study of the SBIR Program is ongoing, with a final report expected
later in 2007.
---------------------------------------------------------------------------
And none can point to such a stellar list of ``graduates,''
including: Qualcomm, Symantec, Amgen, Biogen, Genzyme, Chiron, Titan,
Nanosys, American Biophysics, Luna Innovations, JDS Uniphase, iRobot,
and Armorworks, to name but a few.
SBIR has delivered not only innovations and new companies--but also
patents.
Throughout the 1980's and early 1990's the volume of patents
produced by SBIR rose steadily. A tipping point came in 1997. For the
first time, the number of SBIR-related patents exceeded the number of
university-related patents. Since then, SBIR's lead has widened.
Today, the SBIR program is delivering about 50 percent more patents
than all U.S. universities combined. In 2006, for example, there were
4,588 patents issued to SBIR-related companies. Just over 2,900 patents
were issued to Universities.\9\
---------------------------------------------------------------------------
\9\ Source: SBIR patent database, Innovation Development Institute,
www.inknowvation.com
Not only are SBIR's patents plentiful. They are also produced very
---------------------------------------------------------------------------
efficiently and are exceptionally valuable.
SBIR's vast output of patents--which now exceeds an
average of seven patents a day, and has surpassed 60,000
patents over the life of the program, with about 8,000 patents
pending--is being generated on one-twelfth the federal R&D
funding that U.S. universities receive.\10\
---------------------------------------------------------------------------
\10\ Science and Engineering Indicators 2006, National Science
Foundation.
Overall, smaller companies produce about 13 times
more patents per employee than large patenting firms.\11\
---------------------------------------------------------------------------
\11\ Small Serial Innovators: The Small Firm Contribution To
Technical Change, CHI Research, Inc, under contract to the U.S. Small
Business Administration, March 2003, www.sba.gov/advo/research/
rs225tot.pdf
These small company patents are twice as likely as
large firm patents to be among the one percent most cited in
scientific and technical literature and in subsequent patent
applications.\12\
---------------------------------------------------------------------------
\12\ Ibid.
And small firm innovation is twice as closely linked
to current scientific research as large company research, on
average, and is thus substantially more ``high tech'' or
``leading edge.'' \13\
---------------------------------------------------------------------------
\13\ Ibid.
For scientists and engineers, the opportunity to own this valuable
intellectual property has been one of the principal attractions of
working in a small company setting. Indeed, so many scientists and
engineers have migrated into smaller companies in recent years that
these companies now have the Nation's largest concentration of science
and engineering talent.\14\
---------------------------------------------------------------------------
\14\ Science and Engineering Indicators 2006, op. cit.
Put differently, over half the scientists and engineers in the
private sector now work for smaller companies.
Together, these statistics tell an important story. It's this:
Patents, and the technologies they represent, are
strongly linked to both local economic growth and global
competitiveness.
Awarding competitive federal R&D contracts to small,
technology-based businesses, in a rigorous and disciplined
manner like that used by the SBIR Program, produces a very
large number of high-quality patents.
But there's one problem.
Only 4.3 percent of federal R&D dollars go to small companies--and
the SBIR and STTR Programs account for most of that.\15\
---------------------------------------------------------------------------
\15\ Ibid.
Overall, extramural federal R&D spending is highly concentrated. In
FY 2005, at the National Institutes of Health, one university received
1299 awards, valued at more than $600 million.\16\ This exceeds all
SBIR awards at NIH in FY 2005.
---------------------------------------------------------------------------
\16\ See: http://grants2.nih.gov/grants/award/trends/
Rnk-05-All.xls
---------------------------------------------------------------------------
The same situation prevailed at DOD, where one company's RDT&E
awards greatly exceeded all SBIR awards.
In fact, RDT&E awards to the top three companies at DOD, in FY 2005
alone, exceeded every dollar that has been spent on the SBIR Program--
government-wide--in the entire 25 year history of the Program.\17\
---------------------------------------------------------------------------
\17\ See: http://siadapp.dior.whs.mil/procurement/
historical-reports/statistics/p02/fy2005/
P02-05.pdf
---------------------------------------------------------------------------
III. SBIR AND THE UNIVERSITIES
SBIR and STTR make an important contribution in another way, too.
The Programs offer an especially important venue for public-private,
and nonprofit-private, partnerships with Universities. SBIR researchers
often have ties to universities, and STTR researchers always do. In my
own two companies, I have used researchers from Case Western Reserve,
Cleveland State, Johns Hopkins, Michigan Tech, Notre Dame, Ohio State,
University of Alabama-Huntsville, University of California Los Angeles,
University of Michigan, University of Southern Florida, University of
Toledo, and Washington University in St. Louis. We have also partnered
on projects with a number of universities, such as Colorado State, the
University of Utah and the University of Idaho. And we provide
internships for about a dozen university students every year.
Together, SBIR/STTR companies and the Universities can:
Identify University R&D with potential downstream
commercial applications, strengthening this awareness and
focus,
Develop new revenue streams for the Universities
through R&D sales and licensing,
Supplement the income of University-based researchers
that work on SBIR and STTR projects, thus aiding the
Universities in attracting and retaining talented faculty,
Expose students who work on SBIR/STTR projects, or
intern at SBIR/STTR companies, to the world of commercial R&D,
and
Jointly transfer valuable technology to the Nation as
a whole.
But there is an even more important reason why Universities and
SBIR/STTR companies are natural partners. Just as SBIR/STTR companies
need the flow of scientific and engineering graduates from the schools,
so also Universities need the availability of attractive yet realistic
private sector job opportunities to attract students in the first
place. For many prospective science and engineering students, the
challenges, relative freedom, and upside income potential of working in
a leading-edge small company will be exactly what they are seeking.
With numerous studies suggesting that the Nation urgently needs to
graduate more scientists and engineers, Congress should enhance this
important symbiosis between Universities and SBIR/STTR companies.\18\
---------------------------------------------------------------------------
\18\ The two charts which follow are taken from Measuring the
Moment, op. cit., pages 24 and 26.
The trend shown below is especially disturbing. In the past four
years, the number of degreed scientist and engineers in the U.S.
increased by less than 20,000 graduates per year. India, by contrast,
is graduating 78,000 more scientist and engineers than four years ago--
almost doubling their output.
IV. COMMERCIALIZATION OF SBIR TECHNOLOGIES
The SBIR Program is divided into three Phases that correspond to
the research, development, and commercialization of an innovation.
Since the Program's inception, Phase I (initial research) and Phase II
(development of prototypes) in general have been handled well by the
participating federal agencies.\19\,\20\
---------------------------------------------------------------------------
\19\ Vivek Wadhwa, Gary Gereffi, Ben Rissing, Ryan Ong. Where the
Engineers Are, Part 2, Duke University School of Engineering
Management, 2006
\20\ See the studies cited in endnote 8, above.
---------------------------------------------------------------------------
Where SBIR has needed improvement is in the commercialization phase
(Phase III). Since it requires agencies to either find outside funding
to commercialize an innovation, or to use non-SBIR agency funds to
acquire the innovation for the agency itself, Phase III has been more
challenging for agencies than simply using SBIR Phase I and Phase II to
obtain desired R&D work.
Congress focused considerable attention on SBIR commercialization
in the 2000 reauthorization. Since that time the rate of
commercialization has steadily increased. As part of the SBIR
solicitation process, companies must report their rate of success in
commercialization, using published agency criteria. Today over 40
percent of all SBIR technologies reach the marketplace. This is truly a
remarkable result.
And thanks to commercialization successes in some units within the
Department of Defense,\21\ Congress was able to advance Phase III
broadly within DOD under legislation that was approved in 2006.
---------------------------------------------------------------------------
\21\ SBTC White paper, ``Mining the Small Business Resource: Issues
and Recommendations'' vol. 1, No. 4. www.nsba.biz/docs/
sbir-white-paper-iv-final-
11-jan-07.pdf
---------------------------------------------------------------------------
Called the Commercialization Pilot Program (CPP), the new law\22\
is helping bridge a gap between promising defense R&D and the
mainstream DOD acquisition system that has long been known colloquially
as ``the Valley of Death.''
---------------------------------------------------------------------------
\22\ National Defense Authorization Act of FY 2006, P.L. 109-163,
Sec. 252.
---------------------------------------------------------------------------
The new CPP Program suggests ways that commercialization might be
improved across the government.
While the CPP has only been in place at DOD only since 2006, it has
greatly increased the focus on SBIR insertion in the DOD procurement
process. Actions taken by key officials during the past six months
strongly suggest that a surge of SBIR technology insertion is ahead in
the next one to two years.
V. REPLIES TO QUESTIONS POSED BY THE SUBCOMMITTEE.
1. SBIR Program effectiveness and recommendations.
The SBIR/STTR Programs have succeeded in the goal of recruiting
smaller technology-based companies to help address federal R&D needs.
Over 16,000 companies have participated in the SBIR program, and over
6,000 are currently active in it.\23\ All available evidence indicates
that the SBIR/STTR Programs are working as well as, if not better than,
other federal R&D programs. As noted above, although the SBIR/STTR
programs receive about one-twelfth as much federal R&D funding as that
allocated to universities,\24\ SBIR and STTR companies generate about
50 percent more patents annually than all U.S. universities
combined.\25\
---------------------------------------------------------------------------
\23\ Source: SBIR patent databases, Innovation Development
Institute, www.inknowvation.com, and U.S. Small Business Administration
Office of Technology.
\24\ Source: National Science Foundation, Science Indicators, 2006.
\25\ See: www.inknowvation.com/
PatentGraphsShow.html?graph=SBIRvsUnivPatents.gif
---------------------------------------------------------------------------
It would be hard to overstate the financial significance of SBIR /
STTR to small, technology-based businesses. The Programs are by far the
Nation's largest source of capital for early-stage R&D, particularly
for high-risk projects.
It is not at all clear what would replace these Programs if they
were to disappear.
Banks typically will not lend to early-stage
technology companies, especially over the time horizons that
the companies would need for repayment.
Smaller technology companies tend to be fueled by the
dreams of their initial owners and investors. These individuals
resist yielding equity--especially controlling equity--to
venture capitalists and other ``outsiders.'' Even if the
companies welcomed such equity participation, it would be hard
to find.
Venture capital tends to cluster in specific sectors
and specific geographical areas; relatively little of it is
available for early-stage technology firms like most SBIR/STTR
firms, particularly those outside of the Boston and San
Francisco Bay areas.
Agency flexibility. Agencies in the SBIR/STTR programs have diverse
missions, and have been given considerable flexibility by Congress in
administering their programs. SBTC agrees with this general
orientation. However, certain basic rules do need to be observed and
SBA does need to function effectively as an effective Program
coordinator and impartial adjudicator.
Definition of a small business. The most important rule for the
program is that participation is statutorily limited to companies with
fewer that 500 employees, including affiliates and subsidiaries. This
requirement is derived not only from Congress's long-standing mandate
that a small business must be one that is ``independently owned and
operated,'' \26\ but also from the need to avoid the ``capture'' by
larger enterprises of the resources that Congress intended for small
business.
---------------------------------------------------------------------------
\26\ This legal stipulation has been included in the Small Business
Act (15 USC 632) since the Act was passed in 1953. It is the foundation
of much subsequent small business law and a large body of federal
rules.
---------------------------------------------------------------------------
There are occasional efforts to breach SBIR's statutory maximum of
500 employees; doing so would undermine both the central purpose of the
program and the key ingredient of its success.
It is also appears totally unnecessary. If SBIR accounts for two
and one-half percent of extramural federal R&D, then the other ninety-
seven and one-half percent is available for entities that are not small
businesses.
Technologies developed by other agencies. An area where agency
flexibility should be continued and expanded is encouraging agencies to
fund Phase II awards, or promote the Phase III commercializations of
technology initially developed by other agencies in the SBIR/STTR
Programs. Overlapping agency missions in fields like defense and
homeland security, and science and life sciences, suggest that agencies
should be able to take advantage of technological breakthroughs in any
part of the SBIR/STTR Programs. This type of sharing is in the public
interest and has been occurring for several years. Congress should
encourage it.
SBA management. SBIR and STTR are critical national R&D programs
providing scarce dollars for early stage technologies of potentially
great importance. The interests of the taxpayers in assuring the
effective management and oversight of these programs and these dollars
must be respected. SBA needs to strengthen its Office of Technology to
provide this guidance and leadership to the participating agencies.\27\
---------------------------------------------------------------------------
\27\ For a more complete discussion of this point, see the Small
Business and Entrepreneurship Committee, U.S. Senate, Small Business
Reauthorization and improvements Act of 2006, Report Number 109-361,
p.46.
Award levels. SBIR Phase I and Phase II award level sizes have not been
adjusted since 1992. Inflation and other cost factors in the
intervening years have made an upward revision necessary. At the same
time, some agencies have simply ``taken the law in their own hands.'' A
GAO Report in 2005 found that more than half of NIH's SBIR awards in
recent years exceeded the Program Guidelines agreed upon by Congress,
SBA and OMB and published in the Federal Register.\28\ The 2006 Senate
Small Business and Entrepreneurship Committee report on SBIR
reauthorization cites a $6.5 million Phase II award by NIH.\29\ Such an
award displaces almost seven Phase II contracts that could have been
awarded if the Congressionally mandated cap of $750,000 had been
observed.
---------------------------------------------------------------------------
\28\ Small Business Innovation Research: Information on Awards Made
by NIH and DOD in Fiscal Years 2001 through 2004, GAO Report GAO-06-
565.
\29\ Small Business and Entrepreneurship Committee, U.S. Senate,
Small Business Reauthorization, op. cit., p.45.
---------------------------------------------------------------------------
Congress must be clear about this. Either SBIR/STTR Programs should
grow by several orders of magnitude, or agencies must stop using the
Programs as ``piggy banks'' to finance projects that should be funded
from other agency sources.
SBTC generally agrees with the award size revisions contained in S.
3778 from the last Congress, which was approved by the Senate Small
Business and Entrepreneurship Committee. The Committee bill raised
Phase I awards caps from $100,000 to $150,000 and Phase II award caps
from $750,000 to $1,250,000. However, SBTC would caution Congress that
such increases in the caps will result in a significant reduction in
the number of total SBIR awards (and therefore the number of companies
participating in the Program) if overall SBIR dollars remain constant.
Depending on how awards were distributed between Phase I's and
Phase II's within each agency, as many as 40 percent fewer companies
could end up in the SBIR Program. This could represent a devastating
loss of technological talent to the government. It is another
compelling reason for increasing the percentage of federal R&D
allocated to SBIR/STTR.
Of course, the SBIR/STTR dollar level might not remain constant. If
the higher levels of R&D funding recommended by the President's
Competitiveness Initiative were to be so allocated by Congress, the
dollar size of the SBIR/STTR Programs would grow in tandem. But this is
difficult to predict, and, in any event, future years could just as
easily witness a decline in federal R&D spending.
The Senate bill also anticipates an opportunity for agencies to
``override'' the caps by 50 percent. The Phase I ``override'' would be
$225,000; the Phase II, $1,875,000. This would obviously exacerbate the
foregoing problem. SBTC would like to see clear conditions imposed on
the agencies for any such ``overrides.'' But again, those conditions
could become more flexible if the allocation of funds going to the SBIR
and STTR Programs is increased in the manner that we have recommended.
Commercialization funding gaps. Perhaps no subject is more important
for this reauthorization than the effective transitioning of technology
from the working prototype stage to production and utilization by the
agencies or the private sector. Agency efforts like NIH's Phase IIB,
NSF's Phase II+, and DOD's Commercialization Pilot Program are pointing
the way. Successes like those experienced by the Navy show that such
transitioning can be accomplished in ways that benefit the government
and the taxpayers. SBTC urges Congress to incentivize agencies to match
the successes of SBIR Phases I and II in SBIR Phase III. One key to
this will be the expenditure of additional dollars on testing and
evaluation.
Program administrative costs. SBTC is aware that strengthening the SBIR
and STTR Programs in the ways we recommend will place additional
administrative responsibilities on the participating agencies. Although
SBTC has long opposed the transfer of dollars from contract awards to
administrative overhead, we would, as we told the Senate last year,
consider re-allocating no more than one percent of SBIR's total dollars
to new agency administrative costs. We recommend that this funding
increment be used strictly for strengthening commercialization of SBIR
technologies, and that agencies be required to report on how any
expenditure of these funds directly supports this objective.
Venture capital company participation in the SBIR Program.
Background. Since the SBIR Program is intended for small
businesses, Congress made it a part of the Small Business Act and set a
statutory cap of 500 employees for participating companies.
The Small Business Act defines a small business as one that is
``independently owned and operated.'' \30\
---------------------------------------------------------------------------
\30\ 15 USC 632(a) (1)
---------------------------------------------------------------------------
Charged with implementing this mandate,\31\ SBA promulgated the
``affiliation rule,'' \32\ which states that in determining whether a
business is small, all of the business's subsidiaries and affiliates
will be counted, including any company controlling, controlled by, or
under the mutual control of, the business claiming to be small.
(Likewise, under the commercial codes of all 50 states, a firm that
controls more than 50 percent of another company is treated as owning
the company.)
---------------------------------------------------------------------------
\31\ 15 USC 623(a)(2)
\32\ 15 CFR 121.103
---------------------------------------------------------------------------
This legal framework has not been challenged in over half a
century. Tampering with it would set legal precedents affecting a large
body of laws and regulations, ranging from tax laws to small business
lending to the regulations and procurement policies affecting small
businesses at dozens of federal agencies.
Under the SBIR rules, a venture capital company that is small by
SBA's standards may hold a controlling interest in an SBIR company, as
long as the combined entity is still small and is owned by individuals.
A venture capital company that is large by that standard may hold a
minority (less than 50 percent) interest in an SBIR company. The only
prohibition is on control of an SBIR company by a large VC.
Current controversy. We are now in the fifth year, and third
consecutive Congress, that elements of the biotechnology and venture
capital industries have petitioned Congress and the Small Business
Administration to override the SBA's legal framework for determining
what is a small business.
The focal point of this dispute is a small group of large-VC-
controlled firms that are seeking access to SBIR awards at the National
Institutes of Health and perhaps other agencies.
The fact that the firms involved, and their VC backers, have spent
this long unsuccessfully promoting these changes in Congress and at SBA
should suggest that their arguments are far from persuasive when
closely examined.
The fact that the firms and the VCs are back again in this Congress
is linked, in SBTC's view, to a number of misleading or incorrect
assertions about the issue.
We looked at these assertions very carefully in our Senate
testimony last year;\33\ here we will simply summarize some of them.
---------------------------------------------------------------------------
\33\ Accessible at:
---------------------------------------------------------------------------
www.nsba.biz/docs/
squillante-testimony--ssbec--july-
12--2006-final.pdf
1) Let us start with the most emotional assertion. It is sometimes
stated that the prohibition on SBIR access by large VC-controlled firms
is denying patients with life-threatening diseases the ``important,
life-saving'' medications they need. Various patient groups, among
others, have been told this.
The simplest and most logical response is that if NIH funds
proposals by these large venture-backed companies, then other
``important, life-saving'' proposals will not be funded.
Most proposals that NIH considers have life-saving implications.
Until the NIH budget is large enough to fund every proposal, the
competitive awards process will always yield winners and losers. For
their part, SBTC members that are active in the NIH SBIR Program also
fear that their ``important, life saving'' innovations will lose out--
to the large venture-backed companies.
They may well have more to fear.
Thanks to their deep-pocket backing, the companies that the VCs
fund will be able to submit multiple proposals per solicitation. They
won't necessarily be more life-saving, but they will be more polished.
They will also have features that do well under NIH's scoring system--
like impressive looking ``teams'' and extensive preliminary research.
It costs money to submit multiple proposals, to make them polished, to
keep impressive teams on hold until an award decision is reached, and
to conduct preliminary research. That is exactly where large VC-backed
companies will have the edge.
Proposals that won't have that edge will be those from companies
whose research interests don't fit the large VC business model, and who
therefore don't have that backing. Examples of research that generally
doesn't fit the model are treatments for orphan diseases, (which don't
generate a lot of cash flow), bioterrorism defenses (only one buyer,
the Federal Government), and vaccines (patients only take the drug
once, not daily). Yet a key reason for creating NIH was to address
public health challenges such as these--challenges that are often
outside the normal commercial nexus of medicine. SBIR should support
that mission, not attempt to distract the agency from it.
Whether or not large VCs are interested in such areas, small
companies are.
2) For some reason, the VCs and their allies continue to state that
``SBA changed the rules'' on them. As noted, the Small Business Act and
the affiliation rule are more than 50 years old. GAO looked at this
``changed the rules'' allegation in 2006 and correctly stated that SBA
had clarified long-standing rules.\34\ It may well be true that some
large VC backed firms were obtaining SBIR awards prior to the
clarification; it does not mean that SBA, having had that fact drawn to
its attention, should have allowed it to continue. Nor does it mean
that the large VCs now have some ``right'' to demand such treatment.
---------------------------------------------------------------------------
\34\ Small Business Innovation Research. . ., op. cit., p. 1.
3) Companies and associations seeking this change say that the SBIR
Program at NIH will be strengthened by having the big VC backed
companies in it.
The problem with this assertion is the disconnect between Phases I
& II as they are intended to work in the SBIR Program and what VCs
prefer to fund. In VC terminology, Phase I represents ``seed or
startup'' R&D and Phase II ``early stage'' R&D. Neither is much of a
focus of VCs.
Seed capital currently accounts for a minuscule $3 out of every 100
that large VCs invest, and early stage capital only 16 percent. A large
VC presence in the NIH SBIR Program seems likely to inexorably draw the
Program away from its mission to provide scarce R&D dollars for high-
risk, early stage R&D.
There is another problem as well. Congress intended for the SBIR
Program to harvest innovations from across the country, even in areas
not known as technology centers. That is why the Federal and State
Technology (FAST) Program and Rural Outreach (RO) Program were
developed by Congress as adjuncts to SBIR. They have been fairly
successful. In the ``best practice'' FAST and RO state programs, more
than one out of every three companies receiving the training goes on to
obtain an SBIR award.
By contrast, venture capital investors generally operate out of a
headquarters in a technology center and try to invest in companies that
they can personally visit on a regular basis. This is perfectly
reasonable, but it is a far different model than SBIR. The different
outcomes can be seen in the contrasting distribution of dollars, in the
chart below.
So apart from the damage that the intrusion of large companies
would do to the integrity of SBIR as a small business program focused
on very early-stage R&D, the rise of large VCs in the SBIR Program will
shift the distribution of SBIR's dollars more toward the relative
handful of cities and states that the VCs focus on.
A SBIR Program that is not truly a small business program, and not
truly national, would soon be curtailed by Congress, and deservedly so.
There is a vital and necessary place for large VCs in the SBIR
Program. It is in Phase III.
Companies entering the commercialization phase of SBIR urgently
need to partner with outside investors--and this is precisely the stage
of R&D development that VCs prefer in the first place. Thus neither
Congress nor SBA sets any restrictions on the size of companies that
can participate in Phase III of SBIR. If this does not meet the needs
of large VCs, SBTC would be willing to work them to craft another
program that does--an offer we have made repeatedly over the years.
Now would be a good opportunity to create such a program. It could
be tied in to the strengthening of ATP and MEP, two important
innovation programs for companies of all sizes that SBTC strongly
supports.
But SBIR needs to stay focused on the core issue that we have
outlined--that the Nation still is receiving only a fraction of the
innovation benefits it could--if the growing number and capabilities of
small technology companies were better utilized. Efforts to correct
this problem should not lose their focus or become diluted.
VI. SBTC'S RECOMMENDATIONS TO CONGRESS
In my opinion, SBIR appears to be the most successful program that
Congress has ever devised to stimulate innovations; now is the time to
expand the Program and make it permanent.
SBTC recommends that Congress:
1. Make the Program permanent. SBIR is the largest single source of
patents in the United States. It has stimulated the creation of
thousands of successful companies, provided the Nation with a host of
vital defense, homeland security, and life sciences technologies,
resulted in billions of dollars in economic activity, and created tens
of thousands of high-paying jobs. It should not have to justify its
existence every few years. Delays in Congressional approval of
reauthorization, totally unrelated to SBIR, caused the Program to
temporarily shut down in 2000. Uncertainty about its future, as each
reauthorization looms, puts thousands of jobs, and hundreds of
companies, in jeopardy. SBIR has proved its worth. Congress should make
it permanent, conduct normal cycles of Congressional oversight and
management hearings, and make occasional adjustments as needed to the
Program's legal framework.
2. Increase the allocation of R&D dollars going into the Program. As
the foregoing data have shown, SBIR has become a vital contributor to
the Nation's technological development and wealth creation. The Program
leverages federal R&D resources in uniquely efficient ways. Given the
global competitive challenges faced by the United States, SBIR should
be given the resources to access America's untapped innovation
resources. SBTC recommends that the SBIR share of federal R&D dollars
be gradually increased from today's two and one-half percent to five
percent, at the rate of .5 percent per year. At a five percent level,
smaller companies would still be receiving less than one-sixth of the
dollars that their numbers of scientists and engineers, and their
patent production, should entitle them to. Today they receive less than
one-seventh.
To further enhance cooperation between Universities and small,
technology-based companies, SBTC further recommends that the STTR share
of federal R&D dollars be increased from the current 0.3 percent to 0.6
percent on FY 2008 and 0.9 percent in FY 2009 and thereafter.
3. Strengthen commercialization of SBIR. SBTC suggests that Congress
take several new actions that will help ``Unleash American
Innovation.''
First, if the funding for SBIR and STTR is increased as suggested
above, allowable Phase I and Phase II SBIR and STTR funding should be
increased during 2008 and 2009 to $150,000 for Phase I and $1,250,000
in Phase II, and indexed to inflation, to allow more work to be
performed under the initial two phases of the program.
Second, starting in 2009, one third of the increased funding in the
SBIR and STTR programs over the 2007 funding levels should be set aside
for funding ``Phase 2c'' type initial manufacturing prototypes and
testing by the agency and other commercial clients or for clinical
trials deemed important to the agency's mission.
Third, a ``CPP'' type program should be formed in the NIH, NASA,
and DOE. Additional funding should be provided, and the Program opened
up to companies that have received VC funding from all sources.
4. Reinforce the intellectual property rights of SBIR companies. In a
recent decision involving the intellectual property rights of an SBIR
company, the court appeared to misinterpret longstanding Congressional
intent on the issue.\35\ SBTC would like to work with Congress in
rectifying this problem.
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\35\ United States Court of Appeals for the Federal Circuit.
Opinions, Decisions & Orders. . . 2006/11/22, 06-5048.pdf, CFC, Night
Vision Corp. v. U.S.
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We believe that these actions will allow more new companies to be
formed, SBIR and STTR companies to grow faster and larger, and
encourage venture capital flows to those SBIR companies that are ready
to enter the next stage of their growth.
The gap in funding the growing number of innovative small
companies, and the scientific and technological innovators who work for
them, has potentially important consequences for the Nation. As Harvard
economist Dale Jorgenson has noted about IT companies:
Since 1995, information technology industries have accounted
for 25 percent of overall economic growth, while making up only
three percent of GDP. As a group, these industries contribute
more to economy-wide productivity than all other industries
combined.\36\
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\36\ Dale Jorgenson, Moore's Law and the Emergence of the New
Economy, Semiconductor Industry Association, 2005.
Biography for Robert N. Schmidt
Mr. Robert N. Schmidt is the founder and Chairman of Cleveland
Medical Devices Inc. and of Orbital Research Inc., both of which were
started in 1990. He received his BS degree in Mechanical Engineering
(70) and his MS (71) from Rensselaer Polytechnic Institute in Troy, NY;
his MBA (75) from the Univ. of Utah, and his Juris Doctor (80) from
Cleveland State University. He is a licensed professional engineer
(Ohio, 76) and an attorney (Ohio, 81 and U.S. Patent and Trademark
Office, 82).
Both Orbital Research and Cleveland Medical Devices have
experienced extraordinary growth over the last decade; both being named
to the Inc. 500 list, and both being on NE Ohio's Weatherhead 100 list
at least seven times. Mr. Schmidt is the only person in America to have
two companies named on the Inc. Inner City 100 list, and both companies
have made the list at least three years in a row. Mr. Schmidt is the
only entrepreneur to have received this Inc. Inner City 100 Award from
Harvard seven times in the seven years of its existence. Both companies
have been bootstrapped with sales generated funding. He was on the Inc.
500 Advisory Board in 2002.
Both Mr. Schmidt and his companies have also been recognized for
their innovative technologies: Cleveland Medical Devices has received
the NORTECH/EDI Innovation Award four times, and Orbital Research has
received this award twice. As a principal investigator, Mr. Schmidt has
supervised programs for the U.S. Army, Navy, and Air Force, DARPA, the
National Institutes of Health, NASA, Dept. of Education, Dept. of
Transportation, and the National Science Foundation. The companies have
performed over $50 million of research for the U.S. Government.
Prior to starting his companies, Mr. Schmidt was a consultant to
the Center for Materials for Space Structures, a NASA Center at Case
Western Reserve University. He coordinated materials space flight
experiments to fly on the Space Shuttle and on the Wakeshield,
evaluating the effects of atomic oxygen and the low Earth environment
on lighter weight polymers and ``self-healing'' materials. From 1984 to
1990, Mr. Schmidt served as Director of Technology and Program
Development at Life Systems, Inc. He managed Functional Electrical
Stimulation (FES) programs, helping paraplegics to walk, and other
medical programs; an ``Advanced Collective Protection Chemical Defense
System,'' and several other Army chemical defense programs; and the
``Zero-Gravity Shower'' program and several other hygiene and
regenerable life support programs for the Space Station Freedom; as
well as working on water recycling and regenerative fuel cell programs.
From 1976 to 1983, Mr. Schmidt was Manager of Licensing and
Technology Development, an Engineering Manager, a Project Control
Manager, and a Project Engineer for Davy McKee Corporation. He was
responsible for technology transfer for the 4,000-person engineering
firm. As the project engineer for three petrochemical plants, he
directed engineering efforts and controlled programs worth up to $200
million for ARCO, Exxon, and Shell Oil. He was the chief engineer for
the design of the world's largest single train methanol plant, and
built a coal liquifaction plant for Exxon. From 1972 to 1976, he was
Chief of Engineering Plans for the U.S. Army Corps of Engineers in
Stuttgart, West Germany, managing engineering efforts at 48 U.S.
Military installations in southern Germany supervising over 800
projects.
Mr. Schmidt has received the Edison Biotechnology Center Award for
Outstanding Contribution to Biotechnology in Ohio in 1993, is a
Founding member of the FES Society, and a member of the AIAA, IEEE, and
SAE. He has published over 30 papers, and has 23 U.S. patents in the
areas of medical devices, flight control, radio design,
electrophysiology, pressure measurement, chemical defense, and Braille
displays.
In his newest ventures, Mr. Schmidt serves as the Chairman of
several other companies including iACTIV Corporation and ComSense
Technology Inc., both MEMS companies; and of RadioStorm Inc., Flocel
Inc., and CleveMed NeuroWave Inc. He is also the founder of the
Americas' Arts and Sciences Foundation and of NEOBio; and is an angel
investor in several non-related Cleveland area companies. He is on the
Federal Reserve Bank of Cleveland Business Advisory Council, and has
been the Keynote speaker for the Society of Manufacturing Engineers and
an invited Speaker to the American Institute for Medical and Biological
Engineering. He was named by The National Small Business Association
(NSBA) as the 2006 Small Business Advocate of the Year for his national
and state work promoting policies to help small business prosper (Money
Magazine, p.50 12/05, and p.136 5/06); and is one of only of handful of
individuals in America to have received the Inc. 500 Award as one of
the 500 fastest growing companies in the U.S. as CEO for more than one
company (CleveMed 2000 and Orbital Research 2001).
Chairman Wu. Thank you very much, Mr. Schmidt. Dr.
McGarrity.
STATEMENT OF DR. GERARD J. McGARRITY, EXECUTIVE VICE PRESIDENT
OF SCIENTIFIC AND CLINICAL AFFAIRS, VIRxSYS CORPORATION
Dr. McGarrity. Chairman Wu, Ranking Member Gingrey, and
Members of the Subcommittee, my name is Dr. Gary McGarrity,
Executive Vice President at VIRxSYS, a private biotechnology
company developing treatment for HIV and for vaccines. Our lead
product is a cutting-edge gene therapy technology against HIV
and has completed Phase I safety trials and is presently in
Phase II efficacy trials.
Previously I was CEO of Intronn, Inc., and I have 30 years
of experience in biotechnology companies and biomedical
research, including chairing the recompetent DNA Advisory
Committee at the NIH.
I am testifying today for BIO, the Biotechnology Industry
Association which represents more than 1,100 biotechnology
companies, academic institutions and other organizations in all
50 states. The vast majority of BIO members are small, early-
stage R&D companies just like mine. BIO has over 600 emerging
technology companies, most with fewer than 50 employees that do
not have a marketed product.
Biotechnology research follows a long, unpredictable road
from pre-clinical research to FDA approval, an average about
eight years and upwards of $800 million to $1.2 billion.
Without product revenues, companies must undertake fundraising
from angel investors and venture capital firms. Private equity
fundraising is absolutely critical to the development of new
therapies.
My company started in 1998 using technology out of Johns
Hopkins. We began our clinical trials five years later, and if
we get all of this correct, we will have a marketable product
in 2010 or 2011. In addition, we, like most companies, are
working on three to four other products that are at a very,
very early stage of development.
A biotechnology company requires extensive fundraising for
its lead product, and these funds are tied to very specific
milestones for their product, not for other programs that may
be at earlier stages. Researching other therapies typically
requires different funding sources which is particularly
challenging at the very earliest stages of development as you
have stated today, Chairman Wu.
Congress created the SBIR Program to utilize the
capabilities of innovative companies to fulfill federal R&D
needs, and they provided discretion to the SBA to determine
eligibility of small domestic companies. SBIR grants were never
intended to prop up small businesses through corporate welfare
but instead represent a competitive grant program stressing
innovation.
For 20 years, small domestic biotechnology companies
competed for SBIR grants based on scientific merit through a
peer review process. Obtaining these grants was a powerful
signal to the private sector that the company's research was
compelling.
The SBIR Program has played a pivotal role in advancing new
treatments. For example, of the 163 companies and their
affiliates that have been involved in the development of 252
FDA-approved biologics, 32 percent, one in three, have received
at least one SBIR STTR grant. That is an impressive statistic.
I mean, the system was working. Now, however, many biotech
companies are excluded from competing for SBIR's. In 2003, the
SBA ruled that a biotechnology firm was not eligible for the
SBIR program because of its capital structure based on a new
view of SBA regulations but not a change in underlying statute
or Congressional intent. SBA has stated that the so-called
ownership rule is meant to be a proxy for determining that a
company is domestic. However, this has had the unintentional
consequence of excluding many small domestic biotech companies
from the SBIR program.
My company, VIRxSYS, is actually eligible to compete for
SBIR grants. So I have led companies that have been eligible
and companies that have not been eligible.
When I was CEO of Intronn, we successfully competed for
Phase I and Phase II SBIR grants in cystic fibrosis. In the
summer of 2003, after being awarded the second Phase II SBIR
grant in cystic fibrosis that ultimately would have led to
clinical trials, our grant was rescinded because of the SBA
rule change. The company's previous SBIR grant resulted in
getting venture capital investment into the company which made
us no longer eligible for SBIR's. We had 20 employees at the
time. We terminated promising research in cystic fibrosis, and
we laid off employees. And this is not an isolated incident.
Excluding companies from the SBIR program because of their
capital structure could benefit still eligible companies like
VIRxSYS by reducing highly qualified applicants. But the SBIR
program would be less competitive, and science itself would
suffer.
Since the new rule was implemented, applications for SBIR
grants declined by almost 12 percent at the NIH in 2005 and by
14.6 percent in 2006. NIH director, Dr. Zerhouni, stated in a
letter to the SBA, ``NIH believes the current rule undermines
the statutory purposes of the SBIR program. It undermines NIH's
ability to award SBIR funds to those applicants whom we believe
are most likely to improve human health.'' And I would like to
submit this letter for the record.
I am perfectly willing to compete with small domestic
biotech companies regardless of their capital structure based
on the scientific and the technical merit of our research. That
is the American way. I respectfully request that the Committee
act to allow small domestic companies to compete for SBIR
grants regardless of capital structure. SBIR should be a
competitive program that fulfills federal R&D needs. Funding
highly qualified research should be the priority, not corporate
welfare.
Again, thank you for providing me the opportunity to
testify here this afternoon.
[The prepared statement of Dr. McGarrity follows:]
Prepared Statement of Gerard J. McGarrity
Chairman Wu, Ranking Member Gingrey, and Members of Science and
Technology Subcommittee on Technology and Innovation:
I appreciate the opportunity to testify before the Subcommittee
today regarding the Small Business Innovation Research (SBIR) grant
program. For more than twenty years the SBIR program has served as a
platform by which innovative, small companies can compete to
participate in federal research and development.
My name is Dr. Gary McGarrity, I am the Executive Vice President of
Scientific and Clinical Affairs at VIRxSYS. VIRxSYS is a private
biotech company whose mission is to develop gene therapies using its
proprietary lentiviral vector delivery system. We have completed Phase
I safety testing and are now in Phase II clinical trials testing the
first application of our gene therapy technology against HIV. I have 16
years experience with biotech companies and an additional 14 years of
in-depth scientific experience. Prior to joining VIRxSYS, I was the CEO
of Intronn, Inc., which developed products to fight cystic fibrosis.
I am testifying today on behalf of the Biotechnology Industry
Organization (BIO), an organization representing more than 1,100
biotechnology companies, academic institutions, state biotechnology
centers and related organizations in 50 U.S. states and 31 other
nations. BIO members are involved in the research and development of
health care, agricultural, industrial, and environmental biotechnology
products. The overwhelming majority of BIO member companies are small,
early stage research and development oriented companies pursuing
innovations that have the potential to improve human health, expand our
food supply, and provide new sources of energy.
Biotechnology Companies' Aggressive Capital Needs
The largest obstacle to delivering on the scientific promise of
biotechnology is accessing sufficient capital to fund research and
development. BIO has over 600 emerging companies in its membership that
have fewer than 350 employees and do not yet have a product on the
market. In the absence of product revenue, biotechnology companies are
almost entirely reliant on the capital markets or other sources of non-
dilutive financing to fund research and development. This is
particularly challenging at the earliest, highest-risk stages of
research and development.
Promising biotechnology research has a long, arduous road from
preclinical research, through Phase I, safety, Phase II, efficacy, and
Phase III broader population clinical trials, and ultimately to FDA
approval of a therapy. It is estimated that it takes 97.7 months, or
eight years to bring a biotechnology therapy to market and costs
between $800 million and $1.2 billion.\1\ For the majority of
biotechnology companies that are without any product revenue, the
significant capital requirements necessitate fund-raising through a
combination of angel investors and venture capital firms. The role and
importance of private equity fund-raising in the biotechnology industry
cannot be understated.
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\1\ Tufts Center for the Study of Drug Development. http://
csdd.tufts.edu/NewsEvents/NewsArticle.asp?newsid=69
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Typically, a biotechnology company will begin by fund-raising for
its lead product in development. The lead product is the one that is
furthest along in clinical development, in the case of VIRxSYS our lead
product is VRX496, which as I previously stated, is in Phase II
clinical trials. To get to this point we undertook five rounds of
private fund-raising.
Biotechnology companies are generally a collection of research
projects that range from early to very-early stage development. In
addition to the lead therapy biotechnology companies have, on average,
five other therapies or candidates in development, which are often at
the very earliest stage of pre-clinical research. These candidates may
be an outgrowth of research on the lead product or a result of
utilizing a particular technology to address a different disease with a
completely different set of intellectual property.
Despite the extensive fund-raising that a biotechnology company
undertakes for the lead product, these funds are not interchangeable,
that is they are often tied to very specific milestones to support the
lead the product's development. As such, in order to develop secondary
or tertiary candidates/therapies a company has to find secondary
sources of fund-raising capital. At the very earliest stages of
development this is particularly challenging, and it is often times in
this capacity that the SBIR grants were instrumental in advancing
research and development in biotechnology for over twenty years.
Critical Role of the SBIR Program
Congress created the SBIR grant program in order to utilize the
capabilities of small, innovative, domestic companies to fulfill
federal research and development needs. In the early 1980's there was
growing concern that the United States federal research and development
spending was not improving the health and well being of the citizenry
through the development and commercialization of new products and
therapies. Furthermore, it was recognized that some early stage,
promising scientific research failed to be funded through the markets
because it was viewed as too high risk. This failure of the markets is
often referred to as the ``valley of death.'' In biotechnology, the
``valley of death'' delays potential therapies for HIV, cancer, and
infectious diseases from reaching patients, who often lack other
comparable alternatives.
For these reasons, in 1983 Congress authorized the SBIR grant
program. These grants set aside 2.5 percent of certain departments' and
agencies' extramural research budgets for innovative research grants
with an aim towards commercialization. One of the great strengths of
the SBIR program is that Congress provided the affected departments and
agencies with flexibility in establishing the program. As a result, the
SBIR program both assists the Department of Defense in its procurement
needs and furthers the National Institutes of Health's (NIH's) mission
of advancing science and improving health.
In order to participate in the program, Congress provided
discretion to the Small Business Administration (SBA) to determine the
definition of a qualifying small business concern (SBC). However, the
Congress did make clear that the program should be open only to
domestic, small companies. In order to be awarded an SBIR grant, an
applicant's research is thoroughly examined through peer reviewed
research groups that are comprised of experts in the particular field.
It should be made clear that the SBIR program was never intended to
prop up small businesses through corporate welfare, but instead its
mission is to fund competitive and innovative research in small,
domestic companies with the goal of commercializing a product.
There are two SBIR grant phases. Phase I grants are for proof of
concept or technical merit. These grants are typically no greater than
$100,000 although the granting agency does have some flexibility to
fund awards that exceed this amount. Companies that successfully
complete a Phase I grant can apply for a Phase II grant. A Phase II
application is evaluated again on the science and technical merit and
feasibility as well as the commercialization potential, as evidenced by
private sector, non-SBIR funding commitments. Phase II awards are
typically no greater than $750,000, but again, agencies have some
flexibility to fund awards at a higher amount. This flexibility should
be maintained because it allows expert peer review groups to adequately
fund awards where merited by the science.
Unintended Consequences of the SBA's Domestic Company Proxy
For twenty years small, domestic biotechnology companies competed
for SBIR grants. In addition to providing non-equity diluting funding,
these grants were a powerful signal to the private sector that a
company's research was compelling and possessed scientific and
technical merit. In biotechnology, the SBIR program has played a role
in advancing the science and research of companies that have ultimately
brought a product to market. For example, there are 163 companies and
affiliates involved in the development of the 252 FDA approved
biologics, 32 percent of those companies and affiliates have received
at least one SBIR/STTR award.
However, today most biotechnology companies are excluded from
participating in the SBIR program as a result of a SBA Office of
Hearings and Appeals (OHA) ruling. On April 7, 2003, the SBA
arbitrarily ruled that a biotechnology firm, Cognetix, did not meet the
SBIR size standard because it had venture capital investment in excess
of 50 percent. This ruling is based upon SBA regulations, not
underlying statue, by which a small business concern (SBC) for the SBIR
program is defined as having fewer than 500 employees, including
affiliates, and is at least 51 percent owned by U.S. citizens.
SBA has stated that the ownership rule is meant to be a proxy for
determining that a company is domestic.\2\ However, the use of capital
structure as proxy for determining domesticity and the subsequent OHA
ruling has the unintentional consequence of excluding a sizable portion
of the biotechnology industry that would be otherwise eligible to
participate in the program. These are companies that are solely based
in the United States and are majority funded through a combination of
U.S. based venture capital companies and citizens.
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\2\ 54 Fed. Reg. 52634 (Dec. 21, 1989) Interim Final Rule on
defining a business concern for the purposes of the SBIR program.
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VIRxSYS is a unique biotechnology company because the five rounds
of fund-raising that the company has undergone have been financed
through more than 600 private individuals. VIRxSYS is eligible for
applying for an SBIR grant. However, I have led both an SBIR-eligible
and a non-eligible biotechnology company.
Intronn, Inc., where I was formerly CEO, successfully applied for a
Phase I SBIR grant in the area of cystic fibrosis. After meeting the
objectives of the Phase I grant, Intronn, Inc. applied for and was
granted a Phase II grant. This funding continued to advance the
research in cystic fibrosis and as a result Intronn, Inc.'s work was
published on the cover of the Nature Biotechnology journal. In the
summer of 2003, Intronn, Inc. successfully applied for a second Phase
II SBIR grant to determine if the candidate was appropriate for Phase I
clinical trials.
However, Intronn, Inc. never was able to use this award because
several months later NIH requested information on the capital structure
of the company. As a result of the previous success with SBIR awards,
the company had attracted venture capital investment, which made us no
longer eligible, despite the fact that we were clearly a small,
domestic company at the time of the award. The award was rescinded; we
closed down this promising research into Cystic Fibrosis, which was
also funded by the Cystic Fibrosis Foundation, and laid off employees.
Based upon the reports of other small biotechnology companies, Intronn,
Inc.'s experience of having to abandon promising science is, by no
means, an isolated incidence.
Arguably, excluding companies from the SBIR program solely on the
basis of their capital structure could benefit still eligible companies
like VIRxSYS. Yet it does so by making the program less competitive. As
evidence of the impact of the new rules on biotech and medical device
companies, applications for SBIR grants at the NIH declined by 11.9
percent in 2005 and by 14.6 percent in 2006.\3\ As the Director of the
National Institutes of Health (NIH), Dr. Elias Zerhouni, wrote in a
letter to SBA Administrator Barreto dated June 28, 2005: ``NIH believes
that the current rule undermines the statutory purposes of the SBIR
program. . . It undermines NIH's ability to award SBIR funds to those
applicants whom we believe are most likely to improve human health.''
(emphasis added) I would like to submit this letter for the record.
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\3\ The National Institutes of Health.
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A recent survey of small biotech companies found that 50 percent
are ineligible for the SBIR program because of their capital structure.
Additionally, 85 percent of the companies surveyed said that if the
rules were changed to allow them to apply for these grants they would
do so.\4\ These companies are researching and developing therapies for
diabetes, Alzheimer's, lupus and leukemia, among others diseases.
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\4\ Survey of 144 BIO emerging companies' Chief Executive Officers
and Chief Financial Officers, March-April, 2007.
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I am willing to compete with small, domestic, majority-backed
venture capital companies for SBIR grants based on the scientific and
technical merit of VIRxSYS research. That's the American way. I
respectfully request that should the Subcommittee reauthorize the SBIR
program, that it allow domestic, small companies to compete for SBIR
grants regardless of its capital structure. SBIR should be a
competitive program that fulfills federal research and development
needs while addressing a failure in the market system. It is not meant
to repeatedly be a source of corporate welfare but instead should fund
highly qualified research.
Again, thank you for providing me with the opportunity to testify
today before the Subcommittee.
Biography for Gerard J. McGarrity
Gerard McGarrity has been Executive Vice president of Scientific
and Clinical Affairs of VIRxSYS since November, 2006. VIRxSYS is his
fifth biotechnology company. Previously, he was President and CEO of
Intronn Inc. from 2000 to 2006. Prior to Intronn, Dr. McGarrity was
Founding Chief Scientific Officer of Cambridge Genetics Ltd. in
Cambridge, UK which purchased Cambridge Drug Discovery and sold to
Biofocus plc. He was Senior Vice President of Genetic Therapy Inc./
Novartis and was an ad hoc member of the Research Management Board of
Novartis. Novartis purchased Genetic Therapy Inc. for $310M. Dr.
McGarrity was Chief Executive Officer of the Coriell Institute and was
Adjunct Professor at Thomas Jefferson University and the Robert Wood
Johnson School of Medicine. In his academic career, he served as
consultant to a number of biotechnology and pharmaceutical companies
including Genentech, Abbott, Celltech, among others. He served two
terms on the NIH's Recombinant Advisory Committee (RAC) and was Chair
of the RAC when the Committee formulated policies for human trials in
gene therapy. He received his BS degree from Saint Joseph's University
and his Ph.D. from Thomas Jefferson University, both in Philadelphia.
He was a member of the Board of Trustees of Thomas Jefferson University
and received the Distinguished Alumnus Award from the University's
College of Graduate Studies. He has authored more than 160 publications
and holds five U.S. patents. Additional patents are pending. He had led
delegations of U.S. scientists on visits to the United Kingdom,
Germany, Japan, China and the Czech Republic. He has participated
widely in public policy forums, speaking at academic centers for the
NIH on gene therapy; on gene therapy and transport of genetically
modified organisms for Novartis; and has spoken on behalf of the
Biotechnology Industry Organization a variety of issues.
Chairman Wu. Thank you, Dr. McGarrity. Mr. Ignagni.
STATEMENT OF MR. ANTHONY R. IGNAGNI, PRESIDENT AND CEO, SYNAPSE
BIOMEDICAL, INC.
Mr. Ignagni. Chairman Wu, Ranking Member Gingrey, and Mr.
Mitchell, thank you for inviting me to testify before you today
on SBIR grants and the reauthorization of the program.
My name is Anthony Ignagni, and I am the Founder and
President and CEO of Synapse Biomedical, a start-up medical
device company located in Oberlin, Ohio, established with the
mission for commercializing life-changing, minimally-invasive,
neuro-stimulating devices.
Today I am here to testify on behalf of the Medical Device
Manufacturers Association, a national organization representing
the innovative entrepreneurial sector of the medical technology
industry. Our mission is to ensure that patients have access to
the latest advancements in medical technology, most of which
are developed by small research-driven medical device companies
such as Synapse.
Synapse was founded four and one-half years ago based on
technology developed at Case Western Reserve University and
University Hospitals of Cleveland. We have pioneered the
innovative use of standard laparoscopic techniques to provide a
low-risk alternative to mechanical ventilation, and people with
spinal cord injuries, such as our third patient, Christopher
Reeve. We have also applied this technology in people with a
devastating disease such as ALS, also known as Lou Gehrig's
disease. With our 56th patient just implanted yesterday, we
have a 97 percent success rate in the spinal cord population.
We have evidence that this technology not only works but
saves healthcare costs and is life saving. One of our patients
was able to save $13,000 per month in Ohio Medicaid costs by
weaning off of a ventilator and moving from the vent support
ward to a non-vent support ward one hallway over. He was
recently married and is an advocate for people now living with
spinal cord injury.
Synapse is a small business. We have nine employees and the
sponsor of two pivotal device trials. I have raised $6.5
million to fund these activities, and most importantly, those
dollars enable us to commit the resources necessary for 100
patient ALS pivotal trial.
As indicated in my disclosure statement, we currently
exchanged almost 49 percent of the company's equity to venture
and other institutional investors to raise that money. We have
retained just a little over 51 percent of the ownership with
the founders, employees, initial, individual angel investors.
As you have heard today, the SBIR program was established
in 1982 to offer competition-based awards to small private-
sector businesses such as mine to stimulate technological
innovation with the intention that the small business will take
the product through to commercialization. Synapse's involvement
in the SBIR Program has provided important support for
continued innovation of our technology platform. Our ability to
participate in the program provides the R&D funds to continue
these efforts. Without these funds, we could not support the
manpower to apply the continuing advancement of our platform in
these areas.
I am here today because the Committee has asked me to
address ways in which the SBIR program could be improved. As I
noted before, under the strict eligibility rules, Synapse is on
the cusp of becoming ineligible to apply for a SBIR grant due
to the fact that additional institutional investments would put
us below the 51 percent individual ownership. Our situation is
one that is also faced by a majority of companies in the
medical device industry as evidenced in part by the decline of
applications that have been received since the 2003 rule
change.
Some suggestions that I believe would make the program more
effective in achieving its goals and therefore be improved
include first, increasing the dollar amount of the Phase I and
II awards as they have not changed since 1992 but maintain
these as guidelines, not as caps. Two, providing the agencies
with more flexibility in administering the SBIR Program, and
third, returning to the previous policy before the 2003 rule
change so that all companies can have an equal chance at
participating in the federal grant process. This would mean
that allowing some companies that are majority owned by
multiple VCs to participate in the program.
To elaborate on these recommendations, I believe that it
would benefit the small businesses that apply for the grants if
the Phase I award could be raised to $150,000 and Phase II
increased to $1.25 million. I also believe there are
opportunities to improve the program by providing agencies with
more administrative flexibility. MDMA and those of us in the
industry would agree that it would be appropriate to allow two
to four percent of the funds to pay for administrative and
assistance activities.
Further, it would be beneficial to remove the requirement
that a company must have applied for a Phase I grant in order
to apply for Phase II. Under the current rules, only companies
that have applied for and received Phase I SBIR grants are
eligible to apply for Phase II. If this rule were changed, I
believe more small business participation in the SBIR program
would occur.
Finally, my greatest concern pertaining to the viability of
the program is the need to increase participation of all
innovative small businesses in federal research and
development, including those with venture backing. The SBIR
Program as originally designed did this, but its effectiveness
is being hampered by the fact that many small businesses are
deemed ineligible to participate based on their financing
structure. The stimulation and sustaining of technological
innovation will only be met if all companies, regardless of how
they are financed, are able to apply for SBIR grants. If
agencies have the flexibility they need to administer the
program according to their needs and the needs of the small
business community and the dollar amount of the individual
awards are increased to reflect inflationary adjustment.
Thank you for providing me this opportunity to testify.
[The prepared statement of Mr. Ignagni follows:]
Prepared Statement of Anthony R. Ignagni
Chairman Wu, Ranking Member Gingrey and Members of the Technology
and Innovation Subcommittee:
Thank you for inviting me to testify before you today on Small
Business Innovation Research (SBIR) grants and the reauthorization of
the program.
My name is Anthony Ignagni and I am the President and Chief
Executive Officer of Synapse Biomedical, Inc. Synapse Biomedical is a
privately-held medical device company located in Oberlin, Ohio. We are
a startup company established with the mission of developing,
manufacturing, selling and supporting life changing minimally invasive
neurostimulation devices used in the diagnosis and treatment of persons
with neurological impairment.
Founded in September 2002, Synapse's product portfolio is focused
on neurostimulation devices for minimally invasive surgical
interventions and respiratory assist. These two areas of medical
specialization have come together in our first product, the NeuRX
Diaphragm Pacing Stimulation (DPS) System. The founders of the Company
have pioneered the innovative use of standard minimally invasive
laparoscopic techniques to provide ventilation in persons with
respiratory muscle paralysis. This technological advance provides a
device that is a low-risk, low-cost alternative to a very invasive
procedure that has been performed for thirty-five years.
I am pleased to tell you that our current percutaneous technology
has been successful in over fifty patients including the late
Christopher Reeve (our third implanted patient). Our technology has
demonstrated clinical promise in the pilot series of Amyotrophic
Lateral Sclerosis (ALS, commonly known as Lou Gehrig's disease)
patients. The longest implanted patient has used the device for full-
time respiratory support for over six years. We additionally have
evidence of this technology saving health care costs and potentially
saving lives. Our fourth patient implanted was able to save $13,000 per
month in Ohio Medicaid costs by weaning off of a ventilator, moving to
a non-ventilator support ward in the nursing home he was in, and then
was able to move back home with his elderly mother. He has recently
married and is an advocate for people with spinal cord injury on the
board of local hospitals.
We also have had several implanted patients in the hurricane
affected areas of the South. One young woman specifically lost her home
in Hurricane Rita and had to go to a shelter. Fortunately she had been
already fully weaned off of her ventilator and was able to sustain
extended periods without power as our device lasts several weeks on a
single replaceable battery. These are just two of the many stories that
demonstrate the compelling benefit of our technology.
The NeuRX DPS System is currently being studied in two human
clinical trials. The first trial of chronic diaphragm pacing has
demonstrated clinical efficacy as a ventilator replacement in chronic
respiratory insufficiency with a 97 percent success rate in providing
ventilatory support. The second ongoing clinical trial is for diaphragm
conditioning stimulation to improve the survival time in ALS, which has
shown a preliminary 15 to 20 month survival benefit in the pilot
series. Additional feasibility studies have begun to demonstrate the
therapeutic implementation of diaphragm stimulation in an acute
ventilatory assist trial intended to demonstrate reduction in
ventilator associated risks, improvements in cardiovascular function,
and reduced length of stay in intensive care units. Synapse is at the
forefront of the pioneering use of Natural Orifice Translumenal
Endoscopic Surgery (NOTES) for our clinically recognized efforts as the
seminal application for acute ventilatory assist. Additional trials are
planned, beyond the diaphragm, to demonstrate the feasibility of the
technology platform in two active research areas of Synapse's founders:
chronic abdominal pain and gastroesophageal reflux disease. So, as you
can see we are working on very promising and life enhancing technology
which serves a very narrow patient population.
Today, I am here to testify on behalf of the Medical Device
Manufacturers Association (MDMA), a national organization representing
the innovative, entrepreneurial sector of the medical technology
industry. MDMA's mission is to ensure that patients have access to the
latest advancements in medical technology, most of which are developed
by small, research-driven medical device companies.
As a representative of the medical device industry, I thank you for
allowing me to share with you my experience in applying for and
obtaining a SBIR grant. As you know, the SBIR program was established
in 1982 to offer competition-based awards to small private-sector
businesses (such as mine) to stimulate technological innovation with
the intention that the small business will take the product through to
commercialization, all the while helping to stimulate U.S. economic
growth and international competitiveness. The grant making process is
structured into three phases:
Phase I is the feasibility study in which award
winners undertake a limited amount of research aimed at
establishing an idea's scientific and commercial promise. These
grants typically range up to $100,000.
Phase II funds are used to finance more extensive
research and development and the grant awards are usually
around $750,000-$1 million.
Phase III is the commercialization stage and
companies are expected to use non-SBIR funds to get their
product into the marketplace.
The Small Business Administration establishes the eligibility
criteria for participation in the SBIR program. As such, only United
States small business concerns (SBCs) are eligible for an SBIR award.
The SBC must be organized for-profit with its place of business in the
United States. It must be independently owned and operated, and it must
meet one of two ownership criteria: it must be at least 51 percent
owned and controlled by one or more individuals who are citizens of, or
permanent resident aliens in, the United States, or, it must be a for-
profit business concern that is at least 51 percent owned and
controlled by one or more individuals who are citizens of, or permanent
resident aliens in, the United States. Finally, the SBC must be small
in that it must have no more than 500 employees including affiliates.
Synapse's involvement in the SBIR program has provided important
support for continued innovation of our technology platform. Our
current grants extend the potential use and market potential for our
diaphragm stimulation technology in compelling need orphan clinical
diseases of spinal cord injury and ALS. Our ability to participate in
the SBIR program provides the R&D funds to continue these efforts.
Without the SBIR funds we could not support the manpower to apply to
continuing the advancement of our platform in these areas.
Synapse is a small business. We have eight full-time employees and
one part-time employee. We are actively sponsoring/conducting two
pivotal device trials for application of our DPS System in spinal cord
injury and ALS. We have recently made our first market application to
the FDA for use of the device in spinal cord injury. We have setup a
complete clean-room, manufacturing facility, and quality system with
ISO 13485 certification and also anticipate submitting for European
market approval within approximately one month. To accomplish this we
run a very lean and efficient shop. We have spent $2.5MM since the
inception of Synapse to achieve these accomplishments with a very
dedicated and motivated staff. Our vision is to build a profitable
company based on the sound science of our initial clinical
applications. To continue these accomplishments and establish a sound
foundation for the company to further build upon, we anticipate
spending another $4MM. To be able to fund these activities and most
importantly be able to commit the resources necessary for a 100 patient
pivotal trial in ALS to the patients and clinical community, we have
had to raise significant venture investments. As indicated in my
disclosure statement, we have currently exchanged 49 percent of the
company equity to venture and other institutional investors to raise
this money. We have retained just over 51 percent of the ownership with
the company founders and initial individual angel investors.
Since our device has a Category B1 designation by the FDA and CMS
we have been able to charge for the device during clinical trials and
have therefore been able to realize total income since our inception of
almost $1MM. This includes awards (for our business plan), SBIR grants,
contract manufacturing efforts and reimbursement for clinical study
devices. The SBIR program grant funds that we have drawn down to date
have been approximately 14 percent of this total. We additionally have
another $200K in current SBIR grants funds available and pending award.
The Committee has asked me to address ways in which the SBIR
program could be improved. As I noted before, under the 2003 rule
change, Synapse is on the cusp of no longer being eligible to apply for
the SBIR grant due to the fact that additional institutional
investments would put us below the 51 percent owned by individuals'
qualification. Our situation is one that is also faced by a majority of
companies in the medical device industry as evidenced in part by the
decline in applications for SBIR grants since the 2003 rule change.
Based on the awards statistics located on the National Institutes of
Health's (NIH) website, there has been a significant decline in
applications for SBIR grants. In the first year (2004-2005), post the
rule change, there was a 12 percent decrease in applications followed
by an almost 15 percent decrease this past year (2005-2006). This after
double digit increases in the two years leading up to 2003.
Some suggestions that I believe would make the program more
effective in achieving its goals and therefore improved include:
Increasing the dollar amount of the awards as they
have not changed since 1992;
Providing NIH with more flexibility in administering
the SBIR program; and
Returning to the previous policy before the 2003 rule
change so that all companies can have an equal chance in
participating in the federal grant process. This would mean
allowing companies that are majority venture backed to
participate in the program. This would mean allowing some
companies that are majority owned--in the aggregate--by
multiple VCs to participate in the program.
To elaborate on my recommendations, I believe that it would benefit
the small businesses that apply for the grants if the Phase I award
could be increased to $150,000 and the Phase II award increased to
$1.25 million. This could potentially encourage companies that are
currently not applying for the grants because they think the awards are
too low and therefore not worth the time and effort required to submit
a successful SBIR application.
I also believe there are opportunities to improve the SBIR program
by providing NIH with more administration flexibility. Specifically, I
think it would be helpful to the NIH if the costs of administering the
program (three percent) could be paid out of the SBIR funds. MDMA and
those of us in the industry agree that it would be appropriate to allow
three percent of the SBIR funds to pay for administrative costs. These
resources will help to administer the SBIR program without diverting
funds from other areas within NIH. Second, it would be beneficial to
remove the requirement that a company must have applied for a Phase I
grant in order to apply for a Phase II grant. Under the current rules,
only companies that have applied and received a Phase I SBIR grant are
eligible to apply for a Phase II grant. If this rule were changed, I
believe many more small businesses would submit applications for SBIR
grants.
Finally, my greatest concern pertaining to the viability of the
SBIR program is the need to increase participation of all innovative
small businesses in federal research and development including those
with venture backing. A key purpose of the SBIR program, a public-
private partnership, is to help entrepreneurs overcome many of the
obstacles they face in developing new technologies. The SBIR program as
originally designed does this, but its effectiveness is being hampered
by the fact that many small businesses are deemed ineligible to
participate in the SBIR program based on their financing structure.
Further, the program is not meeting its entire goal to stimulate and
sustain technological innovation. The stimulation and sustaining of
technological innovation will only be met if all companies regardless
of how they are financed are able to apply for SBIR grants; if NIH has
the flexibility it needs to administer the awards and the dollar amount
of the individual awards are increased.
Again, thank you for providing me with the opportunity to testify
today before the Subcommittee.
Biography for Anthony R. Ignagni
As co-founder, President and CEO of Synapse Biomedical, Inc., Mr.
Ignagni (``Tony'') is responsible for the strategic planning for the
company. Tony has developed and commercialized medical devices for over
20 years. He received his undergraduate and graduate degrees from Case
Western Reserve University in the area of Biomedical Engineering
specializing in applied neural control. As a research engineer, at the
Cleveland FES Center, he has designed neurostimulation software and
instrumentation and applied these efforts clinically. As part of the
efforts that led to the formation of NeuroControl Corporation, Tony has
had direct experience in transferring this technology from the
university environment to commercially viable products. As an original
member and Vice President of NeuroControl he established many of the
base systems required for operations within the scope of the regulated
medical device industry and led the product development efforts that
brought neurostimulation devices to the U.S. and European markets.
About Synapse
Synapse Biomedical Inc. (SBI) is established with the mission to
develop, manufacture, market and support life changing minimally
invasive neurostimulation devices used in the diagnosis and treatment
of persons with neurological impairment. Founded in September 2002, to
support the ongoing clinical study of the DPS System for Chronic
Respiratory Insufficiency at University Hospitals of Cleveland, SBI has
licensed the core patents from Case Western Reserve University and is
comprised of investigators from University Hospitals (Cleveland, OH),
MetroHealth Medical Center (Cleveland, OH) and Case Western Reserve
University. The current percutaneous technology has been successful in
spinal cord patients for over fifty cumulative patient years and
demonstrated clinical promise in the pilot series of Amyotrophic
Lateral Sclerosis (ALS, commonly known as Lou Gehrig's disease)
patients. The longest implanted patient has used the device for full-
time respiratory support for over six years.
SBI's product portfolio is focused on neurostimulation devices for
minimally invasive surgical interventions and respiratory assist. These
two areas of medical specialization have come together in our first
product, the NeuRX DPS System. The founders of the Company have
pioneered the innovative use of standard minimally invasive
laparoscopic techniques to provide ventilation in persons with
respiratory muscle paralysis. This technological advance provides a
device that is a low-risk, low-cost alternative to a very invasive
procedure that has been performed for thirty-five years. The media
awareness that has come, as a result of Christopher Reeve, our third
implanted patient, has reached over 13 million households through print
circulation and many more through his appearances on national and
international television broadcasts. As a result of this, we have been
able to reach a large population of patients, with over 50 patient
implants.
The NeuRX Diaphragm Pacing Stimulation (DPS) System is currently
being studied in two human clinical trials. The first trial of chronic
diaphragm pacing has demonstrated clinical efficacy as a ventilator
replacement in chronic respiratory insufficiency with a 97 percent
success rate in providing ventilatory support. The second ongoing
clinical trial is for diaphragm conditioning stimulation to improve the
survival time in ALS, which has shown a preliminary 20 month survival
benefit in the pilot series. Additional feasibility studies have begun
to demonstrate the therapeutic implementation of diaphragm stimulation
in an acute ventilatory assist trial intended to demonstrate reduction
in ventilator associated risks, improvements in cardiovascular
function, and maintenance of diaphragm contractile properties in
intensive care units. SBI is at the forefront of the pioneering use of
Natural Orifice Translumenal Endoscopic Surgery (NOTES) for the
clinically recognized efforts as the seminal application for acute
ventilatory assist. Additional trials are planned, beyond the
diaphragm, to demonstrate the feasibility of the technology platform in
two active research areas of SBI's founders: chronic abdominal pain and
gastroesophageal reflux disease.
Discussion
Chairman Wu. Thank you very much, Mr. Ignagni. And now we
move onto the question phase of our hearing, and The Chair
recognizes himself for five minutes.
Dr. McGarrity, you characterized both in your written and
your oral testimony that SBA has stated the ownership rule is a
proxy for determining that a company is domestic, and Mr.
Schmidt has stated that what is at issue is size. And I wanted
to give both you, Dr. McGarrity, an opportunity to comment on
that and Mr. Ignagni and Mr. Schmidt to reply to that
discussion about whether looking at the capital structure, that
is, whether venture capital is owned 50 percent plus one share
of an enterprise is an appropriate dividing line for SBIR or
not.
Dr. McGarrity. No, I don't think there is at all. The
regulations say that a company, a small company, should be less
than 500 employees. So if you use that as the guideline,
technically my company, Intronn at the time had 20 employees,
no revenue stream, and we were declared ineligible. In other
words, we were not an appropriate small business. On the other
hand, you could have a company with 450 employees and making
revenues of $20, $30 million a year and they qualify. So I
think the rule change was based on the fact that, as you said,
you wanted greater than 50 percent ownership to be domestic
ownership, and I think they use that as a means of saying that
50 percent or 50-plus percent should be owned by individuals;
and for this particular application, the individuals or a
venture firm was not defined as an individual. And I think that
was the basis of the whole change in policy.
Chairman Wu. Mr. Ignagni.
Mr. Ignagni. I certainly agree that I think the 51 percent
ownership issue is really irrelevant from my perspective from
what we are trying to do. We have to raise enough money to be
able to commit to clinical trials, and to do that we have to
find funding from available sources; and if that means going to
a venture company to find that funding, that is what we had to
do. And it is--you know, we are not bringing in revenue. We
have made $1 million since our inception, so it is not
supporting us as a company but it is allowing us to continue in
ways--in increased our technology platform in ways that a
venture company is not going to support. So we can go after
larger markets, but continuing to help people with spinal cord
injury, people with ALS, those are orphan markets, those are
niche markets, and those aren't things that are going to be
supported by the venture community.
So we would have to let go of those if we didn't have this
kind of support.
Chairman Wu. Mr. Schmidt, your response to----
Mr. Schmidt. Yes, thank you.
Chairman Wu.--those statements.
Mr. Schmidt. I am extremely troubled by Dr. McGarrity's
domesticity issue. I'm not quite sure whether he's suggesting
the United States taxpayer support incorporations. I am just
not--I don't know where that is going. On the size issue, what
I am most concerned about is having large company and large VC
control over these small companies.
Chairman Wu. Would you have an objection--let us say it
were a 20-employee biotech but it had 51 percent VC ownership.
Would you object under those circumstances?
Mr. Schmidt. Well, when you have got Intel forming VCs and
all of a sudden they go out and buy, you know, ABC Company with
20 employees, they are not a 20-person employee anymore--20-
person company anymore. They are, you know, a billion-dollar
corporation. And the Milliken Institute which----
Chairman Wu. With all due respect, Mr. Schmidt, when I have
spoken with Intel VCs, they have no--they rarely have any
interest in a strategic ownership of the underlying entity. It
is purely a financial relationship for the most part, trying to
grow out the ecosystem where they are going to take down Intel
chips that has become a future ecosystem for consuming Intel
chips, their core business.
Mr. Schmidt. I think it always becomes a strategic interest
from a large corporation, but on the fact of the VCs, the
Headtron type of VC, you have still got this very large group
of investors and we have no--so you understand our position--we
have no objection to small VCs owning a majority of the company
which happens now and is allowable under the rules. And under
Dr. Zerhouni's letter, which Dr. McGarrity was referring to--in
fact, later on in the letter Dr. Zerhouni goes on to say the
affiliation rules should not be changed.
So in the Milliken Report they go on and say that there are
six ways that they suggest which I would like to include in the
record that we can fund large drug companies or tiny drug
companies to become manufacturers of large drugs, and none of
them involve the SBIR Program. And when we have an $800 million
to $1.2 billion investment in a drug, that means the entire NIH
SBIR budget can't produce one drug.
Chairman Wu. My time has expired. We will return to this
topic. But let me ask folks' indulgence just for a moment to
ask Mr. Held if this ownership issue is of concern in the DOD
SBIR realm as opposed to those programs in other departments.
Mr. Held. It is not an issue that we looked at in our
research, so I really couldn't give you a good answer on that.
Chairman Wu. Thank you, Mr. Held. And I would like to
recognize Dr. Gingrey for five minutes.
Mr. Gingrey. Mr. Chairman, thank you. This is it seems to
me a very crucial question as we develop, go forward with
reauthorization and the markup that will be done later on in
the year. That is the reason we have these hearings, of course,
is to try to improve to go forward with what is good, to
eliminate what is bad, and to make changes based on expert
testimony. And so that is why it is so important that we are
doing this here today.
And it seems that this question, this 51 percent rule
provision, is very critical; and I am not sure I completely
understand it. I think I understand the basics of it, but I
thought maybe Mr. Baron, if I would address my question to you
because you have a fairly long history as you explained in
your--both your statements and your written bio going back to
the time that you were on the Small Business Committee, just
give us a glimpse into the legislative history of this, this 51
percent rule--I guess it is--and was it originally to encourage
domestic innovation? What was really the reason why the SBA
made these new interpretations? Just kind of take us back and
walk through the history of it.
Mr. Baron. Okay. I would be happy to. The legislation
basically defined small companies as having 500 or fewer
employees for the purpose of this program and left it up to the
great discretion--or left great discretion to the SBA to apply
that and develop regulations and so on and to use its normal
rules as to what constitutes a small company with 500
employees, if it is owned by a larger company or affiliated
with a larger company.
So basically, the statute itself gives SBA a lot of
discretion and for most of the history of the program, SBA
allowed in--did not have this ownership, this particular
ownership rule. So this was a change in the way that they--SBA
interpreted what constitutes a small business. That wasn't
based directly in the legislation.
Mr. Gingrey. My understanding is that in 2003 is when they
made this most recent interpretation, this change if you will.
Were there certain other times in the 25-year history of the
program where they made other step-wise changes other than the
500-employee rule?
Mr. Baron. They have made other changes, none I think quite
as had as much affect on the program as that one. They do make
changes over time in things like how strictly they interpret
the size of SBIR awards that an agency can grant, things like
that, whether they allow flexibility to go over the $100,000,
$750,000 mark, things like that; but they tend to be more
modest changes. This was a larger one.
Mr. Gingrey. Well, you haven't quite completely answered my
question. What do you in your opinion--are you an attorney?
Mr. Baron. I am.
Mr. Gingrey. Good. Doctors don't hate all attorneys.
Explain to us what you think their reasoning was behind this
reinterpretation of this change in 2003.
Mr. Baron. I am not intimately familiar with their
reasoning, but I think the general idea was that it didn't
really qualify as a small business for the purposes of what
Congress has intended if it is owned by a venture capital firm
if that is the majority entity.
Let me mention one other thing if I could. As I mentioned
in my testimony, I think a big challenge in the SBIR Program is
focusing SBIR funds on companies that are serious about
commercialization, not just doing research but taking that
research and converting it into a product. A company that has
obtained some venture funding has--I would think is the kind of
company that is more likely to be able to convert their
research. They are clearly motivated. A venture capital firm
would not have contributed money to the company if it hadn't
reviewed the business plan and seen that there was a market
size. So I think my own feeling about the underlying policy is
that it probably inhibits the success of the program in
converting research into viable new products.
Mr. Gingrey. Mr. Chairman, I see my time has expired. I
hope we will have more time to--in our second round to come
back to this and continue to pursue it. It may be that some of
the other witnesses want to comment on that as well, and I
guess they probably would.
Chairman Wu. Dr. Gingrey, I think that you and I will have
multiple rounds. Now that I know that you are an attorney, Mr.
Baron, is there a statutory basis for the ALJ's Decision about
venture capital ownership or is this shall we say a broad
interpretation of the SBA's authority?
Mr. Baron. There was not an underlying statutory change
that caused the SBA to change its interpretation. This was just
a decision that was initiated by the SBA with the idea that
they were interpreting what Congress wanted in saying funds
under this program should go toward small businesses.
Chairman Wu. Mr. Baron and Mr. Schmidt, I think that there
was some expressed concern about skewing, whether it is towards
size, domesticity, or any other factor. Since this decision was
handed down in the relatively recent past, has there been a
change in pattern? Was there skewing before that has been
addressed by this decision?
Mr. Baron. I am probably not in as good a position to
comment on that. The other witnesses I thought were fairly
compelling in evidence from NIH that the--it has excluded some
companies that otherwise would have participated.
Mr. Schmidt. Just as a moment of history, the way I
understand this, and we will get you more information and
provide that over the next week or so, but it is my
understanding that a 1952 statute--so we have had 55 years of
legislative history on independently owned and operated--so we
go back to Eisenhower, you know, in those years to talk about--
actually, this would have been Truman--to be able to say this
is what the small business is all about from 1952. And that has
not been changed since 1952, this independently owned and
operated and 500 employees.
Chairman Wu. That is with respect to SBA statutes----
Mr. Schmidt. Well, SBA----
Chairman Wu.--and not SBIR.
Mr. Schmidt. It incorporated in the 1982 statute, and none
of that ever changed. The only thing that happened in 2003 was
they finally decided to enforce it. So by going back and
changing it now, we are overturning the last 55 years of
history in this area.
Chairman Wu. Well, with the 2003 change----
Mr. Schmidt. It wasn't a change, it was an enforcement.
Chairman Wu. Well, there was certainly a change in 2003,
whether it was a change in interpretation or a change in
enforcement, was there a skewing problem that was addressed by
that?
Mr. Schmidt. I can't answer that question of what this was.
What we had was corporations that were violating the rule that
finally were enforced against.
Chairman Wu. Dr. McGarrity and Mr. Ignagni.
Dr. McGarrity. Well, I would say we looked at the
interpretation, and we applied like everyone else. So I can't
say we were violating the rules. That was what the SBA was
enforcing from the beginning. As far as experiences, I will go
back to the NIH saying that, one, the number of grant
applications of SBIR has gone down, and number two, the quality
of SBIR grants has gone down. If you look at the success
stories that I said, there are companies like Amgen and
Genintech and Genzyme that are wonderful success stories in our
industry. They got SBIR grants in the early stages, and one
would hate to think what might have happened if that rule were
applied to them. In our own particular case, as I said, I think
the emphasis has to be on the innovation and what the Congress
needs and what the Nation needs as far as R&D. The first
application that we made to the NIH, the review committee, 18
to 20 experts in the field said they wanted to double our
budget. Now, when was the last time you heard a government
agency saying we want to double your budget? The next grant
that we put in, a different review committee said this was one
of the most innovative, thoughtful, and exciting application
they ever read.
So the NIH and my company, Intronn, invested several
million dollars that had great promise in cystic fibrosis, and
it was just cut short. So I would say, you know, the objective
here should be what is best for the Nation's need and the
Nation's research. Mr. Schmidt said it takes $800 million. We
can't do that from NIH's budget. That is not even relevant to
the point. What you need is what you said in the beginning,
Chairman. The crying need for biotech companies is in the early
stages. If you can get that financed to a point where you are
in clinical trials or you have proof of concept, then you can
get equity investment and then you can get larger companies
partnering in. So we need the help in the early stages of
development where conventional financing in this field simply
is not available.
Chairman Wu. Thank you very much, Dr. McGarrity. And before
I turn to Dr. Gingrey, Mr. Ignagni, you were eager to have some
input on this particular discussion.
Mr. Ignagni. I think Dr. McGarrity did mention what I was
going to mention also that according to the NIH's website,
there has been a significant reduction in the number of
qualified applications in the years since the 2003 rule change.
And certainly from my own perspective, I did not--there have
been certain times in the development of Synapse that we had to
make a decision. Do we want to go after more grants and try to
keep more ownership or do we really want to step foreword and
go forward with helping patients and go after an ALS trial, to
commit to an ALS trial of the magnitude that we have. We needed
significant funds, and those funds aren't available in the
grant world for us. So we had to go after VC funding. And so
just the nature of the type of company we are running clinical
trials, two pivotal studies, we had to go after VC funding; and
there are decisions that have to be made at this point, whether
or not we go after more VC funding or whether we try to hold
back and not help as many patients and grow as fast.
Chairman Wu. Thank you. Dr. Gingrey.
Mr. Gingrey. Mr. Ignagni, you mentioned I think in your
testimony that you used the term angel investor. I do now know
what that is, but it was only recently that I realized what an
angel investor was; and you might--maybe nobody in this room or
everybody in this room knows exactly what you are talking
about, but you might define that for us, and I am curious to
know whether angel investors in a small start-up technology
type company, biomedical company that both you and Dr.
McGarrity are involved in, do those count against you in regard
to the percentage rule that the Small Business Administration
has handed down back in 2003?
Mr. Ignagni. Since the angel investors and angel investors
are individuals, friends and family, high net worth individuals
in the community, they are individual people identified as
such, so that they would not count against that 51 percent
rule. Groups like Jump Start, which is an entrepreneurial
assistance program in Cleveland but is made up of a large
consortium of people, specifically to help companies such as
Synapse get off the ground and get started. They would be, you
know, in my calculation, my way of interpreting the rule, they
are counted against us because they are a consortium of a
number of unnamed individuals.
Mr. Gingrey. Well, do you count them--it is not actually--
you are not counting individuals, you are counting the
percentage of the worth of a company, the equity in the
company? So if the company is worth $6 million as an example on
the books and then $3,000,001 of that has been sold essentially
to a venture capitalist, whether it is one venture capitalist
who just has a lot of money, you wouldn't consider that person
an angel investor, because they are in the business of lending
money. It could be one or it could be a consortium. But the 51
percent or 50 as the Chairman pointed out, 50 percent plus one
is based on the total dollar amount, right?
Mr. Ignagni. Correct.
Mr. Gingrey. Mr. Chairman, I will yield back at this point,
and I look forward to the next round.
Chairman Wu. Terrific. Let us return perhaps a little bit
later to this issue of size versus capital structure and
whether capital structure ought to be used as a proxy for size,
domesticity, or anything else.
There was discussion earlier about using the track record
of commercialization as a factor in granting future SBIR
grants, and Mr. Baron, can you describe for us first of all how
you think this would work and secondly, what the impact would
be on commercialization rates. And perhaps Mr. Held, Mr.
Schmidt, you would care to comment on that also.
Mr. Baron. Yes, at the Department of Defense, which is the
agency I am most familiar with, its SBIR program, one of the
things that they do is ask each company in submitting an SBIR
application to provide just basic information on previous SBIR
awards that were won and commercial sales that resulted from
that, either to the government or to the private sector, as
well as any additional investment they raised, which are two
good proxies for whether the thing actually got commercialized,
assuming enough time has passed. And so there is very good
information for each applicant which is hard to gain on whether
they have actually done anything with the prior SBIR awards.
And it shows, you know, in general that there are some
companies that are excellent commercializers, including some
multiple award winners are excellent commercializers. And then
there are some companies like those I have described which have
very strong research capabilities, win SBIR awards, but
consistently do not convert them into products that succeed in
either government or private-sector markets.
So one thing that could be done, that information is not
used in a sizeable way in the proposal evaluation process but
it could be. In order to focus funds, it would be possible for
agencies to revise their proposal evaluation criteria to focus
SBIR awards on either companies that are new to the SBIR
Program or to companies that have a strong commercialization
track record and to focus funds away from companies that have
repeatedly won and have not turned the grants into research
into viable products. That is one simple way, I think a fairly
straightforward way it could be done.
Chairman Wu. Would that straightforward method be more
applicable to SBIR programs at some agencies rather than
others?
Mr. Baron. It is a very good question because at some
agencies in different fields, it takes longer to commercialize,
like in the biomedical field to go through a commercial trial
and all of that, than it would at an agency like the Department
of Defense. You might have slightly different rates, time
periods you would look at for the commercialization track
record. However, if an SBIR project has gone through--they went
Phase I, Phase II, and then a couple of years have elapsed and
nothing has happened, no additional money, even in the
biomedical field, no additional money, no additional
investment, no sales, no nothing, you can be pretty well sure--
there is good evidence to suggest from the DOD data that that
project is never going to be turned into a commercial product.
Very unlikely, too.
So I think the time period may differ by agency and by
field, but in general that kind of additional money and track
record is probably a very good indication of whether the
company is a good commercializer.
Chairman Wu. Mr. Held, according to your data at DOD, how
applicable is this commercialization rate? Are there other
proxies that would be applicable to the DOD situation?
Mr. Held. Yeah, the DOD does have a pretty good metric for
looking at commercialization. It is called the
Commercialization Achievement Index. The biggest issue with it
right now is using that metric as a criteria when they are
judging proposals and making it a more important criteria,
particularly for companies that have won multiple SBIR awards.
So you might think about making this something that the--as
they have won five, ten, or more awards over a certain number
of years, the commercialization index becomes more important in
terms of how you judge that particular award.
Chairman Wu. Thank you. Dr. Gingery.
Mr. Gingrey. Mr. Chairman, that is a great question that
you asked, and I want to continue with it because my thinking
is that, as Mr. Baron and Mr. Held both have described, it does
make sense that you want to, unlike Willy Sutton, you want in
this instance not go to where the money is to take it out but
you want to go to where the success it to put it in. And I
understand that. You want to make a good investment of the
taxpayers' dollars and you want to make sure that that metric
of commercialization and track record I guess is the way you
were putting it, but it would seem to me that that might
adversely discriminate against the little start-up.
I will give you an example. I have a--and by the way, to
recuse myself, to my knowledge he has not applied for any kind
of small business innovative research grant--but spent many
years as a stockbroker for one of the large firms and then
retired or was retired maybe a little earlier than he wanted to
be but got involved with a Russian scientist, and this is sort
of getting into the medical field, too. This probably would
be--if he were so interested an application through NIH--but
what they were trying to do is develop a marker, a blood
marker, a blood test to determine who might truly be suffering
from a traumatic brain injury who has sustained a bump on the
head, or maybe even much worse than that. Or in Iraq, been
inside a Humvee when it went over an improvised explosive
device but thank God didn't lose a limb or had no visible
injury except shock. They also felt that they have the ability
to, with a blood test, to determine who is likely--any of us in
this room--to have a stroke at some point in the future. And so
that is pretty much what they are involved in. Well, he has no
track record of innovation or success or commercialization. And
I know in fact that--that is when I first understood what an
angel investor was. You see, I am a doctor and of course we
don't know much about business. We are very poor businessmen
and women. But he was telling me about it. I asked, I said,
Bob, how have you kept going these three or four years, five
years now that you have had no income. You are the president of
the company but, you know, how have you sustained yourself and
how do you keep it going? He told me about angel investors and
of course, at that point I wasn't--I didn't have the privilege
of serving with Chairman Wu on this subcommittee and
understanding all these programs that were available, otherwise
I would have told him about it.
But somebody like that, Mr. Baron, Mr. Held, may be at a
little bit of a disadvantage, particularly in maybe one of the
agencies or departments that participate in this program. It
would be kind of easy to just say, well, let us just make these
grants to the ones that have good track records, and we don't
have to worry about the due diligence. You know, if somebody is
a little bit on the lazy side, it may be that it would
discriminate against folks like this little start-up company
that I am talking about back in Atlanta, Georgia. Dr.
McGarrity?
Dr. McGarrity. Yes, I would just like to extend that
thought a little bit, Congressman, because if you look at the
rules and the interpretations presently, if you look at angel
investors, if I am John Smith and I want to put $100,000 into
your friend's company, if I do it as John Smith, it is fine as
far as SBIR is concerned. If I put it in as John Smith Trust,
that is a separate legal entity; and if I do it as the Smith
Family Foundation or Smith and Friends, that is a distinct
legal entity, and they are not counted as individuals according
to the current guidelines. So even that kind of murkiness
exists whether it is an angel investor as an individual or
doing it as a trust or a family LLC if you will.
Mr. Gingrey. And I want to--Mr. Schmidt, you can respond to
this if you like, and I am sure we will get back to you on the
next round, but the idea of maybe having a set-aside for new
companies.
Mr. Baron. I think the issue you raise is extremely
important. I think it could be actually addressed in a way that
would provide more money for new companies in the following
way. The proposal evaluation process and criteria could be set
up to give priority or advantage to companies that are either
new to the SBIR Program, like the situation you just mentioned,
or that are strong--have a strong commercialization track
record, and focus funds away from the companies that have a
weak--that have consistently not commercialized, thereby
conceivably, and I think plausibly, increasing the amount of
money that would be available for new companies and the good
commercializers. I think that would be one way to handle it.
Mr. Gingrey. Mr. Chairman, I see my time is up, but I yield
back to you and look forward to you yielding back to me.
Chairman Wu. Thank you very much. Several of the witnesses
refer to providing for a relatively small percentage, perhaps
as small as one percent, administrative fee for the agencies to
administer SBIR. What kinds of improvements can we hope to see
from SBIR by providing for these administrative costs, and
secondly, what kinds of costs would you include in this set-
aside for administrative costs, and what kind of costs would
you exclude from that?
Mr. Baron. My suggestion on this, having been the program
manager for the Department of Defense, I think it is very easy
to--there were some things that we did like establishing the
commercialization achievement index, tracking commercialization
outcomes, etc., that I think were very useful and valuable to
the program. There were other things that have been done with
administrative--currently with administrative money, like
holding conferences and commercialization training and all
that. And you know, as the manager of the program, I always
wondered, is this just a lot of activity or are we really doing
any good here? I think my short answer is it is very easy to
spend--everyone is always asking for more administrative money,
and it is easy to spend that on things that may not be that
valuable. And so I sympathize with a lot of what Mr. Schmidt
said about not taking too much off the SBIR Program.
That being said, I would suggest a small--one thing which
is desperately I think--desperate is too strong--a critical
missing piece needed to improve the SBIR program and more of
those breakthroughs is knowledge about different rules like you
have been talking about, what sort of selection criteria, what
sort of training, how do you set up the program so as to get
the right kind of companies in there and produce more of these
breakthroughs, these important outcomes. We don't know how to
do that. We are talking about all these different rules, a
little bit in a vacuum of evidence about which ones will work
and which ones don't. I would suggest a small set-aside that is
devoted specifically toward trying new approaches, trying new
approaches to administering the SBIR program like
commercialization track record and evaluation criteria and then
evaluating outcomes in a rigorous evaluation.
So I would suggest in the short-term, spending it on
different ways of administering the program coupled with a
rigorous evaluation, preferably of the type I mentioned before
where you might use random assignment to make sure it produces
scientifically valid evidence about what works.
Chairman Wu. Mr. Ignagni, you were eager to say something.
Mr. Ignagni. Yes, I actually want to answer part of Mr.
Baron's question as to the value of conferences and the
assistance programs that the agencies run. I have written four
SBIR grants myself and been fortunate to receive three awards,
and I don't think I would have received any of those awards if
I had not attended some of those conferences. I mean, Dr.
Goodnight who I saw in the back provides valuable, extremely
valuable information, to start-up companies and especially the
small companies. Your friend that started a company, if he had
attended one of these conferences, he could have found out
about the aspects of taking knowledge, an idea through the SBIR
Program and how to commercialize it. They run seminars on
providing that kind of commercialization assistance, how to
generate the Phase III, if you will. And those are all things
that I think these kinds of--that kind of set-aside should
continue to support.
Chairman Wu. Thank you, Mr. Ignagni. Mr. Schmidt, you were
most concerned about the effect of an administrative set-aside
on the availably of SBIR funds to a broad range of small
businesses, for this phase of my questions, I will give you the
close on what costs should be excluded.
Mr. Schmidt. Well, thank you. I am glad Tony acknowledged
Dr. Joanne Goodnight. Raise your hand, because she is an
extremely capable, valuable person in this program at the NIH
and runs the program there. And quite frankly, you know, we are
not against administrative costs. The SBTC's position is, don't
suck away from the program the little bit that we have now. I
testified that it had one-eighth of what it should have, if it
was fair. But don't take that to mean we believe that an
increase of one percent of the new money going beyond 2007
funding should be allowed for administrative expenses.
But in general, you know, I think they know how to run
their program, and I would give that discretion to the
individual agencies. The one thing that I would suggest,
though, is that anything above that in administrative expense
go toward this commercialization pilot program type of endeavor
which is in the Defense Department to be able to make sure
technologies get commercialized through DOD, this Section 252
of last year's authorization bill and have something like that
for NIH to get us from technology readiness levels four or five
which is typically where Phase II lets off to technology
readiness level eight which gets you further through the
development phase of clinical trials, in the NIH case in flight
tests or wind tunnel tests in DOD's case, things along those
lines where you do more of the development work that is beyond
the scope of a traditional Phase II. It takes about $10 million
to develop a little widget in today's market places.
So this $850,000 of the Phase I, Phase II, you know,
doesn't get you a tenth of the way there to be able to have a
real product.
Chairman Wu. Thank you, Mr. Schmidt. And Mr. Gingrey, if I
may, I thought that Mr. Held wanted to make a contribution to
this particular discussion.
Mr. Held. I do. I think this is an extremely important
issue to discuss. As we looked at how the SBIR Program is
managed in the Department of Defense, one thing that is clear
is the mismanagement processes is a fairly complex one. It is
time consuming, it takes a lot of resources; and what I am
talking about are things like contract management, technical
oversight. You can start to look at some of the integration
issues with larger systems that some of these technologies may
be going into. So there is a lot that has to go on in terms of
administering and managing the resource that is going on in the
SBIR program. And by separating the costs associated with
managing the program from the projects themselves, you create
disincentives to want to actually manage the projects in the
acquisition programs out there. And hence they get pushed out
of those and the opportunities to commercialize are decreased
as a result of that, at least commercialized in the sense of
going into DOD systems. If a set-aside--and I think it is
substantially larger than the one percent that has been
discussed here--can be put together and attached to the
projects and the program itself, you will start to diminish
some of those disincentives and actually see an ability to
start to commercialize the technologies more.
Chairman Wu. Thank you very much, Mr. Held. And now I would
like to recognize Dr. Ehlers, the gentleman from Michigan with
whom I have had the privilege of working on this subcommittee
as his Ranking Member in the last Congress. Dr. Ehlers.
Mr. Ehlers. Thank you, Mr. Chairman. Actually, the last
hearing we had on this subject the roles were reversed. I was
sitting in the chair, and you were not. I actually thought that
was a good arrangement. But if I had to choose someone to take
my place, Mr. Wu, it would have been you. And I appreciate your
leadership on this.
Let me ask a heretical question and that is, does it make
sense for the administration of this still to be centered in
the SBA, and I am responding in part to your question, Mr.
Held, of management of the program. In the last hearing we had
on this, several Members and I came away concerned about
whether SBA really has the expertise, research expertise, that
is needed for the overall management. Now, I know it is a very
complex structure handled by the different agencies and so
forth. But I came away wondering if perhaps an agency such as
NIST might be better, simply because NIST already does a lot of
this through the MEP program, also through what used to be the
ATP program which is being superseded, thanks to this
committee. If the Senate agrees, we will replace it with a
different program. And again, they have a lot of experience in
this area. It may be perfectly well to leave it where it is,
but I am just trying to get your opinion. So Mr. Held, you
started the thought process in my mind, so you can start first.
Mr. Held. Well, it is not an area that we look at at all in
our research, so I am not sure I am qualified to answer that
question very well.
Mr. Ehlers. Thank you. Mr. Baron.
Mr. Baron. Yes, I think it is an interesting question. The
program more or less is managed right now. The SBA's role in
managing this program is somewhat limited right now. The
program is managed more by each of the individual agencies that
administer the program. They have control over the budgets and
make most of the decisions about program management. So the SBA
has--when I was involved directly in the program as the program
manager at DOD, SBA played a benign role and a good role in
sort of setting out the rules. They had a policy directive that
helped guide the program. They did not get involved in the
technical decisions. Since then, you know, there has been this
venture capital question whether SBA ruling may not have been
the best judgment. But I think in general, maybe with that
exception, the sort of the current structure of the program
with SBA sort of playing this facilitative role has worked
reasonably well.
Mr. Ehlers. Thank you. I noticed the staff in the next row
visibly whispering and you're handing notes back and forth, but
I just like to hear what you think. Mr. Schmidt?
Mr. Schmidt. Yes, Dr. Ehlers, thank you very much. Your
question is intriguing, but I guess I would have to ask how
much interaction and how much knowledge do NIST officials have
about small business; and that is one of the keys because they
have got to have that understanding of the individual
entrepreneur, of what drives them and what is taking this to
the next level. The technology aspect from NIST is probably
better, but it is this, you know--my house is on the line, and
I have got to make this thing work that is even more important
at that early stage that we are talking about.
Mr. Ehlers. Okay. Dr. McGarrity.
Dr. McGarrity. Well, my previous company had approximately
four or five SBIR grants all from the NIH, and I am probably
one of the world's biggest fans of the NIH. I think it is a
shining star. So I think as far as the interaction, the ability
to judge innovative research, I think it is certainly there. So
I think there should be flexibility on this, and as far as my
company's actions with the SBA I would go with what Mr. Baron
said, they are more or less transparent. There were no dealings
directly with them. Interacting with the NIH has always been a
pleasure, and they are capable and competent. So I feel very,
very comfortable about that interaction.
Mr. Ehlers. Yeah, and my question probably is least
relevant to NIH grantees because NIST is primarily in the
physical sciences.
Dr. McGarrity. Yes.
Mr. Ehlers. Mr. Ignagni.
Mr. Ignagni. I can echo those comments, because our grants
are through the NIH, and it has been transparent to the SBA,
but certainly the flexibility that the NIH has experienced has
been good. I think the Medical Device Manufacturers Association
would like to get back with more information as we evaluate
that question.
Mr. Ehlers. Okay. Well, I was just interested in your
comments in response to--I don't know whether it was Mr. Baron
or Mr. Schmidt. NIST does have the expertise. They are using it
with MEP and whatever ATP is going to become and what it was in
the past. They worked with small businesses, small and medium-
sized was their main aim. And they have good expertise there.
I would not, incidentally, propose that SBA be left
completely out of the loop. They have a very important role to
play here, too. But I am just looking for some way to get
uniformity of treatment towards the applicants from one field
to another. And that is where NIST can play a very good role
because they do this all the time. But also--well, I will leave
that thought on the table for the moment. I don't want to start
a whole new field of inquiry, so I will stop at this point. I
have probably done enough damage already. I yield back. Thank
you.
Chairman Wu. Thank you very much. And in fairness to Dr.
Gingrey, I am just going to ask one question and then recognize
Dr. Gingrey. A couple of you have recommended increasing the
set-aside for SBIR, and let us say I think one witness
recommended doubling the set-aside to five percent. Mr.
Schmidt, would increasing the set-aside at least partially
address your concern about where shares of SBIR go to the
different kinds of applicants in the SBIR process?
Mr. Schmidt. Well, absolutely. You know, administrative
costs, certainly if there is more money, the agencies need to
get paid like the rest of us. And so that is very important for
that issue. On the VC issue, though, this is really more of a
political issue. I am very concerned that over time this
program could become the billionaire's funding program versus
the small business program. I have absolutely no objection to a
separate, similar side program where VCs are allowed to be able
to participate. But what I am concerned about is that we are
going to politically put the entire program at risk over the
years by having this with lots of large players and a couple of
things I want to----
Chairman Wu. Well, let me turn to Mr. Baron and Mr. Held
about their views of what an increase in the SBIR percentage
would mean in enlarging the program by 100 percent. But Mr.
Schmidt, let me just say that when Congress wants to say 500
employees, Congress is perfectly capable of saying 500
employees; and if Congress wants to address form of corporate
ownership, then Congress is also perfectly capable of
addressing it in those terms. Mr. Baron, Mr. Held?
Mr. Held. What I would like to see, I think--and again my
research is focused on DOD--is more evidence that this is
producing technologies that the DOD can use. That is not to say
it is doing bad work now, but that technology transition
process hasn't been working as well as it should be. So before
the set-aside is increased, I think we need to fix that
technology transition process to get this to be a more
effective and efficient program for the Department of Defense.
Chairman Wu. This might be more appropriate for some
agencies than for others----
Mr. Held. Absolutely. Yes.
Mr. Baron. I would echo that in the sense that I think the
greatest gains, for the reasons that I mentioned in my
testimony, can be made by improving the incentives in the
program to focus in on companies that are more likely to
convert research into something that is going to benefit the
world, in other words, the Defense Department or the economy.
And so that is where I would suggest focusing most effort, and
I am not sure that raising the size of the program by that
magnitude would necessarily fund more companies that have the
right kind of capabilities that you are looking for.
Chairman Wu. Thank you, Mr. Baron. Dr. Gingrey.
Mr. Gingrey. Thank you, Mr. Chairman. This question about
the transition from Phase II to commercialization is a real
good one that Mr. Held and Mr. Baron just spoke of, and as I
understand the program, you have got a Phase I, $100,000 grant,
you have got a Phase II, $750,000 grant, and you have got a
Phase III, nada grant, assuming that at that point that they
are over the hump, so to speak. But obviously the percentages
of these companies, particularly the start-ups, the ones who
don't have a track record--and I agree, Mr. Baron, that we have
a situation where you focused on a company with a good track
record and you focused on a start-up. You try to avoid those
with a bad track record, but is it possible that we need to
consider some funding in Phase III? Is that maybe a part of the
reason why there are so many that get grants in Phase I or
Phase II that never make it to commercialization? They are
almost there but they are not quite there? Maybe they need a
Phase II-B or C bump, an opportunity to get a little more money
to get them where they need to be.
Mr. Baron. I think there is--the incentives in the SBIR
Program are, and I think appropriately, for providing the
initial money, the Phase I and the Phase II with the idea that
in most cases it is going to take much more money to get a
product to develop, manufacture, further refine, et cetera, a
product toward commercialization. And SBIR has always been
focused on the earliest stage.
That being said, I think there are some excellent ideas
that have been--pilots that have been tried that are designed
to help companies make the transition to additional money. One
of them has been piloted by the National Science Foundation,
and there is a similar version at the Department of Defense
which provides a larger SBIR Phase II award to companies that
get a little bit of matching funds, matching cash, from a third
party investor. So it is a way for the company essentially to
take their SBIR money and leverage it to obtain additional
outside money that they will need in Phase III. That is called
a Phase II-B. I think it is a very promising experiment. Again,
I would suggest I think there is a fairly easy way to test
that, whether it actually produces better commercialization
outcomes. That gets back to the evaluation idea I had in my
testimony.
Mr. Gingrey. Okay. So the answer to my question is that
that already exists.
Mr. Baron. That is sort of matching and the incentive for
matching funds, yes, it provides additional funds for Phase
II--you can even call that a Phase III--coupled with--
conditioned on the company raising outside funds to match it.
Mr. Gingrey. Right, but this would be over and above the
$750,000--it would be in addition to that?
Mr. Baron. That is the way that it works at the Defense
Department. I am not sure about the National Science
Foundation, but yes.
Mr. Gingrey. Mr. Chairman, I wanted to ask another
question. I see I have a little bit of time left. Mr. Schmidt,
in your testimony you mentioned your experience with the
program, and it is extensive. And I understand--you and I
talked earlier. You have more than one company, in fact. You
have been very successful, and I was wondering how many grants
your company received, let's say in the year 2006, and, if you
know this, which different agencies did you receive the awards
from? And I would actually at this time, Mr. Chairman, if Dr.
McGarrity and Mr. Ignagni could also respond to that question.
Mr. Schmidt. Well, I don't have the exact number but it is
about ten to 12. And so obviously this is important to us. One
of the ways in which we helped leverage some of that
commercialization funding is that we have spun off a couple of
new companies as well. And so we were able to raise outside
money from those--from outside funds from the spin-off. And
that is the way we addressed this, so we have two other
companies that are proceeding with the commercialization there.
Dr. McGarrity. My present company, VIRxSYS, as far as I
know, we have never had an SBIR grant, and the reason for that
is--and I am sitting here as a company that is eligible for the
program. We have focused all our energy, all our resources on
our AIDS treatment. Now, however, we have earlier stage
programs coming up, and in all probability, we will apply for
an SBIR grant in the summer, the first time. My previous
company, Intronn, over a course of six years, we had
approximately four, five SBIR grants.
Mr. Gingrey. Mr. Ignagni.
Mr. Ignagni. We have--we had one Phase I STTR grant.
Unfortunately, the market feasibility at the end of that was
such that I didn't feel was sufficient to proceed to a Phase
II. The principal investigator did submit for Phase II, but I
probably dissuaded him from doing that. We have one Phase I
that is actually moving forward into a Phase II later this
year, and as a matter of fact, we have done some early testing
on a young woman from Michigan yesterday in that Phase I and
that worked very well.
Mr. Gingrey. You currently have a Phase I----
Mr. Ignagni. We have an award pending for a Phase I right
now.
Mr. Gingrey. Mr. Chairman I just wanted to ask Mr. Schmidt,
if you don't mind, if you will submit that to us for the
record. I know you didn't have the exact numbers and the
different agencies, but if you would submit that for the record
I would appreciate it. Thank you.
Chairman Wu. Thank you, Dr. Gingrey, and I am just going to
ask one question of the entire panel before turning back to Dr.
Ehlers. Several of you have addressed the issue of award size.
A dollar does not buy the same in 2007 that it did in 1992, and
I would like to just go down the row and have you all address
the issue of award size and what, from a statutory perspective,
if we were not to provide a flexible cap, would provide enough
moving room for the next three or four years for a reasonable
period of authorization. We will begin with you, Mr. Held.
Mr. Held. Well, as I stated in my testimony, I think at a
minimum we need to account for inflation, and if you want to
set a limit that has some flexibility, you would move up from
there. SO you know, perhaps $200,000 for a Phase I and $1.5
million for a Phase II, something along those lines.
Mr. Baron. I think it would make sense to adjust with
inflation over time but also--and I think the current statute
actually does this to allow for a fair amount of flexibility to
go over the amount. In the example that I provided, if a
company can obtain outside matching funds, some of the agencies
do allow you to go over the amount. So I think there is a fair
amount of flexibility now, but the base rate might be increased
with inflation.
Mr. Schmidt. This was an extensive discussion at SBTC and
among their members, and we came down in favor of the $150,000
and $1.25 million goals for these--for the Phase I an Phase II.
The issue becomes, you know, how much do you go above it? And
there was a comment about a $6 million Phase II, and the issue
becomes how many new Phase I's do you give up for these very
large Phase II's or don't deliver your other items. And so what
the SBTC's position was is that there needs to be certain
guidelines and caps on that to be able to limit that. I think
there has got to be flexibility within the agency that they can
do this to fund those particular programs that are most
important to them and which seem to them to have the greatest
scientific breakthrough, but that is another reason why, to go
back and reconvene it again on a Phase II continuation or a
Phase II-B or C, they can get another bite at the apple--but
they have to show that they chewed the first bite properly.
Dr. McGarrity. I would agree with what Mr. Baron said as
far as at least accounting for inflation since the last figure
was set. And I would also echo his sentiments that, you know,
the Congress and the SBA shouldn't micromanage this. I think
you should set the guidelines, and they are appropriate; but
give the agency the flexibility if they have to and if it is
justified to go over the dollar amount for particular awards,
if it is justified on either a piece of equipment or a special
case or something to have that ability to address the needs of
the particular grants and their overall program and mission.
Mr. Ignagni. Again, in agreement down the line here. We
advocated a $150,000 limit for Phase I. Our guideline for Phase
I as well is one-fourth million. And just to note that with NIH
grants, there is flexibility. WE have--as long as the budget is
justified, well-justified and they have the ability to come
back and say no, we disagree with your justification and you
should get X amount of dollars; but ours have been well-
justified. We have gotten 30 to 50 percent over the guideline
in our two grants.
Chairman Wu. Thank you all very much. While I am
sympathetic to granting agency flexibility, sometimes--well, it
depends on what they do with that flexibility. And you know,
Dr. McGarrity, you might be a little bit concerned about the
claimed flexibility about capital structure and the
interpretation there. Mr. Schmidt, I appreciate your discussion
of a higher limit of $6 million; and while I personally think
that an adjustment above the inflation rate is warranted
because in working with SBIR folks before I came to Congress,
that was a tremendous amount of work to do for a modicum of
money and that perhaps an above-inflation adjustment rate might
be warranted. But we might not be able to hit that $6 million
mark. With that, Dr. Gingrey, further questions?
Mr. Gingrey. I would like to go back to Mr. Schmidt in
regard to this issue of venture capitalists MAT companies, and
I know that you are--in your testimony, I know you have some
concerns over that; and you don't think they should be eligible
and are therefore in agreement with the ruling of the SBA back
in 2003. And I really wonder if your thoughts that nine
different agencies that participate with the 2.5 percent set-
aside maybe should be increased. And you were talking--used the
analogy of the bite of the apple. Let me use one. I am not sure
that we are comparing apples to apples in regard to the issue
that Mr. Ignagni and Dr. McGarrity raised, because of the type
of business that they are involved in. I guess those grants
would come through the NIH in the biomedical field, and the
necessity of trying to raise some capital just to get off the
ground almost forces them to go in that direction unless there
are a lot of angel investors around. If I had to look for an
angel investor in my family, I would be dead in the water.
And so I just wonder maybe if in your logic on this, if you
would not agree that maybe you treat these apples and oranges a
little bit differently. In some situations, some agencies that
participate in this program, maybe that rule would make sense,
but in others specifically, the funding through the NIH
wouldn't make sense. Comment on that.
Mr. Schmidt. Congressman Gingrey, I just wanted to clarify
one thing just to make sure everyone is on the same page. The
current rules from '52 before the SBIR program to '82 with the
SBIR Program, and the rules have been the rules all the time,
do not prohibit VC ownership, small VCs with less than 500
employees combined, from owning a majority of the shares. So
they can own 99 percent of the shares under the current rules,
as long as their conglomeration is less than 500 employees.
The second thing is that a large VC with more than 500
employees underneath their domain can own 49.99 percent. So the
only thing that is prohibited is large VCs having majority
ownership. So you know, that is the only thing we are talking
about with this.
The second thing to answer your question previously is
whether things have gone down since this ruling. The GAO report
in 2006 showed the percentage of venture-supported companies at
the NIH has increased in the two years following the SBA
clarification, and we can make that available. So that is not
reduced VC funding at the NIH at all. So the only thing that
they are prohibiting is majority ownership by large VCs.
So I guess I look at this and say, you know, should you
make an exception for the NIH? Well, what I would suggest
instead is having another similar program. We have STTR, we
have SBIR, and I would suggest a growing businesses innovation
research or other similar kind of program where this VC rule
does not apply, that you can allow those people in that
program; and that way we do not mix these individuals and this
program because, Representative Gingrey, you asked about your
friend, you know, that the one person got it. And I was one of
those guys. When I started with the companies, it was me and my
wastebasket. And I kept yelling at my wastebasket that it
wasn't producing the reports I needed. Of course, you work
these 80 to 100 weeks for years on end. I mean you get one, two
days off, in a quarter and that's a big deal. So, in going
through all of this, the SBIR Program provides for those small
companies, and the majority of their companies are under 20
employees. So that's what the SBIR program does. So by
including large VCs into this and having majority ownership,
you are going to make it that much harder for that individual
guy to be able to get up and run. So if you have a parallel
program, that is something that, we can live with, there is
more money for that. I mean, I spend a lot of time in Cleveland
arguing for angel groups, and I am an angel in two different
groups. And having more VC money into our area. I mean, I argue
all the time for that. It is a big deal. It is important. But
to take the SBIR Program and change that purpose, my opinion
and the opinion of the SBTC and the NSBA is that that would be
a mistake.
Mr. Gingrey. Mr. Chairman, I am going to yield back to you.
I think if you want to----
Chairman Wu. Mr. Ignagni, I believe you may have wanted to
respond to that.
Mr. Ignagni. I just have one point that I think is a part
of the confusion around this argument. It is the example--and
Mr. Schmidt brings up the small VC versus the large VC; and I
really don't know what that means. I mean, a small VC company
in Palo Alto, California, three large partners, six people, six
partners in the firm with several assistants and everything.
But they get money from Ford Motor Company's pension fund to
invest some small portion, and there are however many people.
This is a hypothetical example. But they are affiliates, and it
is written as employees over affiliates. I don't know if there
is such a thing as a small VC. As soon as they become an
institutional investor and get money from, whether it is
University Hospitals pension fund or just some other larger
company that is investing in them, I think they are considered
affiliates; and that would make my life a lot easier if it were
just the number of employees at the VC firm.
Dr. McGarrity. And just another supplement to that, the
wording is that it has to be owned by 51 percent of
individuals, and I think a significant change was whether the
VCs were listed as individuals as they were in the past or now
that they don't count as individuals, you have to have
ownership by individual people. Actually, if you go back to the
original investment legislation, that legislation actually said
that investment firms would be counted as individuals, and the
legislation that introduced the SBIR was actually mute on that
point. So I think maybe that is the reason why this has been so
vague and open to interpretation through the years.
Chairman Wu. Well, as we proceed I think that we will focus
a substantial amount of attention on this form of corporate
organization and whether it is relevant or not to small
business definitions and the SBIR Program.
There has been some discussion--one of the strengths I view
of the SBIR program is a relative uniformity of cross-federal
agencies in terms of a percentage set aside that it is handled.
There has been some discussion today of different percentage
set-asides for different agencies and perhaps handling this VC
issue differently between different agencies. Mr. Held, Mr.
Baron, do you see problems where they're starting to treat
different agencies differently under the SBIR program or the
STTR program?
Mr. Baron. Yes. I think you want some flexibility but
different agencies have different missions, needs, and so
forth. But the uniformity as you mentioned in your question,
some degree of uniformity has a real purpose. This program is
for companies most--is intended for a lot of companies that
have never done business with the government before and don't
know all about arcane rules of government granting and
contracting and all of that. You want the process to be, I
would think, as simple and streamlined as possible and to have
a set of fairly clear rules across the agencies, similar sizes
of awards, proposals limited to 25 pages. It serves a great
benefit in allowing--in making the process more merit-oriented
and not less oriented on knowing the nuances of how each
individual agency's rules operate.
Mr. Held. Yeah, I think I generally agree with that. There
is a lot of advantage in terms of efficiency and in terms of
making it easy for small businesses to participate in the
program, to have as much uniformity as you can across the
government. Having said that, there has to be flexibility in
the program to structure each individual agency's program so
that it can best meet the goals of that particular agency.
You look, for example, within DOD, there are agencies like
the, DARPA, Defense Advance Research Project Agency that does
very risky, very far-out kind of research; and then there are
the Armed Services which are trying to get things fairly near-
term into the hands of soldiers and airmen and sailors and
marines and so forth. And the program, because it draws from
each of those agencies, has to be able to have the flexibility
to manage those different goals.
Chairman Wu. Mr. Schmidt.
Mr. Schmidt. Mr. Wu, just one example in our little sleep
monitoring device, we developed a radio underneath NIH funding.
We then took that radio and put it on missiles for the Air
Force. We improved the radio and then put it back into this
device, and we are now coming up with a fifth generation radio
to be able to go back into the military and other places. We
are doing brain monitoring from NIH and now applying it for
Homeland Security and Department of Defense issues after a
chemical warfare attack. The problem is that it is most
beneficial for the Nation to be able to take these technologies
and move them across. If you have different rules for different
agencies and you say, oh, you have got 51 percent funding from
a VC, you are okay over here, but you know, you are going to
hit that wall right there when you are trying to take that over
to another agency, I think that would be detrimental for
overall technology development.
Chairman Wu. Mr. Ignagni.
Mr. Ignagni. I think uniformity and DMA thinks that
uniformity is good, but unfortunately in the NIH, and the
amount that it takes to do a clinical trial, to get a clinical
trial started, is very substantial; and to get a device through
all of the compliance requirements, all of the certifications
that you need to get into human trials, or animal trials for
that matter, is expensive.
Chairman Wu. Thank you all very much. We have tapped at
least most of the horses that we need to tap as we go forward
in the legislative process. We are at risk of reflogging some
of those horses now, and I want to thank all the witnesses for
a very, very productive hearing; and thank you very, very much
for being here today. If there is no objection, the record will
remain open for additional statements from Members, for
questions or answers to the witnesses or from any Committee
Members; and without objection, so ordered, and the hearing is
now adjourned. Thank you all very, very much.
[Whereupon, at 3:05 p.m., the Subcommittee was adjourned.]
Appendix 1:
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Answers to Post-Hearing Questions
Responses by Bruce J. Held, Director of the Force Development and
Technology Program, Rand Arroyo Center, The Rand Corporation
Questions submitted by Chairman David Wu
Q1. In your testimony, you comment about DOD's solicitation schedule
and recommend more frequent solicitations to provide flexibility to
meet DOD technology needs in a timely manner. What do you estimate
would be the additional administrative cost of this flexibility? Do you
think there is an appropriate legislative solution for this?
A1. Under current procedures, the additional administrative cost could
be substantial, though additional study is merited to determine what
that cost would be. Current procedures issue a service/agency-wide call
for topics. Submitted topics then are modified and approved through
various levels of command and management; ultimately the Office of the
Director of Defense Research and Engineering provides the final
approval. This centralized process is administratively burdensome, so
most agencies and services limit their topic proposal and SBIR
solicitation exercise to only one or two of the regularly scheduled DOD
SBIR solicitations per year in order to improve process efficiency.
Increasing solicitation frequency should, therefore, be linked to other
SBIR program reforms intended to improve overall flexibility and
utilization of research outcomes.
Potential legislative solutions could include providing for final
topic approval at a level lower than the DOD level. This would allow
the services/agencies to significantly stream-line the topic approval
process. Additionally, legislation could mandate an ``open''
solicitation, at either the service/agency level or at the DOD level,
to which SBIR topics could be added at any time. Given the current
sophistication of available Internet search and alert tools, an open
SBIR solicitation would have the same effect as regularly scheduled
solicitations in providing small businesses a simple means for learning
about opportunities available in the program.
Q2. What improvements would you recommend in the award application
process which would lower application costs for small businesses and
reduce the funding gap between Phase I and II awards?
A2. It is not clear that the application process for Phase I awards
could be improved significantly to lower application costs without
detracting from competition or reducing the amount information required
to make informed award decisions and collect information necessary to
manage and monitor the SBIR program. Phase II award costs could be
reduced in some cases by making Phase II an option on the initial Phase
I contract. (The term ``option'' as used here is different than the
Phase I Option program that provides bridge funding when a Phase II
award is anticipated.) This would also have the added benefit of
reducing the funding gap between Phase I and Phase II. Rather than have
the small businesses prepare a second proposal and enter into a second
contract, a Phase II option would allow contracting officers to simply
exercise the option upon successful completion of Phase I and a
decision by the benefited command, program office, laboratory or
research center to continue the work.
Since Phase I studies are usually feasibility studies, managing
Phase II awards as options on the Phase I contract will require some
additional work and innovation in drafting and negotiating the Phase I
contract. For example, there would need to be provisions that allow for
adjustments in the technical direction of the project and in the
anticipated cost of Phase II. Nevertheless, the additional effort could
be rewarded by much less effort in making Phase II awards and a much
reduced funding gap between research phases.
Q3. You make the case for flexible program administration, including
award size. In addition to award size, what other specific areas of
program administration would benefit from flexibility? Please describe
how flexibility should be implemented? Is there a need for statutory
change?
A3. I mentioned above, in answer to Question 1, that solicitations
should be more frequent, or there should be some provision for an
``open'' solicitation to make the initiation of SBIR research more
responsive to the needs of the DOD's technology customers. In addition,
the actual schedule and pace of the research should be responsive to
the requirements of the DOD technology customer and to the progress of
the research. For example, in some cases, Phase I might require very
little time. By using a Phase II contract option, as I described in
Question 2, Phase II could be started very quickly. Depending on the
research, such an approach would have the benefit of moving the
technology through research and development much more quickly.
I believe the current SBIR law already allows enough flexibility
with regard to project and solicitation schedule flexibility. At issue
are established procedures for managing the SBIR program in DOD. These
procedures evolved mainly in response to process efficiency
requirements. Legislation that requires administrative funding for the
SBIR program to be drawn from the SBIR set-aside could change the
incentives that make process efficiency in the DOD SBIR program more
important than research utilization.
Flexibility concerning the kinds of research and development
appropriate to the SBIR program would also be very useful. The word
``innovation'' does not just mean cutting-edge science and technology.
In fact, and as currently recognized in the law, one common
interpretation of innovation is the development of existing science and
technology for new uses. Some examples of how to be more innovative
about ``innovation'' are illustrative.
a. The SBIR program could be a particularly effective resource
for conducting engineering improvement programs for already
fielded items of equipment. Program offices managing fielded
equipment, particularly when there is no product improvement
program approved, usually have very few resources for improving
the equipment they manage; for example, developing more robust
components to replace ones that wear out quickly. The SBIR
program can be this kind of resource, providing development
funds that potentially improve equipment performance and save
other resources.
b. The SBIR program could be engineered into a resource for
the rapid development of technology urgently needed by deployed
forces. Though there are other programs and processes to do
this, realigning funding can be time consuming. The SBIR
program could be an accessible source of innovation funding
that doesn't need reprogramming.
c. Provide SBIR awards to take a technology through several
steps in development. For example, a Phase I and II award might
be used to develop a brass-board prototype of a technology, a
second Phase I and II might take the technology from brass-
board to operational prototype and a third Phase I and II might
provide for full up testing and product refinement. (There are
some efforts along these lines now.)
A broad, legislative restatement of what is meant by innovation and
how that applies to the SBIR program would help resolve debate about
the appropriate use of SBIR resources.
Q4. What specific percentage administrative cost recovery of the SBIR
set-aside dollars do you recommend and what types of administrative
costs would you include; what would you exclude?
A4. There are a number of research management comparisons that can be
used to develop an estimate for a specific percentage administrative
cost recovery of the SBIR set-aside dollars. For example, the Navy's
SBIR program appears to be more successful in commercializing its
research results. That program taxes its RDT&E accounts an additional
6.5 percent of the value of the SBIR set-aside to fund administrative
and commercialization costs. Commercial venture capitalists draw an
annual management fee that averages about 2.5 percent of funds under
management, plus they earn a significant portion ( 20 percent) of any
return on investment that is earned. In the DOD, the account for RDT&E
Management Support averaged nearly eight percent between FY 2000 and FY
2008. Based on these benchmarks, I recommend that the percentage
administrative cost recovery of the SBIR set-aside dollars be at least
six percent, and perhaps even higher.
Administrative cost recovery funds should be allowed to address
most administrative costs associated with managing the SBIR program,
including contract management, topic and solicitation writing, proposal
evaluation, technical support and oversight, and the programmatics
associated with integrating SBIR research with other acquisition and
R&D programs.
Whether administrative cost recovery funds should be allowed to
fund business development activities for participating DOD SBIR
companies is a matter that requires more research and explicit policy
decisions concerning these kinds of activities. In fact, current law
already allows some SBIR funds to be used for these purposes.
Q5. In your written testimony, you say there are Department of Defense
SBIR award winners in what you describe as ``research houses'' who
provide research as a service but without the ultimate goal to develop
a marketable product. Why don't these firms focus on commercialization?
How widespread is this practice? What can be done to focus on the
commercialization goals of the SBIR program?
A5. The business model of these firms is to provide a service, and that
service is research. Firms that focus on research as service do so
because selling research services can be a successful business model.
Research is also what motivates the people in these firms rather than
the other tasks that go into commercialization, such as marketing,
sales, product development and manufacture. Research services like this
are also important to organizations that require the work but don't
have an in-house capability for it and, for any number of reasons, do
not want to develop the capability.
In the SBIR program, research houses can be very valuable
contributors, provided that their work will ultimately result in a
product, process or technology used by the DOD. A mechanism for
enforcing this requirement is available in the Commercialization
Achievement Index (CAI). Research houses that conduct numerous SBIR
projects should be able to achieve reasonable CAIs through licensing
fees, follow-on research contracts and other additional investment from
companies interested in the technology. Those that do not achieve
reasonable CAIs should not continue to receive SBIR awards.
Our research did not examine how widespread this business model is.
Getting more focus on the commercialization goals will require more
``mainstreaming'' of the DOD SBIR program into the acquisition
activities of the DOD. So long as most of the DOD SBIR program is
managed from the laboratories and R&D centers, technology transition
and commercialization will remain difficult. Management of the program
should be more aligned with sources of SBIR funds. Since the DOD's
acquisition programs provide most SBIR funds (6.4 and 6.5 dollars
represent the largest categories of DOD RDT&E funding) this kind of
alignment would give acquisition program managers greater control of
SBIR funds and projects. In keeping with my theme above, if acquisition
managers are given more control of SBIR projects, they should also be
given the resources to adequately manage and integrate the research
into their programs.
It should be recognized that in recent years there have been
efforts to make the DOD's acquisition community more involved in the
SBIR program. With the possible exception of the Navy, these efforts
remain inadequate, however, and more needs to be done.
Q6. You recommend increasing the role of the Department of Defense's
(DOD) acquisition staff in managing SBIR projects, such as in award
topic selection. What are the current best practices in DOD which
support integration with DOD's acquisition processes? Is a change in
the statute needed?
A6. The Navy currently provides examples of best practices. It does a
number of things differently, and these appear to have had an impact on
commercialization success.
First, the Navy directly funds SBIR technology transition
management. It collects an additional .1625 percent on top of the 2.5
percent of extramural R&D to provide funding for technology transition
assistance and management.
Second, the Navy participates in all four DOD SBIR solicitations.
Third, the Navy's philosophy concerning use of SBIR resources seems
to be that organizations should benefit from the program more in
relation to the contribution they make toward the program.
Fourth, the Navy has personnel at each SYSCOM/PEO funded by and
dedicated to managing the SBIR program.
Fifth, the Navy's leadership appears to be pushing management of
SBIR projects down through the PEO structure to individual program
management offices (PMO). This is currently most evident in NAVSEA and
NAVAIR, where topic selection, proposal review, and project oversight
are managed by personnel in the PMOs and PEOs, rather than the
laboratories and R&D centers. This greatly increases the chances that a
particular project will be responsive to the needs of an acquisition
activity.
Legislation that could support these kinds of best practices
include:
a. Allowing funding of SBIR administration costs from the SBIR
``tax'' on extra mural R&D.
b. Requiring some percentage of SBIR projects be managed by
the acquisition community. The actual percentage should
probably be made a function of the SBIR tax the programs in
each PEO pay into the SBIR program.
c. Legislatively defining ``innovation'' and
``commercialization'' such that pursuit of the SBIR program's
innovation and commercialization goals will necessarily require
more participation by the acquisition community.
d. Requiring greater application of commercialization
achievements as a proposal evaluation criterion.
Q7. You describe the DOD SBIR leadership focus is on statutory
compliance rather than research outcome and utilization. Given this
assessment, what is your view on doubling the size of the SBIR program?
You also suggest the question around increasing small business
participation should be on increasing the quality of the participation
not the overall number of companies participating. Is this a current
problem?
A7. The DOD SBIR program should not be doubled in size until and unless
it is demonstrated that the results of the research are being
incorporated into DOD equipment, processes, or other DOD R&D
activities. This demonstration requires that appropriate and measurable
metrics be defined and goals established that benchmark acceptable SBIR
research utilization success.
The most consistent complaint we heard from the small business SBIR
program participants was that there was no path to take their research
forward after the end of each project. Therefore, by ``quality of
participation,'' I mean that SBIR research projects should be selected
and managed so that they directly support and are integratable into DOD
acquisition programs and research initiatives. This kind of
participation is much more likely to result in the results of the
research being incorporated into DOD equipment or contributing to
important research efforts. Too often, SBIR projects today are managed
as something outside mainstream efforts and result only in reports that
are rarely read after the conclusion of the project. Simply increasing
the number of small business participants will not relieve this issue.
On the other hand, if SBIR projects are perceived as valuable
contributors to acquisition program success or to research that leads
to future acquisitions, then demand for SBIR resources will increase,
and more small businesses will seek participation in the program.
Q8. What do you see are the most significant data gaps with respect to
program evaluation and the most effective ways to address these gaps in
the future? Who needs to gather this information, and what are the
impediments to compiling this information today?
A8. The DOD SBIR program currently collects sales and additional
investment data from companies that previously participated in the
federal SBIR program and are making a new SBIR proposal. This data can
provide insights into whether SBIR research is being used in the
development of military equipment. Additional data that is more
specific on actual use could provide greater insight. Such data might
include the specific examples of use, time to use and TRL levels.
Actual metrics, however, will require additional development to
determine what information can be feasibly collected. Whatever metrics
are ultimately required, they need to be collected on an on-going basis
and would best be collected by SBIR managers assigned to specific PM/
PEO offices, laboratories and R&D centers.
The ability to collect adequate data for assessing the DOD SBIR
program is currently impeded by two things. First, metrics for
assessing SBIR program success are ill-defined and actual reporting
requirements are focused on program execution. Second, the resources
dedicated to managing the SBIR program are too few to adequately
evaluate and oversee the program much beyond the execution metrics that
are reported up through the DOD, to the SBA and ultimately to Congress.
Q9. Please recommend how you would structure on-going administrative
oversight and evaluation of the DOD SBIR program? Are these
recommendations appropriate to other SBIR agencies?
A9. Oversight of the SBIR program needs to be more closely tied to the
program's legislative purpose. In order to make this possible, specific
criteria and benchmarks that are directly related to the program's
legislative purpose must be established, and metrics that can be used
to assess how well the SBIR program is addressing the criteria and
meeting the benchmarks must be developed, and the data collected.
Reporting requirements for the SBIR program also need to be more
closely tied to the legislative priorities for the program.
In addition, the structure of SBIR oversight and evaluation
responsibilities should more closely align to the legislative
priorities. For two of the services and to some extent at the DOD
level, much of the oversight and evaluation responsibility is
established in Science and Technology organizations, such as the Office
of the Director of Defense Research and Engineering (DDRE) and the
Director for Research and Laboratory Management in the Army. These
organizations certainly have a stake in the SBIR program and should
retain organizational responsibility for oversight and evaluation of
SBIR projects that are comparable to research conducted under the DOD's
RDT&E research categories 6.1 through 6.3. However, acquisition
organizations should have organizational responsibility for oversight
and evaluation of SBIR projects that are comparable to research
conducted under the DOD's RDT&E 6.4, 6.5 and 6.7 research categories.
The DOD's current SBIR management structure is too lean to provide
more than program execution oversight and some level of policy
guidance. Adequate oversight of SBIR program utilization is not
practicable without sufficient information to inform evaluation and
people to actually conduct evaluations. Since the DOD SBIR program
consists of two to four thousand on-going projects and many thousands
of completed projects, and because these are research projects whose
transition into fielded products is a very complex process, evaluating
success is necessarily a labor intensive endeavor. That is one reason
why I recommend at least six percent of the program funds be set-aside
for administrative costs. More personnel are needed at the DOD level,
the service/agency level and the major command/PEO level to collect,
analyze and report progress in the DOD SBIR program.
Administrative oversight and evaluation of the SBIR program should
be structured to the purpose of the parent organization. Since these
purposes vary, and our research did not examine other SBIR
organizations in detail, I cannot comment on how they should structure
their SBIR program oversight and evaluation.
Q10. Looking at Small Business Administration (SBA), how well has SBA
done to date in providing management and oversight of the SBIR program?
What do you recommend to improve management and oversight?
A10. Our research did not examine SBA practices with regard to the SBIR
program, so I cannot comment on Question 10.
Answers to Post-Hearing Questions
Responses by Jon Baron, Executive Director, Coalition for Evidence-
Based Policy, Council for Excellence in Government
Questions submitted by Chairman David Wu
Q1. How should we address the situation of recipients of multiple SBIR
awards who have no record of commercialization? How widespread is this
practice, and what has been the impact on the program? How could award
criteria be revised and applied by review committees to be sure prior
award and commercialization experience is considered by the review
panel?
A1. The GAO studies of the SBIR program, and DOD data, show that some
SBIR companies--perhaps as many as half of those that have participated
long enough to build a track record--consistently are unable to convert
their SBIR awards into viable new products sold to commercial or
government customers.
To ensure that an SBIR applicant's prior award and
commercialization experience is considered by agency review panels, I'd
suggest that an applicant's track record in commercializing its prior
SBIR awards comprise at least 30 percent of its evaluation score. As
noted in my testimony, some agencies such as DOD collect excellent data
on companies' commercialization track records, which could readily be
used in this process.
This criterion would only apply to applicants that have won a
sizable number of prior SBIR awards (e.g., at least three prior phase
II awards); thus applicants that are relatively new to the SBIR program
would not be affected by this policy. (An agency could even give such
new SBIR applicants a competitive priority--e.g., 10 extra points out
of 100--if the agency wishes to encourage their participation in the
program.)
Q2. You describe firms who are consistently unable to convert their
SBIR awards into viable new projects. You provide examples of agency
approaches to improve SBIR award company entrepreneurial skills. Would
you please identify which approaches you believe are most effective?
A2. I think the most promising approaches are to incentivize firms to
(i) hire individuals with the experience and motivation to
commercialize, and (ii) give these individuals a key role in running
the company. Suggested incentives are discussed in response to the next
question. Based on my experience and discussions with companies that
have been highly successful in commercialization, I believe that
bringing such experienced individuals into the company is likely to be
more effective than training or providing other assistance to existing
company personnel who have little background in commercialization.
Q3. What types of incentives do you recommend to significantly improve
commercialization? Please also describe how these incentives should be
administered, considering the different skill sets of award winners.
A3. Revising the SBIR proposal evaluation criteria to give greater
weight to an applicant's commercialization track record, as described
under question 1, would be a powerful incentive.
Another strong incentive would be to provide a larger phase II
award, and/or a competitive priority in the phase II proposal
evaluation process, to SBIR companies that obtain at least a partial
match of funds (cash, not in-kind) from a third-party investor. The
National Science Foundation's ``Phase II-B'' award, and DOD's ``Fast
Track'' and ``Phase II Enhancement'' policies are specific versions of
this approach. The rationale for this approach is that an investor's
hard commitment of matching funds is a strong endorsement of the SBIR
company's entrepreneurial capabilities and the market size (commercial
or military) for its technology. The National Academy of Sciences'
study of DOD's Fast Track provides initial evidence that this approach
yields much higher commercialization and research outcomes.
You might consider including both of these incentives in the
reauthorization legislation.
Q4. What do you think would be the impact of doubling the size of the
SBIR program by increasing the set-aside to five percent, including the
impact on the competitiveness of the awards and the potential for
commercialization of the projects?
A4. I think it's hard to project the impact of doubling the SBIR set-
aside. I think it might be more productive for the reauthorization bill
to focus on revising the incentives in the existing SBIR program, as
discussed above, because there's strong reason to believe that doing so
could greatly increase the program's contribution to American
technological and economic capabilities.
Q5. You recommend agencies be directed to allocate one percent of SBIR
funds to conduct scientifically rigorous evaluations of new approaches
to build awardees' entrepreneurial skills? What information is required
and is it feasible to collect this information? Who do you recommend
conduct these evaluations?
A5. As I discuss in my testimony, scientifically rigorous evaluations
of new approaches to administering the SBIR program--such as the
incentives I describe above--are often feasible at modest cost and with
minimal administrative burden.
For example, an agency could randomly assign half of its SBIR
awardees to a ``treatment'' group that is eligible for a larger phase
II award if it obtains matching funds from a third-party investor (as
is done under the National Science Foundation's ``Phase II-B''
process), and its other awardees to a control group that participates
in the agency's usual SBIR process, without this Phase II-B. The
evaluation would then track commercialization outcomes for the two
groups over time, to determine whether the Phase II-B incentive made a
difference in such outcomes. At agencies such as DOD that already track
commercialization outcome data for most of their SBIR awardees, this
rigorous study could be conducted at a low cost by using such data--
perhaps $250,000 per year over five years as a rough estimate.
In addition to tracking commercialization outcomes, the evaluation
could also survey the agency scientists or engineers who monitored the
SBIR projects to assess whether the projects in the treatment group
made a greater or smaller contribution to the agency's research goals
than the projects in the control group.
To conduct such a study, I would suggest that the agency engage an
independent evaluation firm with a demonstrated track record in
conducting high-quality evaluations using random assignment.
Q6. Looking at Small Business Administration (SBA), how well has SBA
done to date in providing management and oversight of the SBIR and STTR
Programs? What do you recommend to improve management and oversight?
A6. SBA has played a very useful role in making sure that the agencies
follow the clear, streamlined SBIR procedures set out in the SBA policy
directive, and that the program is administered in a fairly consistent
way across the agencies. This is an important role, because it ensures
that firms which are new to the government granting and procurement
process can compete on the basis of merit with firms that have more
experience with the government process. Put another way, SBA is an
effective counter-weight to the pressures that often exist in the
agencies to complicate the SBIR application and review process. I would
suggest that the reauthorization legislation and/or report language
focus SBIR on this key role and not, as some have suggested, on other
aspects of program administration where SBA has less institutional
expertise (e.g., collecting commercialization outcome data).
Q7. You have significant experience with the STTR program in addition
to SBIR. What separate recommendations would you make for the STTR
program to improve program efficiency and effectiveness?
A7. The STTR program serves as an important complement to the SBIR
program by harnessing a new and different source of innovative ideas--
ideas that originate with a scientist or engineer in a university or
federal laboratory. These researchers cannot participate in the SBIR
program in a central way--e.g., as principal investigator--as long as
they remain primarily employed at their research institution.
Because STTR projects include significant involvement of research
institutions--which sometimes don't have a strong interest in
technology commercialization--I'd suggest it is particularly important
for the program to ensure that the small businesses partnering with the
research institutions have strong commercialization capabilities. Thus,
incentives such as those I outline under Questions 1 and 3, and in my
testimony, may be especially important to include in the statutory
authorization of STTR.
Answers to Post-Hearing Questions
Responses by Robert N. Schmidt, Founder and President, Cleveland
Medical Devices, Inc., and Orbital Research, Inc.
Questions submitted by Chairman David Wu
Q1. You have proposed increasing the set-aside for the SBIR program to
five percent over time. The current Administration's American
Competitiveness Initiative would double funding in the physical
sciences for NSF, DOE and NIST. Similarly, NIH funding doubled between
FY99-FY03. What is the basis for your recommendation? How much funding
would the SBIR program be if your recommendation is implemented and
Congress also funded the President's budget proposals for NSF, DOE, and
NIST?
A1. SBTC recommends that the SBIR allocation be gradually increased to
five percent for two major reasons. First, there are new needs within
the Program. These include the need to increase award sizes, which have
not been adjusted in fifteen years, the need to strengthen SBIR Phase
III, and the need to provide the participating agencies with additional
administrative funds.
Second, we believe that Congress should acknowledge the proven
capabilities of the SBIR Program--as well as a growing gap between
where American scientists and engineers actually are and where federal
R&D dollars are going. For almost ten years, SBIR companies have been
obtaining more patents than all U.S. universities combined. Today it's
about 30 percent more. Meanwhile, smaller companies are employing an
increasing share of the Nation's scientists and engineers. Today, about
a third of all U.S. scientists and engineers--and more than half of
those in the private sector--work for smaller companies. Yet the
percentage of federal R&D dollars awarded to smaller companies,
including SBIR companies, is an astonishingly low 4.3 percent. And SBIR
is the only Program that Congress has ever devised which actually
succeeds in empowering small technology-based companies to obtain
federal R&D contracts.
Gradually increasing the SBIR allocation would not only build on
the proven success of the SBIR Program. It would also tap into a huge
pool of underutilized R&D talent. And it would increase the share of
federal R&D dollars awarded to small companies from today's 4.3 percent
to perhaps six or 6.3 percent.
As we suggested in our testimony, SBTC favors the Administration's
American Competitiveness Initiative. We think it is needed, and we hope
Congress approves it.
Having said that, we would note certain limitations to the ACI. The
FY 07 appropriations for the agencies covered by ACI was $10.6 billion.
The FY 08 request for the same agencies is $11.5 billion, an increase
of less than $1 billion (and less than eight percent), if approved by
Congress. The FY09 request, whatever it may be, is the last budget that
the current Administration will be able to monitor and promote through
the Congressional appropriations process. These requests, then,
represent only modest increments compared to the ``doubling'' of the
R&D budgets of these agencies by 2016 that the ACI envisions.
Such an outcome is highly speculative at a time of large budget
deficits and changing political leadership, but, again, we hope it
occurs.
Yet even if the FY08 and presumably higher FY09 requests are
approved, the increases that NSF, DOE and NIST would receive will
affect only a small fraction of the government-wide SBIR Program.
For FY05, the most recent year for which SBIR data is relatively
complete, the agency SBIR budgets were as follows:
DOD $1.2 billion
NIH $525 million
DOE $104 million
NSF $61 million
NIST $3.1 million
The DOD SBIR Program accounts for more than half of the government-
wide SBIR Program funds. The Administration request for DOD science and
technology funds in FY08 is $10.8 billion, down nearly 20 percent from
the FY07 appropriation of $13.3 billion, and more than offsetting the
request for increased R&D funding for the ACI agencies.
Looking at the broader DOD RTD&DE budget outlays, these are reduced
from $75.5 billion in 2007 to $72.9 billion in 2008 in the
Administration's budget.
NIH accounts for about another one-third of all SBIR funds, and
that funding appears to be flat or increasing more slowly than
inflation for the foreseeable future. This year's NIH request, for
example, is 1.1 percent below last year's actual.
Such decreases will likely exceed by a wide margin any R&D funding
increases in the much smaller NSF, DOE, and NIST R&D budgets, and
therefore the SBIR Programs that are based on them.
Comparing the actual number of SBIR awards made in FY05 (the last
year for which such data is relatively complete):
DOD made 3082 awards,
NIH made 1160,
DOE made 427,
NSF made 252 and
NIST made just 23.
Clearly, with DOD declining and NIH flat, the other three agencies
would have to make up an enormous amount of ground to grow the entire
SBIR Program.
Will they? Looking beyond the current Administration's FY08 budget
submission next January, (and the budget that it submits during its
waning hours in January 2009), there is no solid indication of where
federal R&D funding is actually headed. A new Administration and a new
Congress in January 2009 will certainly have their own set of
priorities, not only for R&D in general, but also for the types of R&D
to be funded.
SBTC's recommendation for a gradual, phased increase in the
proportion of R&D dollars allocated to the SBIR Program is based on
three major factors.
First, award sizes need to be increased to account
for inflation and other cost factors since the award sizes were
last set in 1992. A permanent inflation-adjustment mechanism
needs to be set in place. But doing this will shrink the
overall reach of the Program--its numbers of awards, its
technologies accessed, and its awardees--unless the Program
itself grows.
Second, agencies need to be incentivized to make SBIR
Phase III much more of a reality.
And third, some new funds need to be allocated to the
administrative and management expenses associated with agency
participation in the Program.
Along with that is the simple fact that SBIR works. With more of
the Nation's science and engineering talent migrating into smaller
companies, and with SBIR having a demonstrated record as the only
successful method yet devised for providing these smaller companies
with access to federal R&D contracts, it is hard to see how the Federal
Government can continue meeting its R&D needs at a reasonable cost
without a strengthened SBIR program.
Q2. If the set-aside is doubled, will this be at the expense of
university research, cutting their research budgets? Please explain.
A2. If overall federal R&D funding increases under the ACI, as
anticipated in the above question, then the dollars actually going to
universities may well increase, even with a slightly larger SBIR
Program allocation.
But the larger point is this: SBTC does not at all view university
R&D and SBIR R&D as mutually exclusive. Rather, we see the two as
mutually reinforcing. As we noted in our testimony, many, if not most,
SBIR companies utilize university expertise. I myself have partnered
with 14 universities in my SBIR work.
A recent study by the New England Innovation Alliance (NEIA)
examined the university ties of 17 SBIR companies responding to a poll.
These companies had a combined total of 175 subcontracts to 101
different universities, for an average of 10.3 subcontracts to
universities per company. An average of about six universities were
funded by each company.
Thus my companies CleveMed and Orbital Research, which have
contracted with 14 universities (or an average of seven per company)
fall close to the norm of the NEIA study.
The NEIA study also found that the companies it examined provided a
total of $28,124,005 subcontracting dollars to universities. These
university subcontracts involved 243 faculty members and grad students.
As my own experience and the data from the study show, the SBIR
Program helps universities attract and retain talented science and
technology faculty by linking those faculty members to remunerative
outside commercial projects. Faculty members contracting individually
with the companies in the NEIA study received an additional $3,108,700
directly in funding.
Moreover, within just these 17 SBIR companies that NEIA polled:
nine firm founders were university faculty members
49 firm executives held academic positions
45 firm employees or consultants held faculty
positions
33 firm employees came from science and technology
graduate school programs, and
25 firm employees were currently adjunct professors
at universities
Not only do these SBIR firms offer R&D employment and contracting
opportunities to universities and faculty members, they also provide a
significant spur for researchers to focus their efforts on innovations
that will aid the universities financially and have a positive economic
impact on the locality, the region and even the Nation, particularly by
creating new jobs, a key goal of the SBIR Program.
In general, SBIR projects can help universities commercialize
research by identifying ongoing R&D with potential downstream
commercial applications, leading to new revenue streams to the
universities through sales and licensing.
For their part, universities are increasingly active in creating
spin-off companies, especially in economically distressed areas. For
example, in Cleveland, The Cleveland Clinic is looked upon as an engine
of economic growth, and the SBIR program is an integral part of the
Clinic's strategy. If a slightly larger SBIR Program were to translate
into a small incremental decrease of a few percentage points in basic
research dollars available to research institutions like The Cleveland
Clinic, that decrease could be more than offset by gains to the
research institutions from royalties, sponsored research, and capital
appreciation from equity they hold in these spin-offs--many of them
SBIR Program awardees--not to mention the value to the Nation of the
new jobs and products created by these companies. In the long run, such
a strategy would help research institutions enhance their own assets
and endowments, and become less dependent on the Federal Government for
research funding.
And just as SBIR companies depend on the flow of new science and
engineering graduates from the universities, so also the universities
need to demonstrate the availability of attractive yet realistic job
opportunities to appeal to students in the first place. For many
prospective science and engineering students, the challenges and the
relative freedom, as well as the upside income potential, of working in
a leading-edge small company, will be exactly what they are looking
for. SBIR companies offer students not only vivid examples of future
employment, but practical and near-term internship opportunities to
experience first-hand the world of innovative, small company R&D. My
own company offers about a dozen college internships a year, for
example.
Because SBTC sees this university-small company relationship as so
symbiotic, we have asked Congress to phase in a tripling of the STTR
Program, which directly links universities and small companies in
federally-funded R&D.
Q3. You recommend increasing award size but firmly limit the ability
of agencies to exceed SBIR award caps. Would this strict cap have a
negative impact on any agencies funding projects which contribute to
their overall mission? Please explain your reply and identify what
should be the source of funds if review panels determine additional
funds are needed to appropriately fund SIBR projects.
A3. With respect to the award size caps, SBTC generally endorses the
formula approved by the Senate Small Business and Entrepreneurship
Committee last year. That formula would set the caps at $150,000 for
Phase I and $1,250,000 for Phase II, and would allow for annual
inflation adjustments The Senate bill also would permit agencies to
exceed these caps by 50 percent in selected instances. Thus, the
initial Phase I ``override'' would be $225,000; the Phase II,
$1,875,000.
Congress does have a ``balancing act'' to deal with on this issue.
Relatively small caps permit the agencies to explore innovative
ideas without creating major economic fallout if the innovations don't
pan out.
Then, too, the purpose of the SBIR Program since its inception has
been to harvest as much of the small company R&D relevant to the
Federal Government's needs as possible. Historically, these companies
and their technologies have been largely precluded from the federal R&D
contracting process. Keeping the award sizes small helps promote a
broad search for promising innovations and promising companies.
These basic thrusts need to be maintained. Agencies do, after all,
have other sources of funds to expand the funding for exceptionally
meritorious individual projects.
Still, the SBIR Program also needs to be flexible. Perhaps, instead
of using the 50 percent override mechanism favored by the Senate bill,
Congress could authorize participating agencies to allocate as much as
10-15 percent of their overall SBIR funds to individual projects that
hold unusual promise for helping an agency meet its mission.
But we must be realistic about how much additional technological
advance the agencies can achieve by shifting these limited SBIR funds.
For example, the entire annual SBIR budget at NIH would not suffice to
put a single new drug through human testing. The October 2006 Milken
Institute study that we have provided to the Subcommittee, Financial
Innovations for Accelerating Medical Solutions, notes the scale of
funding needed and suggests a number of (non-SBIR) financing solutions
to meet such biomedical needs.
Q4. In your testimony, you support addressing commercialization
funding gaps and comment favorably on several agency efforts. Based
upon the experience of SBTC member companies, which programs are most
promising?
A4. From what SBTC has observed and learned from federal agencies and
SBIR companies, the most promising commercialization activities
currently underway in the SBIR Program are the ``II-B'' awards in the
Navy submarine program, NSF's ``Phase II-B,'' and NIH's ``Phase II
continuation'' awards. While the details of these programs differ to
suit different agency needs, all appear to be working. The
Commercialization Pilot Program (CPP), approved by Congress last year,
is showing great promise at DOD, but initial results are a year or so
away.
The term ``commercialization'' is a relative one, however. For
agencies like DOD, and to a significant extent NASA and DOE,
commercialization entails insertion of the technology into larger
systems that the agency itself is acquiring. Such agencies need to be
incentivized to do exactly this, since they are, in effect, the
customers for the technology.
For agencies that expect the private sector to develop and acquire
the technology, such as NIH and NSF, commercialization entails
incentives to bring partners into the development and marketing phases
of the technology. As NSF and NIH have shown, there is more than one
way to do this successfully. SBTC believes the SBIR reauthorization
should state what Congress expects from the agencies regarding
commercialization, but should give them the flexibility to address that
goal in their own ways.
It should be noted that when SBIR was created in 1982, Congress
foresaw the need to include customer acceptance testing in the SBIR
program. Section 9 (e) (4) of the statute defines ``research and
development'' to include ``(B) a systematic study directed specifically
toward applying new knowledge to meet a recognized need; or (C) a
systematic application of knowledge toward the production of useful
materials, devices, and systems or methods, including design,
development and improvement of prototypes and new processes to meet
specific requirements.''
Q5. You recommend Congress provide incentives to agencies to match the
success in SBIR Phase I and II in SBIR Phase III. What incentives
specifically do you recommend? What should be included in the
expenditures you recommend for testing and evaluation? How should this
be funded?
A5. To advance Phase III of the SBIR Program, SBTC recommends that
Congress devote about one-third of the phased increase in SBIR (that we
have requested) to Phase III incentives. These incentives should
include funds for testing and evaluation, as well as the movement of
SBIR technologies into the acquisition processes of agencies like DOD,
NASA and DOE, (as discussed above in answer 4).
In the case of DOD, most Phase II SBIR technologies exit the SBIR
Program at ``Technology Readiness Level 4'' (TRL 4). This technology
will need to be advanced to about Technology Readiness Level 8 (TRL 8)
in order to be inserted into mainstream DOD acquisition programs.
Agencies like DOD--that have an unfortunate history of paying large
contractors to reinvent SBIR technologies--should be incentivized to
purchase the original SBIR technologies instead.
As an example, one approach at DOD might be to offer an award fee
to prime contractors on programs over $100,000,000 that insert the SBIR
technology into major systems or that provide subcontracts to SBIR
companies equal to or greater than a set percentage of the prime
contract. For NASA, DOE and DOT, a similar award fee could be provided
for prime contractors on programs over $10,000,000 if they meet similar
conditions.
Agencies that don't purchase technologies, or that don't purchase
many technologies, should be incentivized to identify successful
commercialization paths and strengthen them. But to reiterate the
earlier point, SBTC urges Congress to set the goals in this area while
leaving it up to the agencies to invent the best approaches to meeting
the goals.
Q6. You recommend re-allocating one percent of SBIR total dollars to
new agency administrative costs? What administrative costs should be
included? What do you estimate to be the cost for each of these
activities?
A6. SBTC recommends that Congress allot one percent of total new SBIR
dollars to new administrative costs. We believe the agencies should
have some flexibility in allocating these funds. Salaries and expenses
of new personnel devoted exclusively to the SBIR Program will absorb
some of the dollars; new conferences and manuals might absorb others.
COTR's could be given funding for site visits and coordination. The
agencies should be required to report to Congress regularly on how they
are using the new dollars. For its part, Congress should monitor these
reports carefully, to be sure that the new funds are not being used to
displace existing SBIR administrative and management funds, and are not
being diluted by allocations to personnel and programs that have other
tasks besides SBIR.
To the largest extent practical, training and mentoring funds
should be made available directly to the SBIR companies. Within certain
guidelines, these companies should decide on their own best use of the
funds. The same is true of the content of the training. Agencies cannot
always know what a company's competencies and needs are. Companies
should be able to choose training options.
Q7. You noted in your testimony the importance of effective management
and oversight of SBIR/STTR programs. How well has SBA done to date in
providing management and oversight? What needs to be done to strengthen
the SBA Office of Technology?
A7. With respect to SBA, SBTC would note that while the SBIR Program
has quadrupled over the past twenty years, SBA's staffing resources for
administering it have declined by 50 percent. This has led to problems
like slower turnaround times on agency waiver decisions, slower posting
of SBIR award information and statistics on the SBA website, and less
oversight and coordination with the agencies. With more personnel,
SBA's Office of Technology could provide more timely and helpful
guidance for participating agencies in the SBIR Program, as well as
more targeted oversight data for Congress. It will also allow the SBA
to coordinate ``best practices'' sharing and training among the
agencies. Congress also should consider elevating the Office of
Technology within SBA to signal the importance of its mission.
Q8. In your written testimony, you identify an issue with intellectual
property rights of SBIR companies. Would you please explain the issue
and the remedy you recommend?
A8. The intellectual property rights case that SBTC referenced in its
testimony is Night Vision v. U.S., relating to the use of an SBIR
company's proprietary technology by the Air Force. The plaintiffs
allege that the Air Force ``reverse engineered'' their technology and
then gave the resulting intellectual property to another contractor to
further advance the technology. Whatever the merits of the allegation,
it would appear that the Court misinterpreted Congressional intent with
respect to IP rights in the SBIR Program (and predecessor legislation
like the Bayh-Dole Act), thereby setting an unfortunate precedent. For
a strong SBIR program and a strong American technology-based economy,
it is imperative that the IP rights of SBIR technology remain with the
small business, and not be usurped by the government. This will allow
the SBIR companies to grow the technologies that they created. SBTC
intends to work with Congress to clarify these points for the courts
going forward.
Q9. You state in your written testimony that 250 SBTC firms have won
SBIR awards. Which agencies are the primary sources of award funds to
SBTC firms? What percentage received awards from DOD and NIH? What
percentage of the 250 SBTC companies has commercialized products?
A9. SBTC's members who have obtained SBIR contract awards are
distributed across federal agency SBIR Programs in roughly the same
proportions as the relative sizes of Programs. For example, DOD, which
accounts for a bit over half of the SBIR Program dollars, also accounts
for about half of SBTC's SBIR awardee members. NIH, which represents
about a third of the SBIR Program, also represents about a third of
SBTC's SBIR members. And so on. As to commercialization, the last time
we sampled SBTC members on this question, the results were distributed
in a ``bell shaped curve,'' with most SBIR awardees having
commercialization scores of around 50 percent.
Questions submitted by Representative Judy Biggert
Q1. Your written testimony states that, ``Thanks to their deep-pocket
backing, the companies that the VCs fund will be able to submit
multiple proposals per solicitation.'' Given your concern about the
number of proposals submitted and potentially the number of SBIR awards
granted to a particular company, do you think it would be reasonable to
limit the number of grants any one company can receive in a year or
over 10 years across all agencies?
A1. The question as formulated equates two very different issues. The
first issue is how Congress should respond to the prospect of large
companies devising strategies to siphon off funds that are legally
restricted to small business. The second issue is what steps, if any,
Congress or an agency might take to limit the number of SBIR contracts
awarded to individual small companies.
The essence of the first issue is preventing potentially illegal
activity and upholding the integrity of a program that Congress and the
American people expect to be dedicated to small business.
The essence of the second issue is selecting the most effective
policies within a small business program.
As far as having large companies illegally undermine this or any
other small business program, SBTC is opposed to it. As far as the
policy choice of whether to limit the number of SBIR contract awards
that an individual company may obtain, SBTC understands both sides of
the issue, but believes, on balance, this would not be desirable--just
as it would not be desirable to limit the number of R&D awards to major
universities or large businesses.
SBIR is a highly competitive program. Usually, there are between
four and thirty proposals for every award. The proportion of applicant
companies obtaining contract awards varies between agencies, from about
one in five applicants to about one in 12.
By contrast, this intensity of competition is hardly ever seen in
larger federal contracts. Except in rare circumstances, neither the
agencies nor Congress question the awarding of multiple, non-
competitive R&D contracts to large companies and major universities.
Thus, SBIR companies must struggle much harder against competitors
to prove the value of an innovation than do most of their larger
counterparts, such as major ``defense contractors'' (whose very name
suggests their focus on repetitive DOD contracts) or major universities
seeking large research grants from NIH.
SBTC supports the overall SBIR goal of securing the widest possible
array of needed R&D from small business. But we also believe that it
makes little sense for federal agencies to bypass the best technologies
to emerge from these crucibles of SBIR competition--and select the
second or third best solutions to the government's needs--simply to
prevent a small business from obtaining one too many SBIR contracts.
Given the SBIR Program's increasing emphasis on commercialization,
SBIR awardees also represent a significant public benefit. This benefit
takes on added importance in an environment of global competitive
challenges, many of them technological, faced by the United States. It
would be most unfortunate to undermine these benefits of the SBIR
Program.
It is the companies who have won a number of SBIR contracts--most
of whom have relatively high commercialization scores--that are more
likely to be commercializing the technology--domestically and globally.
Two examples from my companies: Cleveland Medical Devices is
beginning to penetrate Asian markets. We are now receiving orders from
Malaysia, Singapore, India, and the Philippines for our sleep apnea
diagnostic devices.
Orbital Research is developing a third generation of flight
control, which we call Aerionics. We recently received third party
confirmation of interest from South Korea, where the technology would
be used on a missile defense system. The South Koreans say that they
believe Orbital Research is the ``leading company in the world'' in
this new technology.
Why would we cut off promising research like this to hold small
companies to a set number of awards? We don't do that with defense
contractors or leading universities. Why would we declare the most
promising new companies as personas non-grata, just when they are
starting to deliver on the whole long-term promise of the SBIR Program?
That would surely tempt some such companies--that U.S. taxpayers have
invested in--to relocate in countries like Singapore that invest much
more heavily in new technology than the U.S. does, on a per capita
basis.
Q2. Your companies have successfully participated in the SBIR program.
Prior to 2003, did you encounter problems participating in the SBIR
program? What is the number of SBIR awards that companies that you lead
received prior to 2003 and have received since 2003?
A2. As my companies became more technologically mature and more
acquainted with the SBIR Program, their performance improved. This has
nothing to do with date of 2003 or any other particular year. It has
everything to do with the companies' internal trajectories of
technological and business development. But to answer the question,
prior to the date of 2003, Cleveland Medical Devices won 36 Phase I and
21 Phase II awards, an average of about five per year. Orbital Research
won 31 Phase I and 14 Phase II awards, also an average of about five
per year. From 2003 to the present, CleveMed won 22 Phase I awards and
17 Phase II awards, an average of about eight a year, and Orbital won
23 Phase I awards and 10 Phase II awards, an average of about six per
year. There has never been a ``spike'' in the number of our awards.
They increased incrementally. So, too, did the college interns that we
trained, the work with our university partners, (now numbering 14), as
well as the jobs and inward investment that we provided in inner city
Cleveland--together with the awards that the companies won from Harvard
University, Inc magazine, and others for these accomplishments.
Answers to Post-Hearing Questions
Responses by Gerard J. McGarrity, Executive Vice President of
Scientific and Clinical Affairs, VIRxSYS Corporation
Questions submitted by Chairman David Wu
Q1. What changes to the SBIR program do you recommend to increase the
number of small businesses applying for awards in the life sciences? In
your response, please estimate the typical dollar cost to a firm to
prepare an application in Phase I and Phase II, and the size of Phase I
and Phase II awards that would attract more SBIR applicants in the life
sciences. What types of flexibility in the application process are
important to applicants?
A1. The primary reason small biotechnology companies are not taking
advantage of the SBIR program is that many of the companies are
ineligible for the program based upon their capital structure. As a
result of a 2003 Administrative Law Judge (ALJ) ruling companies with
majority-venture capital backing are ineligible to compete for SBIR
grants. Small biotechnology companies do not have product revenue, so
companies have to raise funds through venture capital in exchange for
equity in the company. As a result of these capital needs, a
significant portion of biotechnology companies are ineligible to
compete under the 2003 ALJ ruling, and subsequent change in SBA policy.
Biotechnology companies will apply for these grants if Congress
clarifies that those domestic companies with fewer than 500 employees
can compete for these grants. A recent survey of 144 small emerging
biotechnology companies' CEOs and CFOs found that 84 percent of
companies would apply for an SBIR grant if they were eligible despite
their capital structure.\1\
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\1\ Survey of 144 BIO emerging member companies CEOs and CFOs.
Conducted by third-party during March, 2006.
---------------------------------------------------------------------------
While the cost of the application will likely vary depending on the
companies experience with writing grant applications, in my experience
with the SBIR program it takes approximately two months of staff time
for two senior staff to apply for a Phase I SBIR grant, costing in the
range of $20,000-$30,000. To apply for a Phase II SBIR grant usually
requires 3-4 staff and four months time, costing approximately $80,000-
100,000. These estimates are based on experience with one company.
The broad scope of the SBIR program requires that maximum
flexibility is maintained so that grants can serve a variety of agency
missions. Likewise, differences in product development timelines
require agency flexibility so that SBIR grants are meaningful across
industries. For example, in the biotechnology industry it takes eight
to 10 years or more to bring a product to market.\2\ Such flexibility
should include award size and the ability to directly obtain a Phase II
grant where the science merits such flexibility.
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\2\ Tufts Center for the Study of Drug Development. http://
csdd.tufts.edu/NewsEvents/NewsArticle.asp?newsid=69
Q2. Please explain your views on how the NIH peer review groups
---------------------------------------------------------------------------
accesses whether a project is adequately funded.
A2. The peer review process is the only appropriate mechanism for
making factual funding determinations. While it is not a perfect
system, and in some circumstances errors may occur, it is a system in
which a group of scientific experts evaluate the appropriateness of the
budget. When I was in academia, I served on an NIH Study Section for
several years. I have also been a grant reviewer for the NIH since I
have been in industry. I have always been impressed with the enthusiasm
and the competence of the reviewers.
It is reasonable to allow or even encourage agencies to establish
suggested guidelines for determining the budget for an award, but
ultimately strict rules and limitations are arbitrary and will minimize
the ability to get the most of the SBIR awards. This may be an
appropriate area for the agency or department in question to determine
how often budgets are accepted as submitted and how often they are
adjusted upwards or downwards. Typically, the budget is adjusted
downward, because the reviewers do not see the justification for
certain requested items. On the other hand, the first SBIR grant that
my former company Intronn received, the reviewers actually increased
the requested budget because they were impressed with the potential of
the technology.
Q3. You have described the importance of venture capital in meeting
the capital needs of biotechnology companies because of the high cost
and length of product development. If a venture capital firm has
already invested in an SBIR award recipient, how could the SBIR program
be structured to encourage the venture capital company to provide
additional investment and commercialization assistance for the SBIR
project beyond that offered by the SBIR award itself?
A3. Typically, biotechnology companies will receive venture capital
financing for a lead product and would like to obtain SBIR funding for
early stage products that may be viewed as too high risk for venture
capital investment. SBIR grants provide an opportunity for companies to
start or restart research on a product that may be sitting on the shelf
due to lack of funding. SBIR funds will therefore provide an
opportunity to further along development of this project, through proof
of concept and feasibility. This furtherance of development alone makes
the research more attractive to venture capitalists. Additionally,
there is strong evidence that the SBIR program creates a ``halo
effect'' that attracts private investment because the research has
received a certification of sorts from the granting agency.\3\ While
venture capital investment in biotechnology companies remains strong,
the majority of the investment occurs in later stage companies or
projects, especially those that are in Phase II clinical trials. It is
much harder to attract investments in pre-clinical projects.
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\3\ Charles W. Wessner, National Research Council, ``SBIR Program
Diversity and Assessment Challenges, Report of a Symposium,'' pg. 27.
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In addition to the inherent benefits of the SBIR program with
regard to attracting additional investment, Congress should provide
additional flexibility to agencies to implement demonstration projects
in Phase III. For example, an agency could provide matching funds, up
to specified dollar amount, in Phase III to companies that receive
private sector investment for the SBIR project within a specified
amount of time upon completing Phase II grants. Any such demonstration
projects could be shared with all the agencies and departments
participating in the SBIR program, so best practices can be identified.
However, given the breadth of agencies, departments, and participating
industries demonstration may not be appropriate for all facets of the
SBIR program.
Finally, given that the SBIR program rightly invests in high-risk
research, it is appropriate that some of the funded research will not
produce the intended outcomes and attract private sector investment.
This is similar to the research funding that the NIH provides to the
academic community. It is important to also be mindful that the focus
on commercialization should not drive the granting agencies and
departments to award grants to projects that are ``safe.'' Doing so
would undermine one of the unique contributions that the SBIR program
makes to greater knowledge and the economy.
Q4. SBIR awards are granted in support of agency missions--in the case
of NIH, to make medical discoveries that improve health and save lives.
If the market opportunity for an SBIR project is small, what would
encourage venture capital company financial support and
commercialization assistance for the SBIR project over time?
A4. There are a variety of factors that venture capitalists consider
when determining whether or not to invest in research, including, but
not limited to, the quality of the science, stage of development,
intellectual property protections, market size, existence of similar or
competing products, quality of management team, quality of scientific
expertise, and possible insurance coverage and reimbursement policy.
Likewise, a company with a platform technology will conduct a similar
assessment in determining which therapeutic areas to focus development
of a product. Not all these factors are given equal weight, and
strength in one particular area may overcome weaknesses in another
area. Venture capital companies review the opportunity in its totality.
Additionally, venture capital companies' estimation of opportunity of
particular research will not be unanimous.
It is the case that many biotechnology products in development are
for non-traditional markets, such as for orphan diseases or for
diseases predominately found in the third world. The barriers to
bringing orphan drugs to market have been well recognized by Congress
and are the basis for the Orphan Drug Act of 1983. This law aims to
provide incentives through market exclusivity and tax credits for
private sector investment in orphan products. In 2001, the Department
of Health and Human Services Office of Inspector General studied the
impact of the Orphan Drug Act and found that it was particularly
successful in attracting venture capital financing for orphan products
being developed by biotechnology companies.\4\ A BIO survey found that
80 percent of private biotechnology companies pursuing an orphan
product have also received venture capital.\5\
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\4\ Department of Health and Human Services, Office of Inspector
General, ``The Orphan Drug Act, Implementation and Impact'' May, 2001,
pg. 8, http://oig.hhs.gov/oei/reports/oei-09-00-00380.pdf
\5\ Survey of 144 BIO emerging member companies CEOs and CFOs.
Conducted by third-party during March, 2006.
---------------------------------------------------------------------------
Despite the fact that orphan products often successfully attract
venture capital financing, it continues to be an area with additional
challenges. This is also true for biotechnology products being
developed to treat illness predominately affecting the third world.
Foundations have been particularly effective in supplementing funding
for orphan products and third world diseases. For example, the Cystic
Fibrosis Foundation has invested or committed $290 million to early
stage development work since 1998.\6\ Similarly, the Bill & Melinda
Gates Foundation is supporting research and development in the private
sector for therapies and vaccines for Malaria, Tuberculosis, and
diarrhea, amongst other diseases.\7\ These foundations can help fill
gaps that exist in traditional venture capital financing.
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\6\ San Francisco Business Times, ``Foundations move in where VCs
fear to tread,'' December 8, 2006, Sara Duxbury (article attached).
\7\ http://www.gatesfoundation.org/GlobalHealth/
Pri-Diseases/
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As a part of Phase III SBIR commercialization, the NIH could
facilitate connecting companies that are pursuing research in orphan
diseases or diseases impacting the third world with the appropriate
foundations that are making venture capital investments in these areas.
Q5. What criteria do venture capital companies use when making a
decision to invest in a company and a specific project? If a company
has venture capital funding and a company project receives an SBIR
award, but the project does not meet venture capital criteria for
investment upon completion of Phase II, how will that project be
managed? For such an SBIR project, what are the possible options and
issues in spinning out that project to another company?
A5. As previously stated, there a variety of factors that venture
capitalists consider when determining whether or not to invest in
research, including, but not limited to, the quality of the science,
stage of development, intellectual property protections, market size,
existence of similar or competing products, quality of management team,
quality of scientific expertise, and possible insurance coverage and
reimbursement policy. Not all these factors are given equal weight, and
strength in one particular area may overcome weaknesses in another
area. Venture capital companies review the opportunity in its totality.
Additionally, venture capital companies' estimation of opportunity of
particular research will not be unanimous.
For example, the May 22, 2006 Bioentrepreneur article,
Trendspotting: Betting strong but playing safe, found ``Venture capital
investors also appear to be investing more effort in ensuring that the
clinical development program described in a potential portfolio
company's business plan makes sense and is realistic. Because setting
the wrong goals in the program or getting the timing wrong by just a
little bit can have disastrous consequences in subsequent fund-
raisings, VCs are engaging medical consultants as clinical advisory
panels to validate and modify the programs as a prelude to making their
investments. The panels are asked to determine, among other things,
whether the investors are funding to the appropriate endpoints based on
the correct assumptions.''
A biotechnology company's subsequent management of a project that
has not been successful in attracting venture capital will likely
depend on the reason for its failure to attract investment. If the
project is failing to get additional financing because research into
the proposed biologic mechanism failed to produce expected results,
then the project may no longer be pursued or require a reworking and
return to proof of concept stage. Alternatively, if the lack of
investment is being driven by concerns about the company's management
or research team, then a company has the opportunity to bring in
additional personnel resources, consultants, or enter into a joint
venture to address the concern.
Alternatively, if the reason that venture capital firms are not
interested in a project is due to the small market size, SBIR grants
can serve as a critical resource in driving the project forward. As
described above, SBIR awards can be combined with Foundations and
private philanthropy to bring a therapeutic solution to a commercially
unattractive disease.
It is in a biotechnology company's interest to pursue as many
potential therapies as is possible because it diversifies the risk in a
scientific area with a high failure rate. As such, a biotechnology
company is likely try to address the concerns being raised by venture
capital companies if it is possible and reasonable to do so. Outside of
these efforts, other options that exist include the before-described
opportunities with foundations and possibly licensing the technology to
a company that has complementary technology or expertise in this area
in order to further the research.
Q6. What definition do you recommend for an eligible venture capital
company when determining eligibility of an SBIR applicant? What would
this definition include what would it exclude?
A6. Allowing small (fewer than 500 employees) domestic companies the
opportunity to compete for SBIR grants is important to the SBIR program
and the industries or companies that are currently excluded based upon
their capital structure. Small domestic companies with private
investment from eligible venture capital companies, foundations, and
trusts should be eligible to apply for SBIR grants. Currently, a
company with any of above mix of investment that exceeds 51 percent
ownership is precluded.
As it relates to determining an eligible venture capital company,
there are existing references in current law, listed below, that should
encompass US venture capital companies. Additionally, BIO supports
excluding venture capital companies established by large corporations
from the definition of an eligible venture capital company for the
purposes of SBIR.
(1) Venture Capitol Operating Companies
These are VCs defined in a Labor Dept. regulation, 29 CFR 2510.3-
101(d), whose managers have some ``management rights'' with respect to
the portfolio companies in which they invest, and exercise such rights
in at least one such portfolio company. Such management rights are not
inconsistent with minority VCOC ownership positions. For example,
having a single Board seat constitutes a ``management right,'' even
though it affords no VC control over management and operations of the
small business.
(2) VC firms registered under the 1940 Investment Company Act
Most VCs with greater than 100 employees are required to register
with Securities and Exchange Commission (SEC) under the 1940 Investment
Company Act.
(3) VC firms not required to register with SEC, because they fall
within a 1940 Act exception for firms with <100 investors
This covers most smaller VCs--including most VCs that invest in
small, emerging companies--who tend to have fewer than 100 employees.
Q7. In your written testimony you cite 252 FDA approved biologics
developed by BIO companies, and 32 percent of the companies and
affiliates received an SBIR/STTR award. What percentage of the
companies and affiliates that received SBIR/STTR awards also received
venture capital backing?
A7. 162 companies were involved in the development of the 252 FDA
approved biologics. Of those, 52 were past SBIR or STTR award
recipients. Of those 52 companies 39 or 75 percent definitively
received venture capture capital financing prior to becoming a public
company. For the other 13 companies BIO was unable to determine if they
received venture capital financing, either because the company has
merged or changed ownership a number of times, or because existing
databases on private companies were not in existence prior to the
company going public. However, it would be unusual that a biotechnology
company would secure sufficient investment from individuals alone prior
to becoming public.
Questions submitted by Representative Judy Biggert
Q1. Can you illustrate for me why a health sciences company with
venture capital financing, even significant financing, would desire to
participate in the SBIR program, where the award sizes are
significantly smaller than a round of venture financing?
A1. A biotechnology company is a collection of research projects. A
recent BIO survey found that on average an emerging biotechnology
company has five products in development. The typical biotechnology
company's lead product will be in Phase II clinical trials, with one
product in Phase I clinical trials, and three products in pre-clinical
development. A biotechnology company will most likely be able to raise
venture capital for their lead product and maybe the product in Phase I
clinical trials as well.
These venture capital funds are generally not interchangeable; but
instead funds are tied to specific development milestones for a
specific product. Most often companies are unable to use venture
capital funds for a lead product to conduct pre-clinical research and
development. However, SBIR grants provide an ideal opportunity to
further very-early stage development without diluting a company's
equity. Through Phase I and Phase II awards the research project can be
furthered to the point where it is considered attractive to venture
capital investment.
Q2. What role have SBIR grants historically played in your industry?
A2. For the first twenty years of the SBIR program biotechnology
companies were able to compete for SBIR grants. In biotechnology, the
SBIR program has played a role in advancing the science and research of
companies that have ultimately brought a product to market. For
example, there are 163 companies and affiliates involved in the
development of the 252 FDA approved biologics, 32 percent of those
companies and affiliates have received at least one SBIR/STTR award.
Additionally, the Small Business Technology Council's written testimony
before the Subcommittee highlighted 13 outstanding SBIR graduates of
which were four biotechnology companies (Amgen, Biogen, Genzyme, and
Chiron).
This record clearly shows that the original SBIR system was
working. Biotechnology companies with highly innovative technologies
and program were able to compete for limited funds and bring many of
these breakthrough products to successful treatments of patients who
had no alternatives.
Answers to Post-Hearing Questions
Responses by Anthony R. Ignagni, President and CEO, Synapse Biomedical,
Inc.
Questions submitted by Chairman David Wu
Q1. What changes to the SBIR program do you recommend to increase the
number of small businesses applying for awards in the life sciences? In
your response, please estimate the typical dollar cost to a firm to
prepare an application in Phase I and Phase II, and the size of Phase I
and Phase II awards that would attract more SBIR applicants in the life
sciences. What types of flexibility in the application process are
important to applicants?
A1. One of the key elements in applying for awards in the SBIR program
is the timing from initiation of a proposal to award then the timing
from completion of the Phase I to Phase II. Upon recognition of a grant
opportunity for a Phase I SBIR, the time required to formulate the
hypothesis and consider alternatives, perform background and literature
searches, develop the project plan, determine the budget, and develop
an initial commercialization strategy takes (as suggested by NIH) at
least three months to prepare properly. The effort during this time
varies but can easily exceed a cumulative 80 man-hours of preparation,
writing, and internal review prior to submission of the grant. If an
academic or clinical institution is involved, then there are also
significant contractual issues to be addressed up front that can add
time and legal expense. Further, if regulatory submissions (either
animal or human) are needed, then there is significant effort in
obtaining the appropriate approvals prior to submission. When using an
external agency to assist in compiling the grant, the preparation time
is not significantly reduced as there is much interaction in
translating the requirements, tasks and reviewing the output. Between
the internal staff time and consultants (for grant writing, regulatory
submissions, and legal contracts) the estimated costs for a Phase I
grant surely can exceed $15,000. In a Phase I grant this is money that
has a low percentage yield and is only potentially realized in 6-9
months after the grant is submitted. Alternative approaches may be to
have an initial (faster) Phase I review that could provide feedback on
the acceptability of the proposal prior to committing to regulatory and
contractual arrangements. Another approach may be to combine Phase I &
II approvals, such that when Phase I milestones are reached the grant
continuation to Phase II is automatic. This would avoid funding gaps
between grant phases and mean that the initial capital risk of
developing the proposal has a larger payoff.
Q2. Please explain your views on how the NIH peer review groups assess
whether a project is adequately funded?
A2. The only feedback we have on our prepared grant budgets to date has
been ``seems appropriate.'' As we have been working with the NIH on our
budgets we have been encouraged, during early discussions, to budget
what is appropriate with justification for the amount. This has allowed
us to fund the scope of work adequately.
Q3. You have described the importance of venture capital in meeting
the capital needs of biotechnology companies because of the high cost
and length of product development. If a venture capital firm has
already invested in an SBIR award recipient, how could the SBIR program
be structured to encourage the venture capital company to provide
additional investment and commercialization assistance for the SBIR
project beyond that offered by the SBIR award itself?
A3. Additional award levels for matching venture funding toward
commercialization of a grant project may attract additional investment.
Thus an SBIR award to complete the technical/clinical aspects of the
proposal could be made once a venture capital firm invests in the
commercialization strategy. This would help mitigate the risk to the VC
firm of technical risk and let their investment focus on the market and
sustainability risk. Similar to having a academic/clinical collaborator
sign on to assist in demonstration of certain technical or clinical
aspects of the SBIR, the venture firm could be signed on to assist in
funding the commercialization aspects of the SBIR.
Q4. SBIR awards are granted in support of agency missions--in the case
of NIH, to make medical discoveries that improve health and save lives.
If the market opportunity for an SBIR project is small, what would
encourage venture capital company financial support and
commercialization assistance for the SBIR project over time?
A4. I'm not sure that SBIR funding would necessarily help attract
venture capital to a specific small market opportunity. If the
Principal Investigator has a demonstrated track record of being able to
attract SBIR support to multiple projects, has good peer review
feedback (that may be separate from grant review), and can assemble the
funded SBIR projects into a cohesive commercialization plan, there may
be an opportunity of attracting venture financing. One key to this is
developing relationships with the funding agency that can speak to the
venture investor community to establish the worth of the discoveries
and potential for commercialization.
Q5. What criteria do venture capital companies use when making a
decision to invest in a company and a specific project? If a company
has venture capital funding and a company project receives an SBIR
award, but the project does not meet venture capital criteria for
investment upon completion of Phase II, how will that project be
managed? For such an SBIR project, what are the possible options and
issues in spinning out that project to another company?
A5. Certainly the venture community is in the business of risking
capital for a return to its investors. Given that the VC is investing
in the performance of the company, its primary criteria is based on
management's competency in adding value to the product portfolio to
allow a return on money invested. If a project has a manageable
technical risk, there is compelling clinical need, management has
capabilities to achieve significant relevant milestones, and there is a
clearly articulated strategy to achieve a return on investment for the
VC, then there should be a clear decision to invest. If the SBIR
program can provide quantification of technical risks, clinical need
and demonstration of managements ability to achieve milestones, then it
should positively influence investment decisions.
If a completed Phase II SBIR does not fit within the companies
strategic vision or opportunity assessment, it should be determined if
it is a marketable asset through licensing or outright sale. Certainly
intellectual property rights and confidentiality may be at issue if a
project is spun-out to another company. Of course this is a risk that
has to be weighed against the potential gains from marketing the asset.
Q6. What definition do you recommend for an eligible venture capital
company when determining eligibility of an SBIR applicant? What would
this definition include; what would it exclude?
A6. As a small business program, I believe that the criteria should be
employee size (as it is now) and the revenue/net profit size to qualify
as a small business entity. The current small business definition based
on size of 500 employees seems quite large. I would base the employee
count strictly on full time equivalents (FTE's) on payroll. Further,
once a company has reached a critical mass of revenue and bottom-line
net profit, it should be able to self-fund its research. It seems that
once a reasonable amount of revenue is available to fund research, it
should be used to do so. A benchmark of revenue generating public
companies could be used perhaps to set this bar. Thus a company with
revenues of $20-$50 million and 5-7 percent available for research
investment could be considered as too mature for the SBIR program.
Beyond the size constraint, I would also include the ability of the
company to demonstrate results of impact of past funded projects (that
have been funded through Phase II) to have a revenue impact. Without
this type of feedback into the system, it could be just funding good
grant writers without achieving the desired results of making ``medical
discoveries that improve health and save lives.''
Finally, I would redefine the term ``individuals'' to allow venture
capital backed companies to participate in the program and redefine the
affiliation rules for portfolio companies.
From my understanding, sound venture capital firms seek out the
best technologies and management teams, which may be the same teams
securing SBIR grants. The SBIR grant program is one of the key elements
in creating a new company, especially in the life sciences sector. SBIR
grants, coupled with venture capital, provide the critical working
capital used by scientists and companies in the discovery of new
technologies and new therapeutics. For the past 20 years, the dual
financing sources of the SBIR program and the venture capital community
have allowed many promising companies to conduct groundbreaking
scientific research while simultaneously building viable businesses
that bring innovative products to the marketplace.
Appendix 2:
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Additional Material for the Record
Statement of Ms. Linda Oliver
Acting Director
Office of Small Business Programs
Office of the Under Secretary of Defense
(Acquisition, Technology & Logistics)
Review of the Department of Defense (DOD)
Small Business Innovation Research (SBIR)
and Small Business Technology Transfer (STTR) Programs
Chairman Wu, Congressman Gingrey and Members of the Subcommittee on
Technology and Innovation, House Committee on Science and Technology:
Thank you for the opportunity to submit a written statement about
the Small Business Innovation Research (SBIR) and Small Business
Technology Transfer (STTR) programs as you consider reauthorization of
the SBIR program in the year of its 25th anniversary. I welcome this
opportunity because these programs have become important tools for the
Department of Defense (DOD) to seed innovation in our industrial base,
and, in so doing, develop firms to supply leading-edge technologies to
meet warfighter needs today and in the future.
It is the fundamental mission of the Department of Defense to fight
and win our nation's wars. In a time of war, the challenges are myriad,
as we must sustain critical operations around the world while also
preparing for the future--being ready to face the threats of tomorrow.
Tasks of particular importance are the supply of materiel to the
warfighter to defeat identified threats, and the exploration and
development of technologies to enable new or lower cost capabilities.
To these ends, the Department has established key goals to ensure we
are investing in the right technologies, and cultivating an industrial
base capable of meeting our strategic needs. The SBIR and STTR programs
play roles in achieving both of these goals. Specifically, consistent
with statute, this means to seed technologies through small firms which
may eventually provide a materiel solution to our nation's warfighting
soldiers, sailors, marines and airmen, either directly as a product or
service, or as part of a larger weapon or support system.
It is our obligation as public officials to ensure that we are
using taxpayer dollars as productively and efficiently as possible for
their intended purpose. In that vein, today I will address the
questions presented to me in your invitation and will also highlight
actions the Department has undertaken to improve our Program. We at the
Department are always ready to work with the Congressional oversight
committees, other participating federal agencies and the Small Business
Administration (SBA) to ensure that the SBIR and STTR programs are as
effective as they can possibly be.
Program Overview
The DOD SBIR Program encompasses twelve constituent Military
Department and Defense Agency programs. The participating elements of
DOD, hereafter in this testimony referred to as ``Components,''
include, in order of largest to smallest budget in fiscal year (FY)
2007 the: Air Force, Navy, Army, Missile Defense Agency (MDA), Defense
Advanced Research Projects Agency (DARPA), Office of the Secretary of
Defense\1\ (OSD), Joint Office of Chemical and Biological Defense
(CBD), U.S. Special Operations Command (SOCOM), Defense Threat
Reduction Agency (DTRA), Defense Microelectronics Activity\2\ (DMEA),
Defense Logistics Agency (DLA) and National Geospatial-Intelligence
Agency\3\ (NGA). The Department's SBIR budget is determined by a
statutory 2.5 percent assessment of its extramural\4\ research,
development, test and evaluation (RDT&E) budget. Each Component's
portion of the overall program is managed to be responsive to its
specific mission and corresponding technology development needs while
also being consistent with overarching Department science and
technology guidance.
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\1\ The OSD Program includes funds drawn from the Defense Health
Program (DHP) and is managed by the Office of the Deputy Under
Secretary of Defense (Science & Technology) within the Office of the
Director, Defense Research & Engineering.
\2\ DMEA and DLA are new SBIR participants in FY07.
\3\ NGA is a voluntary participant in SBIR.
\4\ Extramural is defined as the sum of the total RDT&E obligations
minus amounts obligated for such activities by employees of the
participating agency in or through government-owned, government-
operated facilities.
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In terms of budget, the Department's Program represents over 50
percent of the total federal SBIR budget, which exceeds two billion
dollars. The DOD SBIR Program has experienced substantial growth in
recent years, more than doubling in size from FY 1999 to FY 2005 to
over one billion dollars, and it continued to grow through FY 2007 to
over $1.13 billion. This expansion is driven directly by growth in
underlying RDT&E budget, as the set-aside percentage has remained
constant over this period of time. In FY06, 883 topics attracted 13,253
Phase I proposals, a rate of 15 proposals per topic--about the average
of the prior four years. The Department awarded 1,862 Phase I contracts
and 1,172 Phase II contracts.
Which firms received these contract awards? The recipients are all
types of technology-focused firms from across the country. To a great
extent, these are very small firms. In FY 2006, 68 percent of Phase I
contracts were awarded to firms with fewer than 25 employees, while
over 42 percent were awarded to firms with fewer than 10 employees.
This shows that, to a great extent, the Department taps entrepreneurial
firms. Entrepreneurial firms tend to offer the most ground-breaking,
potentially disruptive innovation--the type that fundamentally changes
how a capability is provided. Also importantly, the DOD SBIR Program is
an entry point for firms new to the defense business--those seeking to
develop a military customer base. In FY 2006, 21 percent of SBIR Phase
I award winners were first-time SBIR award recipients. And among the
rest of the firms receiving Phase I awards in FY 2006, 44 percent had
previously been awarded four or fewer Phase II contracts. Based again
on FY 2006 data, 22 percent of Phase I award winners were minority- or
women-owned firms, or from Historically Underutilized Business (HUB)
Zones, indicating that a significant portion of resources is utilizing
this segment of the business base, consistent with one of the primary
goals of the SBIR program. Since the inception of the SBIR program in
1983, the Department has awarded nearly $11 billion to qualifying small
firms through over 44,500 contracts.
Examining these statistics, it is clear that the DOD SBIR Program
is a very large, resource intensive enterprise. The central challenge
is to make the best possible small business technology investments for
our warfighters with the resources the Congress provides us. That
concludes a brief overview, focusing on the DOD SBIR Program. Let me
now move on to address the specific questions posed in the invitation
letter with these overview remarks serving as background for the
discussion.
Program Efficiency and Effectiveness
The SBIR and STTR programs, due to the sheer volume of topics,
proposals, and awards demand efficiency in execution. In the time since
the SBIR program was last authorized in 2000, the Department has
provided over $5 billion in extramural research and development funding
to qualifying small businesses through over 17,000 Phase I and Phase II
contracts. On average, the Department has consistently met the goals of
awarding phase I contracts within four months of solicitation closing,
and awarding phase II contracts within six months of the conclusion of
the corresponding phase I contracts.
For administrative efficiency and to make it easier for small
businesses to interact with the Department, all approved topics from
participating components are packaged into one solicitation and pre-
released to the public for a four-week period. During this period,
interested firms may seek additional technical information from the
technical points of contact, as necessary, to clarify the topics. The
solicitation then opens for a four-week period during which proposals
are received. Throughout the pre-release and solicitation periods,
interested firms may ask questions about the topics of interest via the
online SBIR/STTR Interactive Topic Information System (SITIS). After
the solicitation closes, all proposals are reviewed by government
scientific and technical personnel.
This process occurs three times per year for SBIR and once for the
STTR program. SBIR Phase II proposals are submitted to the Department
to meet deadlines established by participating DOD components. Topic
generation and review, as well as solicitation pre-release, release and
proposal submission are entirely electronic, conducted through the DOD
SBIR Worldwide Web site (www.dodsbir.net). These electronic systems
have helped enable the DOD SBIR and STTR programs to accommodate an
increase in the number of solicitations conducted and proposals
received while meeting time-to-award goals.
The high watermark for SBIR/STTR's effect success or effectiveness
in the Department is bringing leading-edge technology solutions to the
warfighter by leveraging the unique, entrepreneurial power of small
businesses. Of course, the dictionary definition of efficiency is the
ratio of the useful output (effect) of a program to the total input.
We've discussed the inputs, or costs, elsewhere in this statement.
Let's spend a few moments on the outputs. Accurately quantifying the
full impact of technology innovation is a challenge. We measure program
output in the form of both documented success stories and
commercialization data, using follow-on sales and investment as a proxy
for value creation.
The Department collects commercialization data from firms on all
Phase II contracts and asks firms to keep this data current. Updates
are requested annually and when firms submit proposals. Both the
strength and weakness of this data set is that it is self-reported by
firms. The Department is thus reliant upon them to report accurate and
timely figures. A drawback to this reporting process is that we do not
capture commercialization accruing to firms that have ``graduated''
from the program, growing to be ineligible for future awards either
through organic expansion or via acquisition.
Commercialization may be quite substantial, perhaps rendering our
data a conservative estimate of program impact. Despite this
limitation, Phase II investments of $6.7 billion in fiscal years 1984-
2004 have generated total reported commercialization of nearly $13
billion in sales, additional R&D, and capital investment. Allowing
three to four years after the completion of Phase II for
commercialization to develop, about 65 percent of SBIR topics--
statements of technology need--generate some recorded
commercialization,\5\ while nearly 30 percent of topics generate
commercialization in excess typical investment levels.\6\ Considering
these aggregate program output measures, the SBIR and STTR programs are
stimulating the development and sales of innovation within the
Department and the broader economy.
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\5\ Again defined as sales, further R&D or further investment.
\6\ Commercialization figures are drawn from the firm-reported DOD
SBIR Commercialization Database and encompass phase I awards made 1990-
2003. Topic commercialization rates are calculated as the mean of
yearly averages over this period of time. Considering only DOD-derived
sales or investment (via prime or subcontract), 42 percent of topics
generated some commercialization while 13 percent generated
commercialization in excess of the typical investment amount. Typical
investment is set at $850,000, the combined value of Phase I and Phase
II contracts based on statutory guidelines.
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In addition to measuring financial outcomes, we track program
success stories, which demonstrate in a more concrete way the value the
SBIR and STTR programs bring to specific customers. Perhaps the most
vivid example of such a success story is Small Arms Protective Inserts
(SAPI) and Enhance Small Arms Protective Inserts (E-SAPI) plates, which
protect warfighters in theaters of operation from assault rifle and
other small arms fire. Based on work done under FY 2000 and FY 2003
Navy SBIR contracts for vehicle armor, and a significant amount of
follow-on research and development, ArmorWorks, Inc. of Tempe, Arizona
developed high technology body armor plates for the Interceptor Body
Armor System using advanced ceramic materials. To date, the firm has
supplied hundreds of thousands of ceramic armor plates for use in
personal (SAPI and E-SAPI), vehicular and aircraft applications, saving
lives of U.S. warfighters every day.
A second excellent example of a success story is the Army SBIR-
originated Cockpit Air Bag System, designed and manufactured by Simula,
Inc of Phoenix, Arizona. Composed of air bags, gas generators, and a
unique three-axis crash sensor, the system is designed to protect
helicopter aircrew from potentially fatal impacts in the event of a
crash. The Army, Navy, Air Force, and Federal Aviation Administration
all participated in the joint development of this system, leveraging
prior SBIR-funded work and leading to a 2001 production contract.
Simula, Inc. has already fielded the system on hundreds of DOD
aircraft.
A third example of a success story is the Phraselator, a hand-held
speech translation device developed by Marine Acoustics, Inc. (MAI), a
veteran-owned small business based in Middletown, Rhode Island, through
an FY 2001 DARPA SBIR effort.\7\ Following the terrorist attack in
September of 2001, just seven months into their Phase II contract,
DARPA requested that MAI accelerate development of a prototype
Phraselator. MAI proved quite capable, delivering 200 units in a matter
of weeks to U.S. military forces for use in Afghanistan during
Operation Enduring Freedom. Over 5,000 Phraselators are now in use in
Afghanistan, Iraq, and around the world, and they were used extensively
in tsunami relief efforts. There is potentially a large commercial
market for the devices, which are particularly helpful in law
enforcement and medical applications where situational urgency may not
allow time for an interpreter to arrive on the scene.
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\7\ The Phraselator is now owned and marketed by Voxtec, Inc.
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A final example highlights the ability of SBIR-funded technologies
to save the Department money by providing capabilities at a lower cost.
It also highlights how two military departments can work together to
develop mutually beneficial technologies and then employ the technology
rapidly to meet an emerging warfighter need. JENTEK Sensors, Inc of
Waltham, Massachusetts developed a thin, conformable sensor system to
perform inspections on difficult-to-access locations of military
systems. Using the same Phase III contract, Navy Depots were purchasing
the sensors to inspect P-3 propeller blades while the Air Force was
adding additional funding to miniaturize the sensors for use in
difficult-to-access areas. A serious problem emerged with weld joints
on some compressor blades threatening planes to be grounded. The
technology available at the time was to disassemble and X-ray each
blade at a cost of $200,000 and considerable down time. In response to
a Wednesday phone call, Jentek quickly found a solution employing the
Air Force modifications under development. On the following Monday,
depot technicians were able to complete a plane inspection in an hour
using the ``meandering, wandering magnetometer'' technology at a cost
of less than $20,000.
Contract Award Guidelines: Flexibility Is Key
In FY 2006, the average DOD Phase I award was $89,300 and the
average Phase II was $720,800. Approximately 30 percent of these awards
were modified due to participation in the Fast Track and Phase II
Enhancement programs or to address technical or mission needs. Among
this set of awards, the average contract award was about $135,000 for
Phase I and $1.1M for Phase II.
Current contract award guidelines are $100,000 for Phase I and
$750,000 for Phase II. These have been in place since 1992 for the SBIR
program and have not been increased to reflect inflation's impact on
the price of research and development. The Department would support any
SBA effort to increase these statutory and regulatory guidelines.
The cost of technology development and prototyping is part
dependent on the type of technology being developed--some technologies
are more expensive than others. For example, manufacturing-related
initiatives can run into the millions of dollars to effectively
prototype and demonstrate. Additionally, test, evaluation and
validation can be quite expensive for technologies destined for
military use. Thus, regardless of the level of the award guidelines,
technology cost variability and the often high cost of bringing
technologies to a transition-ready maturity level militate for
flexibility in program execution.\8\ Thus, the Department appreciates
the flexibility to judiciously go beyond the proscribed guidelines when
necessary to be responsive to technology transition opportunities and
produce successful outcomes.
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\8\ As a general rule, a Technology Readiness Level (TRL) of at
least six (meaning a prototype has been demonstrated on a relevant
environment) is required for system development to begin.
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Small Business Participation: Competition Provides Program Vitality
By almost any measure, the interest and participation in the SBIR
and STTR programs has been strong. Small business participation in the
DOD SBIR & STTR programs has been very strong. In fiscal years 2003-
2006, the Department received an average of about 15 proposals per SBIR
topic and 11 proposals per STTR topic. Prior to that, between fiscal
years 1998 and 2001, the average was under 11 proposals per SBIR topic
and nine proposals per STTR topic. The programs fund only the best
proposals in Phase I and only the ``best-of-the-best'' go on to Phase
II. Historical Phase I funding rates are 14 percent for SBIR and 20
percent for STTR, with Phase II conversion rates of just below 50
percent for both programs.\9\
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\9\ Looking at Phase I awards and associated Phase II follow-on
awards from solicitations in fiscal years 1994-2003.
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Outreach activities are important to ensure that small businesses
have the opportunity to learn about the programs. Outreach is primarily
conducted through attending conferences planned for this purpose, and
through making information available to the public, primarily via the
Internet. The Department and its components support as many conferences
as time and resources allow. Strong support of two national conferences
and several regional and state events is the norm. Additionally,
information contained on the DOD and on DOD component web pages is
quite significant, permitting interested firms to learn virtually
anything they might want to know about the programs. To supplement, the
Department staffs a toll-free help-desk to answer questions firms have
about the programs.
As discussed earlier, the SBIR and STTR programs are often gateways
to the defense market space for firms, a way for firms to test the
market and be tested as a potential new supplier. In fiscal year 2006,
around 20 percent of Phase I awardees were first time award recipients
while 29 percent of phase II award recipients never received a phase II
award before. These are important benchmarks. To maintain a vital,
innovative supplier base, particularly for new technologies, it is
imperative that the Department encourage new and non-traditional firms
to get involved.
Financing and Commercialization
The Department employs several mechanisms to address the funding
gaps in the phased award structure, increase private equity
participation, provide commercialization assistance, and ultimately
help increase small businesses' share of federal procurement and non-
SBIR/STTR R&D. First, commercialization potential plays a central role
in proposals and source selection. Two of three criteria address this
issue:
qualifications of the firm and team to perform the
research and development and commercialize the results, and;
the commercialization\10\ potential of the proposed
solution.
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\10\ Commercialization refers to the process of developing
marketable products or services and producing and delivering products
or services for sale (whether by the originating party or by others),
to government and/or non-government markets. Funds data reported as
commercialization includes the receipt of money for the performance of
follow-on R&D (as government-supplied Phase III funds or other sources)
and the collection of funds from investors. A related term is SBIR
Phase III, which refers specifically to work that derives from,
extends, or logically concludes effort(s) performed under prior SBIR
funding agreements, but is funded by sources other than the SBIR
program. Phase III work is thus typically oriented toward
commercializing SBIR research or technology. The terms are often used
synonymously and interchangeably when describing outcomes beyond SBIR
Phase II.
Further, firms with four or more prior SBIR Phase II contracts are
assigned a Commercialization Achievement Index (CAI) score, which is a
measure of how well the firm has commercialized prior SBIR technology
relative to peers with the same number of Phase II awards. Firms with a
CAI in the lowest fifteen percentile--those with the worst record of
commercialization--receive fewer points in source selection.
To address the funding gap between Phase I and Phase II, many DOD
components employ a Phase I contract option to fund research and
development while the Phase II proposal is evaluated for funding. When
this approach is taken, it virtually always takes the Phase I award
amount above the statutory and regulatory guideline, triggering a
reporting requirement. The Fast Track program also offers gap funding
to qualified proposals while also attracting external matching funds.
The Phase II Enhancement program (also known as Phase II Plus)
offers program funding to match qualifying external funding, sometimes
(but not always) from a non-SBIR/STTR DOD source such as a laboratory
or system program office, to further develop, demonstrate, test, and
validate the technology. The Department's analysis shows that both the
Fast Track and Phase II Enhancement programs are associated with
systematically higher levels of commercialization.
As with the Phase I contact option, Phase II Enhancements virtually
always increase the Phase II award level beyond the statutory and
regulatory guidelines, triggering a reporting requirement. Preliminary
analysis shows there is more interest among the components in
performing Phase II Enhancements than in Fast Track. This is probably
because the matching funds are brought to bear later in the research
and development cycle when technology transition issues are more likely
to be defined, and the potential of the technology is better
understood.
Technical assistance programs offer federal agencies the
opportunity to provide targeted aid to SBIR and STTR award recipients
to increase their chances of success. Section 9(q) of the Small
Business Act currently permits $4,000 per Phase I award and $4,000 per
year per Phase II award to be used to provide such assistance. However,
to make the authority more useful and effective, the Department
recommends a couple of changes:
increase to $5,000 per Phase I award to reflect the
economic impact of inflation; and,
increase Phase II assistance to up to $8,000 per
year, and permit federal agencies to provide the assistance
directly or through the Phase II contract.
The suggested increase in the level of assistance for Phase II reflects
a more realistic cost of providing meaningful assistance to firms that
need to cultivate markets for their innovations while simultaneously
developing their technologies and capacity to produce them.
Within the DOD program, few components currently provide direct
commercialization assistance. The adjustments suggested above and in
the section 824 of the Administration's proposed National Defense
Authorization Act for Fiscal Year 2008 forwarded to the Congress on
February 6, 2007 (NDAA for FY08), will make the technical assistance
more attractive and probably increase the likelihood that DOD
components and other federal agencies will use the authority.
Administrative Costs
SBIR/STTR program administration is quite resource intensive. This
is in large part due to the phased program structure and contract award
guidelines, which result in thousands of individual contracts. Each
contract requires associated Departmental overhead for topic
development and review, pre-release and solicitation interaction with
industry, technical evaluation and source selection, contracting, and
technical oversight and coordination, among other activities.
Preliminary estimates by the RAND Corporation put this overhead at or
above five percent of program budget, varying by component.\11\
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\11\ Drawn from ``Evaluation and Recommendations for Improvement of
the Department of Defense Small Business Innovation Research (SBIR)
Program.'' The study efforts are funded by the Office of Small Business
Programs, Office of the Under Secretary of Defense (Acquisition,
Technology & Logistics).
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The SBIR and STTR set-aside budgets are drawn from previously
programmed, budgeted and appropriated funds for other programs, which
when budgeted contained resources for administration of these funds.
Thus, the SBIR and STTR budgets contain funds that were identified to
support administrative activities. However, the set-aside budgets for
SBIR or STTR may not be used to support program administration. Support
funding thus must be drawn from other sources.
A legislative change proposed by section 823 of the NDAA for FY
2008 would allow up to three percent of the SBIR and STTR set-aside
budgets to be used to fund administrative expenses. The most important
activities requiring these resources are contracting, technical
oversight, and program coordination with systems developers and end-
users. Benefits derived from this change will ultimately manifest
themselves in overall program performance, such as through the
aggregate rate and magnitude of commercialization achieved.
Modification of the current discretionary technical assistance
authority (15 U.S.C. 638(q) ), as suggested above, would provide ample
resources for this task, particularly when combined with resources made
available through the Commercialization Pilot Program (CPP) authority
(15 U.S.C. 638(y) ). Lastly, I would caution against raising the
program set-aside from the current 2.5 percent absent analytically
solid determination that such a change would produce value in excess of
the additional direct and opportunity costs it would impose.
Conclusion
To conclude, I would like to recognize the efforts of our DOD SBIR
program managers and the civilian and uniformed technical
representatives and contracting officers, as well as contractors that
support them. These dedicated, professional individuals work hard, day
in and day out, to ensure that our SBIR dollars are spent on the most
promising and relevant technologies. They don't always see immediate
results from their labors--that is the nature of early-stage research
and development (R&D). However, when projects develop into useful
military products, the fruits of their labor can be seen saving lives
and contributing to a wide variety of missions in Iraq, Afghanistan,
and elsewhere around the world. We need not look further than these
places to see that the program can make a positive impact, and that is
due directly to their efforts.
In summary, again I thank you, Chairman Wu, for the opportunity to
testify on the SBIR and STTR programs. I hope my testimony has provided
you with an understanding of how we run the program at the Department
and will assist in you and your colleagues as you consider program
reauthorization. I would be happy to answer any questions you and the
Members of the Subcommittee may have.
Statement of Dr. Norka Ruiz Bravo
Deputy Director for Extramural Research
Office of Extramural Research
National Institutes of Health
U.S. Department of Health and Human Services
Chairman Wu, Ranking Member Gingrey, and Members of the
Subcommittee: I am Dr. Norka Ruiz Bravo, Deputy Director for Extramural
Research at the National Institutes of Health (NIH), an agency of the
Department of Health and Human Services (HHS). The NIH is the primary
federal agency for conducting and supporting biomedical research.
I appreciate the opportunity to provide for the record testimony
about the Small Business Innovation Research (SBIR) program and the
Small Business Technology Transfer Program (STTR) and ways to
strengthen the participation of small businesses in the NIH SBIR/STTR
programs.
IMPORTANCE OF SBIR/STTR PROGRAMS AT NIH
The NIH mission is to uncover new knowledge that will lead to
better health for everyone. Helping to lead the way toward important
medical discoveries, NIH-supported scientists investigate ways to
prevent disease as well as investigate the causes, treatments, and
cures for diseases and disabilities. The key to achieving our mission
is that the rapid and fundamental advances in biomedical and behavioral
sciences will be translated into prevention strategies and clinical
treatments for rare and common diseases and then further applied to
real-world practice. With new scientific discoveries comes the
opportunity for small businesses to translate research results into the
commercial marketplace.
The SBIR/STTR programs provide qualified small business concerns
with opportunities to propose innovative ideas and to explore their
technological potential. Projects funded through the NIH SBIR/STTR
programs focus on commercialization of the outcomes of research. The
SBIR/STTR programs are fully integrated into the NIH research agenda,
particularly with respect to promoting innovative, cutting-edge
research ideas, as well as translating scientific findings and advances
into tangible benefits for the American people. Thus, they serve to
supplement--but not supplant or diminish--the traditional research
programs of NIH.
The NIH SBIR program and STTR program represent about 98 percent
and 100 percent, respectively, of HHS' programs in these areas. The NIH
contributes the second largest amount of SBIR/STTR funding across the
Federal Government. In fiscal year (FY) 2006, the NIH SBIR program
provided over $580 million to fund 1,275 new Phase I (feasibility
testing) and Phase II (product research and development) SBIR projects.
We provided more than $70 million to fund nearly 200 new Phase I and
Phase II STTR projects. Since the programs' inception, the NIH has
invested more than $5 billion in more than 19,000 projects to over
5,000 small businesses.
PROGRAM EFFECTIVENESS: BRINGING IDEAS TO LIFE
The NIH SBIR/STTR programs are focused on creating research
opportunities for U.S. small businesses to stimulate technological
innovation and to translate discoveries into products/services that
will improve human health. The programs seek to fund the most
scientifically promising projects for which private and public funds
are not traditionally available. As noted from the few examples below,
the program has shown that tangible scientific benefits can result from
a small investment in early-stage ideas with commercial potential but
uncertain verification or feasibility.
GlycoFi Inc. (NH), a biotherapeutics company, used
the NIH SBIR program to explore the feasibility of making
injectable proteins--so called ``biotech drugs''--using a
glycoengineered yeast strain. GlycoFi's work is an example of
exciting translational research where they use an innovative
approach called GlycoDesignTM to control a protein's glycans
(sugars) in order to optimize a therapeutic protein. GlycoFi
demonstrated successfully the technical feasibility to develop
a yeast system for producing therapeutic drugs in large scale.
In May 2006, this six-year-old company was acquired by Merck &
Co. for about $400 million in cash, the largest such deal ever
reported for a private biotechnology company.
IntraLase Corporation (CA) used SBIR funding to
develop a safer and more precise way to create the corneal flap
in LASIK surgery. Today, using a bladeless technology to
generate light pulses as short as one-quadrillionth of a
second, IntraLase's femtosecond laser technology is improving
the safety and efficacy of laser vision correction.
Electrical Geodesics Inc. (OR) has used the SBIR
program to develop important research tools. It has developed a
new generation of high-resolution electroencephalogram (EEG)
measurement and analysis systems for use in medicine,
psychology, and neuroscience research. Based on a patented
Geodesic Sensor Net technology, EGI's systems are now in use in
research laboratories in the U.S., Europe, and Asia, in
projects ranging from infant language comprehension to EEG
pathology in dementia.
Altea Therapeutics (GA) has used NIH SBIR funding to
develop the PassPortTM System, which enables fast, controlled
delivery of drugs (e.g., insulin) and vaccines painlessly
through the skin using a needleless infusion patch.
These examples demonstrate why the SBIR/STTR programs are important
to the innovation process. Marking the 25th year of the existence of
the SBIR program, the time is ripe to reflect on how the programs have
evolved and matured over time and to consider ways to develop program
operations to improve program efficiency and effectiveness.
PROGRAM FLEXIBILITY IS KEY: ONE SIZE DOES NOT FIT ALL
The SBIR program now includes 11 participating agencies, each with
very diverse missions. NIH attributes the success and effectiveness of
its program to several factors, the most significant of which is
flexibility in our proactive administration of the program to
accommodate the changing nature of biomedical and behavioral research
while increasing the efficiency and effectiveness of the program. These
changes were focused on addressing the needs of a diverse business
community, including multiple industries, different technology sectors,
and diverse product outcomes.
Examples of program flexibility include the ability to provide
funding levels that in some instances exceed the norm established in
Small Business Administration (SBA) guidelines; the ability to propose
research projects in the fields that have the most biological
potential; the use of less rigid receipt dates; the permissibility of
application resubmissions and gap funding options, including a Phase I/
Phase II Fast-Track option to accelerate projects that have great
potential for commercialization; and the opportunity to compete for
Phase II Competing Renewal awards for projects that must address FDA
regulatory requirements (e.g., clinical evaluation).
Simply stated, one size does not fit all. Flexibility is key,
particularly in addressing the current challenges noted below.
PHASE I/PHASE II AWARD LEVELS
The median award size in FY 2006 was $143,725 for Phase I and
$415,952 per year for Phase II projects. Our experience is that the
conduct of certain types of biomedical research, such as
nanotechnology, clinically-related studies, vaccine development, and
drug discovery, do not routinely lend themselves to prescribed maximum
time and dollar levels. NIH appreciates the flexibility that the SBA
has provided to exceed their guidelines, where appropriate, for
particular projects, rather than to restrict ideas to projects that can
only be conducted under a prescribed amount of time and money.
Accordingly, we encourage small business concerns to propose realistic
budgets and project periods appropriate for the successful completion
of an SBIR project.
SMALL BUSINESS PARTICIPATION
Outreach is an important link to the participation of small
businesses in the SBIR/STTR programs. We are continually enhancing our
outreach efforts at conferences and forums aimed at increasing
participation of all small businesses, and particularly socially and
economically-disadvantaged and women-owned small businesses; the Small
Business Veterans Conference and the Alabama A&M University 2007 SBIR/
STTR Small Business Conference are just two examples. In addition to
outreach, NIH provides administrative supplements to NIH SBIR/STTR
awardees to improve the diversity of the research workforce by
supporting and recruiting students, post-doctorates, and eligible
investigators from groups that have been shown to be under-represented.
SUSTAINING THE INTEGRITY OF THE SBIR PROGRAM
Small businesses are increasingly recognized as important
contributors and partners to technological innovation. Yet small
business participation in the NIH SBIR/STTR programs is experiencing
another trend of decreases. SBIR/STTR has been decreasing since FY
2004, as it did in FY 2001, at a time when non-SBIR applications have
increased significantly. In FY 2006, NIH saw a nearly 15 percent
decrease from the number of SBIR applications submitted in FY 2005 (see
chart below). This reoccurrence of decreases is of serious concern to
NIH, and we understand that several other agencies are also
experiencing a decrease in submissions.
The downward trend may be the result of several factors. Some firms
are no longer eligible. Some have gone out of business. Some firms are
new start-ups that have not yet fully developed the necessary
infrastructure to successfully compete for an award. Some believe the
time and cost for applying relative to the award levels is not a
sufficient opportunity incentive. (Only about one-third of our SBIR and
STTR awardees are new to the program each year.) NIH encourages small
businesses to participate in the SBIR/STTR programs and to use the
programs as one, but not the only, resource for funding innovative,
commercially viable ideas. In considering ways to increase the
participation of innovative small businesses in the SBIR/STTR programs,
NIH plans to give preference to new firms that have never received NIH
SBIR/STTR awards and/or to firms that respond to agency-specific
priorities, given a firm's level of expertise and evidence of likely
ability to produce innovative products.
FINANCING AND COMMERCIALIZATION ASSISTANCE PROGRAMS
SBIR/STTR program reauthorizations have consistently emphasized the
goal of addressing financing gaps toward product commercialization by
requiring agencies to include as a review criterion the commercial
potential of proposed projects. To help NIH SBIR awardees navigate this
proverbial ``valley of death'' and move their products into the
marketplace, NIH has developed a menu of technical assistance programs
that provide technical and/or commercialization assistance specific to
the companies' individual needs. These programs are:
Technology Niche Assessment (TNATM) Program: The TNATM program
assesses the market opportunities and needs and concerns of the end-
users and helps to discover new markets for possible entry.
CAP: CAP provides Phase II awardees with assistance in developing
and implementing an appropriate business strategy that will help
commercialize the products that have resulted from their SBIR research
projects. CAP is having positive impacts on some SBIR companies seeking
investments and partnerships. For example, Cytograft Tissue Engineering
(CTE) received SBIR funding that enabled the company to explore the
potential of an innovative technology to create a living blood vessel
called LifelineTM. This exciting medical advancement has potential for
coronary bypass candidates, lower limb amputation candidates, and
hemodialysis patients. As a CAP participant, CTE has raised $17 million
in private equity financing to fund some of their clinical studies.
Pilot Manufacturing Assistance Program: In FY 2007, NIH initiated a
pilot assistance program together with the National Institute of
Standards and Technology Manufacturing Extension Partnership (MEP)
program to help companies with making manufacturing decisions when
developing their operational transition strategies (e.g., method of
scale-up, quality control, prototyping, facility design, vendor
identification and selection, plant layout).
NIH believes the technical assistance to SBIR awardees is very
important in helping companies transition to the marketplace.
PARTNERS: GOVERNMENT AND SMALL BUSINESS
The overarching intent of the SBIR program was stated best by
President Reagan in signing the initial legislation: ``We in government
must work in partnership with small businesses to ensure that
technologies and processes are readily transferred to commercial
applications.'' As researchers tackle ever more complex biomedical
challenges and the rising cost of scientific research, strategic
partnerships between NIH and private industry are becoming more
important for advancing science and communicating results of medical
advances to improve the quality of life for all people.
NIH is committed to increasing the participation of small
businesses in the SBIR/STTR programs, ensuring that only small business
concerns receive SBIR/STTR awards, and encouraging the participation of
new start-up SBIR/STTR firms by giving them preference in award
selection, much like new investigators are often given preference in
traditional research grant programs (see http://grants.nih.gov/grants/
new-investigators/
institute-center-practices.htm). We need to find
ways to innovate and collaborate, and promote scientific advances, and
take advantage of every opportunity to improve public health.
CONCLUSION
In conclusion, it is our intention and hope that SBIR/STTR programs
will continue to maintain their integrity and ensure that technology
developments will be translated and disseminated for the benefit of all
Americans.
Thank you for the opportunity to share with you my thoughts
regarding the SBIR/STTR programs.
Statement of Larry James
SBIR/STTR Program Manager
U.S. Department of Energy
Mr. Chairman and Members of the Committee: thank you for giving the
Department of Energy (DOE) the opportunity to provide this Statement
for the Record about the Small Business Innovation Research (SBIR) and
Small Business Technology Transfer (STTR) programs at the Department.
The DOE Office of Science (SC) manages the SBIR and STTR programs
for the Department and has done so since the SBIR program was formed in
1982 and the STTR program in 1992. In addition to SC, six other DOE
programs participate in the SBIR and STTR programs: the Offices of
Fossil Energy, Energy Efficiency and Renewable Energy, Nuclear Energy,
Environmental Management, Defense Nuclear Nonproliferation, and
Electricity Delivery and Energy Reliability. The Department's naval
reactors and weapons activities programs are exempt by law and do not
contribute to SBIR and STTR programs.
The SBIR/STTR programs are viewed within the Department like any
other research and development (R&D) program, namely, as a vehicle by
which the Department accomplishes its R&D objectives. The Department
has benefited from small business participation through the research
and resultant new knowledge and technologies developed by small
businesses that have supported various Department R&D activities over
the years. Examples of commercialization successes from the programs
include development of new photovoltaic systems for utility scale solar
energy production, shock-resistant and temperature-tolerant ceramics
for more energy efficient engines, and fast-growing hybrid poplar trees
as a sustainable and economical biomass energy source. Successful
collaborations between small businesses and the DOE laboratory complex
have also led to new insights and innovative technologies that enable
advancement of the Department's program missions; for example,
technologies that will significantly improve the performance of current
and future DOE scientific user facilities.
Program Effectiveness
The statutory SBIR and STTR programs have several purposes: (a) to
stimulate technological innovation; (b) to use small businesses to meet
federal R&D needs; (c) to foster and encourage participation by
socially and economically disadvantaged small businesses; and (d) to
increase private sector commercialization of innovations derived from
federal R&D.
In accordance with the U.S. Small Business Administration's (SBA)
SBIR Policy Directive, the SBIR program is administered in three
phases. Phase I is to evaluate the scientific or technical merit and
feasibility of ideas that appear to have commercial potential or meet
the internal needs of the Department. Phase II builds on Phase I work
and comprises the core research and development effort. Phase III
refers to work that derives from, extends, or logically concludes
efforts performed under SBIR funding agreements, but is not itself
funded by the SBIR program. Phase III work is typically oriented
towards private sector commercialization or direct transition of the
SBIR research or technology into the Department's research complex.
That is, the SBIR funding pays for research or R&D meeting DOE
objectives (Phases I and II); non-SBIR capital provides follow-on
developmental funding to meet commercial or program specific objectives
(Phase III).
The SBIR and STTR programs both involve a two-phased research
approach. The major difference between the SBIR and the STTR programs
is that STTR grants must involve substantial cooperative research
collaboration between the small business and a research institution. At
least 40 percent of the research or analytical effort must be allocated
to the small business, and at least 30 percent of the effort must be
allocated to a single research institution. The percent set-aside for
the STTR is small, 0.3 percent, relative to the SBIR set-aside at 2.5
percent of federal agency extramural R&D budgets.
The Department's SBIR and STTR programs' goals include: 1) funding
high quality projects with relevance to the Department's mission needs;
2) increasing private-sector commercialization and Departmental
transition of technology developed through DOE SBIR-supported R&D; 3)
stimulating technological innovation in the private sector; and 4)
improving the return on investment from federally-funded research for
economic and social benefits to the Nation.
The Department believes its SBIR and STTR programs are meeting
these objectives. SBIR and STTR program performance compares favorably
with that of other DOE research programs. The DOE SBIR and STTR
programs have and continue to support high-quality, competitive R&D,
which results in spin-off companies, new technologies, and knowledge
which all contribute to advancing DOE missions.
DOE's SBIR program is also a model for the provision of
commercialization assistance. According to the Small Business
Administration (SBA), DOE was the first agency to offer
commercialization assistance to awardees, beginning in 1990. Awards
from the SBIR program help small businesses attract outside investment
by affirming that the companies have excellent technical capability,
thus reducing some of the uncertainty involved in early-stage
investment. Several comprehensive reviews of the federal SBIR and STTR
programs by the Government Accountability Office (GAO) have found it to
be successful in enhancing the role of small businesses in federal R&D
across the participating agencies, stimulating commercialization of
research results, and supporting the participation of small businesses
(Testimony Before the Subcommittee on Environment, Technology, and
Standards, Committee on Science, House of Representatives, Federal
Research: Observations on the Small Business Innovation Research
Program, June, 28 2005, GAO-05-861T, and references therein).
The efficiency and effectiveness of the DOE SBIR and STTR programs
could potentially be improved with two changes in the allocation of
set-aside funds:
(1) Increase the provisions for discretionary technical assistance
within the existing set-aside allowed by law under SBIR. SBA-directed
funding limits in Phase I and Phase II are not adequate to support a
strong technical assistance program, including commercialization
assistance. Currently up to $4,000 in Phase I (above the awarded
amount) can be used per award for commercialization assistance
activities and up to $4,000 per year per award in Phase II (included as
part of the awarded amount) can be used towards these activities. SBIR
Phase II recipients have indicated in qualitative surveys that the
commercialization assistance programs and services offered by DOE's
SBIR program are valuable to their product development and
commercialization efforts. Also, quantitative data from DOE's SBIR
Commercialization Opportunity Forum Program, a program that helps
companies develop a business plan and interact with potential strategic
allies and investors, indicate that more than 50 percent of the
graduates from the program received follow-on investment within 18
months.
(2) Make a small fraction of the existing set-aside available for
agency administrative purposes. Appropriate operating resources are
important to maintain and continue to improve the SBIR and STTR
programs. The use of a small percentage of the SBIR and STTR programs'
funds for administrative purposes could improve their effectiveness by
providing the resources for better evaluation of the successes of
participating small businesses and their impacts on DOE mission goals.
For example, such resources would allow program staff to improve Phase
III follow-up, track commercialization and non-commercialization
successes, and provide more outreach to increase small business
participation. More comprehensive, long-term data collection would
allow better assessment of the results of the programs and enable the
programs to adjust management practices as appropriate.
A key element in the success of the SBIR and STTR programs is the
flexibility of the SBA Policy Directive which lays out the basic rules
by which each agency manages its mission specific programs. Each of the
federal agencies which participate in the SBIR/STTR program manages its
program through processes that work best for that agency. Efforts to
restrict this framework, which has evolved over the 24-year history of
the SBIR Program, would be a step backward and would limit the
agencies' ability to meet the goals of the program.
Award Levels
The SBA is currently considering new award level upper limits for
the SBIR program to account for inflation. In general, higher award
level limits will give agencies added flexibility in managing their
programs and enable support of a broader range of innovative technology
proposals.
Small Business Participation
Over the 24 years of its existence, the DOE SBIR Program has
matured and evolved significantly. We have issued 25 Phase I
solicitations, reviewed approximately 31,797 proposals, and selected
for funding 4,413 Phase I projects and 1,816 Phase II projects. The
SBIR budget for Fiscal Year 2006 was $114 million. The Department
received 1,309 Phase I grant applications from 809 companies, of which
1,021 were sent out for external peer review. We selected 260
applications for Phase I awards resulting in grants to 173 small
businesses in 33 states. Sixty-seven of the 290 grantees were first
time winners with DOE. Thirty-four of the 67 were first time applicants
to DOE. Thirty-one applicants selected for funding were from socially
and economically disadvantaged small businesses and thirteen were from
small businesses located in a HUBZone (historically underutilized
business zone). In FY 2006, the Department received 226 Phase II
proposals and funded 123 awards to 96 small businesses. Approximately
95 percent of Phase I awardees submit Phase II proposals.
Below are additional statistics from prior years:
DOE actively participates in national, regional, and state
sponsored outreach activities, as do other federal agencies, to engage
small businesses and provide information and resources to better
position them to participate in the SBIR and STTR programs. These
outreach activities generally consist of two- to three-day conferences
featuring presentations and panel discussions involving agency program
managers and experts in the areas of proposal preparation and budget
formulation. One-on-one meetings with prospective small businesses are
also provided to allow attendees to discuss their technology concepts
and how they might address agency needs. Agency participation in these
outreach activities is often limited, however, by an agency's limited
administrative resources.
The DOE SBIR and STTR programs facilitate and participate in
presentations and panel discussions at the Department's annual Small
Business Conference. These conferences typically draw between 400-600
participants each year and have been successful in attracting a
significant number of small and economically disadvantaged businesses
that are strongly encouraged to consider SBIR and STTR program
opportunities. Continued outreach efforts by the federal agencies'
programs are important. Likewise, efforts by State Economic Development
Agencies have shown significant success in helping their small business
communities pursue federal SBIR and STTR funding opportunities.
Financing and Commercialization
Because the Department has flexibility to provide partial funding
as soon as Phase II awardees are selected, we are able to minimize any
gaps in financing under the SBIR and STTR phased award structure. Phase
II awardees are typically selected within a reasonable period following
their completion of the Phase I grant. The current SBIR Policy
Directive encourages each agency to develop a program that reduces the
time between issuance of SBIR Phase I and Phase II awards and provides
the agency flexibility for optimal implementation.
As stated earlier, increasing the amount of the existing set-aside
allowed for technical assistance, including commercialization
assistance activities, could potentially improve the commercialization
success of SBIR R&D supported by the federal agencies. The
Commercialization Opportunity Forum Program in which DOE SBIR grantees
are invited to participate brings small businesses with promising
technologies face-to-face with potential investors. This program,
conducted by a private organization competitively selected and under
contract with DOE, provides small businesses the opportunity to work
with professionals first to develop and refine a business plan and
business plan presentation. Then small businesses are brought together
with decision-makers from appropriate partnering and funding sources in
a two-day forum that includes both formal presentations and informal
networking opportunities. While every small business supported by the
DOE SBIR program theoretically has access to commercialization
assistance services, in fact, because of resource limitations, not
every small business is able to participate in the Opportunity Forum,
which involves direct contact with private equity firms. Additional
resources for commercialization assistance through programs like the
Opportunity Forum could help more participating small businesses
develop business plans for their technologies and access the private
equity and investment markets essential to successful
commercialization.
Multiple Venture Capital Majority Ownership
The Department recognizes the positive impact that opening up
competition to multiple venture capital (VC) majority-owned small
businesses may have on stimulating technology development, increasing
private sector commercialization from federal R&D, and meeting agency
mission needs. DOE has concerns, however, with respect to how opening
up the competition to multiple VC majority-owned small businesses may
impact the participation of small businesses which lack the financial
resources of multiple VC majority-owned companies. Because DOE provides
financial assistance in the form of Phase I and Phase II research
grants to the successful applicant, there is no financial risk to the
company if the research and development of a proposed technology does
not result in a commercial product in the near-term. The financial risk
to these companies comes in Phase III, once the SBIR and STTR programs'
funding is no longer provided and small businesses must pursue outside
financial resources for further development and commercialization.
Opening up competition to multiple VC-majority owned companies may
have the effect of squeezing out new technology start-up businesses
that have been the success stories of the SBIR and STTR programs and
may limit the ability of the federal program to increase the
participation of small businesses in federal R&D, particularly
participation by socially and economically disadvantaged small
businesses. Interested venture capital companies have sufficient
opportunity to provide financial support to the small businesses
directly through equity ownership once the technology has proven itself
in Phase II. SBA is currently addressing this issue through its public
rule-making process. SBA has issued an Advance Notice of Public Rule
Making and is reviewing the pros and cons of a possible change in
eligibility requirements.
Raising the Set-Aside Percentage
Since its inception, the Department has invested almost $1.5
billion in SBIR/STTR Phase I and Phase II grants. In return,
approximately 60 percent of Phase II-supported companies have earned a
total of more than $1.6 billion in sales and $1.3 billion in additional
Phase III development funding--67 percent of which came from non-
federal sources--helping the Nation capitalize on its substantial R&D
investment.
As the Committee considers SBIR Reauthorization, the issue of
raising the set-aside percentage is likely to be a subject of debate.
The Department of Energy works hard to maintain a strong and
appropriately balanced core research program through R&D supported at
universities, the DOE national laboratories, and U.S. small businesses.
The Department believes the current set-aside is adequate. At a time
when budgets are particularly constrained, we do not advocate
increasing the set-aside for the SBIR and STTR programs. We are most
concerned that such an increase would negatively impact other areas of
the Department's research portfolio, including maintaining core
research funding at universities. The Department recommends that,
before any increase in the set-aside percentage is considered,
improvements in program efficiency and effectiveness be explored--for
example, through change to the allocation of existing set-aside
resources to allow additional support for technical assistance and
commercialization assistance, as well as for agency administrative
expenses. Such changes may better position small businesses to develop
and commercialize their technologies and maximize their contribution to
agency mission needs without compromising agencies' broader mission
commitments.
Conclusion
Again, Mr. Chairman and Members of the Committee, I want to thank
you for the opportunity to provide this statement from the Department
of Energy. We are committed to the SBIR and STTR programs which have
proved their value over many years, and we look forward to working with
this committee and others on reauthorization to continue and further
improve their efficacy for the agencies which support them and the
businesses which emerge and grow from them.
Statement of Douglas A. Comstock
Director, Innovative Partnerships Program Office
National Aeronautics and Space Administration
Mr. Chairman and Members of the Subcommittee, thank you for the
opportunity to submit a statement for the record to discuss NASA's
Small Business Innovation Research (SBIR) Program and the Small
Business Technology Transfer (STTR) Program. The SBIR/STTR programs are
managed by the Innovation Partnerships Program Office (IPPO) whose
primary mission is to provide leveraged technology and capabilities to
NASA programs and projects through partnerships with industry,
academia, government agencies, and national laboratories.
The SBIR/STTR programs provide an opportunity for small, high
technology companies and research institutions to participate in
government sponsored research and development efforts on key technology
needs. Below, I have addressed the six issues posed by this
Subcommittee: program effectiveness, award level, small business
participation, financing and commercialization, administrative cost and
venture capital.
Program Effectiveness
Many technologies funded by SBIR/STTR have made important
contributions to NASA programs and projects, and many have also been
commercial successes that are bringing important benefits to society.
The agency is actively working to increase the number of NASA-funded
SBIR/STTR technologies with applicability and adequate maturity for use
in NASA's missions and projects.
Some examples of SBIR/STTR technologies that are making important
contributions to some of NASA's programs and projects are provided
below:
NASA's Mars Exploration Rovers are using SBIR
technologies including lithium ion batteries from Yardney
Technical Products of Pawtucket, Connecticut, heat switches
from Starsys Research of Boulder, Colorado, and ASCII chips
from Maxwell Technologies of San Diego, California.
Space Shuttle return-to-flight after the Columbia
accident used SBIR-developed wireless sensors from Invocon of
Cunroe, Texas, for the impact detection system in the wing
leading edge of the Shuttle. These wireless sensors are also
used for vehicle health monitoring and microgravity
instrumentation on the International Space Station.
The Cassini-Huygens Mission now at Saturn used
several SBIR technologies including a helium magnetometer from
Polatomic of Richardson, Texas, a coilable boom to deploy the
magnetometer from AEC-Able of Goleta, California, and filters
for several instruments on the spacecraft from Barr Associates
of Westford, Massachusetts.
The Hubble Space Telescope is using a miniature, high
speed, vibration free turbo-alternator from Creare of Hanover,
New Hampshire.
The heat shield on the return capsule for the
Stardust mission--first ever sample return from a comet, and
fastest ever Earth entry at 12.9 Km/sec--was enabled by an SBIR
with Fiber Materials Incorporated (FMI) of Biddleford, Maine.
FMI scaled up the heat shield fabrication technology for
Phenolic Impregnated Carbon Ablator (PICA) from 0.1m maximum
size at the time, to the 1.0m size needed for Stardust.
A few examples of successful commercialization of SBIR/STTR
technologies are provided below, and from the breadth of examples it is
evident that SBIR/STTR program technologies have potential application
in every key industrial sector:
An STTR contract from NASA's Langley Research Center
led to application of ultra-precise GPS for tractor-steering
systems. Developed by Novariant Corporation of Menlo Park,
California, these systems are in use around the world
increasing crop yields, reducing chemical use and conserving
irrigation water.
Weston Solutions of West Chester, Pennsylvania, is
using a technology developed through NASA STTR funding to clean
up high concentrations of harmful chlorinated solvents from dye
and paint manufacturers, dry cleaners, chemical manufacturers,
metal cleaning and degreasing facilities, pharmaceutical and
aerosol manufacturers, and other industries.
Quantum Devices of Barneveld, Wisconsin, has
commercialized light-emitting diode (LED) chips funded through
SBIR at NASA's Marshall Space Flight Center. Initially used to
grow plants on the Space Shuttle and International Space
Station, these lights are now used for healing wounds and
providing temporary relief from chronic pain due to arthritis,
stiffness, and muscle spasms.
Triangle Research and Development Corporation of
Research Triangle Park, North Carolina, has used a robotic
vision system and SBIR funding from NASA's Goddard Space Flight
Center to develop sophisticated crash test dummies and models
being used by automobile and component manufacturers in vehicle
testing worldwide.
Mineral identification technologies for Mars rovers,
developed with SBIR funding from NASA's Jet Propulsion
Laboratory, has been commercialized by InPhotonics of Norwood,
Massachusetts for use by U.S. law enforcement agencies and
military personnel to identify suspicious liquid and solid
substances through glass and plastic packaging materials.
Ballistic Recovery Systems of St. Paul, Minnesota,
has commercialized a lightweight parachute developed with SBIR
funding from NASA's Langley Research Center, for emergency use
by small airplanes, saving many lives.
Alcon Laboratories of Fort Worth, Texas has used
laser tracking technology for spacecraft rendezvous and
docking, developed with SBIR funds from NASA's Johnson Space
Center, to commercialize an eye-tracking device for LASIK
surgery that tracks eye movements at four times the established
safety margin.
Both the SBIR and STTR programs have evolved and matured over time
and NASA continues to pursue ways to improve program efficiency and
effectiveness. NASA is seeking to improve the effectiveness of the
program through achieving increased infusion into programs and
projects. By increasing the degree of integration of SBIR/STTR
investments into the overall technology development portfolio of NASA's
four Mission Directorates (Science, Aeronautics, Space Operations, and
Exploration Systems), SBIR/STTR investments will address specific
technology gaps, be complementary to other investments, and achieve
greater infusion.
Each of the 11 agencies participating in the SBIR program
implements the program a little differently, based on their mission
objectives. Flexibility in the administration of the program--not using
a ``one size fits all'' approach--has been critical to its success. The
ability for each agency to adjust funding levels, define areas of
research or subtopics of priority, pursue opportunities for cost
sharing, have all greatly enhanced the ability to accelerate projects
that have potential for infusion into agency Mission programs and/or
commercialization. Flexibility does contribute to program effectiveness
by allowing agencies to tailor to their specific needs.
Appropriate Program Award Levels
Adjusting the maximum award levels for phase 1 and 2 to account for
inflation would be desirable, if agencies retained the flexibility to
adjust awards as appropriate within those bounds. While higher awards
would result in fewer awards, the advances achieved by those awardees
would be greater given the increased level of funding. A key obstacle
for achieving infusion or commercialization success is developing
technologies of sufficient maturity or ``technology readiness level''
in NASA jargon. Higher award levels would help increase the maturity of
technologies resulting from the SBIR/STTR investments, thus reducing
the risk of incorporating those technologies into missions and
increasing the likelihood of infusion.
Small Business Participation
Participation in NASA's SBIR/STTR programs has continued to be more
than satisfactory. NASA continues to host a population on average of
proposal submits that range between 1,700 and 2,200 proposals annually.
NASA's outreach efforts at conferences and workshops continue to focus
on increasing participation by the small business community. NASA
continues to see a flow of firms new to the NASA SBIR program each year
and NASA's SBIR program is working closely with NASA's Office of Small
Business Programs (OSBP) to more effectively reach socially and
economically-disadvantaged and women-owned small businesses. Achieving
higher infusion into programs and projects, a key objective of NASA's
SBIR/STTR program, will result in increased Phase III funding for small
businesses.
Financing and Commercialization
NASA is pursuing several program improvements targeted at enhancing
technology infusion into NASA programs, as well as commercialization
assistance specific to the companies' individual needs. NASA has
recently consolidated its SBIR/STTR program structure to reduce
administrative overhead and to focus more clearly on the infusion of
SBIR/STTR technologies into the agency mission programs. Providing
commercialization assistance as an integral part of SBIR/STTR awards
could be beneficial, particularly if the award levels were increased,
as business acumen is not always present in technological innovators.
Existing Phase III SBIR/STTR authorities allow access to SBIR/STTR
firms for continued technology development work with non-SBIR program
funding on a sole-source basis, without the need for a `justification
for other than full and open competition' or JOFOC. This authority has
been beneficial and NASA is seeking to make fuller use of this
authority. It provides incentives for NASA's development programs and
their prime contractors to continue funding SBIR technologies, and has
great potential to increase the infusion of SBIR/STTR technologies into
NASA programs and projects, and to increase the amount of federal
procurement funding going to SBIR/STTR firms.
Administrative Costs
Administrative cost continues to be a challenge in the SBIR/STTR
programs. In October 2006, NASA initiated a new consolidated structure
for the NASA's SBIR/STTR programs. The new program structure seeks to
reduce program administrative cost, increase operational efficiency,
and supports an additional set of objectives focused on technology
infusion of SBIR/STTR developed results into Mission Directorate
programs, while leveraging more of their resources for administrative
support in the program. Allowing agencies to use a portion of SBIR/STTR
program funds to support administrative costs would give agencies more
flexibility.
Venture Capital Majority Ownership
The objective of SBIR/STTR is to support small businesses that are
contributing to agency missions and the Nation's economy. The
willingness of venture capital firms to invest in a small business is a
positive indicator that people who are putting their money at risk
believe in the success of a company. Thus, some venture capital
participation might be a good indicator of the likelihood of a small
business's future success. Venture capital companies, and other
commercial partners, are encouraged to invest in SBIR awardees and may
own up to 49 percent of an awardee firm's equity, so long as they do
not have the power to control the firm.
However, because a lack of access to capital is one of the defining
characteristics of small business, a majority ownership by venture
capital organizations may indicate that business is no longer
appropriately labeled small and its participation in the SBIR/STTR
program needs to be reviewed by the Small Business Administration (SBA)
to ensure that its participation continues to meet the intent of the
SBIR/STTR legislation. In addition, we have to ask whether funds
provided by venture capital firms might merely be a substitute for set-
aside SBIR funds that might be more productively used for projects with
no venture capital participation. SBA has issued an Advance Notice of
Proposed Rule-making (ANPRM) and is addressing this issue through its
public rule-making process.
In closing, NASA supports the SBIR/STTR programs. Technological
innovation is vital to the performance of NASA's Mission and the
Nation's prosperity and security.
Statement of the
Cooperative State Research Education
and Extension Service
United States Department of Agriculture
We appreciate this opportunity to submit this statement to the
Committee regarding the Small Business Innovation Research Program
administered by CSREES on behalf of all USDA agencies. The mission of
the Cooperative State Research, Education and Extension Service
(CSREES) at the United States Department of Agriculture (USDA) is to
advance knowledge for agriculture, the environment, human health and
well-being, and communities through national program leadership and
federal assistance. In this statement we will provide an overview of
the USDA-SBIR program and attempt to answer the specific questions
posed by the Committee.
Within USDA, the staff functions necessary to administer the SBIR
program have been centralized in CSREES in order to provide the SBIR
community effective, efficient and consistent service. These staff
functions include solicitation, review and evaluation of proposals,
award administration and post-award management. CSREES has well refined
systems and procedures for administering grant programs due to a long
history of managing extramural research grants. USDA and CSREES are
very proud of this program that has supported over 1,600 research and
development projects since its inception in 1982, allowing hundreds of
small businesses to pursue innovative ideas and explore their
technological potential.
Overall there are eight USDA agencies with research and development
budgets that set aside 2.5 percent of their extramural research and
development awards for the SBIR program. These agencies are
Agricultural Research Service (ARS), Animal and Plant Health Inspection
Service (APHIS), Cooperative State Research, Education and Extension
Service (CSREES), Economic Research Service (ERS), Forest Service (FS),
National Agricultural Statistics Service (NASS), Rural Development
(RD), and Foreign Agricultural Service (FAS). In fiscal year 2006 these
agencies contributed over $19.5 million to SBIR. Of the total USDA
funding, approximately 82 percent is contributed by CSREES, about 12
percent is contributed by ARS and approximately three percent is
contributed by the Forest Service.
The USDA-SBIR program administered by CSREES has two types of
awards. The first is for Phase I feasibility studies that can be up to
$80,000 for eight months and the second is for Phase II research and
development grants that can be up to $350,000 for 24 months.
Approximately 90 Phase I feasibility grants and 35-40 Phase II research
and development grants are awarded annually. Successful completion of a
Phase I study is prerequisite to receipt of a Phase II grant. Of the
applications received, 15 to 17 percent of the Phase I and 50 to 60
percent of the Phase II proposals have been funded each year.
An important aspect of the SBIR program is post-award management.
Most of the effort is directed toward Phase II projects that have
demonstrated technical feasibility in Phase I and are continuing their
research and development. A commercialization assistance program is
offered to new Phase II winners so that grantees can work with a
contractor who helps identify potential commercialization partners,
markets or new business opportunities. In addition, the USDA's SBIR
National Program Leaders conduct occasional site visits and work
closely with all of the Phase II projects to provide advice and
guidance. Since successful commercialization often takes several years,
the USDA SBIR program maintains contact with past Phase II winners for
many years in an effort to document those projects which achieve
commercial success.
Program Effectiveness
The Committee has asked whether the SBIR program is meeting its
objectives to stimulate and commercialize innovation in support of
agency missions through expanded small business participation in
extramural federal R&D and how program efficiency and effectiveness
could be improved.
The USDA-SBIR program has effectively supported innovative R&D
projects that have led to commercialization of important new
technologies that have benefited many aspects of American agriculture
and rural development. However, SBIR program managers believe they
could encourage more participation by small business firms by
increasing awareness of the SBIR opportunities through attendance at
State and regional meetings. Program managers also believe site visits
would allow them to work with current grantees and help them more
rapidly achieve commercial success. Therefore we recommend allowing a
small percentage of SBIR program funds be made available for these
activities.
Award Levels
The Committee has asked what the appropriate award levels are in
light of typical project costs to support agency missions, the trends
in seed and early stage financing and the fact that there has not been
an inflationary adjustment in award levels since 1992.
Given the size of the USDA-SBIR budget, current award levels are
sufficient to meet our needs. USDA would have no objection if the
maximum award levels were increased beyond the current $100,000 for
Phase I and $700,000 for Phase II awards. However, any such increase
would not directly affect our program because we are currently limiting
grant levels to $80,000 for Phase I and $350,000 for Phase II.
Small Business Participation
The Committee has asked how the programs can increase the
participation of innovative small business in federal R&D including the
total number of small businesses, their geographic distribution, and
participation of minority and disadvantaged firms.
As noted above, one way to increase small business participation in
the SBIR program is through more effective outreach efforts.
Financing and Commercialization
The Committee has asked what common program elements are needed
across all agencies to address financing gaps in the Phased award
structure to provide commercialization assistance.
Different SBIR programs use different approaches to deal with the
funding gap between Phase I and Phase II projects. USDA allows
companies to eliminate this funding gap through a combination of a no-
cost extension of the Phase I project together with pre-award
authorization on the Phase II award. Other Departments allow companies
to submit Phase I and Phase II proposals simultaneously. In reality,
however, very few companies choose to take advantage of either of these
options.
Regarding commercialization assistance, many SBIR programs offer
commercialization assistance in Phase I and/or Phase II. The dollar
limit on this assistance has been set at $4,000 for over 10 years.
Administrative Costs
The Committee has asked how program administration costs should be
addressed in reauthorization in light of the fact that program costs
are currently paid out of non-SBIR funds.
SBIR programs are not currently allowed to use any program funds
for administrative purposes. This has become a serious problem for the
USDA-SBIR program. The administrative costs for the SBIR program have
to come from the limited general administrative funds within CSREES. We
recommend allowing a small percentage of the SBIR program funds to be
used for administrative purposes to improve overall program
effectiveness. These purposes should include travel support for
outreach efforts, support for commercialization assistance and support
for the proposal review process.
As one example, the USDA SBIR program would like to be able to
offer Phase II grant awardees a very successful private sector
commercialization assistance program that costs $12,000 per company.
Unfortunately, the lack of adequate administrative support funds
coupled with the commercialization assistance limits precludes the use
of this valuable assistance. Funds to support this program could be
available if administrative costs were allowed.
Conclusion
In closing the SBIR program has been effective and has encouraged
business initiative and innovation in the agricultural sector of our
economy. Since its inception, over 1,600 innovators and entrepreneurs
have received the resources they needed to examine the commercial
feasibility of their ideas and many of these have gone on to achieve
some measure of commercial success. With several relatively simple
modifications we can improve on this successful track record and help
even more small businesses, which in turn will help expand job
opportunities in rural America and keep America's agriculture strong.
Thank you for the opportunity to provide these comments.