[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
THE ROLE OF THE SBIR AND STTR
PROGRAMS IN STIMULATING INNOVATION
AT SMALL HIGH-TECH BUSINESSES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON TECHNOLOGY AND INNOVATION
COMMITTEE ON SCIENCE AND TECHNOLOGY
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
APRIL 23, 2009
__________
Serial No. 111-20
__________
Printed for the use of the Committee on Science and Technology
Available via the World Wide Web: http://www.science.house.gov
______
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COMMITTEE ON SCIENCE AND TECHNOLOGY
HON. BART GORDON, Tennessee, Chair
JERRY F. COSTELLO, Illinois RALPH M. HALL, Texas
EDDIE BERNICE JOHNSON, Texas F. JAMES SENSENBRENNER JR.,
LYNN C. WOOLSEY, California Wisconsin
DAVID WU, Oregon LAMAR S. SMITH, Texas
BRIAN BAIRD, Washington DANA ROHRABACHER, California
BRAD MILLER, North Carolina ROSCOE G. BARTLETT, Maryland
DANIEL LIPINSKI, Illinois VERNON J. EHLERS, Michigan
GABRIELLE GIFFORDS, Arizona FRANK D. LUCAS, Oklahoma
DONNA F. EDWARDS, Maryland JUDY BIGGERT, Illinois
MARCIA L. FUDGE, Ohio W. TODD AKIN, Missouri
BEN R. LUJAN, New Mexico RANDY NEUGEBAUER, Texas
PAUL D. TONKO, New York BOB INGLIS, South Carolina
PARKER GRIFFITH, Alabama MICHAEL T. MCCAUL, Texas
STEVEN R. ROTHMAN, New Jersey MARIO DIAZ-BALART, Florida
JIM MATHESON, Utah BRIAN P. BILBRAY, California
LINCOLN DAVIS, Tennessee ADRIAN SMITH, Nebraska
BEN CHANDLER, Kentucky PAUL C. BROUN, Georgia
RUSS CARNAHAN, Missouri PETE OLSON, Texas
BARON P. HILL, Indiana
HARRY E. MITCHELL, Arizona
CHARLES A. WILSON, Ohio
KATHLEEN DAHLKEMPER, Pennsylvania
ALAN GRAYSON, Florida
SUZANNE M. KOSMAS, Florida
GARY C. PETERS, Michigan
VACANCY
------
Subcommittee on Technology and Innovation
HON. DAVID WU, Oregon, Chair
DONNA F. EDWARDS, Maryland ADRIAN SMITH, Nebraska
BEN R. LUJAN, New Mexico JUDY BIGGERT, Illinois
PAUL D. TONKO, New York W. TODD AKIN, Missouri
DANIEL LIPINSKI, Illinois PAUL C. BROUN, Georgia
HARRY E. MITCHELL, Arizona
GARY C. PETERS, Michigan
BART GORDON, Tennessee RALPH M. HALL, Texas
MIKE QUEAR Subcommittee Staff Director
MEGHAN HOUSEWRIGHT Democratic Professional Staff Member
TRAVIS HITE Democratic Professional Staff Member
HOLLY LOGUE PRUTZ Democratic Professional Staff Member
DAN BYERS Republican Professional Staff Member
VICTORIA JOHNSTON Research Assistant
C O N T E N T S
April 23, 2009
Page
Witness List..................................................... 2
Hearing Charter.................................................. 3
Opening Statements
Statement by Representative David Wu, Chair, Subcommittee on
Technology and Innovation, Committee on Science and Technology,
U.S. House of Representatives.................................. 8
Written Statement............................................ 9
Statement by Representative Judy Biggert, Acting Ranking Minority
Member, Committee on Science and Technology, U.S. House of
Representatives................................................ 9
Written Statement............................................ 11
Prepared Statement by Representative Harry E. Mitchell, Member,
Subcommittee on Technology and Innovation, Committee on Science
and Technology, U.S. House of Representatives.................. 12
Witnesses:
Dr. Robert M. Berdahl, President, Association of American
Universities
Oral Statement............................................... 12
Written Statement............................................ 14
Biography.................................................... 17
Mr. James C. Greenwood, President and CEO, Biotechnology Industry
Organization (BIO)
Oral Statement............................................... 18
Written Statement............................................ 20
Biography.................................................... 23
Dr. Sally J. Rockey, Acting NIH Deputy Director, Extramural
Research, National Institutes of Health, U.S. Department of
Health and Human Services
Oral Statement............................................... 23
Written Statement............................................ 26
Biography.................................................... 28
Mr. Jere N. Glover, Attorney and Executive Director, Small
Business Technology Council, Washington, DC
Oral Statement............................................... 29
Written Statement............................................ 31
Biography.................................................... 46
Discussion....................................................... 81
Appendix: Answers to Post-Hearing Questions
Dr. Robert M. Berdahl, President, Association of American
Universities................................................... 112
Mr. James C. Greenwood, President and CEO, Biotechnology Industry
Organization (BIO)............................................. 115
Dr. Sally J. Rockey, Acting NIH Deputy Director, Extramural
Research, National Institutes of Health, U.S. Department of
Health and Human Services...................................... 118
Mr. Jere N. Glover, Attorney and Executive Director, Small
Business Technology Council, Washington, DC.................... 123
THE ROLE OF THE SBIR AND STTR PROGRAMS IN STIMULATING INNOVATION AT
SMALL HIGH-TECH BUSINESSES
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THURSDAY, APRIL 23, 2009
House of Representatives,
Subcommittee on Technology and Innovation,
Committee on Science and Technology,
Washington, DC.
The Subcommittee met, pursuant to call, at 2:35 p.m., in
Room 2318 of the Rayburn House Office Building, Hon. David Wu
[Chair of the Subcommittee] presiding.
hearing charter
SUBCOMMITTEE ON TECHNOLOGY AND INNOVATION
COMMITTEE ON SCIENCE AND TECHNOLOGY
U.S. HOUSE OF REPRESENTATIVES
The Role of the SBIR and STTR
Programs in Stimulating Innovation
at Small High-Tech Businesses
thursday, april 23, 2009
1:00 p.m.-3:00 p.m.
2318 rayburn house office building
I. Purpose
On Thursday 24 April, the Subcommittee on Technology and Innovation
of the Committee on Science and Technology will hold a hearing to
examine the role of the Small Business Innovation Research (SBIR) and
the Small Business Technology Transfer (STTR) Programs in supporting
innovation at small high-tech firms and how, in turn, this promotes the
economic welfare of the Nation.
II. Witnesses
Dr. Robert Berdahl is the President of the Association of American
Universities.
Mr. James Greenwood is the President and CEO of Biotechnology Industry
Organization (BIO).
Dr. Sally Rockey is the Acting NIH Deputy Director for Extramural
Research at the National Institutes of Health (NIH).
Mr. Jere Glover is the Attorney and Executive Director at the Small
Business Technology Council.
III. Hearing Issues
How could the SBIR and STTR effectiveness be improved
in promoting innovation in today's global R&D enterprise?
Are the current SBIR (2.5 percent) and STTR (0.3
percent) set asides appropriate?
How effective are the SBIR and STTR programs at
stimulating innovation at small high-tech firms?
What is the role and importance of small high-tech
firms to the US innovation cycle and to foster economic growth?
Should small high-tech businesses with venture
capital investment be allowed to participate in the SBIR and
STTR programs?
IV. Background
SBIR
Congress has demonstrated an ongoing interest in the small business
sector. Addressing issues related to economic growth and
competitiveness, special consideration has been given to small, high
tech firms for several reasons, including the fact that data indicates
such companies tend to be highly innovative, play a significant role in
technological advancement, and contribute to a high standard of living
in the United States. Such was the rationale behind legislation
creating the SBIR program, reflecting an effort to increase that
portion of the federal research and development (R&D) budget provided
to small enterprises for work associated with the mission
responsibilities of government departments and agencies. Believing that
small companies were under-represented in government R&D activities,
P.L. 97-219 established agency SBIR programs to guarantee this sector a
portion of the government's research and development budget to
compensate for what was viewed as a federal contracting preference for
large corporations.
Current law requires that every federal department with an
extramural R&D budget of $100 million or more establish and operate a
SBIR program. Generally, a set percentage of that agency's extramural
research and development budget--currently set at 2.5 percent--is to be
used to support mission-related work in small companies. To be eligible
to compete in the program, a company must be independently owned and
operated; not dominant in the field of research proposed; for profit;
the employer of 500 or fewer people; the primary employer of the
principal investigator; and at least 51 percent owned by one or more
U.S. citizens or lawfully admitted permanent resident aliens.\1\
Subsidiaries of SBIR-eligible companies are also eligible to
participate as long as the parent company meets all SBIR requirements.
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\1\ The House passed H.R. 5819 altered the previous eligibility
requirements to permit majority venture capital ownership of small
firms in the SBIR and STTR programs.
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Agency SBIR efforts involve a three-phase activity. In the first
phase, awards up to $100,000 (for six months) are provided to evaluate
a concept's scientific or technical merit and feasibility. The project
must be of interest to, and coincide with, the mission of the
supporting organization. Projects that demonstrate potential after the
initial endeavor may compete for Phase II awards of up to $750,000
(lasting one to two years) to perform the principal R&D. Phase III
funding, directed at the commercialization of the product or process,
is expected to be generated in the private sector. Federal dollars, but
not SBIR funds, may be used if the government perceives that the final
technology or technique will meet public needs. P.L. 102-564 directed
agencies to weigh commercial potential as an additional factor in
evaluating SBIR proposals.
As of FY 2008, 11 departments administer SBIR programs, including
the Departments of Agriculture, Commerce, Defense (DOD), Education,
Energy, Health and Human Services (HHS), Homeland Security, and
Transportation; the Environmental Protection Agency; the National
Aeronautics and Space Administration (NASA); and the National Science
Foundation (NSF). Each agency's SBIR activity reflects that
organization's management style. Individual departments select R&D
interests, administer program operations, and control financial
support. Funding may be disbursed in the form of contracts, grants, or
cooperative agreements. Separate agency solicitations are issued at
established times.
The SBA created broad policy and guidelines under which individual
departments operate SBIR programs. The agency monitors and reports to
Congress on the conduct of the separate departmental activities.
STTR
A pilot effort to encourage commercialization of university and
federal laboratory R&D by small companies was created by P.L. 102-564
and reauthorized several times through FY 2009. The STTR program
provides funding for research proposals that are developed and executed
cooperatively between a small firm and a scientist in a research
organization and fall under the mission requirements of the federal
funding agency. Up to $100,000 in Phase I financing is available for
one year; Phase II awards of up to $750,000 may be made for two years.
Currently funded by a set-aside of 0.3 percent of the extramural R&D
budget of departments that spend over $1 billion per year on this
effort, the Departments of Energy, Defense, and Health and Human
Services, NASA, and NSF participate in the STTR program.
The SBIR program has been extended several times and was scheduled
to terminate on September 30, 2008. In the 110th Congress, several
bills were introduced to reauthorize and alter the SBIR initiative.
H.R. 5819 passed the House on April 23, 2008, and S. 3362 was reported
from the Committee on Small Business and Entrepreneurship on August 22,
2008. Although no specific legislation reauthorized the program, the
Small Business Administration determined that P.L. 110-235 temporarily
extended the SBIR activity through March 20, 2009. P.L. 111-10 provides
another extension of the program through July 31, 2009.
110th Congressional Hearings
Hearings were held in the 110th Congress on April 26, 2007 and June
26, 2007 (Serial Nos. 110-23 and 110-43, respectively).
The first hearing\2\ focused on several important issues for the
future of the SBIR and STTR programs, including: the degree to which
the current programs are meeting their objectives; the adequacy of the
award levels; strategies to maximize small businesses participation and
increase participation by women and minority owned small businesses;
the programs' effectiveness in promoting product commercialization;
covering administrative costs; and the appropriate role for venture
capital-backed small businesses.
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\2\ The following is taken from the Summary of Activities of the
Committee on Science and Technology U.S. House of Representatives for
the One Hundred and Tenth Congress, 4.6(c).
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Chair Wu opened the hearing by discussing the benefits of the SBIR/
STTR programs, such as the stimulation of high-tech innovation and
strengthening U.S. competitiveness. He then invited witnesses to
address topics such as the size of the awards, broadening the
participation of small business, creating funding within the program
for administrative costs, and determining the extent of participation
by venture capitalists. Both Chair Wu and Ranking Member Gingrey
emphasized the role that these programs have in moving ideas from the
laboratory to the marketplace, particularly innovative work on health
care issues such as diabetes and Alzheimer's research.
Mr. Held, the Director of the Force Development and Technology at
the RAND Arroyo Center at RAND Cooperation, stated that the DOD SBIR
program could benefit from changes that would make the program more
effective in generating technology and products that are utilized by
the Armed Forces. He suggested that more flexibility in the
solicitation and funding process would enhance the program. He called
for increases in the minimum awards for Phase I and Phase II and
advised a set-aside for administrative expenses.
Mr. Baron, the Executive Director of the Coalition for Evidence-
Based program Policy at the Council for Excellence in Government,
opened with examples of SBIR successes in the computer and biomedical
fields and said that the program had led to multiple scientific
breakthroughs and commercial successes. He cited GAO and DOD data that
suggests that the projects which fail to meet commercial success are
often in firms lacking entrepreneurial capabilities, and recommended
that SBIR consider methods to build up entrepreneurial skills. In
response to a question by Chair Wu regarding using a portion of funding
for administrative costs, Mr. Baron as well as Mr. Schmidt and Mr.
Held, cautioned that an administrative set-aside could draw funds away
from program goals and create disincentives for good management.
Mr. Schmidt, the founder and Chairman of Cleveland Medical Devices
and Orbital Research Inc., expressed concern that the U.S. was falling
behind in the creation of technological products and jobs. He described
some benefits of SBIR and STTR such as helping universities to
strengthen commercialization and job creation at small high-tech firms.
He cautioned against proposals that would give SBIR funds to large
companies or blur its research focus and recommended a gradual doubling
of the programs.
Dr. McGarrity, the Executive Vice President of Scientific and
Clinical Affairs at VIRxSYS Corporation, explained that biotechnology
research takes a lot of time and a large initial expenditure. He
criticized the SBA decision to exclude some venture capital (VC) backed
businesses from SBIR and stated that his firm had to abandon promising
research in cystic fibrosis and laid off employees as a result of the
ruling. He stated that his company is willing to compete with VC backed
companies for SBIR funds on the basis of scientific and technical
merit, and believes that science suffers from the exclusion of firms
that have a commercialization track-record. In response to a question
by Mr. Wu about the impact of the SBA ruling, Dr. McGarrity argued that
the SBA rule led to ineligibility of businesses based not on the number
of employees of their own business, but on the number of employees in
their VC backing firms.
Mr. Ignati, the President and CEO of Synapse Biomedical Inc.,
recommended that the minimum award for Phase I and Phase II be
increased from their 1992 amounts and that the agencies administering
the SBIR program be granted more flexibility making administrative
decisions. He also recommended that companies be allowed to apply for
Phase II grants without having first received a Phase I grant. He then
expressed his concern that the SBIR program is not able to increase
participation of innovative high-tech firms as a result of the SBA
ruling excluding VC backed firms. He recommended that all VC backed
firms be allowed to participate in SBIR.
The second hearing\3\ focused on the following issues: program
trends; outreach to encourage new applicants and reaching out to a
diverse pool of applicants; program data and tracking; and the role of
procurement in enabling commercialization. Chair Wu opened the hearing
by discussing the large growth of the SBIR and STTR programs, which are
now the largest government programs supporting research and development
at small companies. He emphasized the programs' duties to promote
efficiency in operations and maximum public benefit. In Ranking Member
Phil Gingrey's opening statement, he explained that every department
and agency with an R&D budget exceeding $100 million must provide 2.5
percent of this budget for research at small companies, resulting in
more than $2 billion in funds across the agencies. The goal of these
programs, he said, is to stimulate competitiveness and innovation. He
was optimistic about past achievements of the programs and the prospect
of future success.
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\3\ The following is taken from the Summary of Activities of the
Committee on Science and Technology U.S. House of Representatives for
the One Hundred and Tenth Congress, 4.6(e).
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Mr. Caccuitto, the SBIR and STTR Program Coordinator at the Office
of Small Business Programs and the DOD, said that the SBIR and STTR
programs at the DOD are crucial in seeding innovation for defense
technologies. Each ``constituent'' military department and defense
agency has its own program, with centralized oversight and
decentralized management, with the total DOD SBIR/STTR budget across
all military departments at over $1.26 billion. DOD funds about one in
seven SBIR Phase I proposals and one in five STTR proposals.
Ms. Goodnight, the SBIR and STTR Program Coordinator at the Office
of Extramural Research of NIH at HHS, emphasized that program
flexibility is the key to fulfilling SBIR and STTR goals at NIH. She
noted that the programs have not grown at the rate of other NIH
programs due to firms losing eligibility, going out of business, or
perceived lack of participation incentives. She discussed NIH's
development of Performance Outcome Data Systems for data tracking that
help to monitor achievements of awardees. In response to a question by
Ranking Member Gingrey about the effect of the 2003 SBA ruling on
venture capital-backed companies' participation in the program, Ms.
Goodnight stated that the nature of biotechnology research requires
venture capital to fund expensive trials. She described some cases
where important research was halted as a result of the ruling.
Mr. James, the SBIR and STTR Program Manager and Acting Director at
the Small Business Research Division at the DOE, said that, like at the
DOD, the Department of Energy has a balance of centralized and
decentralized management for their SBIR and STTR programs. He explained
that the Department hosts State-sponsored events to reach out to small
businesses. These small businesses have excellent science skills but
lack business skills; thus, DOE provides these professionals with
assistance in designing business plans. He stated that in the past 24
years the DOE has invested almost $1.5 billion, 60 percent of the
companies have had sales of more that $1.6 billion.
Mr. Comstock, the Director of the Innovative Partnership Program
Office at NASA, noted that the SBIR and STTR programs were recently
moved from NASA's four mission directorates to an agency-wide mission
support office that reports to the Administrator's Office in response
to the Innovative Partnerships Program of 2005. This more integrated
approach helps to illuminate technology gaps and future technologies
which will be infused into NASA, helping to reach mission goals. He
cited Phase III authority to enter into sole source contracts as a
benefit for NASA's programs. He stressed that NASA's outreach efforts
have been successful in providing a fresh applicant pool. In response
to a question by Chairman Wu on whether the agencies have adequate
funding for administration, Mr. Comstock, as well as Mr. James and Ms.
Goodnight, stated that administrative funding is not adequate to allow
the optimal level of commercialization assistance.
Mr. Narayanan, the Director of the Division of Industrial
Innovation and Partnerships in the Directorate for Engineering and NSF,
stated that SBIR plays a critical role in moving discovery to
innovation at NSF. He explained that in addition to the SBIR/STTR
grants, NSF has pioneered a Phase II supplement for funding, providing
greater incentive for third-parties to invest in the awardees'
projects. He stated that follow up of 400 NSF SBIR grantees has shown a
significant impact; however, limited funds prevent program managers
from providing hands-on mentoring.
Summary of the SBIR/STTR Reauthorization Act (H.R. 5819)
H.R. 5819, the SBIR/STTR Reauthorization Act, a bill that would
have reauthorized and made several significant changes to the SBIR and
STTR programs, passed the House on April 23, 2008. Among these changes
were:\4\
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\4\ The following points were all taken from the CRS Report The
Small Business Innovation Research Program: Reauthorization Efforts,
April 29, 2008.
The termination date for the SBIR program was
extended from September 30, 2008 to September 30, 2010, while
the STTR activity was reauthorized through September 30, 2010
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rather than the current sunset date of September 30, 2009.
The bill increases the level of awards made under the
SBIR and STTR programs from $100,000 to $300,000 for Phase I
awards and from $750,000 to $2,200,000 for Phase II awards.
A recipient of a Phase I grant from one federal
agency would be permitted to apply for a Phase II award from
another agency to pursue the original work. A small business
would be allowed to switch between the SBIR and STTR programs.
In addition, a small company would have been allowed to apply
for a Phase II award without first obtaining and successfully
completing a Phase I grant as currently required. The bill also
would have permitted sequential Phase II awards for a project.
For the SBIR and STTR programs, H.R. 5819 would have
allowed majority venture capital ownership in a small business
if not more than 50 percent of the firm is owned by one venture
capital company and the employees of the venture capital
company are not a majority of the small firm's board of
directors. If the venture capital company is controlled by a
business with more than 500 employees, the small business would
have been eligible if not more than two large venture capital
companies have ownership interest in the small firm, these
large venture capital companies do not collectively own more
than 20 percent of the small business, and the venture capital
companies ``do not collaborate with each other to exercise more
control over the small business concern than they could
otherwise exercise individually.''
The bill would have directed agencies to focus on
certain research areas for ``special consideration'' including
energy-related work, R&D in the area of rare diseases,
transportation-related topics, and nanotechnology.
The bill would have mandated that each agency that
administers $50,000,000 or more in SBIR grants establish a SBIR
Advisory Board comprised of agency employees, private sector
representatives, veteran small business owners, and others
deemed appropriate. The Advisory Board was to make
recommendations to the agency on programmatic topics including,
among other things, mechanisms to encourage a broad range of
applicants and commercialization efforts. An annual report was
to be required.
The bill would have reauthorized and made changes to
the Federal and State Technology Partnership (FAST) program,
which provides grants to organizations to provide outreach
designed to encourage increased participation in the SBIR
program.
Chair Wu. I want to welcome everyone to this afternoon's
hearing on the Small Business Innovative Research, or SBIR, and
Small Business Technology Transfer, or STTR, Programs. This is
the third hearing that this subcommittee has held on these very
important programs.
Both of them were created over 25 years ago, designed to
support and encourage small high-tech entrepreneurial firms and
play a more important role than ever in the economy that we
live in today.
Almost a year ago the House passed an SBIR Reauthorization
Bill, H.R. 5819, which included the first significant changes
to the program since its inception. This bill reflected not
only the cost of research today but also reflected the
international competitive market American high-tech firms face
and the recommendations of various research bodies that have
put about SBIR.
Much has changed over the past 12 months. Today we are
looking to small, high-tech firms to create the new products,
services, and technologies that can rejuvenate our economy and
make us more competitive internationally.
When the SBIR and STTR Programs were created, we didn't
fully appreciate the power of small entrepreneurial high-tech
firms to create economic growth. Companies such as AMGEN,
Apple, Genentech, and Microsoft all started as small
entrepreneurial firms and now employ thousands or tens of
thousands. Other companies started small and stayed small. All
were innovators and drove economic growth.
When SBIR and STTR were created, these companies were
either in their infancy or didn't yet exist. In part because of
SBIR and STTR today the United States is a world leader in IT
[Information Technology] and in biotech.
As the testimony indicates, SBIR and STTR-supported
companies are still driving innovation in the IT and biotech
fields. The authorization for SBIR and STTR expires at the end
of July, and given the current economic situation, we need to
ensure that we structure these programs to reflect the current
economy and the globalization of R&D. We can't afford to think
we are the only country with first-class science and
engineering talent. We need to foster the innovation that
creates economic growth, jobs, and new products and services
right here at home.
Maintaining the status quo of programs created a quarter
century ago makes neither good business nor policy sense. We
must always keep in mind that it is the American taxpayer who
pays for these programs. In these difficult economic times we
need to ensure they receive the highest return on their
investment.
We have a varied panel of witnesses here today representing
small business and the NIH [National Institutes of Health],
which provides the second largest amount of SBIR funding of any
federal agency. I hope they can tell us more about the economic
challenges facing those firms and their thoughts on the
program. At over $2 billion per year the SBIR and STTR Programs
are now far and away the largest technologic development
programs or transfer programs in the Federal Government.
I want to thank our witnesses for appearing before us
today.
And now I would like to turn to our Ranking Member, the
gentlewoman from Illinois, for her opening statement.
[The prepared statement of Chair Wu follows:]
Prepared Statement of Chair David Wu
I want to welcome everyone to this morning's hearing on the Small
Business Innovation Research (SBIR) and the Small Business Technology
Transfer (STTR) Programs. This is the third hearing the Subcommittee
has held on these programs. Both of these programs, created over 25
years ago, were designed to support and encourage small high-tech
entrepreneurial firms.
Almost a year ago, the House passed a SBIR reauthorization bill,
H.R. 5819, which included the first significant changes to the program
since its inception. This bill reflected not only the cost of research
today, but also reflected the international competitive market American
high-tech firms face.
Much has changed over the past 12 months. Today we are looking to
small high-tech firms to create the new products and technologies that
can rejuvenate our economy.
When the SBIR and STTR programs were created we didn't fully
appreciate the power of small high-tech firms' ability to create
economic growth. Companies such as AmGen, Apple, Genentech, and
Microsoft all started as small entrepreneurial firms and now employ
thousands. Others stayed small. All were innovators and drove economic
growth. When SBIR and STTR were created these companies were either in
their infancy or had yet to exist. In part because of SBIR and STTR,
today the United States is a world leader in the IT and biotech
industries. And as the testimony indicates, SBIR and STTR supported
companies are still driving innovation in the IT and biotech fields.
The authorization for SBIR and STTR expires at the end of July.
Given the current economic situation, we need to ensure that we
structure these programs to reflect the current economy and the
globalization of R&D. We can't afford to think we're the only country
with first-class science and engineering talent. We need to foster the
innovation that creates economic growth jobs and new products and
services here at home.
Maintaining the status quo of programs created almost 30 years ago
makes neither good business nor policy sense.
We must always keep in mind that it's the American taxpayer who
pays for these programs. In these difficult economic times we need to
ensure they receive the highest return on their investment.
We have a varied panel of witnesses here representing small
business and the NIH, which provides the second largest amount of SBIR
funding of any federal agency. I hope they can tell us more about the
economic challenges facing those firms and their thoughts on the
program. At around $2 billion a year, the SBIR/STTR programs are now
far and away the largest technological development programs in the
Federal Government. I want to thank our witnesses for appearing before
us today.
Ms. Biggert. Thank you, Mr. Chair, and thank you for
holding this hearing today on the role of SBIR and STTR
Programs in stimulating innovation at small businesses. As you
know, our Ranking Member Smith was unable to be here at this
moment. He might be in a little bit later, but he had an
immoveable conflict, but I am pleased to have the opportunity
to take his place as we examine this important program today.
On this committee we are, of course, well aware of the
importance of innovation to economic growth and improved
quality of life, particularly as we work our way through this
recession. We recognize that advances in science and technology
will help to enable short-term economic recovery as well as
sustain prosperity over the long-term.
To this end the SBIR and the STTR Programs play a key role
as an important part of an overall federal R&D portfolio,
serving to facilitate increased private sector
commercialization of promising ideas, while leveraging the
unique capabilities of small business to help the government
advance its R&D goals and meet its technological needs.
Today's hearing represents a continuation of the SBIR
reauthorization efforts undertaken by this committee and the
House Small Business Committee during the 110th Congress. As
such it will focus on two primary changes under consideration
last year. One is whether or not to increase the research set-
asides that fund SBIR and STTR, and two, whether or not to
relax restrictions on participation by venture capitalist-
backed small businesses.
These are very important issues that this hearing provides
an opportunity for us to hear from the key stakeholders
involved. With respect to the set-aside, it is important to
remember the unique funding structure through which the SBIR
and STTR Programs are funded. Through an assessment on
extramural national, extramural federal research that is
carried out by our universities and national labs.
As a result an increase set-aside comes at the expense of
basis and applied research performed at universities and the
National labs, and because of the large base from which the
funding is derived and even what might appear to be a minor
increase in the set-aside from two and a half to three percent
for SBIR and from .3 to .6, that would be 0.3 and 0.6, percent
for STTR, would result in a rough reduction of roughly $650
million to core agency research programs.
For this reason and because SBIR and STTR budgets have
grown substantially over the last 10 years, I am strongly
opposing--I am strongly opposed to increasing this set-aside.
The issue of eligibility of majority venture capitalist-based
small businesses is significantly more complicated but no less
important. The origin of the dispute over this eligibility is
due to the lack of clarity in and changing interpretations of
the existing statutory definition of a small business.
Regardless of what side of this issue one is on, I think we
could agree that the solution is to define small business in a
manner that maximizes the eligibility of legitimate small
businesses while minimizing the inappropriate eligibility of
large businesses. To this end I am concerned that the current
SBIR rules may unreasonably exclude many legitimate small
businesses, particularly in the biomedical sector due to its
high dependence on venture capital to advance drugs and
therapies through the regulatory approval process.
I hope this is something that we will address in this
upcoming legislation. This committee and the Full House built a
solid record of work on SBIR reauthorization during the 110th
Congress, so I anticipate that we will be able to work
cooperatively and swiftly to extend the SBIR Program before its
July 31 expiration.
However, I hope and expect that we can do so through
regular order so the Committee Members have an opportunity to
review any changes to the legislation from last year and offer
input and amendments as necessary.
And I thank your witnesses for being here today and waiting
for us. We had those pesky votes, as you know, and I look
forward to a productive discussion.
And I yield back.
[The prepared statement of Ms. Biggert follows:]
Prepared Statement of Representative Judy Biggert
Mr. Chairman, thank you for holding this hearing today on the role
of SBIR and STTR programs in stimulating innovation at small
businesses. As you know, Ranking Member Smith was unable to make this
hearing due to an immovable conflict, but I am pleased to have the
opportunity to take his place as we examine this important program
today.
On this committee we are of course well aware of the importance of
innovation to economic growth and improved quality of life.
Particularly as we work our way through this recession, we recognize
that advances in science and technology will help to enable short-term
economic recovery as well as sustained prosperity over the long-term.
To this end, the SBIR and STTR programs play a key role as an
important part of the overall Federal R&D portfolio, serving to
facilitate increased private sector commercialization of promising
ideas while leveraging the unique capabilities of small businesses to
help the government advance its R&D goals and meet its technology
needs.
Today's hearing represents a continuation of the SBIR
reauthorization efforts undertaken by this committee and the House
Small Business Committee during the 110th Congress. As such, it will
focus on the two primary changes under consideration last year: (1)
whether or not to increase the research set-asides that fund SBIR and
STTR; and (2) whether or not to relax restrictions on participation by
venture-capital backed small businesses. These are both very important
issues with potentially far-reaching impacts, so I am pleased that this
hearing provides an opportunity for us to hear from the key
stakeholders involved.
With respect to the set-aside, it is important to remember the
unique funding structure through which the SBIR and STTR programs are
funded--through an assessment on extramural federal research that is
carried out by our universities and national laboratories. As a result,
an increased set-aside comes at the expense of basic and applied
research performed at universities and national laboratories, and
because of the large base from which funding is derived, and even what
might appear to be a minor increase in the set aside--from two and a
half to three percent for SBIR and from 0.3 to 0.6 percent for STTR--
would result in a reduction of roughly $650 million to core agency
research programs. For this reason, and because the SBIR and STTR
budgets have grown substantially over the last 10 years, I am strongly
opposed to increasing the set aside.
The issue of eligibility of majority venture-capital backed small
businesses is significantly more complicated, but no less important.
The origin of the dispute over this eligibility is due to lack of
clarity in--and changing interpretations of--the existing statutory
definition of a ``small business.'' Regardless of what side of this
issue one is on, I think we could agree that the solution is to define
``small business'' in a manner that maximizes the eligibility of
legitimate small businesses while minimizing the inappropriate
eligibility of large businesses.
To this end, I'm concerned that the current SBIR rules may
unreasonably exclude many legitimate small businesses, particularly in
the biomedical sector due to its high dependence on venture capital to
advance drugs and therapies through the regulatory approval process. I
hope this is something that we will address in this upcoming
legislation.
This committee and the Full House built a solid record of work on
SBIR reauthorization during the 110th Congress, so I anticipate that we
will be able to work cooperatively and swiftly to extend the SBIR
program before its July 31St expiration. However, I hope and expect
that we can do so through regular order so the Committee Members have
an opportunity to review any changes to the legislation from last year
and offer input and amendments as necessary.
I thank our witnesses for being here today and I look forward to a
productive discussion.
Chair Wu. I thank the gentlelady and would just add that it
is fully my intent to move legislation on this very important
subject through regular order, but as the gentlelady fully
understands, sometimes we have our intentions changed for us.
If there are Members who wish to submit additional opening
statements, your statements will be added to the record at this
point.
[The prepared statement of Mr. Mitchell follows:]
Prepared Statement of Representative Harry E. Mitchell
Thank you, Mr. Chairman.
Today we will examine the role of the Small Business Innovation
Research (SBIR) and Small Business Technology Transfer (STTR) Programs
in supporting innovation at small high-tech firms.
Small businesses are continuously growing in Arizona, especially
those in the biotechnology field. Many biotechnology and other small
firms are centered in my home district and frequently work with one of
the largest universities in the country, Arizona State University.
ASU often partners with small businesses to apply for Small
Business Innovation Research (SBIR) and Small Business Technology
Transfer Program (STTR) grants. Through this partnership, businesses
are able to benefit not just from grant money, but also the tools,
facilities, and knowledge that ASU offers.
I look forwarding to hearing more from our witnesses about the
effectiveness of the SBIR and STTR programs and how these programs
could be improved.
I yield back.
Chair Wu. I just want to note that I will be stepping away
for a few minutes at about three o'clock, and I believe that
the gentlelady from Maryland will be available to step in the
chair for awhile. Thank you very much.
At this point it is my pleasure to introduce our witnesses.
Dr. Robert Berdahl is the President of the Association of
American Universities [AAU]. I would like to add a proud former
Duck for almost 20 years. The Honorable Jim Greenwood is the
President and CEO of the Biotechnology Industry Organization
and well represented Pennsylvania for a dozen years, and I
always thought that was such a long, long time, but I am
hitting the dozen mark soon myself, and it is amazing how
perspective changes. Dr. Sally Rockey is the Acting NIH Deputy
Director for Extramural Research at the National Institutes of
Health. And finally Mr. Jere Glover is the Attorney and
Executive Director of the Small Business Technology Council.
Welcome one and all. Your full written testimony will be
included in the record of the Subcommittee. Please if you will
summarize your written testimony. You will each have five
minutes for your spoken testimony, and when you complete your
testimony, we will hopefully have plenty of time for questions,
and each Member will have five minutes to answer questions.
Dr. Berdahl, please proceed.
STATEMENT OF DR. ROBERT M. BERDAHL, PRESIDENT, ASSOCIATION OF
AMERICAN UNIVERSITIES
Dr. Berdahl. Good afternoon, Chairman Wu, Congresswoman
Biggert, and Congresswoman Edwards. It is a great privilege to
present our association's views on the Small Business
Innovation Research Program and the Small Business Tech
Transfer Program. I have to note at the outset that I had the
privilege of being a faculty member and an administrator at
both the University of Oregon and the University of Illinois,
and so I have some familiarity with the role that those
universities play in the economies of those respective states.
Chair Wu. Your attempt to carry a favorable impression has
been very successful.
Dr. Berdahl. All right. Very good. Well, let me begin my
testimony by stating that the AAU supports SBIR and STTR
programs as they are currently structured. We agree with the
National Academy's assessment of these programs as being sound
in concept and effective in practice. In the early years of
SBIR many of our campuses were critical of the program, viewing
it as coming at the expense of funding that would have
otherwise supported university basic research.
In recent years, however, as our universities and faculty
have become--they have become much more interested in
commercializing new technologies, our universities have come to
support SBIR and STTR Programs as they currently exist.
To drive this point home I would like to highlight a SBIR
success story from Chair Wu's home State of Oregon and my
former university, the University of Oregon. Electrical
Geodesics Incorporated, EGI, was a University of Oregon spin-
off company. It was founded by U of O neuroscientist Don Tucker
to develop advanced, non-invasive ways to visualize brain
activity. Over the last decade SBIR grants have played a key
role in fueling EGI's maturation, growth, and expansion. As a
direct consequence of SBIR support, EGI's geodesics sensor net
can now be found in more than 350 laboratories in 28 countries
around the world.
Given the success of EGI and other SBIR firms, it is clear
that the SBIR and STTR Programs have played an important role
in stimulating innovation at small high-tech firms throughout
the country. The specific degree to which these programs are
responsible for innovation, however, is not easy to assess due
to a lack of sufficient data. According to the National
Institutes of Standards and Technologies [NIST], more than 26
billion has been spent on SBIR and STTR grants, yielding 84,000
patents and attracting more than $36 billion in venture capital
for more than 17,000 SBIR-funded companies.
Despite the success of these programs, the NRC [National
Research Council] report makes significant recommendations
about the need for better data collection and systematic
assessment of SBIR and STTR Programs, and we commend those
recommendations to you.
In your letter of invitation you asked us to assess the
current SBIR and STTR set-aside percentages. While supportive
of the current set-aside, we oppose any increases in the SBIR
set-aside because there is no indication that highly-qualified
SBIR proposals are currently being rejected for lack of
sufficient funding.
Moreover, we question whether there is enough small
business research and of sufficient quality to merit an
increase in the SBIR set-aside, especially if such funding were
to come at the expense of peer reviewed, basic, and applied
research programs, where success rates have hit all-time lows
in recent years.
Our view is that the best way to increase the amount of
funding available to these programs is to provide steady and
sustained funding increases for federally-supported basic
scientific research. As research funding increases, the dollars
available to these programs will also increase.
At this point the only modification we would encourage
would be the slight increase recommended by the NRC in the
percentage of set-aside that would be used for program
management from the .03 percent to .05 percent.
You also asked our views about venture capital and SBIR.
AAU supports the Subcommittee's view that firms with
significant venture capital funding should be allowed to
compete for SBIR and STTR awards. However, the current
regulation effectively disqualifies small companies that have
received significant venture capital or are owned by another
company with significant venture capital investment from
competing for SBIR or STTR funds.
The AAU shares the view of the NRC that venture capital
investment in companies seeking SBIR funding confirms the
quality of those projects and would raise the quality of the
applicant pool overall.
You also asked for thoughts concerning ways to improve the
effectiveness of these programs. In responding to this request
I would commend to you the recommendations made by the National
Research Council in its 2008 report.
There is one related issue that we would ask the
Subcommittee to examine in reauthorizing the SBIR Program, Mr.
Chair. Even with today's existing SBIR Program, there is a
funding gap that often prevents universities from moving new
research discoveries and technologies quickly into the
marketplace. This bridge funding often crossing the ``Valley of
Death'' as it is called, would be very, very important.
Let me conclude, I see my time is up here, let me conclude
my remarks with a statement that I made earlier in my testimony
that these are sound and effective programs. It is clear that
these programs are at their core good programs that help foster
successful entrepreneurial opportunities for our nation's
scientists, engineers, and innovators. These programs were
created well over 20 years ago. They can be improved by
adopting some of the NRC's recommendations. I also believe that
it might be time to consider supplementing these programs with
a new program aimed at providing additional gap funding.
Mr. Chair, Members of the Subcommittee, once again, I thank
you for the opportunity to share AAU's thoughts. I look forward
to your questions.
[The prepared statement of Dr. Berdahl follows:]
Prepared Statement of Robert M. Berdahl
Introduction
Good afternoon Chairman Wu, Ranking Member Smith, and Members of
the Subcommittee. I am Robert Berdahl, President of the Association of
American Universities (AAU). I appreciate the opportunity to present
AAU's views on the Small Business Innovation Research (SBIR) and Small
Business Tech Transfer (STTR) programs to you today.
AAU is the association of 60 leading U.S. public and private
research universities, and we also have two Canadian university
members. AAU's 60 U.S. member institutions perform 60 percent of
federally funded university-based research and award more than half of
all Ph.D. degrees earned in our country.
I. AAU supports the current SBIR and STTR programs and set-aside
percentages.
Let me begin by stating that AAU supports the SBIR and STTR
programs as they are currently structured. We agree with the National
Academies assessment of these programs as being ``sound in concept and
effective in practice.'' Both programs play an important role in the
Nation's overall innovation ecosystem by transforming cutting-edge,
innovative ideas and research into viable, market-ready products for
the American consumer.
In the early years of SBIR, many on our campuses were critical of
the program, viewing it as coming at the expense of funding that would
have otherwise supported university-based basic research. In recent
years, however, as our universities and faculty have become more
interested in commercializing new technologies, our universities'
attitude towards the SBIR and STTR programs has become more positive.
Indeed, the SBIR and STTR programs are now widely viewed by many
faculty and research administrators as an important tool that can help
them transform the research generated in our university laboratories
into new industrial products, goods, and services. As a result, more
and more of our faculty are directly engaged in research funded through
these two programs.
When the National Research Council (NRC) surveyed SBIR recipients
for its 2008 report, ``An Assessment of the SBIR Program,'' more than
half of respondents reported that university faculty were involved in
their SBIR-funded projects. Clearly, SBIR and STTR are encouraging
university faculty to start or work with small companies in an attempt
to commercialize their research results.
The NRC found that the SBIR and STTR programs not only provide a
vehicle for commercialization of research but also stimulate scientific
and technological collaboration between faculty and industry that
yields a variety of ``knowledge outputs.'' These ``knowledge outputs''
can take the form of ``data, scientific and engineering publications,
patents and licenses, analytical models, algorithms, new research
equipment, prototype products and processes, and spin-off companies.''
\1\
---------------------------------------------------------------------------
\1\ National Research Council, Assessment of the SBIR Program,
National Academies Press, p. 3.
---------------------------------------------------------------------------
To elaborate on this point, I would like to highlight an SBIR
success story from two of our AAU universities.
The first example comes from Chairman Wu's home State of Oregon.
Electrical Geodesics Inc. (``EGI''), a University of Oregon spin-off
company, was founded by UO neuroscientist Dr. Don Tucker to develop
advanced, non-invasive ways to visualize brain activity. Over the last
decade, SBIR grants played a key role in fueling EGI's maturation,
growth and expansion. As a direct consequence of SBIR support, EGI's
Geodesic Sensor Net can now be found in more than 350 laboratories in
28 countries around the world, supporting human neuroscience research
on topics ranging from child development to psychopathology to
neuroeconomics. EGI's Geodesic Sensor Net has become an icon of
advanced neuroscience technology, appearing on the covers of National
Geographic and Newsweek. Electrical Geodesics has been a past winner of
the Tibbetts Award for excellence in the SBIR program. This innovative,
university-born small business--whose research, development and
manufacturing provide high-quality employment to scores of Oregonians
in the City of Eugene--received recognition as Oregon's Bioscience
Company of the Year in 2006, and received the Emerald Award for
Innovation from the Eugene Chamber of Commerce in 2008.
The second example comes from Nebraska, where, in 2002, GC Image,
LLC, a Lincoln based company was incorporated based on software
developed by a University of Nebraska-Lincoln Computer Science
Professor, Dr. Stephen Reichenbach. GC Image delivers industry-leading
software solutions for visualizing, analyzing, and reporting on
scientific data from comprehensive two-dimensional gas chromatography
and comprehensive two-dimensional liquid chromatography. The company
has been awarded $1.5 million in SBIR and STTR Phase I and II awards
over the last five years from the National Science Foundation and the
National Institutes of Health. GC Image continues to grow and build on
its successes through strategic partnerships to deliver software
products in diverse markets.
So, to address the first of the questions posed by the
Subcommittee, clearly the SBIR and STTR programs have played an
important role in stimulating innovation at small high-tech firms in
Oregon, Nebraska, and throughout the country. The specific degree to
which the programs are responsible for innovation, however, is not easy
to assess because of a lack of sufficient data.
According to the National Institute of Standards and Technology
(NIST), more than $26 billion has been spent on SBIR and STTR grants,
yielding 84,000 patents and attracting more than $36 billion in venture
capital for more than 17,000 SBIR-funded companies. The NRC report
cites Small Business Administration (SBA) data indicating that nearly
15,000 small companies received at least one Phase II SBIR grant
between 1992 and 2005.
Despite the success of these programs, the NRC report makes
significant recommendations about the need for better data-collection
and systematic assessment of SBIR/STTR, and we commend those
suggestions to you. We would agree with the NRC that is difficult to
truly assess the economic and innovation impact of SBIR and STTR
because there has not been systematic data-gathering on the part of
sponsoring agencies. Requiring such data collection and program
assessment and providing the resources needed to finance these
activities would be one positive action that this subcommittee and the
Congress could take to enhance the SBIR and STTR programs.
You also asked us to assess the current SBIR and STTR set-aside
percentages. In response to this question, AAU is supportive of the
current SBIR set-aside of 2.5 percent of R&D spending for major
research agencies and the 0.3 percent set-aside for the STTR program.
While supportive of the current set-aside, we oppose any increases
in the SBIR set-aside because there is no clear justification for such
increases. We question whether there is enough small business
research--and of sufficient quality--to merit SBIR funding that would
come at the expense of peer-reviewed basic and applied research
programs at agencies such as NIH and NSF, where success rates
unfortunately have hit all-time lows in recent years. In our view,
increasing the set-aside would reduce even further the number of
successful research grants that are awarded by federal research
agencies.
This is not to suggest that we do not favor increasing the amount
of funds going to SBIR and STTR. Our view is that the best way to
increase the amount of funding available to these programs are to
provide steady and sustained funding increases for federally supported
research. Indeed, we hope to work with the small business community to
increase research budgets across all of the major research agencies,
which would result in significant funding increases for the SBIR and
STTR as well as other important research programs.
As for modifications to the set-aside, the only modification we
would encourage would be the slight increase recommended by the
National Research Council in the percentage of the set-aside that could
be used for program management and assessment from .03 percent to .05
percent of the total program funding.
II. AAU supports allowing small businesses with significant amounts of
venture capital investments to participate in the
SBIR and STTR programs.
AAU supports the Subcommittee's view that firms with significant
venture capital funding should be allowed to compete for SBIR and STTR
awards. As you know, current Small Business Administration (SBA)
regulations limit participation in these programs to companies that are
at least 51 percent owned by individuals, rather than companies or
other entities. This regulation effectively disqualifies small
companies that have received significant venture capital investment or
are owned by another company with significant venture capital
investment from competing for SBIR and STTR funds. We would note that
this was not always the case. Before 2001 and 2003 SBA administrative
law judge rulings, companies with venture capital were allowed to
participate in the SBIR program.
As then-NIH Director Elias Zerhouni said in a 2005 letter to the
SBA, ``this rule dries up Federal funding for early stage ideas from
small companies that, by attracting substantial [venture capital]
funding, show strong signs of likely success.'' AAU shares the view of
the NRC that venture capital investment in companies seeking SBIR
funding confirms the quality of those projects and would raise the
quality of the applicant pool overall.
III. Recommendations on how the SBIR and STTR programs can be
improved.
You also asked for thoughts concerning ways to improve the
effectiveness of the SBIR and STTR programs. In responding to this
request, I would commend to you the recommendations made by the
National Research Council in its 2008 report, which we fully endorse.
Program Evaluation: We agree with the NRC that the agencies should
conduct regular evaluations of their SBIR and STTR programs. As part of
this overall evaluation process, we support the idea of agencies
providing annual reports to Congress on the successes or
disappointments of their programs, as well as developing a form of
external evaluation of the programs' effectiveness.
SBIR Award Sizes: We also support the NRC recommendation that award
sizes be adjusted. Currently, SBIR/STTR Phase I awards are limited to
$100,000 at NSF and $150,000 at NIH, and Phase II awards are limited to
$750,000 at NSF and $850,000 at NIH.\2\ The statutory amount of SBIR
and STTR Phase I and II awards should be adjusted to reflect the
effects of inflation over the years and, more importantly, to make the
awards more attractive. In its report, the NRC calls for a one-time
adjustment in award sizes increasing Phase I awards from $100,000 to
$150,000 and Phase II to $1 million.\3\ Embedded within this
recommendation is the notion that standard award sizes simply serve as
guidance for the agencies and that agencies should be given the
flexibility to exercise their own judgment when determining the size of
the award needed to meet the mission and goals of the SBIR project.
---------------------------------------------------------------------------
\2\ National Research Council, An Assessment of the SBIR Program,
National Academies Press, p. 44; pp. 95-97.
\3\ National Research Council, An Assessment of the SBIR Program,
National Academies Press, pp. 84-85.
---------------------------------------------------------------------------
Post Phase II Awards: Another NRC recommendation that AAU supports
is that agencies be given the flexibility to develop follow-on SBIR
funding mechanisms beyond Phase II. NIH has improvised to provide such
funding with its ``competing renewal'' mechanism for especially
promising projects, and the Navy has a similar ``Phase IIb'' option.
NSF also has a mechanism to match supplemental industry funding for
Phase II awards. We agree with the NRC that such follow-on SBIR and
STTR funding would enable small companies with highly promising
projects to traverse ``the ``Valley of Death'' between the end of Phase
II research funding and the commercial marketplace.'' This is the
single greatest challenge for SBIR and STTR-funded companies.
Additional ``Gap'' Funding: There is one other related issue that
we would ask the Subcommittee to examine in reauthorizing the SBIR and
STTR programs. Even with the existing SBIR and STTR programs, there
still exists a funding gap which often prevents universities from
moving new research discoveries and technologies quickly into the
marketplace. SBIR and STTR funding presumes there is already sufficient
evidence that a particular research advance or technology has enough
commercial value to attract further investment for commercialization.
Often times, however, there is not the funding available within our
universities, or from other sources, to push these technologies across
the ``Valley of Death'' to that point.
The current economic climate has left companies, angel investors
and venture capitalists even less willing to invest in the proof-of-
concept, scaling up, and modeling required to explore the commercial
value of such advances. While the current SBIR program partially
addresses this issue, it often still falls short of providing enough
funding to allow emerging technologies to reach the level of
development required for investment or adoption by the commercial
sector. AAU would welcome the opportunity to work with the subcommittee
to explore innovative new ways that would allow our universities to
extend the horizon for development of research advances and new
technologies, thereby making the end product easier to transfer to a
small business and improving the success rate of these businesses.
Conclusion
If there is a consistent theme in these recommendations, it is that
the SBIR and STTR are, at their core, good programs that help to foster
successful entrepreneurial opportunities for our nation's scientists,
engineers, and technology innovators. However, these programs, which
were created well over 20 years ago, can stand to be improved by
increasing award sizes, providing flexibility in program administration
and management, and providing beyond Phase II award opportunities. We
also believe that it might be time to consider supplementing these
programs with a new program aimed at providing additional gap funding.
Chairman Wu, Ranking Member Smith, and Members of the Subcommittee,
thank you for the opportunity to share AAU's thoughts and perspective
on the SBIR and STTR programs. We would welcome the opportunity to work
with you in fleshing out some of the recommendations we have made
today. I look forward to any questions you may have at this time.
Biography for Robert M. Berdahl
Robert M. Berdahl became President of the Association of American
Universities (AAU) in May 2006. Prior to this position, Berdahl served
as Chancellor of the University of California, Berkeley from 1997 to
2004. As Chancellor at Berkeley, he led the campus in a major effort to
renew its infrastructure. During his tenure, more than $800 million was
invested in a comprehensive plan to renovate and seismically upgrade
numerous buildings, rendering them more suitable for modern scientific
research and teaching. He worked to restore library collections to a
preeminent position and undertook the construction of two new library
buildings. Under his leadership, two new major interdisciplinary
initiatives were undertaken: the Health Sciences Initiative and the
Center for Information Technology Research in the Interest of Society.
An advocate of enhancing and humanizing undergraduate learning, Berdahl
expanded the highly popular Freshman Seminar Program, in which senior
faculty teach small freshman classes. To integrate student life more
fully with a challenging academic environment, six new residence halls
were constructed. As the first Berkeley Chancellor to cope with the
decline of minority enrollment after the elimination of affirmative
action in California, Berdahl strengthened campus outreach programs for
disadvantaged students in the public schools. Following his tenure as
Chancellor at Berkeley, Berdahl remained as a faculty member. Prior to
going to Berkeley, Berdahl served as President of the University of
Texas at Austin from 1993 to 1997. While at Texas, he initiated a
master plan for the physical development of the campus, worked to
introduce data-driven planning in the allocation of resources to the
academic colleges and schools, and endeavored to build a stronger sense
of community within a large, diverse campus. While at the University of
Texas and at Berkeley, Berdahl was an active member of AAU, including
service as its Executive Committee Chair. Berdahl began his academic
career in the History Department at the University of Massachusetts
Boston in 1965. He joined the history faculty at the University of
Oregon in 1967 and served as Oregon's Dean of the College of Arts and
Sciences from 1981 to 1986, when he left Oregon to become Vice
Chancellor of Academic Affairs at the University of Illinois at Urbana-
Champaign. Berdahl received his B.A. from Augustana College in Sioux
Falls, South Dakota, his M.A. from the University of Illinois, and his
Ph.D. from the University of Minnesota, which also awarded him an
honorary Doctorate of Science in 1997. He is recipient of numerous
honors and awards, including an honorary doctorate and distinguished
alumnus award from Augustana College, a Fulbright Research Fellowship,
and an NEH Independent Study and Research Fellowship. He has been a
Research Associate at the Institute for Advanced Study in Princeton and
at the Max Planck Institute for History in Goettingen, Germany. Berdahl
was elected to the American Academy of Arts and Sciences in 2001. He is
the author of one book and the co-author of another, and has written
numerous articles dealing with German history. Berdahl was born in 1937
in Sioux Falls, South Dakota. He and his wife Margaret (Peg) have three
married daughters, Daphne (deceased), Jennifer, and Barbara, and six
grandchildren.
Chair Wu. Thank you, Dr. Berdahl. We very much appreciate
AAU's input into this process.
Dr. Berdahl. Thank you.
Chair Wu. Mr. Greenwood, please proceed.
STATEMENT OF MR. JAMES C. GREENWOOD, PRESIDENT AND CEO,
BIOTECHNOLOGY INDUSTRY ORGANIZATION (BIO)
Mr. Greenwood. Good afternoon, Chairman Wu and
Congresswoman Biggert and Members of the Committee. I am Jim
Greenwood, President and CEO of the Biotechnology Industry
Organization, BIO, and I am privileged to be here this morning
on behalf of BIO's more than 1,200-member companies, academic
institutions, State biotechnology centers, and related
organizations in all 50 states involved in health care,
agricultural, environmental, and industrial biotechnology.
Congress created the SBIR Program in the early 1980s
because it recognized that all too often promising early-stage
scientific research lacked adequate funding and as a result
perished in the ``Valley of Death.'' The importance of
advancing science through the ``Valley of Death'' has never
been more important than it is right now.
In fact, in just the last several months at least 25 of our
companies have either placed drug development programs on hold
or cut programs altogether. This includes therapies for HIV/
AIDS, cervical cancer, multiple sclerosis, and diabetes.
Roughly a third of small publicly-traded biotechnology
companies are now operating with less than six months of cash
on hand, which is a 90 percent increase relative to this time
in 2007. The total capital raised by the industry in 2008 is
down 55 percent compared to last year. As such, it is more
important than ever that government funding opportunities such
as SBIR are made more accessible to America's cutting-edge
companies.
My recommendation to strengthen and improve the SBIR
program can be grouped under the following three general goals.
First, increase competition and foster innovation and
commercialization by the best small companies. For 20 years
domestic biotechnology companies competed for SBIR grants.
However, in 2003, the Small Business Administration's [SBA]
Office of Hearings and Appeals ruled that a biotechnology
company, Cognitics, did not meet the SBIR size standard because
multiple venture capital investors in the aggregate, and that
is more, that is important, in the aggregate, owned more than
50 percent of the company's stock.
The ruling, which is not based on the statutory language,
ignores the reality of the marketplace where small
biotechnology firms must raise tens of millions of dollars to
conduct incredibly capital-intensive research. The SBA's 2003
ruling to exclude majority venture-backed companies inhibits
the SBIR's Program's access to the most competitive pool of
applicants possible, and it stifles the ability of SBIR to
carry out its mission to fund projects that will have the most
commercial potential.
The NIH's acting director recently reported that the number
of SBIR applications has dropped over 40 percent since 2004,
which is about the same time the SBIR-participating agencies
implemented the new SBA restriction and majority VC [Venture
Capital]-financed companies.
BIO respectfully requests that the Committee reinstate the
eligibility of small VC-backed biotechnology firms to compete
for SBIR awards. This will ensure the most competitive pool of
applicants and that grants will be awarded based on projects
that show the most promise in bringing breakthrough therapies
to the public.
Second, Congress should clarify the SBA eligibility rules
to make the application process more straightforward and more
user friendly. It is equally important the authorization
clarify SBA affiliation regulations. Under current SBA
regulations when determining the size of a business, the SBA
considers the number of direct employees at the business as
well as affiliated business employees. These affiliation rules
create a situation where a small company with 50 employees
could be affiliated with hundreds of other employees of
companies with which the small company has no relationship
whatsoever, simply because the companies share a common
investor, even where the investor owns a minority stake in the
business in question.
BIO recommends the Reauthorization Bill provide language to
clarify that minority investment by a venture capital investor
does not make the company an affiliate of another company for
the purposes of determining size. This is a commonsense measure
that will provide clarity and peace of mind for small business
entrepreneurs looking to participate in the SBIR Program.
Third, Congress should maintain adequate agency flexibility
within the SBIR Program. One of the great strengths of the SBIR
Program is that Congress has provided participating agencies
with flexibility in how they administer the program.
Maintaining flexibility is supported by a National Research
Council 2007 report, which states, ``Flexibility is a positive
attribute in that it permits each agency to adapt its SBIR
Program to the agency's particular mission, scale, and working
culture.''
BIO does not believe that a hard dollar cap should be
applied to the SBIR grant amounts. Agencies should be the best
judge of how to use their SBIR funds to advance science and to
commercialize new innovations. By making necessary reforms to
the SBIR Program, Congress can continue to support the USA
biotechnology community by allowing the government to partner
with small biotechnology companies that have promising science
but need additional resources at key stages of development.
Thank you.
[The prepared statement of Mr. Greenwood follows:]
Prepared Statement of James C. Greenwood
Good morning Chairman Wu, Ranking Member Smith, Members of the
Committee, ladies and gentleman. I am Jim Greenwood, President and CEO
of the Biotechnology Industry Organization (BIO). I am privileged to be
here this morning on behalf of BIO's more than 1,200 member companies,
academic institutions, State biotechnology centers and related
organizations in all 50 states involved in health care, agricultural,
environmental and industrial biotechnology.
The role of the SBIR program in bringing breakthrough therapies to
the American people is a matter of record. There are 252 FDA approved
biologics that have been developed by 163 companies. Thirty-two percent
of those companies have received at least one SBIR/STTR award. Despite
its noble past, the ability of the SBIR program to provide critical
funding for medical research projects will remain hampered unless SBIR
reauthorization updates the program to address the current realities
facing small, innovative American companies.
As you know, Congress created the SBIR program in the early 1980's
because it recognized that promising, early stage scientific research
all too often 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.'' The importance of advancing science
through the ``Valley of Death'' has never been more important than it
is right now as numerous small biotechnology companies are being forced
to shelve promising therapies as result of the current economic crisis.
In fact in just the last five months, at least 25 U.S. public biotech
companies have either placed drug development programs on hold or cut
programs all together. These programs include therapies for HIV,
cervical cancer, Multiple Sclerosis, and diabetes.
For twenty years small, domestic biotechnology companies competed
for SBIR grants. In addition to providing funding, these grants were a
powerful signal to the private sector that a company's research was
compelling and possessed scientific and technical merit. However, in
2003 the Small Business Administration's Office of Hearings and Appeals
(OHA) ruled that a biotechnology company, Cognetix, did not meet the
SBIR size standard because multiple venture capital investors, in the
aggregate, owned more than 50 percent of the company's stock. The
ruling, which is not based on the SBIR statutory language, ignores the
realities of the marketplace where small biotechnology firms must raise
tens of millions of dollars to conduct incredibly capital-intensive
research. It is estimated that it takes between 8 and 12 years to bring
a biotechnology therapy to market and costs between $800 million and
$1.2 billion. These small biotech firms typically have fewer than 50
employees, no products on the market and must raise considerable funds
through a combination of angel investors and venture capital firms to
make a therapeutic commercially available to patients.
The impact of the current economic crises on small biotechnology
companies has been and continues to be severe. According to the latest
available data, 30 percent of small, publicly-traded biotechnology
companies are now operating with less than six months of cash on hand,
a 90 percent increase relative to 2007. Forty-five percent of these
companies have less than one year of cash remaining. The total capital
raised by the industry in 2008 has seen a steep decline (down 55
percent in 2008 compared to 2007).
The SBIR program has always been critical to helping innovative
biologic therapeutic development programs traverse the ``Valley of
Death'' and move towards a publicly-available product. This is a role
that has never been more critical than it is today. A recent joint
study by BIO and Thompson Reuters found that the current economic
crisis has forced over 80 percent of biotech investors to change their
investment approaches. They can no longer afford the high-risk
characteristic of investment in biotech. The decline of the biotech
industry jeopardizes not only America's patient population, but also
America's competitive edge in the 21st century global economy. The
importance of restoring eligibility to small biotechnology companies
has never been more clear.
SBA has stated that the ownership rule is meant to be a proxy for
determining that a company is domestic. However, the use of capital
structure as a proxy for determining domesticity and the subsequent OHA
ruling has had the unintended consequence of excluding a sizable
portion of U.S. biotechnology companies that would otherwise be
eligible to participate in the program. Even more alarming is the fact
that NIH SBIR applications have decreased 40 percent since 2004, about
the time that SBIR-participating agencies implemented the new SBA
restriction on majority VC-financed companies.
A small biotechnology companies is generally engaged in several
projects with one lead product and an average of five other therapies
or candidates in early stage/pre-clinical research. Typically, a
biotechnology company will begin fundraising for its lead product in
development. Companies generally raise between $5 million and $15
million in their first round of venture financing, an amount that often
results in multiple venture capital companies collectively owning more
than 50 percent of the company. This is especially the case with very
young companies whose valuation may reflect their high-risk, early
stage nature. However, it is typically the case that no single venture
capital company will own more than 15 to 25 percent of the company's
equity.
Despite the extensive fundraising a biotechnology company
undertakes for its lead product, these funds are tied to very specific
milestones to support the lead product's development. As such, in order
to develop secondary or tertiary candidates/therapies a company has to
find secondary sources of fundraising capital. At the very earliest
stages of development other sources of financing, such as SBIR grants,
have been instrumental in advancing research and development in
biotechnology.
Opportunity to Strengthen/Restore SBIR Program
I appreciate the opportunity to discuss much-needed changes to the
current SBIR program. I believe these changes would strengthen the
program and ensure that it is funding the best small biotechnology
businesses which are working on innovative programs that have the most
potential to benefit the public. My recommendations can be grouped
under three general goals. First, increase competition for SBIR grants
and, as such, foster innovation and commercialization by small
companies with the most promise. Second, clarify SBIR eligibility rules
to make them easier to understand and increase transparency regarding
the program's operation. Third, maintain agency flexibility to make
certain the SBIR program continues to serve the needs of individual
agencies.
I will briefly discuss each of these important goals.
Increase Competition and Foster Innovation and Commercialization by the
Best Small Companies
SBA's 2003 ruling that excludes majority venture-backed companies
inhibits the SBIR program from receiving the most competitive pool of
applicants possible and stifles the ability of SBIR to carry out its
mission to fund projects that will improve public health and have the
most commercial potential.
The current SBA interpretation would deem eligible a public company
with 499 employees and significant--perhaps hundreds of millions--of
dollars in revenue. However, a private company with 20 employees, no
annual revenue and $8 million in venture capital by multiple venture
capital funds equaling 56 percent of the company's equity--even though
no one venture capital firm has more than 30 percent of total equity--
is ineligible. A significant number of BIO's emerging companies are
ineligible, the majority of which would apply to SBIR if able. These
companies are working on breakthroughs for the treatment of diseases
such as cancer, Alzheimer's, lupus, and leukemia.
The National Institutes of Health (NIH) have documented disturbing
trends since the 2003 ruling. Applications for SBIR grants at NIH have
declined by 11.9 percent in 2005, 14.6 percent in 2006, and 21 percent
in 2007. Additionally, the number of new small businesses participating
in the program has decreased to the lowest proportion in a decade.
Small biotechnology companies have high and intense capital needs
(over $1 billion) and an unusually long development time of five to
twelve years. The vast majority of biotechnology companies raise
between $5 million and $15 million in their first round of venture
financing for their lead product(s), an amount that usually results in
the venture capital firms collectively owning more than 50 percent of
the company. However, the investment group usually consists of several
firms, none of which owns more than 15-25 percent of the company.
SBIR plays a critical role in aiding small biotechnology companies
in their early stage research to navigate through the ``Valley of
Death'' where the concept is too high-risk for private market support.
This has never been more important as the ``Valley of Death'' is only
getting wider and deeper in these difficult economic times.
BIO respectfully asks the Committee to reinstate the eligibility of
small, VC-backed biotechnology firms to compete for SBIR awards. This
will ensure the most competitive pool of applicants and that grants
awarded will be based on projects that show the most promise in
bringing breakthrough therapies to the public.
Clarify SBIR eligibility rules to make the application process more
straightforward and user-friendly.
It is equally important that the reauthorization clarify SBA
affiliation regulations. Under current SBA regulations, when
determining the size of a business, the SBA considers the number of
direct employees at the business as well as affiliated businesses'
employees. Businesses are affiliates of each other if the SBA
determines that another business has either affirmative or negative
control. Current regulations state that a venture capital company that
holds a minority share in another business can be considered an
affiliate of that business. If the SBA determines a venture capital
company is affiliated with the business, not only are the employees of
the venture capital company included in the size determination but so
are the employees of other businesses in which the venture capital firm
is invested.
As a result of these affiliation rules, a small company with 50
employees could be deemed to be affiliated with hundreds of other
employees of companies with which the small company has no relationship
whatsoever, simply because the companies share a common investor. It is
important to note that this can be the case where the VC investor owns
a minority stake in the small business applying for SBIR.
Not only are these affiliation rules nonsensical, the manner in
which they are applied is often a mystery to the small business
applying for the SBIR grant. As a result, a small company may certify
in good faith that it is eligible for an SBIR grant, only to later find
out that the SBA has affiliated it with a large number of employees at
other unrelated companies, thus making the small business ineligible.
BIO recommends the reauthorization bill provide language to clarify
that minority investment by a venture capital operating company does
not make that company an affiliate of another company for the purposes
of determining size. This is a common sense measure that will provide
clarity and peace of mind for small business entrepreneurs looking to
participate in the SBIR program.
Maintain Agency Flexibility
BIO also supports maintaining agency flexibility in the SBIR
program. One of the great strengths of the SBIR program stems from the
fact that Congress provided the affected departments and agencies with
flexibility in establishing the program. Maintaining flexibility in the
program is also supported by a National Research Council 2007 report
which states, ``. . . flexibility is a positive attribute in that it
permits each agency to adapt its SBIR program to the agency's
particular mission, scale and working culture.''
The reality is that various government agencies may structure their
SBIR programs in different ways to meet differing agency needs. This is
a good thing, so long as the original goals of the SBIR program are
preserved. Certain agencies, for example, may need the flexibility to
award larger grants, if projects they are funding are in an area where
research is typically more expensive. This is sometimes the case for
biotechnology companies researching therapies that are especially novel
or cutting-edge. For this reason, BIO does not believe that a hard cap
should be applied to the SBIR grant amounts. Agencies should be the
best judge of how to use their SBIR funds to advance science and
commercialize new innovations.
Additionally, any caps on SBIR grants, if imposed, should apply to
particular SBIR phases and should not apply to the entire amount that
the agency spends on a particular project. The NIH, for example, has
chosen to implement a commercialization assistance program for those
companies that may need extra funding before they can attract private
dollars. A hard dollar cap in the SBIR program could threaten such a
program and this would be, in BIO's opinion, very unfortunate.
CLOSING REMARKS
Congress can continue to support the United States biotechnology
community by allowing the government to partner with small
biotechnology companies that have promising science but need additional
resources at key stages of development not readily available in the
private capital markets. SBIR should be an aggressively competitive
program that fulfills federal research and development goals of
bringing breakthrough public health discoveries to the public.
Biography for James C. Greenwood
James C. Greenwood is President and CEO of the Biotechnology
Industry Organization (BIO) In Washington, D.C., which represents more
than 1,200 biotechnology companies, academic institutions, State
biotechnology centers and related organizations across the United
States and in more than 30 other nations. BIO members are involved in
the research and development of innovative health care, agricultural,
industrial and environmental biotechnology products. BID also produces
the annual BIO International Convention, the world's largest gathering
of the biotechnology industry, along with industry-leading investor and
partnering meetings held around the world.
Since his appointment in January of 2005, he has markedly enhanced
the trade association's capacity increasing both its staff and budget
by nearly fifty percent. BIO is now a world class advocacy organization
playing a leading role in shaping public policy on a variety of fronts
critical to the success of the biotechnology industry at the State and
national levels as well as internationally.
Mr. Greenwood represented Pennsylvania's Eighth District in the
U.S. House of Representatives from January 1993 through January 2005. A
senior member of the Energy and Commerce Committee, he was widely
viewed as a leader on health care and the environment.
From 2001 to 2004, Mr. Greenwood served as Chairman of the Energy
and Commerce Committee Subcommittee on Oversight and Investigation with
oversight authority over issues In the Full Committee's vast
jurisdiction. He led hard-hitting investigations into corporate
governance at Enron, Global Crossing and WorldCom; terrorist threats to
our nation's infrastructure; and waste and fraud in Federal Government
agencies.
Prior to his election to Congress, Mr. Greenwood served six years
in the Pennsylvania General Assembly (1980-86) and six years in the
Pennsylvania Senate (1986-1993).
Mr. Greenwood graduated from Dickinson College in 1973 with a BA in
Sociology. From 1977 until 1980, he worked as a caseworker with abused
and neglected children at the Bucks County Children and Youth Social
Service Agency.
Mr. Greenwood resides in Upper Makefield, Pennsylvania with his
wife and three children.
BIO represents more than 1,200 biotechnology companies, academic
institutions, State biotechnology centers and related organizations
across the United States and 31 other nations. BIO members are involved
in the research and development of health care, agricultural,
industrial and environmental biotechnology products.
Chair Wu. Thank you, Mr. Greenwood.
Dr. Rockey, please proceed.
STATEMENT OF DR. SALLY J. ROCKEY, ACTING NIH DEPUTY DIRECTOR,
EXTRAMURAL RESEARCH, NATIONAL INSTITUTES OF HEALTH, U.S.
DEPARTMENT OF HEALTH AND HUMAN SERVICES
Dr. Rockey. Good afternoon, Chairman Wu, Congressman
Biggert, and other Members of the Subcommittee. Thank you for
the opportunity to discuss the NIH SBIR/STTR Programs, and the
role they play in stimulating innovation at small high-tech
businesses.
NIH [National Institute of Health] is one of the largest
funders of the SBIR/STTR Programs and the largest supporter of
biomedical research that focuses on extending healthy life and
reducing the burdens of illness and disability. The SBIR/STTR
Programs are poised to fund early-stage, high-risk, high-
quality research from which important medical advances can be
developed. In fiscal year 2009, the total SBIR/STTR set-aside
will be about $672 million.
I would like to begin by highlighting several SBIR
innovations that have made differences and can make differences
in people's lives. Altea Therapeutics, a Georgia company,
developed a needle-less infusion patch called the passport
system for a painless and controlled delivery of drugs such as
insulin or vaccines such as hepatitis B antigen through the
skin. Three Rivers Holding, an Arizona company, focused on
assistive technology, developing better wheels for wheelchairs.
This smart wheel optimized wheelchair route to route out the
cause of chronic pain in the shoulder, hand, or wrist of
wheelchair users.
SIG Technologies Inc. in Oregon developed a small molecule
inhibitor, a small pox virus replication. While small pox has
essentially been eradicated, it remains a formidable biowarfare
threat. And finally, Biopsy Sciences in Florida developed
hydroMARK, a novel water containing site marker used in breast
cancer procedures. This technology is helping patients by
replacing lengthy mammogram-guided localization wire procedures
with a quick and accurate and more comfortable ultrasound
localization. As a breast cancer survivor, I have personally
experienced the excruciating procedure that this new technology
can replace. I find it very satisfying that the NIH and the
small business community contributes to helping women who are
battling a life-threatening disease have one less painful
procedure in what can be a grueling treatment regime.
Stories such as this come from companies all over the
United States and underscore the importance of SBIR to our
mission. In support of the goal to increase commercialization
of federally-supported R&D, NIH has designed programs such as
the Phase I, Phase II Fast Track Program and competing renewal
award to help our awardees negotiate the agonizing period
between discovering commercialization or as we heard mentioned,
the ``Valley of Death.''
In addition, NIH offers commercialization assistance by
facilitating matchmaking. It is our version of match.com, with
the NIH pipeline to partnerships. This is a virtual space where
SBIR and STTR awardees can showcase their technologies, and it
allows for potential strategic partners, licensing partners, or
investors to find them on this virtual space. And currently we
have over 100 technologies in this database.
NIH is pleased that a recent study conducted by the NRC,
the National Research Council, found that 40 percent of NIH
SBIR-funded projects are commercialized. Further, using a
dynamic monitoring system that enables NIH to document the
continuing achievements of its SBIR awardees over time, we have
found that about 50 percent have achieved sales. Other factors
such as FDA approval, strategic partnerships, and investments
also demonstrate our program's success.
We attribute the success and effectiveness of the program
to several factors. The most significant of this is the
existing flexibility in our administration of the program to
address the changing nature of biomedical research and
accommodate the needs of multiple industries and diverse
product outcomes.
Examples include the ability of companies to propose their
own project ideas and an opportunity to resubmit unfunded
applications. And the ability to exceed the award guidelines in
justified cases.
Simply stated, one size does not fit all. Flexibility is
critical at a time when science is changing rapidly, becoming
much more complex, and evermore expensive. Despite these
program flexibilities and enhancements, as you already heard,
what we have observed is there have been some troubling trends.
Specifically, the numbers of our applications have declined
from 2004 through 2008 by nearly 40 percent. Though the reasons
are not fully understood for this decline, it is a
disconcerting trend--this disconcerting trend may be related to
certain distance incentives that are either rendering worthy
companies ineligible or driving them away for other reasons.
For some the award amounts or the current phase structures
are not sufficient incentives for applying. For others the
process appears too competitive. New companies may find the
process daunting or aren't sure how to match their skills with
our research areas. Some firms have lost their eligibility or
may be confused by the eligibility criteria.
For many biomedical technology companies the SBIR Program
is an important source of seed funding for early-stage ideas of
unproven feasibility, but venture capital financing is the only
realistic way that their innovative product will enter the
marketplace. Research and public health in biotechnology is
characterized by high and intense capital needs, as you know,
and to see these products from idea to market usually have very
long development times, exceptionally high burn rates for
investment funds, and often multiple rounds of financing to
fund the extensive and essential clinical research. Individuals
alone simply cannot finance the hundreds of millions of dollars
for necessary clinical phases to bring the product to market.
The NRC study of the SBIR Program noted that the synergies
between SBIR funding and venture capital are useful. As the
innovative process is not linear, even small business
benefiting from venture funding may well seek SBIR funding as a
means of exploring a new idea. For example, a new drug
candidate. Keeping the pipeline full of new ideas is important
because in today's high-risk biomedical research environment,
the reality is that fewer than one percent of the innovative
promising projects reach the marketplace.
Therefore, I believe appropriate incentives can be--can
strengthen the role of small businesses in stimulating
technological innovation.
In conclusion, I want to reemphasize the NIH's commitment
to supporting small businesses and maintaining the integrity of
the SBIR/STTR Programs. We look to small businesses to
stimulate technological innovation, help us face new
challenges, and to produce benefits for the public. We look
forward to working with Congress on ways to reinvigorate the
program, incentivize America's small businesses to participate,
and create an environment enabling commercialization of health-
related products and services that will sustain our national
economy.
That concludes my statement. I look forward to answering
any questions you have.
[The prepared statement of Dr. Rockey follows:]
Prepared Statement of Sally J. Rockey
Good afternoon, Chairman Wu and Members of the Subcommittee. My
name is Dr. Sally Rockey. I am the Acting Deputy Director for
Extramural Research at the National Institutes of Health (NIH), an
agency of the Department of Health and Human Services. Thank you for
the opportunity to discuss the NIH Small Business Innovation Research
(SBIR) and Small Business Technology Transfer (STTR) programs and the
role they play in stimulating innovation. Among the 11 federal agencies
that participate in the SBIR program, the NIH is one of the largest
funders of this program, and the largest Federal supporter of
biomedical research.
IMPORTANCE OF SBIR PROGRAM AT NIH: IGNITING IMAGINATIONS AND SPURRING
NEW DISCOVERIES
The NIH SBIR Program is ideally suited for creating research
opportunities for U.S. small businesses to stimulate technological
innovation. Part of a complex innovation system, the NIH SBIR program
provides dedicated funding for small businesses to conduct early-stage
research and development to explore the feasibility of innovative ideas
that may eventually result in products or services that will lead to
better health for everyone. The NIH SBIR program is one means by which
the NIH Institutes and Centers (ICs) accomplish their R&D objectives. A
unique feature of the SBIR program is a focus on commercialization of
the outcomes of research. Thus, the program serves to supplement the
more basic and applied research programs of NIH.
TYPES OF RESEARCH NIH SUPPORTS UNDER SBIR
Examples of the types of research that NIH supports through the
SBIR program include, but are not limited to, drug discovery, medical
devices, biosensors, nanotechnologies, proteomics, imaging,
bioengineering, behavioral research, and technologies that reduce
health disparities. Investigator-initiated ideas are the cornerstone of
the NIH research portfolio, including projects supported by the SBIR
program. Thus, while we solicit projects on specific topics, we also
encourage small businesses to propose their own innovative research
ideas that are relevant to our mission.
NIH SBIR PROGRAM OVERVIEW
The NIH, in accordance with statute, must set aside 2.5 percent of
its extramural research and development budget for a SBIR program. In
fiscal year (FY) 2008, the NIH SBIR set-aside was about $580 million.
NIH awarded 806 new Phase I and 288 new Phase II SBIR projects to small
businesses working in many different technology areas across the
country. Funding decisions are based on several factors: 1) ratings
from the scientific and technical evaluation process; 2) areas of high
program relevance; 3) program balance among areas of research; 4)
available funds; and 5) the commercialization status, when a small
business concern has received more than 15 Phase II awards in the prior
five fiscal years (FYs).
EMPLOYMENT EFFECTS ON NIH SBIR AWARDEES
Since the program's inception in 1982, the NIH has invested more
than $5 billion in more than 19,000 projects to over 5,000 small
businesses. Past studies of the SBIR program conducted by the NIH\1\
and the National Research Council (NRC) \2\ have shown that small
businesses are seen as sources of economic vitality and are especially
important as a source of new employment. In looking at job growth of
SBIR awardee firms since the receipt of their award, the NRC found the
mean employment gain was 29.9 FTEs. In addition, respondents estimated
as a result of their SBIR projects their companies were, on average,
able to hire 2.7 full time employees (FTEs), and to retain 2.2 FTEs
that might not otherwise have been retained. Although the employee size
limit for firms receiving an SBIR award is 500, the median size of
companies receiving NIH SBIR awards is actually relatively small: 10
employees. Sixty percent were found to have 15 or fewer employees at
the time of the NRC survey. These data suggest that the SBIR program
has positive employment effects on small business job creation and
growth.
---------------------------------------------------------------------------
\1\ National Institutes of Health, National Survey to Evaluate the
NIH SBIR Program: Final Report, July 2003.
\2\ National Research Council Phase II Survey, An Assessment of the
SBIR Program At the National Institutes of Health, 2009.
PROGRAM EFFECTIVENESS: BRINGING IDEAS TO LIFE
The SBIR program seeks 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.
NIH SBIR projects are stories of discovery. Following are a few
examples of how SBIR products are touching people's daily lives:
An anti-viral drug, Tyzeka, under the generic name of
telbivudine, is used to treat chronic hepatitis B in adults.
A needle-less infusion patch called the PassPortTM
System is capable of delivering drugs such as insulin. This
novel technology bypasses metabolism in the intestinal tract
which typically results in low bioavailability of oral drugs.
A new cholesterol test, called the VAPTM (Vertical
Auto Profile), can identify twice the number of people at risk
for heart disease than traditional cholesterol tests developed
in the 1970s.
The HydroMARKTM, a novel, visible marker used in
ultrasound, is addressing an unmet clinical need and has helped
patients by replacing lengthy mammogram guided wire
localization procedures with quick, accurate ultrasound guided
localization procedures that are more comfortable.
The LifelineTM, which is tissue engineered blood
vessels comprised entirely of the patient's own living cells,
is targeted to help hemodialysis patients, lower limb
amputation candidates, pediatric patients with cardiac defects
and coronary bypass candidates.
Examples such as these demonstrate ways the SBIR program is
stimulating technological innovation and underscore why the NIH SBIR
program is important to our mission and to the entire innovation
process.
PROGRAM FLEXIBILITY IS KEY: ONE SIZE DOES NOT FIT ALL
NIH is continually focused on ways to address the needs of a
diverse business community, multiple industries, different technology
sectors, and diverse product outcomes. 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.
Examples of program flexibility include the ability to propose
research projects in fields that have the most biological potential;
the ability for an applicant to resubmit an unfunded application; and
the ability to exceed the Phase I and Phase II award guidelines when
the science proposed warrants such a deviation to produce successful
outcomes. The SBIR median award size in FY 2008 was $151,440 for Phase
I and $841,381 for Phase II projects. For STTR, the median award size
was $149,711 for Phase I and $907,970 for Phase II.
In addition, we have developed programs to help companies address
funding gaps between Phase I and Phase II and programs to help them
negotiate the agonizing period between discovery and commercialization.
For example, the Phase I/Phase II Fast-Track award and Phase II
Competing Renewal award are aimed at accelerating research projects
that have great potential to produce products; and, our
commercialization assistance programs are targeted to the specific
needs of small businesses funded by NIH.
For many biomedical technology companies, the SBIR program is an
important source of seed funding for early-stage ideas of unproven
feasibility, but a venture capital financing strategy is the only
realistic way that their innovative product will enter the marketplace.
Research in public health and biotechnology is characterized by high
and intense capital needs to see a product from idea to market (e.g.,
it takes an average of $1.2 billion to bring a drug to the market);
unusually long development times (i.e., five to twelve years);
exceptionally high ``burn rates'' for investment funds; investment by
venture capital companies (VCCs), many of whom are not owned at least
51 percent by individuals; and often, the necessity for multiple rounds
of financing to fund the extensive and essential clinical research.
Individuals, alone, simply cannot finance the hundreds of millions of
dollars for necessary clinical phases to bring products to the market
that will improve the health of Americans.
The NRC's study of the SBIR program noted the synergies between
SBIR funding and venture capital are useful and their study underscored
the notion that the innovation process often does not follow a linear
path. So, even small businesses benefiting from venture funding may
well seek SBIR funding as a means of exploring a new idea or, for
example, a new drug candidate. Keeping the pipeline full of new ideas
is important because, in today's high-risk biomedical research
environment, especially in areas such as drug development, drug
discovery, and therapeutics, the reality is that fewer than one percent
of the innovative, promising projects reach the marketplace.
Simply stated, one size does not fit all.
Flexibility is critical at a time when science is changing rapidly,
becoming more complex, more interdisciplinary, and ever more expensive.
Throughout the SBIR program's history, small businesses, including
those companies with venture capital funding, have applied for and
received SBIR funding in areas that help to advance our mission. The
National Research Council's study found no evidence that participation
of companies with multiple VC ownership was harmful to the program or
that other small businesses have ever been crowded out by the
participation of small businesses that are majority-owned by VCCs.
KEY TRENDS
Overall, the SBIR program has complemented NIH's mission to advance
science while reducing the burden of illness on public health. In spite
of our commitment to small businesses and our proactive enhancements to
the NIH SBIR program, the program has not increased participation of
applicants at the same rate observed for other sectors of the NIH
extramural community at NIH. Specifically, the numbers of SBIR
applications and new firms participating in the program declined from
fiscal years 2004 through 2008. Though the reasons for this near 40
percent drop in applications are not fully understood, this
disconcerting trend appears to be the result of disincentives in the
program that are either rendering worthy companies ineligible or
driving them away for other reasons.
CONCLUSION
In conclusion, I want to reemphasize the NIH commitment to
supporting small businesses, maintaining the integrity of SBIR program,
and ensuring that technology developments will help improve the health
and extend the lives of all people. We are looking to small businesses,
primarily through the SBIR program, to stimulate technological
innovation, help us face new challenges and to produce not only new
knowledge but also tangible benefits that touch the lives of every
individual. We are hopeful that our continuing outreach efforts and
actions to modernize the SBIR program will be helpful in that regard.
Finally, we continue to believe strongly that flexibility within the
SBIR program is essential to achieving greater successes in these
programs. This concludes my statement. I will be pleased to answer any
questions you may have.
Biography for Sally J. Rockey
Dr. Sally Rockey has spent the majority of her career in the area
of extramural research administration and Information Technology. She
received her Ph.D. in Entomology (1985) from Ohio State University and
held a post doctoral appointment at the University of Wisconsin. In
1986 she joined the U.S. Department of Agriculture's extramural
research arm, the Cooperative State Research Education and Extension
Service (CSREES), as a program officer for entomological grant
programs. She quickly moved up in the organization and became Deputy
Administrator for the Competitive Research Grants and Award Management
Unit where oversaw extramural competitive research, education and
extension portfolio. In 2002, Dr. Rockey became CSREES's Chief
Information Officer where she applied her breadth of government
knowledge to IT by aligning state-of-the-art information technologies
with the goals and objectives of CSREES. In 2005 Dr. Rockey was
appointed to the position of Deputy Director of the Office of
Extramural Research (OER) within the Office of the Director, National
Institutes of Health (NIH). OER serves as the focal point for policies
and guidelines for extramural research administration within NIH where
Dr. Rockey applied her experience in research and grants administration
to public health. She also served as Acting Director of the Office of
Research Information Systems in OER where she again used her CIO
experience to oversee the eRA (electronic research administration) and
OER reporting activities. Among her many other responsibilities Dr.
Rockey serves as the NIH Agency Extramural Research Integrity Officer
managing research misconduct issues for NIH extramural programs and
Directed the OER Office of Planning and Communications. In 2008 Dr.
Rockey became Acting NIH Deputy Director for Extramural Research and
Acting Director of OER and will again apply her many skills to leading
the extramural activities at NIH.
Rockey is a skilled public speaker and has given hundreds of
presentations on extramural research priorities and policies,
grantsmanship, the competitive peer review process, scientific
integrity, and IT. She is active on a number of federal
intergovernmental committees related to science, research, grants
management and electronic government and collaborates closely with
academic and scientific communities. She has been honored by receiving
the Presidential Rank Award in 2004.
Dr. Rockey has actively participated in the science education of
young children by giving presentations on insects to local elementary
schools where she was known as the ``Bug Doctor'' coordinated her local
pool's swim team, is an avid Bridge player and sings and plays the
guitar.
Chair Wu. Thank you, Dr. Rockey. We are very grateful for
NIH's continuing support for SBIR and STTR.
Mr. Glover, please proceed.
STATEMENT OF MR. JERE N. GLOVER, ATTORNEY AND EXECUTIVE
DIRECTOR, SMALL BUSINESS TECHNOLOGY COUNCIL, WASHINGTON, DC
Mr. Glover. Mr. Chairman, Congresswoman Biggert, other
Members of the Committee, I want to thank you for the
opportunity to be here. I am Jere Glover, Executive Director of
the Small Business Technology Council of the National Small
Business Association. We represent the 7,000 SBIR companies
that are active in the SBIR Program today.
America is certainly not doing enough to promote
innovation, especially given the state of competition from
foreign countries that are graduating more scientists and
engineers than we are and the state of our economy today. Our
share of the global technology market is declining.
Ten foreign countries have copied the SBIR Program. Major
countries. Witness after witness, GAO [Government
Accountability Office] study after GAO study, report after
report say the program is working remarkably well and has for
26 years. Please don't mess it up.
The SBIR Program isn't broken. It doesn't need fixing.
Please make changes that are limited and monitored carefully
and make sure the agencies, the GAO, and the National Academy
of Sciences report fully on those changes and how they affect
the program and how they affect the technology community.
Asking small business to trust the government to allow the
agencies to be flexible, to allow the government to change or
modify the program that is small businesses' only real portal
or access to the federal R&D dollars is like waving a red flag
in front of small business.
Thirty years of experience with the government has proven
that small business will come out on the short end. Little has
changed in the federal R&D marketplace in the last 30 years.
Small businesses' share of the federal R&D market was 3.5
percent in 1978. It has now increased to 4.3 percent in 30
years.
But the technology marketplace has changed, and changed
significantly. In 1978, small business employed only six
percent of the scientists and engineers in America. Today,
according to the National Science Foundation's Science
Indicators that number has gone up to 38 percent. Small
businesses receive 38 percent of all U.S. patents, and SBIR
companies have received over 60,000 patents and are patenting
at the rate of basically 5,000 patents per year.
Where do innovations come from? One of the more surprising
studies recently is looking at where the innovation comes from.
According to the R&D top 100 innovations, small business has
gone from zero SBIR companies--from zero in 1980, '82, when the
program started to now having 25 percent of all American key
innovations. At the same time large firms have dropped from 40
innovations per cycle down to under ten. So small business is
where the job creation is really happening.
Let me just mention that there is a lot of discussion to
where the SBIR Program should be focused. It has always focused
on the first three basic parts of this; basic research, applied
research, and development. The commercialization has always
been beyond the SBIR Program, and it should be.
For example, the entire HHS [Health and Human Services]
budget would not fund one single drug going through their
application [process at FDA]. My friend, Jim Greenwood, has
pointed out that it takes $800 million. The HHS entire budget
would not even fund one. We have to be realistic. When you get
in the commercial arena, this program and the Federal
Government simply don't have the funds to pick enough winners
to make it work.
The economic impact of the SBIR Program, the job creation,
just as a small business, if you look at this indication, small
business has led us out of every recession, and they are doing
a--will continue to do that. The economic impact of the SBIR
Program, if you will look in the back of my testimony, you will
see green pages, and they have information on each specific
Congressional district or the states of the various Members.
What is important to point out is that this SBIR Program, using
a random selection of states, those represented on this
subcommittee, have received $6.5 billion of SBIR awards.
Currently in the last five years there are almost $2 billion
involved, and those companies have created over 100,000 jobs,
or maintained, I should say. Created--maintained 100,000 jobs
and they filed 14 times just for the Members in the states that
are represented on this subcommittee.
It is a wonderful program. It has worked extremely well.
The universities and small businesses have worked well
together, and that has been improving and working well. We are
starving the most productive sector of the small business
economy; the high-tech small business companies and
underfunding the most prolific scientists and engineers. That
in a nutshell, ladies and gentlemen, is why we are losing in
the international market, market share, and what we need to do
to improve our economy. We can't continue down this road with
small business receiving less than five percent of the federal
R&D dollars and expect technology innovation to lead out of the
recession and into a larger share of the global technology
market.
Thank you.
[The prepared statement of Mr. Glover follows:]
Prepared Statement of Jere N. Glover
Chairman Wu, Ranking Member Smith, Members of the Subcommittee,
thank you for the opportunity to appear here today to discuss the
importance of technological innovation to the United States and the
reauthorization of the SBIR and STTR Programs. I am Jere W. Glover,
Executive Director of the Small Business Technology Council (SBTC) of
the National Small Business Association in Washington, DC. I have been
involved in federal science and technology innovation programs since
1978, when, as Counsel to the House Small Business Committee, I helped
convene the first joint House-Senate hearings on the subject.\1\ I
subsequently testified before Congress regarding small business and
innovation on numerous occasions, as Deputy Chief Counsel for Advocacy
at SBA during the Carter Administration and as Chief Counsel during the
Clinton Administration.\2\
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\1\ The 1978 hearings showed that, despite their demonstrated
superior efficiencies at innovating, small companies received only 3.5
percent of federal R&D contract dollars. Today, with far more science
and engineering talent at their disposal, and a far more widely
acknowledged record of innovations, small companies still receive only
4.3 percent of those R&D contract dollars. And SBIR/STTR accounts for
more than half of that.
\2\ See ``Small Business and Innovation,'' Report of the Joint
House and Senate Small Business Committees, August 9 and 10, 1978. As
an example of my testimony on the subject, see Testimony of Jere
Glover, Chief Counsel for Advocacy, Small Business Administration,
Senate Small Business Committee, August 4, 1999, http://www.sba.gov/
advo/laws/test99-0804.pdf
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An outgrowth of the White House Conference on Small Business in
1995, SBTC is the Nation's largest association of small, technology-
based companies in diverse fields, and represents more companies that
are active in the federal Small Business Innovation Research (SBIR) and
Small Business Technology Transfer (STTR) Program than any other
organization. SBTC also serves as the Technology Council of the
National Small Business Association, the Nation's oldest nonprofit
advocacy organization for small business, which represents over 150,000
small companies across the United States. I appear here today on behalf
of both organizations.
This hearing comes at a critical time. For more than a decade,
other nations have been chipping away at the U.S.' global leadership in
technological innovation. Now a second powerful threat is upon us--the
worst recession since the Great Depression.
As the chart below shows, our global market share in this key
economic area is declining:
While the pie is getting bigger, the U.S. share is getting smaller.
Another way of looking at this is to plot the balance of trade. Our
trade surplus in advanced technology exports has disappeared; we now
have a deficit:
The global challenge also shows up in U.S. patent statistics. Here
again, the pie is getting larger, as more patents are issued each year.
But here again, the U.S. share of the pie is shrinking. U.S. patents
issued to Americans have fallen from two-thirds of all those issued in
1980, to less than half today.
Over the past seven months, technological innovation has faced a
new menace: a deep global recession that is drying up both the supply
of capital and the demand for technological goods and services.
Unemployment is increasing.
To help restore our economy and strengthen our place in the world,
we must encourage the growth of technology and innovation. As I hope to
show in my testimony, small business generally, and the SBIR Program
specifically, offer extremely efficient ways to meet the challenges we
face. Of course, SBIR alone cannot do all that is needed. Programs such
as the Department of Commerce's Advanced Technology Program (ATP) and
the Technology Innovation Program (TIP) of the National Institute of
Standards and Technology should be expanded, and new efforts to
encourage and commercialize innovation should be explored. Likewise, we
need to promote early-stage investments in technologies, like those
provided by ``angel'' investors. We should also provide assistance for
small businesses in filing foreign patents.
In this testimony, however, I want to concentrate on a few key
themes:
1) Small business has a well-established track record of
creating most new jobs in the U.S. economy, and particularly so
when the economy is coming out of recessions. For purposes of
today's discussion, what's especially important about small
business job creation is that small business has now become the
largest single source of employment for U.S. scientists and
engineers, outstripping large business, universities and
government.
2) Small business also has become the Nation's leading source
of technological innovations, particularly breakthrough
innovations, as measured by several indicators.
3) As demonstrated by the recent National Academy of Sciences
reports and an array of earlier analyses, the SBIR Program has
become uniquely and powerfully effective in harnessing these
small business scientists and engineers, as well as their
breakthrough innovations, to the task of meeting federal agency
R&D needs.
4) While some modest adjustments in the SBIR Program would be
helpful--such as those recommended by the National Academy
studies--overall Congress should renew the Program without
major design changes. An increase in the Program's allocation
of federal funds would yield important benefits to the Federal
Government and to the Nation's economy and global
competitiveness.
5) The STTR Program, while newer and smaller than SBIR, shows
great promise in uniting small business and university
capabilities in innovation, and deserves to be expanded.
Let me expand on each of those points.
SMALL BUSINESS AND JOBS
For the past 40 years, small companies have created 60-80 percent
of all net new jobs, on average.\3\ In other words, add up all the new
jobs created, subtract the jobs lost when businesses close their doors,
and you find that, year in and year out, small business supplies our
country with two-thirds to three-quarters of all the new jobs. This
tempo may even be increasing. Recent data from the U.S. Bureau of
Census and the Office of Advocacy, U.S. Small Business
Administration,\4\ shows that small businesses (with less than 500
employees) created 93 percent of the net new jobs in the U.S. during
the period 1989 to 2005.
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\3\ U.S. Small Business Administration, Small Business FAQ's, 2009.
\4\ SBA Office of Advocacy, from data provided by the U.S. Bureau
of the Census, Statistics of U.S. Business. See: http://www.sba.gov/
advo/research/dyn-b-d8905.pdf. This data series
runs from 1989 through 2005 only.
As striking as these figures are, the role of small business as a
job creator during recessions is even more remarkable. The year-by-year
table (based on the same data sources) shows the impact.
As Figure 2 shows, in the recession years of 1990-1 and 2000-2002,
small businesses created all net new jobs. In fact, one can say that
small businesses created more than 100 percent of all net new jobs,
since large companies were actually shedding jobs during these periods.
In 2001-2, at the trough of the recession, more than two million net
jobs disappeared at large companies.
Moreover, this pattern of large business job loss persists until
well after the country has ended its recession by statistical measures.
In 1992, large companies continued to shed jobs. In 2002-3, they shed
more than a million of them. Small businesses offset all of these large
business job losses in 1992 and again in 2002-4. For these years, small
business created 124 percent of all net new jobs, by offsetting the 25
percent loss in large business employment.
In other words, if recent history is any guide, we can look to
small businesses to do most of the hiring in this recession for now and
the foreseeable future.
This strongly suggests that supporting small businesses in stimulus
legislation is likely to have the maximum short-term and medium-term
payoffs on Main Street, and more broadly, on the population as a whole.
(The population as a whole seems to grasp this. According to a recent
Zogby Poll, 63 percent of the public believes that ``small business and
entrepreneurs will lead the U.S. to a better future'' while only 21
percent believe that ``large corporations and business leaders'' will
do so.\5\ )
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\5\ WE Media Zogby Poll, 25 February 2009, http://www.zogby.com/
news/ReadNews.cfm?ID=1678
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There are obviously many worthy objectives to be supported in the
economic stimulus legislation. It's unfortunate, however, that much of
the legislation seems to have overlooked this major point of economic
leverage.
SMALL BUSINESS AND SCIENCE AND ENGINEERING
Our focus today is on one aspect of how small business supports the
broader economy--its role as a technological innovator.
1. SCIENCE AND ENGINEERING EMPLOYMENT
One reason why small business seems to be getting better and better
at technological innovation is that it employs more and more scientists
and engineers. The trend over the past generation is shown in the chart
below.\6\
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\6\ National Science Foundation, Science and Engineering
Indicators, 2007.
Strikingly, there are now more scientists and engineers working in
smaller companies (38 percent) than in any other sector. Some 27
percent of U.S. scientists and engineers currently work for large
companies, 16 percent for universities, 13 percent for government, and
six percent for non-profits.\7\
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\7\ Ibid. (For a very thoughtful and nuanced analysis of this
shift, see the White Paper by SBIR Founder Roland Tibbetts that is
attached as an annex to this testimony.)
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The SBIR Program, which may be at least partly responsible for
small business' growing science and engineering firepower, has deployed
it to remarkable effect.
2. PATENTS
Since a major consideration at today's hearing is stimulating the
economy through science and engineering innovations, consider an
important but often overlooked measure of wealth and poverty--patent
productivity.
For a striking illustration of the relationship between patents and
wealth, we can turn to a recent economic study for the Federal Reserve
Bank by Paul Bauer, Mark Schweitzer and Scott Shane.\8\ The authors
measured eight determinants of personal income growth per capita, in
the 48 contiguous states of U.S., from 1939 to 2004.
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\8\ ``Altered States: A Perspective on 75 Years of State Income
Growth,'' Federal Reserve Bank of Cleveland, Annual Report 2006. 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\9\ below shows the power of this indicator in each of the
48 states studied:
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\9\ Ibid., p. 46.
Broadly speaking, the above chart can be read from left to right.
States with lagging growth over the period studied are on the left;
those with higher growth, on the right. Remarkably, the patent
indicator is the top predictor of both wealth and poverty. States with
low patents per capita tend to be poor. Those with higher patents per
capita tend to be affluent.
Overall, patents are more closely associated with economic growth
than education, industry structure, or any of the other variables
tested.
This finding underscores the importance of an earlier study of
patent productivity, which showed that small technology-based companies
produce 13 times more patents per employee than larger technology-based
companies, and that these smaller company patents are twice as likely
to be among the most cited in other patent applications.\10\
---------------------------------------------------------------------------
\10\ Diana Hicks, Small Serial Innovators: The Small Firm
Contribution to Technical Change, CHI Research, 2003, produced under
contract to the Small Business Administration, contract SBA01C-0149.
---------------------------------------------------------------------------
Firms in the SBIR Program are among the most prodigious producers
of patents in the United States. Figure 6 below, provides a
glimpse.\11\
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\11\Innovation Development Institute, 2009, from U.S. Patent and
Trademark Office data.
As of today, more than 60,000 patents have been issued to SBIR
companies--despite the fact that the program is only 25 years old. A
relatively modest program, representing only 2.5 percent of extramural
R&D spending at 11 federal agencies, SBIR nevertheless is accounting
for 40 percent more patents than all U.S. universities combined, and is
generating new patents at an average speed of 13 a day.
SBIR also does a remarkable job of spreading contract dollars, and
therefore the resulting patents, around the country. By way of
contrast, in 2005 about 70 percent of venture capital investments went
to just five states--versus only 45 percent of SBIR contract dollars.
The ``middle 20'' states--those ranked 15-25 in SBIR contract dollars--
obtained 25 percent of SBIR dollars but only six percent of VC dollars.
Although venture capital investments exceed SBIR funding by about ten
to one, there were still 15 states that received little or no venture
investment--and five states that received virtually none. SBIR dollars
reach virtually every state.\12\
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\12\ SBIR data from U.S. Small Business Administration,
www.sba.gov/sbir/2004SBIRStateChart.xls Venture capital data from
National Science Foundation, Science and Engineering Indicators, 2006,
Table 8-42.
3. INNOVATION QUALITY
Is the quality of SBIR innovation output matched by its quantity?
Are these innovations really ground-breaking and economically
significant?
From the perspective of the Federal Government, for whom the SBIR
research is performed, the quality would appear to be quite high. The
U.S. Government Accountability Office has studied the SBIR Program on
at least ten occasions since the program began, and offered positive
assessments in each case.\13\ So have several earlier reports by the
National Academy of Sciences and the National Academy of
Engineering.\14\
---------------------------------------------------------------------------
\13\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; Small Business Innovation Research,
GAO report 06-565, April 2005; Federal Research: Observations on the
Small Business Innovation Research Program, GAO Report GAO-05-861-T,
June 28,2005.
\14\ Conflict and Cooperation in the National Competition for High
Technology Industry, National Academy of Sciences, 1996; Small Business
Innovation Research Program: Challenges and Opportunities, Board on
Science, Technology and Economic Policy, National Academies of Science
and Engineering, 1999; SBIR: Assessment of the Department of Defense
Fast Track Initiative, STEP Board, National Academies of Science and
Engineering, 2000.
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One indication of the importance of a patent is the number of times
that it is cited in other patent applications. A study of companies
that were ``serial innovators'' (with 15 or more patents over five
years), found that over one-third were small companies, many of them
SBIR companies. Patents from these small ``serial innovators'' were
cited 28 percent more often by other inventors, were twice as likely to
be among the top one percent of the most widely cited patents, and were
twice as closely linked to scientific research than were the patents
from the large ``serial innovators.'' \15\
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\15\ Hicks, Small Serial Innovators: The Small Firm Contribution to
Technical Change, op. cit.
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From a different perspective, the Information Technology and
Innovation Foundation recently analyzed the annual lists of the 100
most technologically-important innovations, as selected each year by a
panel of judges for R&D Magazine.\16\ In the chart below (Figure 7),
the authors compared the performance of innovations from SBIR companies
on these annual assessments, with those from Fortune 500 companies and
universities.
---------------------------------------------------------------------------
\16\ Fred Block and Matthew Keller, Where Do Innovations Come From?
Transformations in the U.S. National Innovation System 1970-2006,
Information Technology and Innovation Foundation, July 2008.
As the chart indicates, for the past decade, about one-fourth of
the most important technological innovations in the Nation have been
---------------------------------------------------------------------------
coming from the SBIR Program. Or, as the authors themselves put it:
``The results show that these SBIR-nurtured firms consistently
account for a quarter of all R&D 100 award winners--a powerful
indication that the SBIR Program has become a key force in the
innovation economy of the United States.'' \17\
---------------------------------------------------------------------------
\17\ Ibid., p. 15.
It perhaps bears repeating that this is surely a unique level of
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economic performance for such a relatively small federal program.
4. WHY?
The metrics suggesting both the value and the profusion of SBIR
innovations raise a very important question: Why? Why would a modest
program produce such outsized results?
The National Academy of Sciences team studying the SBIR Program
wondered about that, too.
Part of the answer, the NAS says, can be found in the scrupulously
meritocratic design of the SBIR Program. SBIR is founded on
competition, peer review, and the milestones of Phase I, Phase II and
Phase III that are gated by rigorous demonstrations of scientific
validity and commercial potential.
In their recent report on the SBIR Program at the National Science
Foundation, the Academy also suggests that a new and different model of
innovation appears to be emerging from the SBIR Program.\18\
---------------------------------------------------------------------------
\18\ An Assessment of the SBIR Program at the National Science
Foundation, National Academy of Sciences, 2008, page 17. See: http://
www.nap.edu/catalog/11929.html. As noted in Footnote 13 of this study,
``This view was echoed by Duncan Moore: `Innovation does not follow a
linear model. It stops and starts.' '' See also National Research
Council, SBIR: Program Diversity and Assessment Challenges, Charles W.
Wessner, ed., Washington, DC: The National Academies Press, 2004, p.
24.
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Figure 1-1 below shows the ``Linear Model of Innovation'' that is
presumed to occur in most R&D programs, whether public or private:
basic research gives way to applied research, which in turn is
developed and commercialized.
The NAS believes that something very different is happening in
SBIR.
Figure 1-2, just below 1-1, attempts to describe the new process--
as a ``Feedback Model of Innovation.'' At each step of the way between
basic research and commercialization, feedback loops evolve, altering
the previous and succeeding steps. These loops recalibrate and revise
innovations, delivering much more commercializable end products. But
the process doesn't end there. The commercialization step itself,
rather than being the end point, is the source of yet another feedback
loop--leading to new characteristics, tradeoffs, and unanticipated
applications. Thus, while the ``Feedback Model'' appears to be more
complex than the ``Linear Model,'' it is actually far more efficient at
delivering usable innovations.
Notably, the NAS extracted this analysis and schematic from its
report on the National Science Foundation and reiterated it in the
final report on the SBIR Program as a whole.
Further insights into the why the design of SBIR Program seems to
work so well are provided throughout the Academy reports on the various
federal agency SBIR Programs, as well as in the White Paper on the SBIR
program written by its founder, Roland Tibbetts, which is attached to
this testimony as an annex. The Tibbetts paper, in particular, focuses
on the way in which SBIR is aligned with the motives of scientists,
inventors, and investors. (Tibbetts also comments on how changes that
were proposed by H.R. 5819 of the last Congress would have weakened the
foundations of the SBIR Program's success since 1982.)
THE NAS EVALUATION OF THE SBIR PROGRAM
This committee was instrumental, during the last SBIR
reauthorization cycle, in directing that the National Research Council
should conduct a broad scientific review of the SBIR Program. This
ambitious effort, which the NRC assigned to the National Academy of
Sciences, cost over $5 million and took more than five years. The
result was a series of agency studies, and a broad program overview,
that offers the most comprehensive analysis of SBIR--and for that
matter virtually any federal science and technology program--ever
undertaken.
Completed just this past January, the NAS findings paint a
remarkably positive portrait of the Program. The studies and even the
summaries are extremely rich and detailed, and worth careful
consideration. SBTC's own precis of the research, which we hope and
believe is a fair overview of the studies, follows:
The SBIR program is sound in concept and effective in practice.
The SBIR is an efficient program that is successfully achieving
important public objectives.
SBIR's results meet the key Congressional objectives for the Program.
(1) Stimulating technical innovation.
The NRC study found that, by a wide variety of metrics, the program
is contributing to the Nation's stock of new scientific and technical
knowledge.
(2) Using small business to meet federal research and development
needs.
The NAS study found that the SBIR program objectives are aligned
with, and contribute significantly to, fulfilling the mission of each
of the studied agencies. This is also true across a wide variety of
metrics. The inherent flexibility of the SBIR Program makes it
especially valuable to agencies with widely-varying missions.
(3) Increasing private sector commercialization of innovations.
SBIR is successfully commercializing innovations. Commercial
success includes sales, license revenues, R&D investment, research
contracts and the sale of equity. The average sales per Phase II
project were $2.4 million and the average investment for Phase II was
$1.5 million. Given the inherent technical risks involved, ``the fact
that a high proportion of the projects reach the market place in some
form is significant, even impressive.''
(4) Supporting the growth of a diverse array of businesses.
SBIR provides market access, funding, and recognition to a wide
array of businesses, including those owned by women and minorities.
Conclusions:
The program is achieving its goals of successfully increasing
innovation, encouraging participation by small companies in federal
R&D, providing support for small firms owned by minorities and women,
and resolving research questions for mission agencies in a cost-
effective manner.
Recommendations:
No fundamental changes should be made to the program.
The basic Phase I, Phase II, Phase III structure
should be preserved. Allowing firms to apply directly for Phase
II would be detrimental to the program.
Experimentation by the agencies, such as the Fast
Track program should be encouraged.
Agencies should be encouraged to develop pilot
programs to experiment with potential improvements to the SBIR
program.
Funding mechanisms beyond Phase II, such as the NSF
Phase IIB program and NIH continuation awards, could be adopted
at other agencies.
Any such ``Phase IIB'' type program should be
carefully monitored and evaluated to ensure the result is
positive.
The standard limits on award size have not changed
since 1995. The Phase I limit should be increased to $150,000
and Phase II should be increased to $1,000,000.
The processing periods for awards vary substantially
by agency. Agencies should also specifically report on
initiatives to shorten decision cycles.
Multiple award winners do not appear to be a problem.
Awards should be based on merit. Setting an arbitrary limit to
the number of awards that a company receives is neither
necessary nor desirable in light of the contributions made by
these firms.
Additional attention should be paid to outreach
efforts, including the existing FAST and Rural Outreach
programs, and further outreach to women and minorities.
Some internal tracking mechanisms should be upgraded,
and Congress should consider a provision for additional program
funds for management and evaluation.
Should Congress decide to allocate additional funds
to the SBIR Program, those funds could be utilized effectively.
SBTC RECOMMENDATIONS FOR THE REAUTHORIZATION OF THE SBIR AND STTR
PROGRAMS
Congress could take no action with a better promise of stimulating
the U.S. economy over the short-, medium-, and long-term than to
reauthorize and strengthen the SBIR Program.
SBTC specifically recommends that Congress:
1. Make the Programs permanent. SBIR has just been given a strong
endorsement by one of the most extensive studies of any federal program
ever undertaken by the National Academy of Sciences. This follows three
previous studies by the NAS and the National Academy of Engineering
that positively evaluated SBIR, as well as ten favorable GAO studies.
SBIR is now the largest single source of patents in the United
States, accounting for 40 percent more patents annually than all U.S.
universities combined. It is also the source of a quarter of the most
important technological innovations in the United States each year. It
is generating, directly or indirectly, billions of dollars in wealth,
far outstripping its cost.
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.
If this is not a successful and cost-effective federal program, one
may reasonably ask what is.
SBIR should not have to re-justify its existence every three or
four years. Delays in Congressional approval of reauthorization that
were 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 a permanent program,
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 a half 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. A portion of this increase should be allocated to expanding
SBIR commercialization programs in the federal agencies, such as the
Defense Department's highly-successful Commercialization Pilot Program
(CPP).
3. Take the steps recommended by the National Academy of Sciences to
strengthen the Program.
The NAS studies include several valuable recommendations for
strengthening the management of SBIR Programs in the various agencies,
and for improving SBIR outreach, among other subjects.
The NAS also recommends that SBIR Phase I awards be increased to a
limit of $150,000 and the Phase II awards to $1.25 million limit, to
adjust for the inflation and cost increases that have occurred since
the last such adjustment 14 years ago.
At the same time, the Academy correctly notes, Congress must be
careful not to extend the dollar limits too high. Companies with
promising technologies will be driven out of the Program if fewer firms
and fewer innovations absorb more of the available dollars in each
funding cycle. (Multiple awards to single firms in single funding
cycles would have a similar effect.) Awards in excess of statutory
limits, or multiple awards to a single company during a single award
cycle, should be approved in advance on the basis of a written
justification and a higher level of review. They should be monitored
and compared to the performance of other contract awards.
SBTC agrees with the Academy on giving federal agencies ample space
to experiment with ``Phase IIB'' and similar development efforts.
4. Maintain the integrity of SBIR as a small business program.
At various times in the past, legislation has been proposed that
would allow large firms and universities, either alone or acting
through intermediaries, to have unrestricted access to the SBIR
Program.
Such an action would violate the foundation of small business law
in this country, and more than half a century of legal precedents. It
would also violate the ``common sense'' understanding of most citizens
about the proper definition of a small business and the proper use of
taxpayer dollars intended for small business.
The most persistent controversy in this area has been about the
conditions under which venture capital companies can participate in the
SBIR Program.
SBIR receives only 2.5 percent of extramural federal R&D. SBTC sees
no reason to divert any of these funds to large companies that are
eligible for the other 97.5 percent. We have, however, repeatedly
offered to work with the large venture capital companies that are
seeking innovation funding from Congress, to try to address their
concerns in other ways. The matching of VC investments in biotechnology
with funds from the National Institutes of Health, which the VC and
biotechnology industries reportedly are seeking from Congress and NIH,
represents one such path.
A further danger, should large VCs be permitted to hold majority
interests in SBIR companies, is that absent extensive monitoring and
evaluation, such VC control could quickly shift from be allowed to
being required, as a selection criteria for SBIR contract awards. A
concentration of large VC influence in the SBIR Program would also skew
SBIR dollars more toward the handful of local areas, such as Boston and
San Francisco, where most VC investments tend to be directed. As noted
on page 7, above, the SBIR Program is far more egalitarian in its
investments.
SBIR/STTR and the Universities--expanding a successful partnership
The STTR Program, enacted in the 1990's, provides an important
adjunct to SBIR by facilitating partnerships between small, technology-
based businesses and Universities. Like SBIR, STTR offers an important
venue for public-private, and nonprofit-private, partnerships in
pursuit of technological innovation. SBIR researchers often have ties
to universities, and STTR researchers always do. The National Academy
of Sciences report found that SBIR collaboration and subcontracting
with universities was widespread. The STTR program has allowed this
collaboration to grow.
In a separate and revealing study, the New England Innovation
Alliance (NEIA) surveyed in depth 17 of its members that are
participating in the SBIR Program. The NEIA study found that these 17
SBIR companies had 175 subcontracts with 101 different universities
worth over $28 million, while employing 243 university professors and
graduate students.
So this avenue of collaboration offers the promise of a classic
win-win situation.
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.
As the shift in science and engineering talent from large companies
to small ones makes clear (see Figure 4), large firms are a declining
source of employment for university science and engineering graduates.
In fact, large firms out-source many of these jobs to foreign
companies.
At the same time, however, the growth in science and engineering
talent in small businesses makes SBIR companies a crucial source of
future employment opportunities for University science and engineering
graduates. Such attractive and realistic opportunities to collaborate
with leading-edge technology companies can help Universities attract
students to science and engineering careers in the first place.
Moreover, the STTR program is a locus of contracts and subcontracts
that provide financial support to Universities.
A more robust STTR Program would hold significant promise of
reinvigorating the growth in University patents (see Figure 6) and in
improving University performance in developing key innovations (see
Figure 7).
To 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 in
FY 2010 and 0.9 percent in FY 2011 and thereafter.
Annex 2: Jere W. Glover Biographical Statement
Jere Glover is an attorney with the Brand Law Group in Washington,
DC, representing small businesses on SBIR-related issues. He also
serves as the Executive Director of the Small Business Technology
Council (SBTC), a group of small high tech companies most of whom are
involved in the Small Business Innovation Research (SBIR) program. He
served on the Board and the investment committee of the
Telecommunications Development Fund and is a Board member of Homeland
Ventures Partners. In 2006 Jere was selected as SBIR Man of the Year.
As one of the creators of the SBIR program, Jere's experience with
SBIR is extensive. He was Counsel to the House Small Business
Committee, where he directed an extensive set of hearings on small
business and innovation that laid the ground work for SBIR in 1978. He
was also the lead-off witness before Congress in 1982 when SBIR was
first proposed. He was later Counsel to the Senate Small Business and
Entrepreneurship Committee, where he worked on Small Business
Technology Transfer (STTR) Program Reauthorization. Throughout SBIR's
existence, he has been one of its most active supporters.
Jere has a unique blend of private and public sector experience. A
former CEO and attorney in private practice, Jere also spent many years
in government service, most of it focused on minimizing the regulatory
burden on business. For more than six years, he was the Federal
Government's lead defender of small businesses in the regulatory
process. In that capacity, he systematically analyzed hundreds of
regulatory actions by federal agencies, identifying flaws and
shortcomings in many of those actions and helping the affected
businesses seek relief, without undermining the broad public purposes
of the regulations. The work that Jere directed saved the private
sector more than $20 billion in annual regulatory costs, and it cut a
wide swath across many types of businesses--including mining, fishing,
telecommunications, transportation, financial services and agriculture.
He has testified before Congress over 30 times and appeared in over 100
agency proceedings, including rule-makings, adjudications, and
enforcement proceedings.
In the private sector, Jere previously was the CEO or principal of
a biotech company, a medical technology company and a group of medical
clinics. Since re-entering the private sector last year, he has become
the managing director of another medical technology company and counsel
to a variety of SBIR and technology companies.
Jere obtained his undergraduate and law degrees from the University
of Memphis and an L.L.M. in Administrative Law and Economic Regulation
from George Washington University.
Annex 3: SBIR White Paper, by SBIR Founder Roland Tibbetts
REAUTHORIZING SBIR: THE CRITICAL IMPORTANCE OF SBIR AND SMALL HIGH TECH
FIRMS IN STIMULATING AND STRENGTHENING THE U.S. ECONOMY
Roland Tibbetts
SBIR Program Manager, 1976-1996
National Science Foundation
The proposed Small Business Innovation Research (SBIR)
reauthorizing legislation (H.R. 5819) is of great concern to thousands
of small technology-based firms and should be of similar concern to
Congress.
The bill would significantly weaken the basic elements of the SBIR
program by:
(1) Cutting the number of awards, probably in half. Far larger SBIR
awards would be allowed. Companies could receive multiple development
awards. Agencies could waive even the higher award caps. Yet the
overall size of the program would not be increased. Together, these
steps would eliminate funding for a large number of innovative and
breakthrough ideas.
(2) Allowing firms to avoid SBIR's competitive ``proof of concept''
step and move directly to much larger ``development'' awards. This is
an irresponsible policy for a program that is funding very high-risk
ideas. The ``proof of concept'' requirement, Phase I of SBIR, is
necessary to weed out ideas that are not feasible, so that large sums
of taxpayer dollars aren't wasted on them.
(3) Substituting SBIR's R&D funding for private investment capital in
the commercialization phase of SBIR (Phase III). Phase III is a market-
based reality check. A project that can't attract private-sector
funding or mainstream government procurement contracts at that point
should not be pushed forward with more R&D funding from SBIR.
(4) Threatening the integrity of SBIR as a small business program by
weakening the safeguards against large business access to SBIR funds.
With each of these changes, the needs of the SBIR Program, and the
history of its best practices, call for doing exactly the opposite of
what the bill proposes.
What SBIR Is Designed to Do
SBIR was created to address a need that is still critical: to
provide funding for some of the best early-stage innovation ideas--
ideas that, however promising, are still too high-risk for private
investors, including venture capital firms. As happened with Microsoft,
Apple and hundreds of other firms, technology innovations can mushroom
into major products and businesses once private sector investors make a
commitment. But they'll only make that commitment once the innovation
is well along. In 2005 only 18 percent of all U.S. venture capital
invested went to seed and early stage firms while 82 percent went to
later stages of development that are lower risk.
The positive role of innovative small technology firms in the
economy is evident not only in the dozen or so geographic strongholds
of tech entrepreneurship across the Nation, but also in the increased
productivity of the companies that buy and use the innovations. That is
perhaps the most compelling reason to maintain a strong, effective SBIR
Program.
SBIR addresses a paradox at the heart of innovation funding:
capital is always short until the test results are in. At the idea
stage, and even the early development stage, the risks are too great
for all but a few investors. But innovations can't get beyond that
stage without funding.
There is another paradox, too. The Federal Government has R&D needs
that, for a variety of reasons, will never interest private sector
investors. The business models of most investors focus on generating
many sales to many customers. When the government is the only buyer,
and buys on a one-time or very occasional basis, investors get
skittish.
Large government contractors typically aren't interested in such
R&D, either. The amounts involved are too small, and most large
contractors don't have early-stage R&D capabilities anyway.
So needed innovations in fields like defense, space exploration and
homeland security may not occur. The same can be true for innovations
in science, especially the health sciences, when the projected patient
populations are small or the innovation may only be needed once per
person (such as with a vaccine).
SBIR was designed specifically to solve both of these paradoxes:
First, it provides a transparent, competitive and reliable source
of early-stage funding for R&D, based entirely on scientific merit.
Today, SBIR is the Nation's largest source of such funding.
Second, it allows the government itself to obtain needed R&D that
the private sector could not otherwise provide.
Why SBIR Has Been Successful
SBIR's success, as recently documented by the major National
Research Council/National Academy of Sciences study, is rooted in a
number of the program's characteristics.
Drawing on small business scientific talent. SBIR draws on the six
million scientists and engineers that are now employed by small firms.
That compares to the five million employed by medium-sized and large
firms. In fact, small business employs more scientists and engineers
than large business, universities, federal labs, or nonprofit
organizations. A great many of these small business scientists and
engineers are entrepreneurial. To see the entrepreneurial zeal of these
technology-based small companies, one has only to look at the extent to
which the SBIR Program and the Nation's venture capital companies--the
only important sources of risk capital for such companies--are swamped
with proposals. Or one can look at patents granted. The SBIR Program
accounts for more than 50,000 of them. Currently, it accounts for an
average of seven patents a day, which is more than all U.S.
universities combined. SBIR has given us Qualcomm, Symantec and dozens
of other highly successful technology companies.
Providing the primary source of government R&D funding for small
business. Despite their huge numbers of scientists and engineers, and
despite their well-documented science and technology successes, small
businesses have virtually no access to federal R&D contracts outside of
the SBIR Program. According to the National Science Foundation's annual
Science Indicators report, large firms receive 50.3 percent of federal
R&D, universities receive 35.3 percent, non-profits 10 percent, and
small businesses just 4.3 percent. SBIR accounts for over half of that
4.3 percent. This is an astonishingly small figure for a nation that
expects technological innovation to lead it to new economic heights,
but there it is. For small companies, SBIR remains the only game in
town, just as it was in 1983, when it began.
Adopting best practices.
In designing the SBIR program, I drew on my own experience as a
founder, director and treasurer of Allied Capital here in Washington
and as operational VP for two small tech firms, one of which grew to
600 employees before being sold to TRW. I read about 50 articles on
innovation and R&D management. I talked with a few dozen economists and
directors of research in large firms and universities. I met with ten
or so venture capitalists. I asked them, and others like the DuPont R&D
advisory committee, about best practices.
Best practices 1: managing portfolio risk. One thing everyone agreed on
was the need to manage R&D portfolio risk through diversification. With
the high risk involved in early-stage R&D, there is need to diversify
the federal investment by betting on many, rather than fewer,
technologies and ideas. (The R&D risk is high not only because of the
technical challenges but also because cutting-edge R&D requires
expensive equipment. Such R&D is the furthest away in time from the
market, and the market may change during that period.)
The size of SBIR awards and thus the dollars at risk per innovation
was therefore a major topic. Most of those I worked with in developing
SBIR agreed that the technologies involved were such inherently high
risks that smaller bets should be made on many projects before making a
few larger bets.
Best practices 2: making the largest number of awards possible. Making
many smaller awards was not only good risk management practice.
Virtually everyone I spoke with argued, and my own 20-year experience
as an SBIR Program Manager subsequently confirmed, that the economic
payoffs would be higher this way. Many smaller awards mean that more
ideas can be evaluated for their potential. More and better choices for
further development become available.
Probably a few thousand CEO's of small tech firms have talked with
me about SBIR over the years. In general, they liked almost everything
about SBIR, except the terrible odds against winning an award. Many no
longer submit proposals because of the large investment of time and
cost required to prepare a competitive proposal when only one in 15-20
receive the larger Phase II funding. Others still compete because there
are almost no alternative sources of such funding.
If there are fewer SBIR awards in the future, not only will fewer
technologies get evaluated and funded. Fewer companies will compete,
because the odds against winning will get even higher. I believe we
have been seeing some of this occur already at the National Institutes
of Health, where larger award sizes and fewer awards have been
accompanied by a fall off in applicants.
Best practices 3: creating scientific gates and milestones. Another
best practice that we adopted for SBIR was the use of science-based
gates and milestones before letting projects obtain more funding. Often
an idea can be found to be infeasible through the Phase I ``proof of
concept'' process. Other ideas show only a low probability of success.
No further expenditures should be made on such technologies.
Unfortunately, some companies always came to us seeking to obtain
as much SBIR funding as possible in both Phases I and II. Indeed,
during my 20 years as an SBIR program manager, we frequently heard such
requests from both the companies and the agency scientists and
engineers. However, no proposer was ever allowed to go directly to
Phase II. Even if they had done relevant work earlier, we expected
Phase I to show further progress. Our strict policy on this point
proved to be a good thing. The companies that argued that they had
already done the early R&D, and therefore should be able to go directly
into Phase II, almost always were unsuccessful when faced with
competition. Their requests had been sales ploys. A company's success
on earlier projects was no guarantee that its newest idea was
competitive. It is important to always remember that SBIR provides
funding for ideas, not for companies. Competitive, science-based
gateways are vital for identifying the best ideas.
Best practices 4: making SBIR a powerful economic development tool.
The past. The roots of SBIR actually go back to Congress' concern over
the ``Rust-Belt Recession'' of the 1970's. Unemployment in Detroit was
high, due to the growing sales of new smaller automobiles and machine
tools from Japan and Germany. The question was asked whether National
Science Foundation research was focused on economic needs. The result
was a new NSF program in applied research called ``Research Applied to
National Needs'' or RANN. For the first time in NSF history, ten
percent of a program budget--the RANN program budget--was set aside for
small business. This was the basis for the design and initiation of the
Small Business Innovation Program at NSF in 1977. That program grew
each year. Its successes led to legislation in 1982 that required all
agencies with an extramural R&D budget over $100 million (today 11 such
agencies) to participate. There were some early successes, such as
Symantec, that gave us confidence in the basic design of the program.
A little background here: Individuals and small firms are the
primary source of category-creating inventions and technical
breakthroughs. It is not the successful wagon company that invents the
automobile. And it's not the large business that risks up-ending its
business model and its product lines. Small company major economic
breakthroughs include the digital computer, microchips, the personal
computer, software, the successful cell phone, the internal combustion
engine, diesel engine, steam turbines (steamships and railroads), the
electric motor, typewriter, telephone, refrigerator, electric
transmission, phonograph, incandescent lights, vulcanized rubber,
pneumatic tire, photo plate, airplane, motion picture, anesthesia, x-
ray MRI; and even earlier the cotton gin, power looms, the sewing
machine, the mechanical reaper, and other agricultural machines.
Fast forward a few generations: The great technology-based economic
successes of the late 1970's and 1980's--along the Route 128 corridor
near Boston and in Silicon Valley--as well as the communications and
information technology companies that have proliferated since the
1990's, were the result of tens of thousands of scientists and
engineers annually opting to start or join small firms. Often this
included many of the best and brightest, the most creative, the most
entrepreneurial, and the shrewdest risk takers: exactly the qualities
that private sector investors, particularly venture capital companies,
were looking for.
Think about what happened as Internet-based businesses grew in the
90's. It wasn't all boom and bust. The core of the ``dotcom'' era was a
series of rapid and related breakthroughs in new and emerging
technologies. Most of the breakthroughs came from startup companies.
Five ``dotcom'' era startups are now in the ``20 Most Widely Held
Stocks in the U.S'': Intel (microchips), Microsoft (software), Apple
(personal computers), Oracle (relational databases) and Cisco Systems
(networks). In 2007 alone, their combined sales were $166 billion and
they employed 221,000. Add to this the thousands of smaller new firms
with directly related new products and services, both in the U.S. and
worldwide. Overall, the ``dotcom'' era was probably the largest
economic growth breakthrough in history.
The future. Just as we have seen small-business-driven technological
breakthroughs throughout our history, we can see them again in the
future. There are a whole series of new and emerging technology areas
where innovations could have powerful economic impacts. They include:
global warming and other environmental areas, such as
water purity;
alternative energy and energy conservation;
all kinds of security--national, military,
commercial, and economic;
ever-changing communications;
health care improvements and cost reduction measure;
disease prevention;
more effective education;
improved transportation;
agricultural challenges addressed;
nano- and miniaturization technology;
automated manufacturing; and many more.
All of these needs represent potentially large markets. Today, the
technological risks are still too great for most private investors. But
the technologies still need funding. SBIR is perfectly situated to
explore ideas in these areas.
SBIR funding is necessary because large firms, despite their public
relations, do not in fact invest extensively in these areas. Big
companies do not take major risks on unproven technologies, except with
massive government funding, such as in defense, NASA, and nuclear
power. Large firm R&D budgets focus on improving product
competitiveness and the processes for fabricating their goods, solving
specific problems, and overall growth in sales and profits.
Universities and non-profits also cannot raise high-risk money for
private sector technological innovations.
The mechanism. Generally only small high-tech firms can raise
sufficient amounts of high-risk capital to pursue commercially and
economically relevant innovations. The key reason for this is that only
small companies can realistically offer the promise of their stocks
multiplying dozens of times. It's the prospect of that exponential
growth in stock value which makes the rewards worth the risks to
investors.
When SBIR is guided well, it fosters breakthroughs by such small
companies. These breakthroughs get the technologies to the point where
they can deliver great economic benefits.
At that point, when the scientific evidence is starting to come in,
innovations attract not only additional VC investments, but also
investments by individual ``angels,'' mutual funds, insurance
companies, endowment funds, and others. Longer-term bank lending
becomes possible. All of that financing lays the foundation for stock
offerings. Then these stock offerings attract more capital. This
business growth, plus the revenues from subsequent product sales and
spin-offs, is the money that stimulates the economy.
Successful SBIR-funded technologies can thus generate many
multiples of their federal investments, often in a much shorter time
frame than traditional investments.
Again, the key steps are: casting the net as widely as possible,
attracting entrepreneurial individuals and small companies, insisting
on technical feasibility in a competitive and transparent environment,
and then moving to a commercialization phase that requires private
sector investment equaling or exceeding the federal investment.
What To Avoid in the Future
Avoid needless disruptions to the SBIR Program.
SBIR has proven itself over 25 years. It is known and understood by
hundreds of thousands of scientists and engineers, most of them in
small firms, but many of them also in the 11 participating federal R&D
agencies, in universities, in venture capital companies, in larger
firms, in Congress and in other parts of government, including the 50
State governments and a number of foreign countries. SBIR is
successful. The National Research Council/National Academy of Sciences
comprehensive assessment of the SBIR program last year confirmed the
effectiveness of SBIR along the broad general lines that it exists
today. Other studies, too, such as those by GAO and by Professor Josh
Lerner of Harvard Business School have been highly favorable. No
reputable independent study in the past 25 years has called for major
changes in SBIR.
Rather than implementing the constructive recommendations offered
by the NRC/NAS study, the House-passed bill (H.R. 5819) mandates a vast
upheaval in SBIR. Such a re-write of the program would make the NRC/NAS
changes far more difficult to execute. How, for example, can the agency
Advisory Committees that the study recommends do their work when
agencies in the program would be spending the next few years redrafting
all their SBIR program rules and retraining all their personnel?
Worse, the extensive reworking of the program would confuse
everyone who uses the program--all those people in the small firms,
universities, VC firms, large companies, State programs, and Congress
that tap into the program. It would lead to lengthy award delays as the
program is retooled in one agency after another.
Small technology-based companies will suspect, probably correctly,
that all these changes will self-destruct and that SBIR will have to be
re-tooled again in a few more years. So they'll hold back and shift to
other activities. This will intensify the upheaval.
And for what? H.R. 5819 is designed to sharply increase the amount
of SBIR funding that goes to maybe half the current number of
companies, and to explore perhaps half as many promising ideas. This
bill is more like special interest legislation than national interest
legislation.
All available evidence suggests the major changes proposed by H.R.
5819 would be highly detrimental to SBIR's mission and effectiveness.
Congress has never examined the full implications of these changes and
should not embark on them without doing so. Unraveling SBIR now, at a
time when the Nation urgently needs the economic boost that the program
can provide, would be a national tragedy.
Avoid excessive increases in award sizes.
SBIR is not intended to pay for the entire R&D costs required for
every project. Some ideas could require tens of millions and even
hundreds of millions of dollars ultimately. The purpose of SBIR, as
stated earlier, is to lower the R&D risk to the levels that can attract
private investment.
H.R. 5819 triples the Phase II award cap, making it $2.2 million.
The bill would also allow agencies to make multiple Phase II awards,
and even to waive the $2.2 million cap. One effect of doing all this
will be to divert tremendous amounts of energy to negotiations about
how much of an award each project will get. It is difficult, unwise and
unfair to most small firms and program officers to have to judge how
much to request or award over such a vast range of dollars. Determining
the award size will become a time consuming negotiation, complicated by
questions of fairness to other participants. Those other applicants
often will be equally qualified, and their projects will always be in
need of more money. Ultimately, the size of many awards will end up
being decided by salesmanship and personal connections, not by science.
This will be a very corrosive influence on SBIR.
Just as important, larger awards reduce the number of ideas that
can be funded. An $8 million Phase II award, if cut back to $1 million,
could free up funding for seven other $1 million Phase II awards. Or,
that $7 million difference could fund 35 ``proofs of concept'' ideas at
$200,000 each. Similarly, a $1 million Phase I ``proof of concept''
award eliminates the possibility of four others at $200,000 each. We
need to remember that research on innovative ideas at the idea stage is
often primarily a one person job.
Avoid bypassing Phase I.
The foundation of the SBIR program is competition and openness.
Take away the need to prove an innovation against other worthy
innovations, in an above-board competition, and SBIR will degenerate
into salesmanship and influence-peddling. Its genuine scientific
accomplishments will diminish, year by year. If companies are allowed
to apply directly for Phase II funding, SBIR will become little more
than a traditional procurement program, not an innovation program.
Phase I must not be by-passed; it is the seed bed of the entire SBIR
Program.
Avoid using SBIR funds for commercialization.
If an SBIR firm cannot obtain a commercialization commitment from
private sources, or from federal agencies (using non-SBIR funds), that
at least equals the SBIR investment in an innovation, then SBIR's
involvement in that innovation should end. The far more pressing public
need is to fund additional recommended early-stage innovations, not to
keep projects afloat that cannot attract financial support from the
government or the private sector.
If SBIR award levels rise moderately to keep pace with inflation,
an approach that the NAS/NAS study recommended, and that I agree with,
then the SBIR investment in an early-stage technology idea should not
exceed $1.2 million ($200,000 for Phase I and $1 million for Phase II).
An innovation that cannot match or exceed that $1.2 million in the
commercialization phase (Phase III) of SBIR, using non-SBIR funding,
should not be rewarded with more SBIR funding.
In other words, no SBIR funds should be spent for Phase III. SBIR
dollars are urgently needed to support additional promising ideas and
to keep the high-risk SBIR portfolio diversified. If an agency feels
that an innovation deserves financial support beyond a single Phase II
award, then it can provide this further investment with non-SBIR
funding. An agency that lacks that much faith in an innovation
developed under its own guidance should not expect the taxpayers, via
the SBIR program, to supply that faith.
Avoid steps that would diminish the small business character of the
program.
Large companies view innovation much differently than small
companies. A large company wants to protect its product lines and its
customer bases. It looks for incremental innovations that make those
existing products a little better and a little cheaper to produce. It
looks for new products that are familiar and comfortable. For large
companies, ``re-defining'' types of innovations are frightening. They
upset settled ways of doing business. the Nation needs both incremental
innovations and quantum-leap innovations, but right now and for the
foreseeable economic future, it needs those out-sized innovations the
most. SBIR can deliver sweeping innovations, but to do so it must avoid
taking on the coloration and biases of large companies.
Even if there were only a modest national need for ``out-of-the-
box'' innovations, there would still be a powerful need for SBIR,
because nothing else in the country, and certainly nothing else in the
Federal Government, supports early-stage innovation by small companies.
Despite having more scientists and engineers than large business,
universities, nonprofit organizations, or the Federal Government
itself, small business gets only 4.3 percent of federal R&D dollars.
And SBIR accounts for over half of that. Those other institutions draw
more than 90 percent of federal R&D dollars. And here's the rub: there
aren't any other sources of that early-stage innovation funding for
small business. Capital for small business innovation research is so
short in the United States that SBIR rapidly became, and remains, the
largest source of it.
I come from a long and deep background in venture capital and I am
a great believer in it. SBIR won't be nearly as successful unless VCs
can participate in it. But VCs that directly or indirectly report back
to large companies shouldn't be in Phase I or Phase II of the SBIR
program. Nor should VCs that are big companies themselves.
VCs that are large firms in fact or spirit will inevitably focus on
companies more than innovations. That's fine in Phase III, but not
earlier. If big VCs get into Phase I and Phase II, they will push for
bigger bets on fewer companies. They will want to shift SBIR funding
away from high-risk Phase I ideas and toward Phase II development,
which is closer to market and therefore less risky for them. Sooner or
later, they will back SBIR funding for Phase III, which will also
offset some of their risk. And the kind of innovations they ultimately
favor will be those that big companies favor--safer and more familiar
ones, incremental rather than quantum leap. SBIR can do much more than
this. SBIR's current restrictions on big VCs are therefore wise. By
contrast, H.R. 5819's approach to this issue is dangerously unwise.
What to Do in the Future
We must meet the competitive challenge.
We are currently the world leader in small high tech firms, in
venture capital, and in basic research. These strengths are critical to
our future economic growth. But others are catching up.
China, Japan, and Western Europe are rapidly increasing their
investment in all three areas.
In a recent Harvard Business School Bulletin article, Jim Breyer,
founder of Accel Partners and past chairman of NVCA, stated that there
are now 6,000 venture-backed companies in Beijing alone! Accel has
recently closed its second Chinese venture fund for $510 million.
``Many of the very best [VC] firms in Europe and in Asia are affiliated
with firms here in the United States,'' he notes.
The UK has just announced a new innovation program. Dozens of
countries, notably including those that came here to study the SBIR
program, are now increasing their investment in innovations by small
technology firms, venture capital development, business schools, and
basic research.
Seeking out technology breakthroughs should be a far more important
objective of government R&D than ever before. The single most important
initiative we could mount would be to increase the SBIR to five percent
of extramural federal R&D in a series of steps.
Such an initiative would be opposed by the current recipients of
over 90 percent of federal R&D, like large companies, universities,
non-profits, and the organizations representing them, but these were
the same groups that opposed the creation of SBIR in the first place
and have opposed every modest increase in the program ever since. The
NAS/NAS report clearly shows that SBIR can successfully deploy
additional funding.
Think what the Internet and the telecommunications revolution have
done for our economy. This was accomplished primarily by small, high-
tech firms with major VC support. Now the investment risk is even
higher for initial funding. Seed-stage and early-stage VC support has
plummeted. If there are only rare investments at the idea stage, there
will be no storehouse of proven ideas ready for later development
funding. As bad as our economic problems are today, with budget
deficits, trade deficits, a shaky dollar, and so on, where would our
tax revenues, our productivity, and our technology leadership be today
if we had not had that technological revolution?
The SBIR program should be carefully strengthened.
The following are my recommendations to Congress about some
specific issues in the SBIR reauthorization:
1. Small firms with 500 or fewer employees should remain eligible for
SBIR awards as long as one or more large firms, including large venture
capital firms, do not acquire a majority of ownership. Broad
eligibility is necessary to identify and accelerate those innovations
that can lead to technical and market success and superior economic
growth. the Nation needs these potentially fast-growing firms far more
than those that do not grow. Outside investors can, and often must,
obtain more than 50 percent of the stock to protect their investment.
That should be acceptable in SBIR as long as these investors are
individuals and as long as the companies that they represent are small,
as is required today. However, these investors must not be controlled,
directly or indirectly, by large businesses. SBIR was created to
provide small companies with innovation funding. The program remains
too small to allow funds to be siphoned off by large companies, which
already receive over half of federal R&D.
2. There should be a set review period for Phase I results, as well as
a set period for Phase II proposals, based upon Phase I results. Some
firms are obtaining early reviews, before other firms. That is not fair
to others and should not be allowed.
3. Agencies should not allow companies to extend the break between
Phase I and II except for illness or similar reasons. On the other
hand, agencies themselves sometimes need to extend the breaks between
Phase I and Phase II due to budgetary issues. This should be allowed
when truly necessary, despite justifiable company concerns about cash
flow. In the end, SBIR's purpose is to fund ideas, not to support a
company's financial picture.
4. SBA is still the proper organization to manage SBIR, not the
Department of Commerce. Criticism of SBA over the years has been due in
great part to significant under-staffing by SBA management that should
not have been allowed. SBA's SBIR staff is less than half the level any
evaluator would recommend. When SBIR was a much smaller program, SBA
had eleven staff members assigned to it. Today, there are only four.
This headquarters staffing crisis is responsible for many complaints.
But some agencies, such as DOE, also grossly under-staff SBIR. This
leads to reductions in the number of award topics, in order to reduce
agency workloads, and to the temptation to use jumbo awards, far in
excess of the program's legal guidelines. I suggest some kind of a
brake on agency proposal cutbacks and stricter enforcement of the caps.
5. Breakthroughs occur in new and emerging areas that cannot be
predicted. I suggest that all agencies should allow innovation
proposals in all areas that are relevant to their R&D programs. This
openness to innovation proposals should be outlined in agency
solicitations. Many agencies think in terms of relatively few topic
areas. The original interagency innovation program essentially opened
entire agency R&D programs for proposals. Solicitations now have become
far more restrictive, which cuts against the national economic
interest. Breakthrough ideas that are relevant to an aspect of an
agency's R&D should be invited.
6. The commercial results of SBIR need to be strengthened. Awards
should not be made by agencies solely on the basis of technical merit
and without any consideration being given to downstream commercial
potential. Unfortunately, some SBIR firms favor agency approaches that
minimize commercial potential, because the firms are really only
interested in having their R&D ideas funded, not in commercializing the
results. I suggest that proposers and agencies require a
commercialization plan in both phases with a more detailed and specific
plan in Phase II. Reviewers should consider both technical and
commercial merit in their recommendations. This would include the
proposer's plan for obtaining non-SBIR funding for Phase III. I would
also support an SBIR funding cutoff for firms that win many Phase I
awards without advancing any of them to Phase II, along the lines of
what H.R. 5819 proposes. SBIR was specifically designed to force the
small firm to focus on innovation, technology breakthroughs, and
commercialization for their economic benefits to the Nation. Defense
and NASA should also seek SBIR projects that have potential Phase III
follow-on funding from non-SBIR sources. SBIR funds should not be used
for mainstream procurement.
7. Award sizes should be increased in size in this reauthorization, to
keep pace with inflation since the last adjustment in 1992. I recommend
increasing Phase I awards to a $200,000 cap and Phase II awards to a $1
million cap. These are both substantial amounts of risk capital to
explore technical feasibility. SBIR is not intended to build up the
capabilities of a company, based on considerations like its other
projects, but to explore the promise of the specific idea proposed. And
SBIR's budget must fund as many ideas as possible.
8. The SBIR set-aside should doubled as soon as possible. SBIR is a
major national asset. It accelerates technological innovation and
technology breakthroughs. It helps attract private sector investment to
the most promising innovations. It increases economic growth. We need
to reinvigorate the economy, and we need more technological innovation.
Yet despite the history of small company innovations, notably relating
to the Internet and to telecom, and despite the fact that there are six
million scientists and engineers employed by small firms, over half of
the government's external R&D, (50.3 percent) goes to large firms, 35.3
percent to universities, and 10 percent goes to non-profit
institutions. Small business firms received only that 4.3 percent.
(2005 figures from NSF.) Even a modest increase in the award caps, such
as I recommend, will diminish the number of SBIR awards and companies
unless Congress takes the sensible step that it took last time award
steps were increased--increasing the program size by a large enough
amount to offset the larger awards. Shrinking SBIR would be exactly the
wrong thing for Congress to do at this point in our economic history.
Finally, I must say that as I review the SBIR recommendations made
to Congress by the Biotechnology Industry Organization (BIO) and by my
former VC colleagues in the National Venture Capital Association
(NVCA), I am deeply troubled. It is mainly these two organizations that
are calling for the far-reaching changes in the program. Many of the
changes they are proposing would, in my judgment, significantly and
perhaps irreparably harm the program. I can understand the desire of
any organization to represent its members and prospective members, but
this is a case when we must think of the broader national interest.
Without open and competitive early R&D efforts, spread as widely as
possible, innovations will never reach the level of maturity that can
draw in venture capital or other follow-on funding. BIO and especially
NVCA should understand this. The need is to explore as many ideas as
possible and lower the risk as much as possible to attract follow-on
Phase III investment. There will be no shortage of great new
innovations to invest in if we allow SBIR to do its work in supporting
truly innovative small companies by objectively assessing which ideas
are wheat and which ones chaff.
Congress supported the current SBIR objectives with the first SBIR
legislation in 1982. The program is working well, but can be improved,
as stated in the comprehensive NRC/NAS report. SBIR can stimulate
thousands of high-risk, economically promising ideas like no other
program. Given the opportunity to work as designed, and as proven, SBIR
can make a major contribution to the national economic welfare.
Discussion
Chair Wu. Thank you very much, Mr. Glover, and while I may
not completely agree with all your substantive points, I sure
do wish that I could talk like you. I have always wanted to
have a southern accent. I have always wanted to be a western
cowboy, but there are just some things that aren't going to
happen in this life.
I do want to mention that I believe our Ranking Member
needs to step away at 3:15, and we have agreement that the
hearing may continue in the absence of any Republican Members.
And we look forward to Mr. Smith joining us, and I just want to
reiterate that Ms. Edwards will be stepping in for me
momentarily, and I aspire to return to continue some of the
discussion.
Now it is appropriate for us to open to questions, and the
Chair recognizes himself for five minutes.
Mr. Glover makes a point in both his oral and his written
testimony for a five percent set-aside, and I am sympathetic to
some set-aside increase, but I would like to get the views of
Dr. Berdahl, even though you have stated your preference, and
Mr. Greenwood and Dr. Rockey.
First of all, Dr. Berdahl, when you said that you would
like the program to stay the same, I assume you mean that you
want the set-aside to stay the same and that you are not
stating that you want every aspect of the program to stay the
same.
Dr. Berdahl. That is correct.
Chair Wu. Microphone, please.
Dr. Berdahl. We favor the current set-aside provision. We
also favor greater flexibility in the agencies' ability to
apply as many of my colleagues here at the table have also
recommended, but we believe that the current set-aside is
sufficient and that in many instances clearly adequate.
Chair Wu. Thank you very much, Dr. Berdahl.
Mr. Greenwood.
Mr. Greenwood. Thank you, Mr. Chair. Obviously it would be
in the interest of our company if we had a larger share of the
NIH pool available to us, and I would like to see that day
arrive.
Having said that, I served in the Congress when we doubled
the NIH budget. It was a good and noble thing that we did. I
think many of us failed to understand why providing level
funding, at best, after that was a mistake. We sort of took the
attitude that, you know, doubling--nobody gets their budget
doubled, so, you know, stop complaining about lack of growth.
So as--but it was a mistake, and we really need--we need to
continue to grow the NIH budget at a reasonable, at least
inflationary factor annually. I would presume that an effort to
get much beyond where we are now would meet resistance from my
friend to my right and his colleagues and perhaps such----
Chair Wu. And perhaps the friend on your left also.
Mr. Greenwood. Perhaps. But so perhaps if and when the time
comes that the Congress can see fit to significantly increase
the size of the pie, that would probably be the best time to
discuss changing the ratio of the slices.
Chair Wu. May I take your answer to mean in an ideal world,
yes.
Mr. Greenwood. Yes.
Chair Wu. Thank you, Mr. Greenwood.
Dr. Rockey, please.
Dr. Rockey. NIH would favor keeping the set-aside at the
current 2.8 percent level.
Chair Wu. Combined for both?
Dr. Rockey. Combined for both. We would find it sufficient
to meet our current mission. And as Mr. Greenwood had just
mentioned, we have appreciated that as the NIH budget had grown
and doubled essentially through--from 1998, to 2003, we were
able to also sustain a doubling in the SBIR Program as well. So
we feel that that level is appropriate just to meet the mission
of NIH and to support innovation in the small business
community.
Chair Wu. Terrific. Thank you very much, Dr. Rockey, and I
just want to say that I think everyone that I can think of in
this institution is a fan of NIH and for good reason. It is
because you all do really, really good work. I am also happy to
hear that you do support a 2.5 percent set-aside for SBIR and a
0.3 set-aside for STTR.
So that leads to my next question. In the American Recovery
Act, ARRA, better known as the stimulus bill, the additional
billions that NIH is to receive were specifically exempted from
the SBIR requirement.
Do you know if anyone from NIH asked for that exemption?
Dr. Rockey. Well, I can tell you that I had concerns. At
the time that the ARRA or the American Recovery and
Reinvestment Act was being discussed, I had concerns regarding
the ability to have enough SBIR/STTR applications in the pool.
Originally when we were discussing ARRA, the methodology that
NIH was going to use to use the ARRA funds was to take existing
applications, both in the SBIR Program and all of our programs,
and to fund those to get those funds out the door immediately.
Because of the decreasing numbers of SBIR applications and
the increasing success rate, the applications that we would
have had at hand were the 2008 applications, and we simply
would not have had enough applications to meet the----
Chair Wu. Well, let us return to the question. Did you or
anyone else at NIH ask for that exemption?
Dr. Rockey. I raised concerns. Yes.
Chair Wu. You raised that concern with Congress?
Dr. Rockey. No, I did not.
Chair Wu. Did someone from NIH raise that concern with
Congress?
Dr. Rockey. I can't tell you exactly how the process was.
The negotiation with----
Chair Wu. Someone did.
Dr. Rockey.--Congress. Congress has indicated that they
asked questions of if there were any concerns with the entire--
--
Chair Wu. Someone at NIH volunteered that?
Dr. Rockey. Yes. I expressed my concerns. How the process--
I can get back to you for the record of how the process----
Chair Wu. Yes. I would be very interested in hearing that
for the record.
Dr. Rockey. Sure.
Chair Wu. I have a letter for the record from two Senators,
Mary Landrieu and Olympia Snowe, and it is answered by a letter
from Acting Director Kington?
Dr. Rockey. Yes.
[The information follow:]
Chair Wu. And in it the Acting Director commits to leaving
the 2.8 percent set-aside for SBIR and STTR, that NIH intends
to adhere to that, and I take it that you agree with the
Director's answer in that letter.
Dr. Rockey. Yes. That letter he agreed to the 2.8 percent
out of our appropriation. We are also--NIH is also using ARRA
funds to support SBIR applications.
Chair Wu. ARRA is an appropriation.
Dr. Rockey. I understand that.
Chair Wu. Yes.
Dr. Rockey. So----
Chair Wu. So we are in agreement on that.
Dr. Rockey. Two point eight percent of our $30 billion
appropriation. Yes.
Chair Wu. But 2.8 percent of also the ARRA funds.
Dr. Rockey. Those funds according to the legislation were
not subject to the set-aside.
Chair Wu. But take the letter as a voluntary commitment to
maintain the 2.8 percent set-aside.
Dr. Rockey. Again, I guess it is in the interpretation of
the letter. I would not interpret the letter to say that. I
believe what he is saying is that he was----
Chair Wu. Then can we have a resolution of that----
Dr. Rockey. Sure. Sure.
Chair Wu.--disagreement perhaps with the NIH staff and with
the Senate Small Business Committee and the House----
Dr. Rockey. Sure.
Chair Wu.--Small Business Committee?
Dr. Rockey. Uh-huh.
Chair Wu. Deeply appreciate that.
Dr. Rockey. I appreciate that.
Chair Wu. Thank you for going over a little bit with me.
Dr. Rockey. Can I----
Chair Wu. Mr. Greenwood, do you have a further point to
make?
Mr. Greenwood. If I may, Mr. Chair. I have spoken with both
Senator Specter and his staff on this and we all know, Senator
Specter was instrumental in this, and my understanding is that
the language, while it may not require the NIH to set aside 2.8
percent, nor does it prohibit them from setting aside up to----
Chair Wu. That is----
Mr. Greenwood.--that----
Chair Wu.--my interpretation of the statutory language
also. It is a pretty clearly crafted carve out. Things like
that don't happen by accident, but it does seem quite
permissive.
With that I would like to recognize the Ranking Member for
five minutes.
Ms. Biggert. Thank you, Mr. Chair, and thank you to all the
witnesses for your testimony.
I have Argonne National Lab in my district, and I have a
lot of spin-off companies. And what happens so many times is
that they have a product that they are working on, and they get
through the original, the first couple of steps until they get
to, you know, they get through the demonstration project. And
then they want to get to the commercialization, and so they
might have gotten the loans and whatever, and then they come to
me to see what we can do to help them with that further step.
They can build the small demonstration project, but to go to
that full step, and obviously this is something that either
venture capital funding is necessary or they want an earmark,
which obviously is a lot of money, which makes that kind of out
of the question.
But what--and you don't want to expand the program. What
can we do for that ``Valley of Death'' that can bridge the gap
there? Is there any--there was some talk about gap funding or
whatever. Is there--Dr. Rockey.
Dr. Rockey. Sure. Again, we have a number of programs or,
excuse me, we fund a fast track program that allows Phase I and
Phase II. We also give a renewal of the Phase II, which in part
addresses this issue, although it only gets you a small way to
funding the gap, and that is why I believe that the NRC's
report which discusses the importance of venture capital, is
significant in this case, particularly for biomedical research
projects that may be very long term, very expansive, take a
long time between the--for the clinical portion of it. And so
we recognize that this is a serious issue and would like to
look at ways to provide some flexibility for that more
extensive research and development that needs to be going on.
Ms. Biggert. Do you see also with this economic situation
that we are in that the venture capitalists aren't as--don't
have the ability to fund, too? Are there some projects that you
see that are going, you know, that are not going to go through
because they don't have that?
Dr. Rockey. I think that is a possibility. I think what you
may be seeing is venture capitalists are not taking on new
ventures, and they are digging into the current investments
that they have made, and thus, if we had a way also to allow
them to also take on new venture as well, I think that would be
very beneficial to the whole small business community.
Ms. Biggert. Dr. Berdahl, why do you think that this was
put in with the affiliation, if a venture capitalist company
that have to include those members of the venture capital as
well as any other business that they are involved in counting
the number of employees?
Dr. Berdahl. Why was it put in----
Ms. Biggert. Yeah.
Dr. Berdahl.--in the initial legislation do you mean?
Ms. Biggert. Why, which really, I think, causes a lot of
these companies not to be able to get the funding as well as
venture capital.
Dr. Berdahl. I think that obviously the availability of
venture capital is harder to come by in the current climate. It
is more difficult for young scientists or investigators who
have developed something that has commercial value to be able
to move to the proof of concept and scaling-up phase of this
and the modeling that is required to assure a venture
capitalist that it has commercial value and potential
commercial success. And although the current SBIR Program
partially recognizes this issue, it often falls short of being
able to reach the level of development necessary to assure
investors that a product has commercial viability. And so I
think that we should be thinking very hard about how we can
push these new technologies over this ``Valley of Death'' or
across the gap, however anyone wants to describe it.
And that certainly, I think, is in the interest of the
Nation and in the interest of the scientists developing these
products. We would welcome the opportunity to think with the
Committee about and explore ways in which it might enable our
universities, which also are pretty hard hit by this economy
and don't have the resources in many cases to assist or the
ability to assist in driving this--these developments over this
gap.
So there should be, I hope, some way in which we can extend
the horizon for development of research advances and new
technologies.
Ms. Biggert. Do you think that--just to remove the counting
of the people that are----
Dr. Berdahl. I think that is a very important first step.
Absolutely.
Ms. Biggert. Is there--what would you do further then?
Dr. Berdahl. Well, possibly an additional program of some
sort. I don't favor increasing the set-aside as a means of
doing that because I am not sure that we have an indication
that there are----
Ms. Biggert. Yeah.
Dr. Berdahl.--enough----
Ms. Biggert. Thank you.
Dr. Berdahl.--able applicants.
Ms. Biggert. Mr. Greenwood, what--would you think that that
would solve the problem, just not to count the employees or the
venture capitalists or their affiliates?
Mr. Greenwood. I think that is part of the solution, and I
think it would reflect the original intent of the Congress. I
think that those affiliation rules really were interpretations
made by the bureaucracy at SBA and doesn't reflect--it reflects
neither the original Congressional intent nor I would think
current Congressional intent.
But certainly changing the rules with regard to the
majority-backed VCs is critical. Companies who are doing
important biomedical research that will have huge potential to
release, relieve human suffering and premature death face the
``Valley of Death'' whether they are or are not backed by a 50
percent plus venture capital dollars.
And keep in mind that what is important here is that these
companies, if you are a drug discovery company, you cannot get
very far down the road without VC funds, and what we are
talking about there is very rare that one venture capital firm
comes in and provides more than half of the funds for one of
these companies. It is usually the case that several of them in
the aggregate do. So maybe this one is providing ten percent
and this one is providing ten percent and so forth.
And none of that alters either the fact that these are
still small companies and B, that they are making, as judged by
the NIH reviewers, they are making important contributions to
research that has great potential for humanity.
Ms. Biggert. Thank you. Yield back.
Ms. Edwards. [Presiding] Thank you, and thank you to the
witnesses.
I want to explore if we could for a bit the implementation
of the SBIR Program, because it seems to me that obviously we
have one agency in front of us, a big one to be sure, but there
are wide variances in the implementation across the agencies of
the program, and I understand your testimony with regard to
flexibility and nimbleness across the agencies.
But it makes it really tough to gage from one agency to the
next whether there is consistency in terms of the
implementation of the program and whether we are getting to the
targeted need.
And so I wonder if you would comment about the possibility
or explore the possibility of some way that we can aggregate
data, that we have some way across agencies of analyzing the
effectiveness, the relative effectiveness. I mean, if NIH is
doing it in the right way that it makes sense for that agency,
what is the cross fertilization with other agencies?
Dr. Rockey. So we have, of course, we have a number of ways
as you mentioned, Congresswomen Edwards, regarding and
analyzing our own data and also through the SBA we have some
data available but at least will give you information on firms,
and we can do some analysis.
I think the issue about how the SBIR Program is implemented
in each agency is an important one, and it becomes particularly
important in your reauthorization, because I think it is good
to look at best practices and what has worked well for each
agency. I will say that the sectors that are being supported by
each agency are quite different, and thus ultimately the
flexibility that is allowed does help promote the particular
type of program that is necessary to support that kind of
sector. For example, the biomedical field that NIH would be
working with as opposed to some of the more--in the physical
sciences there are other small businesses that might be, for
example, DOE [Department of Energy] or DOD [Department of
Defense].
So I think it is important not only to understand those
flexibilities but understand best practices and their
relationships to how the programs are managed for the
particular sectors.
Ms. Edwards. Mr. Glover.
Mr. Glover. We have the National Academy of Sciences five-
year study that went into this at some length, and it did a
very good job of analyzing what the agencies are doing. The
conclusions were that the program is remarkable, that it is
working very good. This is a data-driven, well-analyzed study.
A lot of information is there.
There is flexibility within the programs. A couple of basic
things that are important to realize is it has the most
remarkable rate of success of any of the federal R&D programs.
Approximately half of the technologies make it to the
marketplace in some shape or form or fashion, and that is quite
successful. NIH just mentioned you are close to 50 percent. The
Department of Defense is close to 50 percent. The other
agencies are not quite that good but are still in there. So the
program is quite good. That is why I say we have to be very
careful on how we change it.
Allowing large-size awards, much bigger awards, for
example, NIH talks about the number of applicants have dropped.
Well, quite frankly, the number of awards dropped, too. Which
one came first? Chicken? Egg? I don't know, but they both went
down together. So we have to be careful that we don't crowd out
good innovations by giving a few large or super, jumbo awards
or multiple awards that crowds out a lot of other technologies
that may be coming along.
The SBIR Program was designed to fill the earliest stage.
One of the things I looked at for each of the states
represented on this committee is whether seed and angel
financings to your states were bigger than SBIR awards. That
answer is they are not. That early stage, the really--the only
source of money is SBIR, and that is why I think you have got
to be careful about watching what you are doing. It is working
remarkably well across all the agencies.
Ms. Edwards. But let me just ask this because it gets to
the question, I think that there was some suggestion that the
changes that essentially screened out the venture capital based
programs, backed programs contributed to the decline. I don't
know what analytical data we have that suggests that is true,
but if we do have it, I would be interested in seeing it.
And what I wonder, the current economic environment that
Ms. Biggert talked about, I think, you know, one could make an
analysis that perhaps that has contributed as well to the
decline in applications. And I come out of doing private
sector, non-profit, grant making, and I always know that you
always get many more applicants than you can ever fund. At the
same time there is always a percentage of those that are just
not worth funding at all no matter how much money you ever had.
But my experience is then there is always, you know, a
sector of them, maybe even it is above the 2.8 percent that you
go, you know, if we just had some more, we actually might want
to do that. And so I question, you know, what seems like a
really, at least for most of you, a very sort of clear
indication that there is no need to increase the set-aside, and
then we have testimony from Mr. Glover that, you know, four or
five percent set-aside, and I am not even sure why five percent
and why not 2.9 percent or three percent, and so there must be,
you know, some room in there both from the agency and small
business standpoint but also, you know, looking at the percent
of set-aside numbers, it says, well, maybe there is at least
some room for movement on the set-aside.
Mr. Greenwood or Dr. Rockey.
Mr. Greenwood. The first thing I would say is that--and
first reflecting on your comment that you get a certain number
of applications and not all of them are the best, you know,
almost by definition, but if you think about what we are trying
to accomplish here in the big picture it is all about advancing
the mission of the National Institutes, in terms of our
industry, advancing the mission of the National Institutes of
Health and making sure that the particular alacrity, the
particular level of entrepreneurship and risk taking that small
companies can take and be involved in because they don't have
large overhead, they don't have large bureaucracies, that those
skills are applied to the search for treatments for diseases.
And the best way to make that happen, I think, and to get
the greatest number of very qualified applications is to expand
the application pool back to just what it was prior to 2004,
and that is to re-allow these venture backed companies to
participate. You will undoubtedly get a significant number of
very qualified applications, making the process more
competitive and making--and that competition I am sure will
inspire excellence.
Ms. Edwards. Thank you, and I will turn the chair back over
to Chair Wu.
Chair Wu. I thank all the Members and the witnesses for
keeping a lively discussion going while I had to step away for
another commitment just momentarily. If I rework any territory
that has already been explored or thoroughly explored, please
apprise me, and we will move on.
I came back in during this discussion of the set-aside, and
I very much understand and appreciate that this is a delicate
balance, and it is a difficult balance. One can pick 1.0
percent, 2.0 percent, 2.5 percent, 3.5 percent, five percent,
and it is basically a value judgment about the appropriate role
of tech transfer and tech development versus fundamental
research. There is no getting away from that. But that is the
line drawing that this institution engages in on a continual
basis.
Mr. Glover, I emphatically want to help small business in
this endeavor, and it is an effort to help small business that
we looked at increasing the set-aside so that although the
total amount of funds is going up because of increased research
funds, we wanted to grow the pie for everybody so that no one
would be left out, as we try to get more people in, applicants
in, and at the same time increase the size of grants.
So I am very sensitive to your concerns. I just note that
there is some significant resistance to changing set-asides,
and I think I understand those concerns also.
Dr. Rockey, there was, what, approximately a 40 percent
drop in applications to NIH starting in 2004, and that is
roughly correlated with the date of the ALJ [Administrative Law
Judge] decision banning venture capital investment, which came
down in 2003. Is that correct?
Dr. Rockey. That is correct.
Chair Wu. Now, we want to work out something that helps
this program remain an innovation as well as a small business
program, and it is in that spirit, Mr. Glover, that I am asking
you to the extent that, you know, would you say that a
substantial percentage, perhaps even a majority, of your paying
membership, if you have paying membership, are in the defense
industry or funded through DOD SBIR funds?
Mr. Glover. They are not. Our current chairman has a
significant number of NIH awards and is one of the top NIH
award----
Chair Wu. Right. But that is----
Mr. Glover. Many of the other ones, many of the other
companies are as well.
Chair Wu. Well----
Mr. Glover. We are across the whole spectrum.
Chair Wu.--Mr. Glover, in looking at some of the data it
seems to me that the organizations that you have brought in,
when I have dug underneath, every single one of them was on the
DOD SBIR.
Mr. Glover. Mr. Chair, very few--we have only had one
witness appear before this committee from the Small Business
Technology Council.
Chair Wu. Oh, I mean folks who came to my office.
Mr. Glover. Oh. I am not sure who all has come to your
office but----
Chair Wu. Uh-huh.
Mr. Glover.--they are certainly--half of the program is
DOD, and so--and many companies that are in other areas are
also in DOD.
Chair Wu. Well, you know----
Mr. Glover. So----
Chair Wu.--Mr. Glover, I am asking this as a friendly
question.
Mr. Glover. I understand that.
Chair Wu. And I am trying to find some basis which
hopefully gets us away from capital structure as a proxy for
either domestic ownership or as a proxy for the character of
small business, because I think 500 employees is quite crisp on
that front.
It seems to me that a lot of Mr. Greenwood's issues have to
do with biotechnology, and there are also software and hardware
companies that burn a lot of cash. But if it is the case that
DOD uses SBIR in a fundamentally different way as an adjunct to
its research, as a spur to innovation by the large defense
contractors, then perhaps what we can do if we can't get away
with an intellectually pure solution of getting away from
capital structure as a proxy for size, at least taking a
substantive approach of perhaps exempting DOD from the new
statute. And that is the avenue that I am trying to explore
with you as an alternative, which may be even more palatable to
your membership than the generous concessions which we made in
negotiation of the last Congress to take into consideration the
very real concerns that your membership has.
Mr. Glover. It certainly solves the problem for
approximately half of our members. Those members who are in the
health sciences and the biotech, there are a lot of very good,
important small biotech companies who are working very hard to
survive. The only source of funding----
Chair Wu. Do any of those small biotech companies not have
venture capital investment?
Mr. Glover. Absolutely. Many of them do not have venture
capital, and they are successful.
Chair Wu. And would you characterize those companies
currently?
Mr. Glover. Well, some are here today. The Maryland, State
of Maryland has a wonderful program for angel investors that is
making some of our biotech companies in Maryland grow very
nicely. You got a 50 percent tax credit for investing in those
companies. They have gone to that source. They have been able
to raise angel capital to move their companies. There are many
successful biotech companies that don't get----
Chair Wu. Earlier, Mr. Glover, you said that the HHS SBIR
budget would be insufficient to commercialize one
pharmaceutical. Are you saying now that these small biotechs
can make it on angel investment alone?
Mr. Glover. Many have so far.
Chair Wu. Then----
Mr. Glover. But I am talking, but now when you talk about--
--
Chair Wu. Are you taking back what you said about HHS and
its SBIR Program?
Mr. Glover. No, sir. There is a very clear distinction. Mr.
Greenwood has said many times that it takes $800 million to
take one drug through the FDA approval process. There are an
awful lot of technologies that don't have to go through that
$800 million process. But those that have to go through that
process, you couldn't use the whole HHS budget to take one drug
through that process.
Chair Wu. Mr. Greenwood, I am going to give you an
opportunity to respond to this conversation.
Mr. Glover. Mr. Chair, I do want to respond to one thing
you said earlier about believing the information and data that
I provided. I did footnote virtually everything I said so that
you can at a time take a chance to look at that. We are very
careful about that.
Chair Wu. I read your submissions to the Subcommittee with
great interest and in detail.
Mr. Glover. Thank you, sir, and I--but I did footnote as
much as I could because quite frankly that kind of information
is shocking to the innovation community.
Chair Wu. Thank you very much, Mr. Glover. Mr. Greenwood,
would you care to respond.
Mr. Greenwood. I would. Thank you, Mr. Chair.
This is a bit of a mystery to me because I think to some
extent Mr. Glover's membership and mine are, they are not
entirely mutually exclusive, but they seem to be fairly
different. The companies in BIO, the companies that I am here
to represent, are fundamentally drug discovery companies. They
are companies that patented molecules. To some extent they are
platform companies, but for the most part they are moving
forward trying to get drugs into clinical trials and into the
FDA approval process, and that, of course, is a challenge that
takes hundreds of millions of dollars. And you cannot get very
far down that path without having to rely on venture capital
investment. In fact, without having to rely on a majority of
your funds coming from venture capital.
So companies that can do well year after year on SBIR
grants are not companies that have as their core competency
drug discovery and development. I am not frankly quite sure
what these companies are doing. I am not suggesting that it is
not valuable. Sometimes I wonder if the core competency is
succeeding in getting SBIR grants, but they are certainly not
companies that are moving down the path towards drug discovery,
which is largely what the NIH is trying to accomplish.
Chair Wu. Thank you, Mr. Greenwood.
I just want to return for a moment to what are very
legitimate concerns of the different parties to this
discussion. Mr. Greenwood was addressing small biotechs which I
think share some characteristics with software and hardware
startups. Frequently they are VC funded. They are looking to
hockey puck growth where hopefully if they succeed they will
lock it up in size and employment and revenues and the VC
investor fundamentally wants his or her money back times 60 if
possible.
What I was trying to encourage Mr. Glover to think about
and this I only learned recently, that there has been an
unfortunate bitterness between the different sides of this
debate, and I am familiar with high-tech startups. I was
unfamiliar until very recently with an entire industry, which
is very, very important, which is primarily concentrated in
defense, which does have repeat SBIR grants but for good policy
reasons. Frequently there are only a few large defense
contractors left in a given field, and not only, as Mr. Glover
covered, the small entrepreneur companies have weight for
weight more research going on. And the small companies not only
innovate new products and in essence by getting contracts
repeatedly from the DOD, are forming the backbone of some very
important research for DOD, but by being small entrepreneur
companies, they also spur the big companies because DOD is able
to come to the big contractors and say, look. Those guys came
up with better body amour. Why can't you?
Now, that is a very legitimate use of repeat SBIR grants. I
think I would like to carve something out so that we can all
live with this, so that we don't have to live with what in my
view is not only a very crude but an erroneous ALJ decision
that was made by one person in Boston, ironically, but it has
excluded the majority of VC-owned companies or companies that
in the aggregate have many minority VC owners but in the
aggregate have majority of VC ownership. And the aggregation
rules also are a problem for these companies, and as Dr. Rockey
points out, there is a problem with a drop off in applications
to NIH, and we can't all count on positive outcomes or cures
from these many companies, but I believe that they are very,
very important, and we should have a crafted balance to bring
that process back into harmony.
Mr. Glover, I want to give you another opportunity to talk
about the relative weights of your membership versus Mr.
Greenwood's.
Mr. Glover. Quite frankly, we do have members who are
involved in both organizations. Some of our members cannot
afford to be in Mr. Greenwood's organization. They simply can't
afford the dues, but they share many of the common
characteristics and traits.
There is a lot of overlap between the two organizations. I
think we feed to his organizations, that as our folks get
bigger and grow, they probably do end up in his organization.
There are many parts of NIH that are not related to drug
development, and I think that you have to be a little careful
in that. We are looking at an $800 billion solution to a
problem that SBIR is not designed to fix. There is no way that
this program is big enough to fund drug approval process
through the FDA.
But I think that there is probably some way to shape a
compromise that goes along that way, but we have to keep a
whole variety of biotech companies that have succeeded and been
effective in the program, and we can't allow a few large giant
companies with large awards or giant money, lots of money, not
giant companies but with lots of backing, to crowd out all the
other companies. And what we have seen is NIH--some large
awards have, in effect, crowded out the number of awards that
could be given.
If you, for example, give a $10 million award, then you
have foreclosed a lot of other companies that could have
competed. So there is a balance here, and I have to tell you
that my membership is far more concerned about competing with
well-funded venture capital companies than I was when I first
got involved in this process. They are genuinely concerned
about the process.
Remember, the company that started this at SBA [Small
Business Administration], that decision was the Administrative
Law Judge who looked at it and said, AIG's Swiss venture
capital company and a Canadian venture capital company owned
that company, we don't want money to go to that company. That
is what it was. It was not local U.S. venture capital
companies. It was AIG, a Swiss company, and a Canadian venture
capital company, and he looked at it and said, this program is
designed to help American businesses. No.
Chair Wu. Well, Mr. Glover, I see that you have spent some
time in this organization and on this Hill. But I recommend to
you two things. The next time you want to engage in Canadian
bashing, think first about their actions in saving our folks in
the Toronto Embassy and the longest undefended border between
any two countries the world has ever seen. Secondly, I think
that a few organizations get away with no, no, never, never, we
are not going to bend one inch. For whatever reason the NRA
comes to mind, although I am a loyal firearm owner, but most
organizations can't get away with that, and I am glad to hear,
Mr. Glover, that your organization is willing to bend and reach
reasonable compromises which take care of the legitimate
interests of your membership and all the other folks out there
as well as the technologic needs and employment needs of this
country.
We will return momentarily, but I thank Mr. Lujan, the
gentleman from New Mexico, for his forbearance, but I might add
that we have kept the discussion alive, so Mr. Lujan could be
next in asking his questions. The gentleman from New Mexico is
recognized for five minutes.
Mr. Lujan. Mr. Chair, thank you very much, and I won't take
long. I think that this is a great conversation, Mr. Chair, and
both with what Ms. Edwards and yourself have been able to move
forward, and I need to get some answers today as we get some
more discussion on those items would be great.
Dr. Rockey, why do you think the number of applicants has
dropped?
Dr. Rockey. It has been almost like the perfect storm. We
really don't understand the entirety of why the applications
have dropped. We have mentioned the question about eligibility
with the venture capital companies as being perhaps a
component. We also had mentioned about the complexity of
determining eligibility and whether or not a company is
eligible.
There are a number of companies because of the linear
fashion of this program which is a Phase I and Phase II,
perhaps their model does not fit within the SBIR Phase I and
Phase II approach.
And in addition there are just some companies I think feel
overwhelmed by the entire process of applying for SBIR grants.
So there is a number of things that go on. I can't say that we
understand it exactly. I think Chair Wu had pointed out or
Congresswoman Edwards about the complexity of this issue, and
really if we had any actual data that would support our
understanding, we really don't. There are a number of things
that have come together, and we really would have to tease out
all of those different aspects to be able to understand it.
Mr. Lujan. Anything specific with venture capital
participation?
Dr. Rockey. Well, as we said, the ruling at the same time
we saw a drop in applications, whether or not there is a direct
correlation we can't say, but we did see that drop.
Mr. Lujan. Okay, and Mr. Glover, along the questioning I
think that the Chair was pursuing, isn't it true that a small
business can be disqualified where multiple venture firms each
have a minority stake, but in the aggregate own a majority of
the company share?
Mr. Glover. That is the current situation.
Mr. Lujan. And isn't it true that many small companies in
this situation have been excluded from the SBIR Program since
the reinterpretation, since '03?
Mr. Glover. We looked at some years later--the NIH gave us
an analysis, and they said that I think after the first two or
three years they looked at it. Only 50 companies had been
excluded. A number of those were foreign-owned companies, a
number of those had grown beyond 500 employees, and that it
turned out to be very few actually had been excluded based on
the analysis NIH did at the time. Clearly there are companies
that have been excluded. I am not saying they are not. I don't
think there is a huge number of them, but I think there
certainly have been companies excluded.
Mr. Lujan. Okay, and Mr. Glover, you also stated that
Congress should renew SBIR without major design changes. Are
there any changes in your opinion that should be considered or
that would increase the effectiveness of these programs?
Mr. Glover. Certainly we have suggested that the award size
needs to go up. It hasn't gone up. SBA has proposed raising it.
It certainly should be raised for inflation, and we think that
there are some additional suggestions.
For example, there needs to be some additional
commercialization, and I think everybody recognizes we need to
find some way to move the technology readiness level from where
it comes out of the SBIR Program closer to commercialization.
The founder of the program, Roland Tibbetts--and his paper--
analysis is attached to my testimony, very specific. This
program is not a commercialization program but moving it closer
to commercialization, doing some testing and evaluation, some
additional funding. There are good programs like the TIP
Program [Technology Innovation Program], the old ATP Program
[Advanced Technology Program] that is designed to move
technology further down. There clearly needs to be something
else done in that area, whether it is part--in addition to the
SBIR Program or whether it is something freestanding. We really
do have a problem. We are trying to get small business up to
the ``Valley of Death'' to look in. Everybody else says we got
to get it across. I am just saying we need to get more up to
it, but we also need a bridge across that ``Valley of Death.''
So there needs to be something extra. I am flexible on how
that works, and I--but I think it clearly needs to be something
that goes beyond SBIR, but I don't think we want to take away
from the base program that we have now----
Mr. Lujan. Thank you.
Mr. Glover.--to do that.
Mr. Lujan. And lastly, Mr. Greenwood, Dr. Rockey gave--
mentioned this in the first response to my question. You also
brought this to our attention through your testimony with the
application process. What can be done to increase the
effectiveness or awareness, participation, competition within
the program and to get your thoughts on that, Mr. Chair, then I
would make sure that we would yield back any excess time that I
have consumed today.
Chair Wu. That would be fine.
Mr. Greenwood. Thank you. I am going to sound like a one-
trick pony because I am on this subject, and it has to do--if
you want to get more competition and more excellence in the
program, you have to go back to the original Congressional
intent and overrule statutorily this ill-found decision by the
ALJ that excludes the majority backed venture capital
companies.
A couple of points--conjectures that need to be put to
rest. This idea that somehow when--allowing these companies to
participate crowds out the other applications. The National
Research Council study found no evidence that participation of
companies with multiple VC ownership was harmful to the program
or that small businesses have ever been crowded out by the
participation of small businesses that are majority owned by
VCs. So that is not a concern at all.
Another thing that is important here is that no one is
suggesting that SBIR money is what gets companies through the
process, that multiple hundred million dollar process of moving
to FDA approval. What really happens is a biotech company will
have a molecule that it thinks might cure brain cancer, and
venture capitalists will look at that, look at the intellectual
property and say, you know what? We think we are right, and we
want to invest ten million or $15 million in that. And that
program becomes, might become ineligible for an SBIR grant.
Now, meanwhile, back in the laboratory the scientists are
saying, you know, this molecule might also cure prostate
cancer, breast cancer, have another application, and they want
some seed money to get that process started, and the venture
capitalists are saying, no, no, no, no. We put our money on the
brain cancer application. So then it is--because it is
perfectly appropriate for that company to come back with an
application and say, this is a secondary project that holds
great potential to cure human disease as well. And we think it
makes perfect sense, even though that company has venture
capital funding to come back to the NIH and say, what about
this? Does this look like a good project that you might want to
fund as well?
So we think that, again, for all of those reasons that--and
particularly going back to the original Congressional intent,
and as the Chair said, it was never, never the intent of
Congress and nor is it rational to make financial structure a
proxy for smallness.
Chair Wu. Mr. Greenwood, I would interrupt while you are
quoting me with approval. I have a request from the minority to
adhere more closely to the five-minute time limit, which is
somewhat unusual, but I intend to abide by that request.
So if you could draw your comments to a close and when Mr.
Lujan is ready to yield back the balance----
Mr. Greenwood. I have.
Chair Wu. Thank you, Mr. Greenwood.
Mr. Lujan. And Mr. Chair, I would just close with, you
know, we had a phenomenal conversation with Secretary Chu with
his visit to Las Alamos National Laboratories in New Mexico,
talking about the importance of R&D science and technology
innovation, looking to see what kind of projects we should be
supporting, recognizing that eight of the ten may fail, but it
is those two that succeed and the breakthroughs that we would
yield from them with solving domestic problems and global
problems. And that is why we need to be supporting projects
like this so we can get these products to market.
Thank you, Mr. Chair.
Chair Wu. Mr. Lujan, you had Secretary Chu at a national
lab, and you didn't invite me. And all this time I just always
talk you up as a very valued contributing Member of the
Subcommittee.
Mr. Lujan. Mr. Chair, next time we will make sure we invite
you, but, Mr. Chair, we had a 24-hour notice, and I am not sure
we could have gotten many more people to the laboratories.
Thank you, Mr. Chair.
Chair Wu. I thank the gentleman, and now the----
Mr. Glover. Mr. Chair, could I just mention one thing about
national labs?
Chair Wu. If Mr. Smith will permit that, I would be happy
to.
Mr. Smith of Nebraska. Briefly.
Mr. Glover. The other thing about where innovations come
from, the National labs has done remarkably well. That is the
biggest increase in innovations, key innovations is the
National labs. It is really quite a remarkable success story.
Chair Wu. Thank you, Mr. Glover.
The gentleman from Nebraska, five minutes. Thank you very
much. Good to see you.
Mr. Smith of Nebraska. Thank you. I apologize. This might
be begging for a long answer, but if you could be as brief as
possible.
Could you comment on the National Academies of Sciences'
review that--of SBIR that found the program is not sufficiently
evidence based and in need of improved data collection on
program outcomes and performance matrix to measure its impact?
Could you respond to that?
Dr. Berdahl. In my testimony I mentioned the fact that that
is a recommendation of the National Academies and certainly one
that we endorse. Indeed, perhaps much of the discussion that
has been conducted here in this hearing today could have
benefited from some more rigorous data that we might have
acquired if we had really done the kind of analysis as between
agencies and so forth that would yield some evidence that would
help shape policy.
Mr. Smith of Nebraska. Anyone else wishing to respond?
Mr. Glover.
Mr. Glover. I would just comment that there is a lot more
information about the SBIR Program than virtually any other
federal R&D program. It is quantified, it has been studied by
GAO a number of times and the National Academy study is a five-
year, $5 million study. There is an awful lot of information
about it. We can never get enough information when we are
trying to evaluate and make decisions, but there is a lot more
here than there is on most other programs.
Mr. Smith of Nebraska. Okay.
Dr. Rockey. I would also say that I would agree with Dr.
Berdahl, and I had mentioned earlier that understanding our
drop in applications would have been a lot easier had we had
some evidence base. We have done a number of studies on the
SBIR Program. As you know, the NRC just did theirs. We also
have our own PODS [Performance Outcome Database System]
database, which is really a way to look at commercialization,
what happens.
In addition, the SBA has a database called TechNet which
also can help us with some evidence base, but we would agree
that there should be and could be more evidence-based analysis
of this program.
Mr. Smith of Nebraska. Okay. Thank you. Mr. Greenwood, if
you could give an example of the kind of companies that BIO
believes should be made eligible for SBIR funding through a
change in eligibility rules and how such a company might
compare to others that are currently eligible in terms of
employees, revenue, and other things.
Mr. Greenwood. Uh-huh. Well, thank you, Mr. Smith. First
off, we think it is important that companies who are small, and
because they are small, are not burdened by the huge overhead
and bureaucracy of, say, large pharmaceutical companies, they
are much more willing to take risks and to go into areas that
for which there are no cures right now, no treatments. They are
into unknown territory, if you will. These are the kind of
companies that we think can contribute the most to advancing
the science around solving problems related to human disease.
We think that companies that advance the science to the
point where the venture capitalists, who are increasingly
skeptical, in the beginning when the human genome was first
sequenced in about 2000, any biotech company that emerged was
pretty quick to get venture capital funds because it was
assumed that there was going to be quick solutions. It has
turned out that the problem of using the human genetics,
understanding of genetics and DNA is more complicated than was
first thought.
So venture capitalists are being skeptical. So when the
venture capitalists come in and say we are going to bet on this
company, it is much more likely than it ever has been that this
company is really going somewhere, that this is going to be a
new breakthrough invention.
And so the fact of venture capital investment should be--
and at times in the program's history, it was an indication
that they should merit additional grants, not that they should
be turned away. And so we have had a perversion of the original
process in which a company that is good enough, the science is
good enough, it is smart enough, and making important
breakthroughs to the point where the venture capitalists are
willing to risk their money, I think those should be the
companies that minimally should be able to compete for SBIR
funds because they obviously have demonstrated their ability to
build the talent pool necessary to advance the science.
Mr. Smith of Nebraska. Thank you, and what about the impact
of the recession? Have you seen change in pattern of
application for funds and otherwise?
Mr. Greenwood. Well, I don't know that we have had enough
time to see that, but we are in trouble. Small--most of our
companies don't have any products on the market. They rely
entirely on investor capital for their revenues, and they do
for a very long period of time, and in this credit crunch right
now we are in the position where there is just no money for
those. And so we, as I said in my opening statement when you
weren't able to be with us, fully a third of our companies are
down to their last six months in capital and something like 40
percent are down to their last--30 down to their last 12 months
and 40 percent down to their last six months.
So we are going--our companies whether they are majority
VC-backed or not are going to be more in need of help in the
next 12 months or so than they ever have before. And much will
be lost if these companies dissolve.
Mr. Smith of Nebraska. Thank you. Thank you, Mr. Chair.
Chair Wu. Mr. Smith, you are prompt. I am going to have to
mend my ways.
The gentlelady from Maryland, Ms. Edwards, recognized for
five minutes.
Ms. Edwards. Thank you, Mr. Chair.
I just have one real question, and it has to do with the
moving the process towards commercialization, and Dr. Rockey
and Mr. Greenwood, when I hear from small businesses,
especially these that are nimble technology and research firms
and minority-owned business and women-owned business, what they
say is they do need that first push. That is why we have the
program, but then, you know, a lot of them are not able to get
that venture capital at the beginning, but they need something
that helps them get there. And so I want to know actually
within the context of the program, you know, what ability the
program allows to even, you know, sort of see whether it is
consultants or some assistance to get the business plan
together to then, you know, move into that next phase and then
out to real commercialization. Because I think if you are going
to go ahead and make an investment in seeding the research and
the technology and then you just kind of give it away at the
time at which it needs to be spurred on, that is a particular
dilemma for small, women, and minority-owned businesses.
Dr. Rockey. And while we haven't invested greatly in this,
we do have a number of programs at NIH called CAP
[Commercialization Assistance Program] and TAP [Technical
Assistance Program], which are commercialization assistance
programs, and some of them are designed specifically for the
smaller programs that really need help in just even
understanding the process under which they can commercialize.
So we have two programs, one of which supports training for
those kinds of businesses to understand the process and one for
more actual assistance in the commercialization process further
down the road.
But it is an issue. It is an enormous issue that I believe
Mr. Greenwood would relate to many companies is getting onto
that further step.
Mr. Greenwood. If I may, as valuable as the SBIR Program
is, and it has been essential to the development of
biotechnology in this country, it is not the only source of
revenue for early-stage companies, and one of the things that I
do is travel from state to state talking to governors and State
legislators about what they can do to help these companies as
well.
Every state in the union, in fact, virtually every country
in the world right now wants to be a big biotech hub because
they see both the opportunity to advance the health of their
citizens, as well as to advance the economy, because this is a
growth industry.
So we encourage states to initiate their own programs. We
have in my State of Pennsylvania we took tobacco settlement
money and created a greenhouse, incubation centers for small
biotechnology companies to get some of the help as you suggest
with business plans and that sort of thing.
There are--we have a whole catalog of programs that states,
you know, can engage in in order to help all companies, include
women-owned, minority companies, to get into this field. And
frankly, BIO is taking a leading role in trying to bring
minorities into this industry, young people, people of all ages
to demonstrate that this a real growth field and an opportunity
for diversity.
Ms. Edwards. Thank you, and Dr. Rockey, you do feel that in
the current structure of the program you have the flexibility
to be able to assist with some of that as well, and I would say
my own home State of Maryland, you know, does a tremendous job
of seeding this because we view like other states, this is
definitely a growth industry, at least on the biotech.
Dr. Rockey. We have some, and we have, as I pointed out,
considered technical assistance in this area for
commercialization, very appropriate. I will point out that the
SBA did have the Federal and State Partnership Program that
ended in 2005. The FSPP Program, I think some of you might have
been aware, was an outreach effort, and that was also helpful
as was a rural outreach program, which were two programs
specifically designed to help bring people in and understand
what was happening at a State and federal level.
So while those programs have gone by the wayside, there
are--we also have extraordinary efforts in outreach. We attempt
to outreach. I would mention that in--we are having our 11th
annual SBIR conference in Nebraska this year in Omaha, and so
we do think outreach as well as assistance is important in this
whole program.
Ms. Edwards. Thank you, Mr. Chair, and I will yield.
Chair Wu. Thank you very much.
Mr. Smith, do you have any further questions? Okay. I
understand that Mr. Lujan has a further comment to make.
Mr. Lujan. Mr. Chair, yes, and it is to extend an
invitation to the Chair to New Mexico. We will make sure we
have the appropriate hearing scheduled for that invitation Mr.
Chair.
Quickly, Mr. Chair----
Chair Wu. I look forward to it.
Mr. Lujan.--we reached out to a few businesses in New
Mexico, and one of them by the name of Southwest Sciences in
Santa Fe, New Mexico, is an example of how this program can
work. And another example of a small business that is asking
for support from the Congress to be able to support the
reauthorization but making sure that the program is made
available to their small businesses.
Southwest Sciences has now been issued 28 United States
patents, all of them on inventions made through the support of
SBIR or STTR Programs. They license many of the patents to
manufacturers who are actively making and selling products in
the semi-conductor industry, natural gas pipeline industry,
environmental monitoring, and atmospheric research
applications.
And so we just continue to see, Mr. Chair, not only with us
reaching out to businesses but them reaching out, back to us
that shows the jobs that can be created, progress that can be
made, and the importance of making sure the capital is going to
be made available to especially a lot of these small companies
who need that little boost to be able to make great things
happen.
Thank you, Mr. Chair.
Chair Wu. Mr. Lujan, would you like to enter any of those
materials in the record?
Mr. Lujan. Mr. Chair, we will request without any objection
to submit a letter from Southwest Sciences into the record.
Chair Wu. Without objection so ordered.
[The information follows:]
Chair Wu. As I said, the gentleman from New Mexico is a
valued Member of the Committee and has now--works diligently
and now has also invited me to New Mexico. I thank the
gentleman.
Well, the Chair recognizes himself. Ms. Edwards, I am about
to get to your fine State of Maryland. We count on the NIH for
innovation, and it has not gone unnoted that in the very
thorough materials prepared by Mr. Glover that there is a
tremendous concentration of SBIR companies and employees in the
lovely State of Maryland, and we suspect that that may have
something to do with NIH innovation. Another arena in which you
all have been innovating is Phase II competition re-awards I
would call it.
Dr. Rockey, could you describe that program to us, because
I think we share an interest in getting folks over the ``Valley
of Death'' in promoting innovation, in protecting legitimate
small business interests, and this may be an interesting tool
for us to follow up on as a method of getting over the ``Valley
of Death,'' although there are some downsides to it, too,
perhaps.
Dr. Rockey. So the competitive renewal of Phase II is
really a phase 2.5, which allows us to support companies that
have successfully completed their phase or are in the midst of
their Phase II and come back in for competition to further
their project towards the ultimate goal of commercialization.
I would say that in the case of clinical research, we are
still pre-clinical at that stage, but it is taking the projects
further down the line. We do support these projects for three
years at $1 million per year. So it is substantial support, and
we do think it has been effective at getting closer to the
``Valley of Death,'' although as I said, it is usually still
pre-clinical. But we find this is a way to successfully try to
navigate this next step, which they otherwise would not have
funding for.
But I do want to point out that it is competitive renewal.
They are not guaranteed the renewal. They must come in and
compete for it, and so they are judged against others who are
competing for this as well.
But we found it to be a very effective way of promoting the
development further along.
Chair Wu. Thank you very much, Dr. Rockey. We very much
value NIH's innovation in Phase II competitive re-awards, its
innovation with respect to flexibility and grant sizes. I would
just like to underscore in a very friendly way that there are
those of us who prefer NIH to innovate with a more clear
statutory basis, and that is up for discussion.
Mr. Glover, would you like to comment on the Phase II
competitive re-award efforts that NIH has engaged in? Is that
something that you view as a positive negative or a sideway
slam?
Mr. Glover. We think that is a positive. We think that
because it is a gaited process where they have to compete again
for the additional money, that is important. We also think that
it can't be too big, because if you get too much money going
into that phase, you are crowding out, you are eating your seed
corn. You are not getting enough new ideas coming forward, but
we think that so far that seems to be to be balanced at NIH,
and it is a positive.
And I think that as long as Congress puts a gaited process
in and provides some additional funding for this kind of
activity, it is a great idea.
Chair Wu. Well, Mr. Glover, I just want to point out that
you and your organization might feel that our $2.2 million
Phase II award was way too high last go-round, but I think that
in view of your support of a Phase II competitive re-award,
there is flexibility on these numbers.
Mr. Greenwood, would you care to comment on this Phase II
re-competition?
Mr. Greenwood. I would like to, but I can't. I don't know
enough about it to give you good information.
Chair Wu. Hopefully we will have the benefit of your
organization's thoughts.
Mr. Greenwood. We will submit it in writing if the Chair
would like.
Chair Wu. Thank you very much. I appreciate that.
And with that I guess there are not going to be comments
from any other Members of the Subcommittee. If our witnesses
are not going to volunteer anything for the good of the order,
then I want to thank you all for being here this afternoon and
spending a decent chunk of time with us. It has been I think
edifying for all Members, and I hope that it is part of a
collaborative process as we go forward to have an SBIR Program
that helps stimulate innovation, stimulate small business and
employment and the production of new products, new services,
and life-saving therapies and also helps keep our defense and
other industries strong.
The record will remain open for additional statements from
Members and for answers to any follow-up questions that the
Committee may ask of the witnesses.
Again, I want to thank the witnesses and you are excused,
and thanks profusely for your participation. The meeting is
adjourned.
[Whereupon, at 4:15 p.m., the Subcommittee was adjourned.]
Appendix:
----------
Answers to Post-Hearing Questions
Answers to Post-Hearing Questions
Responses by Robert M. Berdahl, President, Association of American
Universities
Question submitted by Representative Adrian Smith
Program evaluation, performance measures.
Q1. The recent National Research Council review of SBIR found that the
program is ``not sufficiently evidence-based'' and is in need of
improved data collection and tracking of program outcomes, as well as
clear performance metrics for assessing the success or failure of a
given initiative. Do you agree with this finding and recommendation?
A1. In response to your question about the need for ``improved data
collection and tracking of program outcomes,'' I would commend to you
the comments made in my written testimony, as well as the
recommendations made by the National Research Council in its 2008
report, ``An Assessment of the SBIR Program.'' As stated in my written
and oral testimonies, it is difficult to truly assess the economic and
innovative impact of the SBIR and STTR programs when there has not been
systematic data-gathering by sponsoring federal agencies. To this
point, the NRC report includes an example in which a sponsoring agency
suggested the need to increase in the median Phase I and Phase II award
sizes. However, due to the lack of data-collection, the sponsoring
agency was unable to provide a systematic, data-driven justification
for increasing the award sizes. Simply put, limited use of metrics,
data-collection, and analysis hinders our ability to assess and improve
these programs. In addition to providing for better assessment of these
programs, it is also important that the specific missions and goals of
each federal research agencies be taken into account when assessing
these programs effectiveness. This was a point that was also
highlighted in Chapter 4 of the NRC report.
Questions submitted by Representative Daniel Lipinski
Q1. If the SBIR and STTR award amounts are increased and the set-
asides are not, thus resulting in fewer awards, what do you think the
impact will be on the number of successful commercializations? Will we
see more successes because we cull out more marginal companies and
increase award sizes, or will it diminish the overall impact of the
program because it eliminates research on promising ideas?
A1. If federal funding for research stays flat, then indeed increased
award sizes in the absence of an increased set-aside will lead to fewer
awards. On whether fewer awards lead to fewer commercializations, we
can only echo the recommendations of the National Research Council in
suggesting that accurate data collection about the performance of
agency SBIR/STTR awards--and indeed the results of individual SBIR/STTR
awards--is needed. The National Institutes of Health's experience seems
to suggest that, where NIH has been able to be more flexible in the
size of grants awarded, the agency has been able to attract and fund
higher quality proposals. In addition to the recommendations made by
the NRC and contained in my testimony, I would underscore the
importance of sustained increases for federally funded research. Such
increases will not only allow us to maintain our global scientific
leadership, they will also assure that the SBIR/STTR programs grow in
tandem with our nation's research enterprise.
Q2. The STRR in particular program looks to promote cooperation
between a small firm and a scientist in a University or National Lab.
But starting a company from the ground up can be a full-time job for a
scientist. Do you have any sense about the extent to which University
or Lab scientists can actually participate in a startup? How flexible
are Universities and Labs, respectively, with policies to allow their
researchers this opportunity?
A2. Many universities have policies that will allow faculty leaves of
absence or reduction in appointments to assist in the formation of a
start-up, with appropriate conflict of interest oversight. They also
have policies that permit faculty to devote a certain percentage of
their time to consulting outside of the university. Having said that,
many faculty members want to continue their research and don't want or
don't have the time to start a new company. As a result, most
university spin-offs are created by a faculty member in partnership
with an entrepreneur outside of academia who actually guides the
formation of the start-up. The faculty inventor serves as a consultant,
the Chief Scientist or Chair of the Science Advisory Board to the start
up, where their knowledge of the new technology is their primary
contribution. It is precisely this partnership that STTRs seek to
enhance--the transition from academic lab to a company lab. This less
time-consuming role can be handled by most faculty within the time
allotted by many institutions for consulting activities. The transition
is often facilitated by a graduate student, post-doc or research
associate leaving the university to help start-up the research and
development effort at the new company.
Questions submitted by Representative Gary C. Peters
Q1. When I talk with my constituents back home, they echo much of what
has already been said here: that the SBIR/STTR programs are often the
life blood for small firms, and that small firms are a crucial driver
of innovation. However, they also mention the ``Valley of Death'' that
occurs for technologies after the prototype has been developed. The
companies do not have the dollars for marketing and commercialization
of the product. To truly support economic development, we need for
these small firms to have the support to make the jump from development
to commercialization. How can SBIR/STTR support companies in making
this leap and avoid the ``Valley of Death''? Wouldn't we see a greater
return on our tax dollar investment if the SBIR/STTR program dollars
helped companies through the commercialization phase?
A1. In response to your question about ``traversing the Valley of
Death,'' I refer you to the comments made in my written testimony. As
addressed in the NRC report, and as discussed during the hearing, some
agencies are currently providing ``beyond Phase II'' support in order
to improve the commercialization potential for SBIR-funded
technologies. For example, National Institutes of Health has improvised
a system to provide such funding with its ``competing renewal'' program
for especially promising projects. Likewise, the Department of
Defense's Navy Technology Assistance Program has developed a system for
companies entering Phase III.
The AAU agrees with the NRC's recommendation--``beyond Phase II''
funds are important and an essential step in helping companies traverse
the ``Valley of Death.'' Embedded within this discussion of ``beyond
Phase II'' is the notion of agency flexibility. Indeed agencies should
be given the flexibility to develop their own, agency-specific ``beyond
Phase II systems''; systems that lend themselves to the overall mission
of the agency and the needs of the specific SBIR/STTR project.
Q2. New companies in my district find the Fast Track program extremely
valuable, and have even been launched based on a fast-track Phase II
award. The National Academies have also found that experimentation by
the agencies, such as the Fast Track program should be encouraged. Can
you expand on how we can further promote the Fast Track program within
SBIR/STTR?
A2. In response to your question concerning the Fast Track program, I
would commend to you the recommendations made in the NRC SBIR report,
as well as my own testimony before the Subcommittee in endorsing
experimentation in the SBIR/STTR programs.
Research agencies should have the flexibility to adapt SBIR/STTR
awards to suit their programmatic objectives, address the needs of the
companies competing, and ensure that additional commercialization
arises from SBIR/STTR awards. To this point, the National Research
Council's report, ``An Assessment of the Department of Defense Fast
Track Initiative'' found that agency experimentation and flexibility at
DOD increased the effectiveness of the SBIR program by encouraging the
commercialization of new technologies.
Similarly, the NRC's SBIR report notes that NIH's Fast Track
program operates differently than DOD's and functions more as a
complete Phase I and II award without matching funding. The NRC report
further states that ``to date, there is little evidence about the
impact of the program,'' but we are confident that, with the additional
data collection and analyses, the relative merits of such expedited or
flexible approaches should be revealed.
Q3. Do you see a need to encourage larger companies to participate in
the SBIR/STTR program at an earlier stage? Would extending R&D tax
credits on a limited basis to larger commercial partners provide more
of an incentive for large companies to partner with a small firm that
may be operating at a zero net profit?
A3. A program that required pairing of small and large companies would
be a great boon to emerging start-ups. The ``first customer'' barrier
is a critical stage in the life of a start up and the large company
partner could provide that entree to the market for a small business.
Additionally, the networks, facilities, technical and business
assistance that might be available from a larger company would be
invaluable to a small company. Start-ups are often able to develop
products and processes as a function of their agility and flexibility
that larger companies are unable to incubate, so the partnerships may
be productive to both, especially in these days when access to
investment capital is so difficult to come by.
Answers to Post-Hearing Questions
Responses by James C. Greenwood, President and CEO, Biotechnology
Industry Organization (BIO)
Question submitted by Representative Adrian Smith
Program evaluation, performance measures.
Q1. The recent National Council review of SBIR found that the program
is ``not sufficiently evidence-based'' and is in need of improved data
collection and tracking program outcomes, as well as clear performance
metrics for assessing the success or failure of a given initiative. Do
you agree with this finding and recommendation?
A1. BIO supports efforts to ensure that the SBIR program is able to
track outcomes. We would recommend that metrics used to assess the
success or failure of a given initiative are discussed with each
individual agency, as the measures of success or failure will be unique
to each agency's goals and missions. We would also recommend that the
metrics focus on tracking the potential benefit to the public of
projects being funded and whether those projects are commercialized
over time. It is important to note that in some industries, such as
biotechnology, it can take longer than a decade for a research project
to reach commercialization. As such, any analysis of data collected
must take this time horizon into consideration when evaluating success.
Examining the potential for public benefit is equally important, as
early stage research can often evolve into discoveries beyond the scope
of the initial research project, based on scientific findings in the
early stage research projects.
Questions submitted by Representative Daniel Lipinski
Q1. If the SBIR and STTR award amounts are increased and the set-
asides are not, thus resulting in fewer awards, what do you think the
impact will be on the number of successful commercializations? Will we
see more successes because we cull out more marginal companies and
increase award sizes, or will it diminish the overall impact of the
program because it eliminates research on promising ideas?
A1. It is important that the award amounts are reflective of inflation
and the increased costs associated with scientific research. The award
amounts need to be meaningful in order for the funded research to be
able to meet designated milestones in the funded project. This will
increase the ability of these projects to move forward towards
commercialization.
As discussed in my testimony, it also important that agencies
maintain flexibility in how they fund SBIR projects. This was supported
by the National Research Council's 2007 report which stated ``. . .
flexibility is a positive attribute in that it permits each agency to
adapt its SBIR program to the agency's particular mission, scale and
working culture.'' BIO believes that agencies are the best judge of how
to use their SBIR funds to advance science and commercialization of new
innovations.
The number of awards each agency is able to give is also dependent
on the research and development budget of that agency. BIO has
consistently communicated to Congress the importance of having a
properly funded NIH. More research and development funding at NIH
equals more funding that will go to the SBIR program.
Thus, the combination of a properly funded NIH, meaningful award
amounts, and the ability of the agencies to have flexibility in
exceeding those award amounts will help maximize the impact of the SBIR
program.
Q2. During the hearing Dr. Rockey discussed the NIH ``Phase 2.5''
competitive re-awards. The NSF has a similar ``Phase II supplement''
program. Is either of these programs, or are there similar efforts at
other agencies, that are particularly effective at commercializing
products toward the end of their Phase II grant?
A2. The competitive re-award programs at NIH are critical to ensuring
research projects that have great scientific and commercialization
potential are able to receive more funding, when warranted, to meet
early-stage research milestones. This program is vital to small
companies' ability to traverse the oft-discussed ``Valley of Death,''
where funding is difficult to find for early-stage high-risk but
promising research projects.
Q2a. Does the current approach to Phase III funding for
commercializing products, which precludes using any SBIR or STTR funds,
work for companies and products that are trying to move beyond their
Phase II grant? Are there changes that you would recommend?
A2a. As mentioned previously, NIH's Phase 2.5 awards and ability to
exceed award caps, when warranted, are key to maximizing
commercialization of SBIR-funded research projects. BIO would also
recommend that Congress look to the successes of NIH's
Commercialization Assistance Program (CAP), which has been very
successful in helping small businesses develop a sound strategy for
commercialization, as an example of how to help small businesses move
beyond their Phase II grants towards commercialization. The success of
this program is dependent on the ability of the agency to have
flexibility in awarding SBIR dollars. Caps on SBIR grants, if imposed,
should not apply to the entire amount that the agency spends on a
particular project. The NIH CAP program provides commercialization
assistance to those companies who may need extra funding before they
can attract private dollars to further develop early-stage research
projects.
BIO also supported provisions in H.R. 5819, the Small Business
Innovation Research Program Reauthorization Act, as passed by the House
in 2008, that would help small businesses develop a commercially-
available product. These included establishing the Partnerships,
Resources, Investors, and Market Entry Research Program (PRIMER) [Sec.
302]; increasing partnerships between SBIR awardees and Prime
contractors, VC and larger businesses [Sec. 404]; and providing funds
to all agencies to develop commercialization programs [Sec. 406].
Q3. The STRR in particular program looks to promote cooperation
between a small firm and a scientist in a University or National Lab.
But starting a company from the ground up can be a full-time job for a
scientist. Do you have any sense about the extent to which University
or Lab scientist can actually participate in a startup? How flexible
are Universities and Labs, respectively, with policies to allow their
researchers this opportunity?
A3. I agree that founding a start-up company can be time-consuming and
challenging, yet it is essential to the commercialization of new
technologies in areas such as biotechnology. I would defer to my fellow
witness, Dr. Berdahl of the Association of American Universities (AAU),
to comment on the specific policies of Universities with respect to
their researchers' involvement in start-up firms.
Q4. Some of the nanotech businesses I've spoken with in Chicago have
pointed to inconsistent paperwork as an obstacle encountered by people
who are trying to turn their idea from a laboratory success into a
small business. Can you comment on the consistency of SBIR and STTR
program and application procedures across and within agencies? Is this
something that discourages first-time SBIR applicants?
A4. BIO member companies have not indicated they are discouraged from
applying to the SBIR program due to inconsistent application
procedures. The two main obstacles hampering the ability of small
biotechnology companies' to apply to the SBIR program are the SBA rules
excluding small companies that are majority venture capital-backed and
the overly-broad application of SBA's affiliation rules. In certain
instances, if the SBA determines that a venture capital company is
affiliated with the SBIR applicant, they will then make determinations
that a venture capital company's other portfolio businesses are also
affiliated to the SBIR applicant, even though the only thing they share
in common is an investor. These complex and broadly-applied
affiliations rules are an application barrier to many small
biotechnology companies that rely on funding from multiple sources and
investors to continue their capital-intensive research and development
projects. The rules, as currently applied, create an enormous amount of
uncertainty for many life sciences entrepreneurs as to whether or not
their company is eligible for an SBIR grant award.
Questions submitted by Representative Gary C. Peters
Q1. When I talk with my constituents back home, they echo much of what
has already been said here: that the SBIR/STTR programs are often the
life blood for small firms, and that small firms are a crucial driver
of innovation. However, they also mention the ``Valley of Death'' that
occurs for technologies after the prototype has been developed. The
companies do not have the dollars for marketing and commercialization
of the product. To truly support economic development, we need for
these small firms to have the support to make the jump from development
to commercialization. How can SBIR/STTR support companies in making
this leap and avoid the ``Valley of Death''? Wouldn't we see a greater
return on our tax dollar investment if the SBIR/STTR program dollars
helped companies through the commercialization phase?
A1. The development of biotechnology treatments and therapies requires
several avenues of funding working in a cohesive manner. As stated in
my testimony, it takes between eight and twelve years to bring a
biologic therapy to the market and costs between $800 million and $1.2
billion. A small biotechnology company generally has between one and
five research projects in development. Small biotechnology companies
rely on grant funds, angel investors and venture capital companies to
develop their biotechnology innovations into commercially available
products. Since 2003, the majority of small biotechnology companies
have been unable to access critical SBIR dollars because they are
``majority owned'' by venture capital companies. This ruling has
prevented small companies who generally have fewer than 75 employees
and no product revenue from competing.
It is important to understand that small biotechnology companies
often exceed the majority owned restriction in the very early stages of
the company because they usually have multiple venture capital
companies who each have minority ownership stakes in the company for
the company's lead product, that collectively trigger the 51 percent
ownership restriction. As such, these small biotechnology companies are
now unable to compete for SBIR dollars that can help fund their early-
stage projects and have a very difficult path to develop those projects
to the point where it is attractive to private-sector investors.
Allowing small businesses that happen to be majority venture-backed
once again compete for SBIR funds is the best way for the SBIR/STTR
programs to better support companies through the ``Valley of Death.''
Additionally, we support agency flexibility within SBIR so that
commercialization programs, such as NIH's Commercialization Assistance
Program, can continue to provide valuable funding for small companies
that need further assistance in the commercialization process.
Q2. New companies in my district find the Fast Track program extremely
valuable, and have even been launched based on a fast-track Phase II
award. The National Academies have also found that experimentation by
the agencies, such as the Fast Track program should be encouraged. Can
you expand on how we can further promote the Fast Track program within
SBIR/STTR?
A2. I would agree that experimentation by the SBIR-participating
agencies is an important component of an effective and successful SBIR
program. Maintaining agency flexibility as part of the SBIR
reauthorization process will enable each agency to pursue programs,
such as Fast Track, that the agency determines is necessary to improve
that agency's SBIR program. While it is Congress's job to set the broad
parameters of the SBIR and STTR programs, we should not forget that it
is the individual agencies that are in the best position to implement
these programs effectively.
Q3. Do you see a need to encourage larger companies to participate in
the SBIR/STTR program at an earlier stage? Would extending R&D tax
credits on a limited basis to larger commercial partners provide more
of an incentive for larger companies to partner with a small firm that
may be operating at a zero net profit?
A3. The SBIR program should be reserved for small businesses, so long
as this determination is made using an objective and technology-neutral
metric such as employee count. The current restriction on venture
capital investment does not relate to the size of the company and it
effectively discriminates against more capital-intensive sectors, such
as biotechnology, relative to less capital-intensive technologies. This
restriction does nothing to preserve the small business element of the
SBIR program that could not be just as effectively preserved through
the 500 employee count limitation. It does, however, serve to exclude
many worthy small businesses from the SBIR program.
With respect to the R&D tax credit, I agree that a major issue
facing many small businesses is their inability to utilize many of the
tax incentives that Congress has seen fit to enact over the years.
These not-yet-profitable small companies are able to carry-forward
their tax credits, but this carry-forward does nothing to inject
investment capital into the small company at the point when it is most
needed. I would be pleased to work with you and other Members of
Congress to enact tax policies that more effectively support U.S.
innovation and global competitiveness.
Answers to Post-Hearing Questions
Responses by Sally J. Rockey, Acting NIH Deputy Director, Extramural
Research, National Institutes of Health, U.S. Department of
Health and Human Services
Questions submitted by Chair David Wu
Q1. In the American Recovery Act, the additional $8.2 billion that NIH
is set to receive for extramural research was specifically exempted
from the SBIR/STTR set aside requirement. Who at NIH asked for this set
aside and what was the justification for the specific exemption from
the SBIR/STTR statutory requirement?
A1. Due to the unique nature of the American Recovery and Reinvestment
Act of 2009 (ARRA) funding requirements, NIH originally planned that
most of the NIH's funding would be distributed by supplements to
existing grants, or applications that had already been reviewed/scored
and deemed to have scientific merit.
NIH was concerned that because of the decreasing number of SBIR
applications (we saw a near 40 percent decrease in fiscal years 2004
through 2008), that a lack of flexibility on how to expend the funds
would make it difficult to continue funding scientifically meritorious
projects under the ARRA requirements. I have no specific details of how
this exemption was put into ARRA.
Although the NIH is not required by this law to provide a set
amount of the funds toward the SBIR/STTR programs, it is important to
note that small businesses are able to receive such funds. NIH is
committed to the small business community and has been encouraging
small businesses to apply for stimulus funds through the Challenge
Grant and Grand Opportunity ``GO'' grant funding opportunities.
Additionally, new funding mechanisms will be coming out soon under
which NIH plans to set-aside some ARRA funds for small businesses.
Question submitted by Representative Adrian Smith
Program evaluation, performance measures.
Q1. The recent National Research Council review of SBIR found that the
program is ``not sufficiently evidence-based'' and is in need of
improved data collection and tracking of program outcomes, as well as
clear performance metrics for assessing the success or failure of a
given initiative. Do you agree with this finding and recommendation?
A1. While the National Research Council (NRC) may highlight certain
inherent challenges to measuring the program success and impact, the
NIH has conducted two evaluations of its SBIR program and other groups,
such as the General Accountability Office have also assessed the
program. The NRC correctly observed that factors such as firms
obtaining SBIR funds from several agencies, firms changing names and/or
locations, key individuals moving on and taking their knowledge of the
project with them pose real challenge to data collection. However,
program decisions and management are evidence-based. Regular data
collection and tracking of program outcomes helps to keep the SBIR
program up to date on program performance and are useful in assessing
the success or failure of a specific pilot program an agency may
initiate.
NIH has conducted two evaluations of its SBIR program and other
groups, such as the National Research Council of the National Academies
of Sciences and the General Accountability Office have also conducted
studies. Regular data collection and tracking of program outcomes helps
to keep the SBIR program up to date on program performance and can be
useful in assessing the success or failure of a specific pilot program
an agency may initiate. Therefore, the NIH developed an evaluation
framework that includes performance measures and indices and conducts
regular evaluations of its SBIR program. In addition, NIH established a
dynamic monitoring system, called Performance Outcomes and Data System
(PODS), which enables NIH to document the continued achievements of
SBIR awardees over time. For example, through surveys and regular
updates on SBIR awardees, NIH has found that about 50 percent of its
SBIR awardees funded from 1992 to 2001 have achieved commercial sales.
It is important to note that some products take much longer to
reach the market than others. For example, the drug development process
is a complex, long, and expensive one. The cost of bringing a drug to
market is estimated to be over $1 billion with a timeframe of eight to
twelve years before availability of the drug. Therefore, it is
important when analyzing the success of the program to consider the
trajectory a product takes to reach the market, and to consider other
metrics equally valuable in demonstrating success of SBIR projects.
These include published papers, patents, conduct of FDA-regulated
trials, FDA approval/clearance of drugs and devices, Initial Public
Offerings, the use of the technology in other research projects, and
increasing the knowledge base in a scientific field. In addition to
sales, these other metrics provide the much-needed evidence based data
for tracking program outcomes.
Questions submitted by Representative Daniel Lipinski
Q1. If the SBIR and STTR award amounts are increased and the set-
asides are not, thus resulting in fewer awards, what do you think the
impact will be on the number of successful commercializations? Will we
see more successes because we cull out more marginal companies and
increase award sizes, or will it diminish the overall impact of the
program because it eliminates research on promising ideas?
A1. The SBIR and STTR award amounts have remained at their current
levels since 1992. Although agencies have the discretion and
flexibility to exceed those award amounts where appropriate for a
particular project, formally increasing the Phase I and Phase II award
amounts to reflect economic adjustments and programmatic considerations
may be viewed by small businesses as financial incentives for
participating in the program, especially new start-ups who may not be
aware of the program nuances. Larger award amounts may incentivize
startups that have no other resources on which to draw, while being
required to present feasible and exciting projects. Further, larger
award sizes may enable small businesses to hire or retain strong talent
that can help a project succeed. We believe that there could be a
positive correlation between program incentives and successful
outcomes. While we believe that the SBIR legislation should contain
purposeful guidelines on award amounts and project periods, we believe
that agencies should also have the flexibility to provide support for
meritorious SBIR research projects at a funding level that is
considered appropriate to achieve success in these projects. Our
experience is that the conduct of some types of biomedical and
behavioral research projects, such as clinically-related studies,
vaccine development, drug discovery or certain technology development,
does not routinely lend itself to prescribed maximum dollar levels.
The commercialization success rate for NIH SBIR projects is now
over 50 percent. While award amounts is likely not the only reason for
success, we believe that the flexibility to make awards of sufficient
size to accomplish the meritorious proposals, stimulates research on
truly promising ideas with commercial potential. Further, what has made
our program so appealing are the opportunities for firms to propose
investigator-initiated, research projects in the fields that have the
most biological promise, rather than to restrict their ideas to
projects that can only be conducted under a prescribed amount of time
and money. Such projects can be important steps in integrally involving
small businesses in some of the most exciting, cutting-edge research
with the potential to benefit health related outcomes.
Q2. During the hearing, Dr. Rockey discussed the NIH ``Phase 2.5''
competitive re-awards. The NSF has a similar ``Phase II supplement''
program. Is either of these programs, or are there similar efforts at
other agencies, that are particularly effective at commercializing
products toward the end of their Phase II grant?
A2. Small businesses are playing an increasingly important role in drug
discovery and development, typically, but not entirely, focusing their
efforts on the earlier stages of this process rather than clinical
trial evaluation. SBIR support has heretofore only allowed for a Phase
I and single Phase II grant for such research. A recipient of an NIH
SBIR Phase I and Phase II award normally receives no more than $1
million and less than three years of support. Although Phase I and
Phase II SBIR support is sufficient for initial discovery efforts, it
is often not adequate to support either the kind of developmental work
needed for compliance with the FDA's requirements for an
investigational new drug (IND), or for clinical trials. If the intended
commercialization product is a drug or biologic, the SBIR funds are
often a small percentage of the funds necessary to complete the studies
required for licensing by the Food and Drug Administration (FDA).
Further, the process of moving promising new products from bench to
bedside typically takes more than a decade.
The NIH ``Phase 2.5'' competitive re-awards, which at the NIH are
called Phase II Competing Renewal awards, provide up to three
additional years of support to small businesses for promising drug
research and development through the award of a Phase II Competing
Renewal grant. It is recognized that even with a competing renewal
grant, the entire development timeline will not be supported by the
SBIR Program for any given drug. The competing renewal grant will,
however, allow small businesses to carry further the fruits of their
research to advance science and to attract interest and investment in
their research programs by third parties.
NIH started issuing Phase II Competing Renewal awards in 2005.
Therefore, some of the earlier projects just finished last year and
many of the projects are still ongoing. To date, 56 Competing Renewal
awards have been awarded. We are tracking the companies closely and
plan to evaluate the Phase II Competing Renewal award program to assess
the extent to which it is effective at helping small businesses bridge
the ``Valley of Death'' by contributing to the critical funding needed
by companies to carry out R&D activities necessary to move a product or
technology along the commercialization pathway.
Q2a. Does the current approach to Phase III funding for
commercializing products, which precludes using any SBIR or STTR funds,
work for companies and products that are trying to move beyond their
Phase II grant? Are there changes that you would recommend?
A2a. NIH does not provide Phase III funding. However, the current
approach NIH uses to assist SBIR/STTR awardees in their transition to
the marketplace does seem to work well. The NIH SBIR program
commercialization success rate is now about 50 percent, the current
approach to Phase III funding for commercializing products seems to
work well. It is important to not lose sight of the fact that, given
the ``I'' in the SBIR program, some projects will fail.
Increasing the commercialization of products and services derived
from Phase I and Phase II SBIR/STTR awards is one of the four
Congressional goals of the Program and also a high priority of the
agency. An interesting approach might be to consider revising the SBIR
provisions of the Discretionary Technical Assistance to SBIR Awardees
clause (and consider applying the clause to the STTR program) to permit
a larger portion of the SBIR dollars to be used to provide small
business concerns engaged in SBIR projects with technical assistance
services. The $4,000 level has not been amended since 1992. The
increase in Technical Assistance funds would be more aligned with the
current market for such services. The increase will also allow federal
agencies to establish more robust technical assistance programs that
will permit more effective translational research.
Currently, NIH's Technical Assistance Program (TAP), serves to
enhance the current phased award structure, provides commercialization
assistance, facilitates partnering opportunities, and helps small
businesses cross what is so often called the ``Valley of Death,'' that
gap between innovative promising research and development (R&D) and
transitioning those innovations to the market. One program within the
NIH TAP, called the ``Niche Assessment Program'' helps Phase I awardees
assess the market opportunities as well as the needs and concerns of
end-users and assists them in discovering potential new markets. This
program has been helpful to researchers who often lack the
entrepreneurial skills to assess whether there are other applications
or niches for their SBIR-developed technology. Another TAP program, the
NIH ``Commercialization Assistance Program'' (CAP) provides
entrepreneurial training assistance and one-on-one business counseling
to Phase II SBIR awardees in order to develop and implement an
appropriate business strategy aimed at commercializing the products
resulting from their SBIR research projects. CAP culminates with an
investment event at which the participants present their business
opportunities to a targeted group of potential investors and/or
strategic partners. A recent enhancement to the CAP makes available
publicly the abstracts and company presentations upon completion of the
CAP to facilitate the identification of commercialization partners
after the opportunity forum. NIH is tracking each participating
company's commercialization progress for 18 months following completion
of the program. Although investments and deals take time to mature, we
believe the CAP is having positive impacts on SBIR companies seeking
investments and partnerships. For example, one company is developing a
technology to create a living blood vessel. This exciting medical
advancement holds promise for coronary bypass candidates, lower limb
amputation candidates, and hemodialysis patients. As a CAP participant,
the company has raised more than $30 million in private equity
financing to fund some of their clinical studies.
Since the program's inception in 2004 through June of 2008, we have
found that 91 NIH-CAP companies have been able to raise over $326.5M in
funding. In addition, NIH-CAP participants have experienced over 3,900
contacts with investors, over 2,800 meetings with investors and
partners, 1,500 Confidentiality Disclosure Agreements signed, 800
negotiations with investors and partners, 400 initial proposals and
term sheets, and 235 deals.
Finally, understanding that negotiations and deals take time, NIH
has established the NIH Pipeline to Partnerships (P2P), a virtual space
for NIH SBIR/STTR awardees and NIH licensees to showcase technology and
product development for an audience of potential strategic partners,
licensing partners and investors. P2P helps NIH in advancing its
mission by furthering the development of its own licensed technologies
or those for which it has provided SBIR/STTR funding. Currently, there
are over 150 technologies in the searchable/indexed database.
NIH is hopeful that this type of approach will help SBIR/STTR
awardees attract funding and partners that will help to commercialize
products and services supported by Phase I and Phase II.
Questions submitted by Representative Gary C. Peters
Q1. When I talk with my constituents back home, they echo much of what
has already been said here: that the SBIR/STTR programs are often the
life blood for small firms, and that small firms are a crucial driver
of innovation. However, they also mention the ``Valley of Death'' that
occurs for technologies after the prototype has been developed. The
companies do not have the dollars for marketing and commercialization
of the product. To truly support economic development, we need for
these small firms to have the support to make the jump from development
to commercialization. How can SBIR/STTR support companies in making
this leap and avoid the ``Valley of Death''? Wouldn't we see a greater
return on our tax dollar investment if the SBIR/STTR program dollars
helped companies through the commercialization phase?
A1. For the past five years, the NIH focused on ways that can assist
SBIR awardees cross the ``Valley of Death.'' NIH has one of the highest
success rates, and we attribute this to several factors. First, we
recognize that the three-phase program progression is more a cyclical,
rather than linear, uniform one. Thus, it may take multiple Phase I and
Phase II projects to ultimately reach the Phase III stage. In addition,
NIH offers gap-funding between Phase I and Phase II (e.g., Fast-Track
awards, Phase I administrative and competitive supplement funding) and
between Phase II and Phase III (e.g., Phase II Competing Renewal
awards, Phase I administrative and competitive supplement funding;
Commercialization Assistance Program; NIH Pipeline to Partnerships).
The funding a company receives can serve as leverage for attracting
additional resources that are critical in helping a company cross the
``Valley of Death.'' SBIR and venture capital or strategic partner
investments act in synergy with all three phases of the SBIR and in
accord with two broad legislated goals of the SBIR program:
``To more effectively meet R&D needs brought on by
the utilization of small innovative firms (which have been
consistently shown to be the most prolific sources of new
technologies) and
To attract private capital investment to
commercialize the results of federal research.''
When the SBIR program was reauthorized in 2000, the authorizing
legislation included a provision for the establishment of the Federal
and State Technology Partnership (FAST) program, which was intended, in
part, to strengthen the technological competitiveness of small business
concerns in states. The types of services that States offered through
the FAST program (e.g., technology deployment; establishing a mentoring
network; commercialization assistance) are one approach that could help
SBIR/STTR awardees ``make the leap'' to the marketplace.
A primary goal of the SBIR program is the commercialization of the
outcome(s) of the research, leading to job creation and the significant
attendant economic benefits to the Nation attached thereto. Phase II is
the in-depth continuation of the project that has met the requirements
of Phase I for scientific and technical feasibility. Thus, Phase II
provides the greatest opportunity for achieving Phase III
commercialization. Another approach, particularly given non-SBIR/STTR
funding opportunities for which small businesses are competing, is to
consider is an alternative to the current phased structure of the
program where small businesses would not be restricted to having
received an SBIR- or STTR-funded Phase I in order to obtain Phase II
SBIR or STTR support.
Q2. New companies in my district find the Fast Track program extremely
valuable, and have even been launched based on a fast-track Phase II
award. The National Academies have also found that experimentation by
the agencies, such as the Fast Track program should be encouraged. Can
you expand on how we can further promote the Fast Track program within
SBIR/STTR?
A2. NIH has heard repeatedly, and the case studies gathered by the NRC
in its recent assessment of the SBIR program at the NIH underscored,
that one of the most difficult issues faced by small businesses and
entrepreneurs is the funding gap between Phase I and Phase II. As one
company noted, ``The funding gap, which can be six months or more,
creates an unstable employment environment. The funding gap can induce
key scientific personnel to leave the firm and force the firm to
abandon that line of research.''
Current efforts to address this lull in funding include a Phase I/
Phase II Fast-Track review option in which applicants submit a Phase I
and Phase II simultaneously for concurrent review. The Fast Track
program is intended for companies that have some preliminary data as
well as measurable and realistic milestones for transitioning to Phase
II seamlessly, and who may be able to obtain letters of interest from
investors or strategic partners for carrying the R&D further along the
commercialization pathway. In NIH's experience, encouraging but not
requiring third-party support is very important given how early-stage
some of the projects may be in the eyes of an investor or strategic
partner. NIH has exercised caution to not create unrealistic
expectations or put a company in a position that might compromise
future partnerships.
We realize that the Fast-Track mechanism is not appropriate for all
applicants or for all types of research, and in some cases, fully
eliminating the funding gap is not possible. Therefore, NIH offers
alternative gap-funding avenues such as no-cost award extensions,
supplemental awards, and Phase II Competing Renewal awards.
One approach to promote the Fast-Track program within SBIR/STTR is
to consider longer Phase I project periods such that the Phase II could
be submitted in the second year of Phase I.
Q3. Do you see a need to encourage larger companies to participate in
the SBIR/STTR program at an earlier stage? Would extending R&D tax
credits on a limited basis to larger commercial partners provide more
of an incentive for large companies to partner with a small firm that
may be operating at a zero net profit?
A3. This is an interesting approach to consider and would add a new
dimension to the SBIR and STTR programs. Extending R&D tax credits to
larger commercial partners may provide more of an incentive to become
involved with small companies at an earlier stage. Small companies may
benefit from their involvement if the partners can bring resources that
would supplement SBIR/STTR R&D activities and that would further the
R&D toward commercialization.
Answers to Post-Hearing Questions
Responses by Jere N. Glover, Attorney and Executive Director, Small
Business Technology Council, Washington, DC
Question submitted by Representative Adrian Smith
Program evaluation, performance measures.
Q1. The recent National Research Council review of SBIR found that the
program is ``not sufficiently evidence-based'' and is in need of
improved data collection and tracking of program outcomes, as well as
clear performance metrics for assessing the success or failure of a
given initiative. Do you agree with this finding and recommendation?
A1. The National Research Council/National Academy of Sciences study of
the SBIR Program\1\ offered high praise for the Program, both in
individual agencies and government-wide. Calling SBIR ``an effective
program'' that ``is increasing innovation, encouraging participation by
small companies in federal R&D, providing support for small firms owned
by minorities and women, and resolving research questions for mission
agencies'' (p. 88 of the summary of the final report), the report also
recommended improved data collection and tracking of program outcomes,
as well as an enhanced culture of evaluation (pp. 73-4). The NRC/NAS
identified ``inadequate management funding'' (p. 74) as the underlying
cause of these needs and stated that ``additional management resources
are needed'' (p. 76). The report weighed various approaches to
financing these recommended steps. It noted that diverting funds from
existing program dollars would ``limit funds for awards to small
companies, the program's core objective'' (fn 68, p. 76). But a new
funding set-aside, dedicated to these data collection and evaluation
initiatives, and structured within an overall increase in the SBIR
Program set-aside, would ``perhaps be more easily achievable'' (fn 68,
p. 76), the report observed. The report recommended a management
funding increase of 0.03 percent to 0.05 percent, and noted that even
the upper end of this range (0.05 percent) would still only bring the
total SBIR set-aside ``to 2.55 percent, providing modest resources to
assess and manage a program that is approaching an annual spend of some
$2 billion'' (fn 68, pp. 76-7).
---------------------------------------------------------------------------
\1\ National Research Council, Chuck Wessner, editor, An Assessment
of the SBIR Program, National Academies Press, 2008.
---------------------------------------------------------------------------
SBTC agrees with both the need and the solution identified by the
NAS study. There is a need for better data collection and evaluation,
and enhanced funding for program management would best address the
need. We urge Congress to increase the management funding for SBIR as
part of an overall increase in the SBIR set-aside, as described further
in our testimony.
Questions submitted by Representative Daniel Lipinski
Q1. If the SBIR and STTR award amounts are increased and the set-
asides are not, thus resulting in fewer awards, what do you think the
impact will be on the number of successful commercializations? Will we
see more successes because we cull out more marginal companies and
increase award sizes, or will it diminish the overall impact of the
program because it eliminates research on promising ideas?
A1. In assessing commercialization strategies, it must be remembered
that the primary goal of the SBIR Program, and indeed most federal R&D,
is to conduct research that the government needs. Thus the R&D topics
chosen by the government for SBIR solicitations often do not lend
themselves to private sector commercialization. Yet, as the NRC/NAS
studies show, the SBIR Program still manages to move some 40-50 percent
of its innovations close to the point that they are commercially
feasible. This is an impressive feat, but it is due in large part to
the current design of the SBIR Program. Crucially, SBIR and STTR sets
relatively low award maximums for Phase II, and particularly for Phase
I. This makes the Program dollars go further, because technological
approaches that turn out to be unworkable or highly unpromising are cut
off quickly, before much money has been spent on them.
SBTC regards it as very unlikely that a major increase in the SBIR
and STTR award maximums would lead to more commercialization. In the
first place, the R&D that SBIR and STTR fund is very high-risk, meaning
most Phase I innovations will not reach Phase II. In the second place,
SBIR and STTR are intended to address Federal Government R&D
priorities. Thus, quite a few Phase I's will lose out in competition
with better technologies and never get to Phase II. Then, quite a few
Phase II's will do just fine addressing the government's needs, but
won't interest the private sector. The more robust the SBIR Program is,
in terms of the number of science and technology ideas that it can
choose from, the more likely the Program is to identify breakthrough
innovations, for both the government and, subsequently, the private
sector.
Fewer and larger awards would not only reduce the options for later
development and commercialization. They would also significantly
increase the odds against a company winning an SBIR award, particularly
a Phase II SBIR award. This would discourage many companies from making
the effort to apply. As SBIR Founder Roland Tibbetts wrote, in a White
Paper that SBTC included with its testimony:
``With the high risk involved in early-stage R&D, there is a
need to diversify the federal investment by betting on many,
rather than fewer, technologies and ideas . . .. Most of those
I worked with in developing SBIR agreed that the technologies
involved were such inherently high-risks that smaller bets
should be made on many projects before making a few larger bets
. . .. My own 20-year experience as an SBIR Program Manager
subsequently confirmed that the economic payoffs would be
higher this way. Many smaller awards mean that more ideas can
be evaluated for their potential. More and better choices for
further development become available . . .. If there are fewer
SBIR awards in the future, not only will fewer technologies get
evaluated and funded. Fewer companies will compete, because the
odds against winning will get even higher . . .. There will be
no shortage of great new innovations to invest in if we allow
SBIR to do its work in supporting truly innovative small
companies by objectively assessing which ideas are wheat and
which ones chaff.''
Q2. During the hearing, Dr. Rockey discussed the NIH ``Phase 2.5''
competitive re-awards. The NSF has a similar ``Phase II supplement''
program. Is either of these programs, or are there similar efforts at
other agencies, that are particularly effective at commercializing
products toward the end of their Phase II grant?
a. Does the current approach to Phase III funding for
commercializing products, which precludes using any SBIR or
STTR funds, work for companies and products that are trying to
move beyond their Phase II grant? Are there changes that you
would recommend?
A2. The NIH ``Phase 2.5'' NSF Phase II supplement'' programs have
helped many companies move their technology closer to ripeness for
commercialization. SBTC believes that these programs have been largely
successful. The structure and cost of these programs must be
continually evaluated, however. They, and similar programs elsewhere in
the government, must not drain away funding needed for the Phase I and
Phase II core of the SBIR Program, the seed bed of its innovations.
Q3. Some of the nanotech businesses I've spoken with in Chicago have
pointed to inconsistent paperwork as an obstacle encountered by people
who are trying to turn their idea from a laboratory success into a
small business. Can you comment on the consistency of SBIR and STRR
program and application procedures across and within agencies? Is this
something that discourages first-time SBIR applicants?
A3. DOD, the agency with the largest SBIR budget, has consolidated and
standardized its application process across the twelve diverse
operational units that participate in its SBIR Program.\2\ That change
is working well. The DOD example shows that more standardization is
possible. So Representative Lipinski and his constituents have good
point: agencies in the SBIR Program ought to do more to standardize.
Generally the SBIR law requires the agencies to use the same awards
process, but the agencies have evolved different application processes
and to some extent different proposal evaluation processes. Much more
standardization could be achieved. At the very least, SBIR applications
could be divided into two parts, one of which is common to all agencies
in the Program, and the other of which meets more specific agency
needs. We would note, for example, that the ``Grants.gov'' process used
by NIH is extremely hard for first-time applicants to master. By
contrast, the NSF application procedure is far more user-friendly,
especially for first time users.
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\2\ These include the Departments of the Air Force, Army and Navy,
Chemical and Biological Defenses Program, Defense Advanced Research
Projects Agency, Defense Logistics Agency, Defense Media Activity,
Defense Threat Reduction Agency, Missile Defense Agency, National
Geospatial Intelligence Agency, Office of the Secretary of Defense, and
United States Special Operations Command.
---------------------------------------------------------------------------
As the agency that administers SBIR, SBA should play a role in
this, perhaps by bringing in a specialized management consulting firm
to move the process forward.
Questions submitted by Representative Gary C. Peters
Q1. When I talk with my constituents back home, they echo much of what
has already been said here: that the SBIR/STTR programs are often the
life blood for small firms, and that small firms are a crucial driver
of innovation. However, they also mention the ``Valley of Death'' that
occurs for technologies after the prototype has been developed. The
companies do not have the dollars for marketing and commercialization
of the product. To truly support economic development, we need for
these small firms to have the support to make the jump from development
to commercialization. How can SBIR/STTR support companies in making
this leap and avoid the ``Valley of Death''? Wouldn't we see a greater
return on our tax dollar investment if the SBIR/STTR program dollars
helped companies through the commercialization phase?
A1. The ``Valley of Death'' problem exists for every new technology-
based business. And our country hasn't yet found a way to solve it.
Consider venture capital investments. They succeed in roughly one case
out of every eight. Thus even a large majority of those companies that
attract VC investment never exit the ``Valley of Death.'' The SBIR
success rate for moving early-stage R&D to a later stage of
development--defined as sales or investments in excess of SBIR awards--
is in the 40-50 percent range. While this is a remarkable achievement,
as the NRC/NAS report often emphasizes, it still falls short of the
commercialization that's needed. Ironically, it has been the amazing
success of SBIR as a nurturer of technology that has increased the
calls to shift its limited funds to commercialization.
In assessing SBIR, then, it is important to keep in mind that the
Program was never designed to bridge the ``Valley of Death.'' Rather,
it was designed as a competitive, science-based source of early-stage
R&D investments. It is supposed to stimulate the creation of innovative
technologies and then move these technologies on to later stage
development.
For more than twenty years, SBIR has been the Nation's largest
source of early and seed-stage R&D funding. Today SBIR provides more
than ten times as much early-stage and seed capital as venture capital
investments, even though VC investments overall are orders of magnitude
larger than the entire SBIR and STTR Programs. Diverting the scarce
early-stage funding that SBIR currently provides, and shifting it to
much later-stage commercialization funding, would be bad policy for
several reasons. First, it would duplicate funding that is already
available from many sources, including ``angel'' funding, bank lending,
IPOs, and venture capital financing. Second, and much more
destructively, it would dry up a vital stream of innovations before
they can reach the potential for commercialization.
Instead of consuming the SBIR seed-corn by diverting precious
early-stage R&D funding to commercialization, we should find new ways
to grow the plants.
Programs such as the former Advanced Technology Program (ATP), now
the Technology Innovation Program (TIP) at the National Institute of
Standards and Technology have shown great promise in helping companies
cross the ``Valley of Death.'' These programs should be expanded. Other
new programs outside SBIR should be devised and tested.
Within the SBIR program, the SBIR Commercialization Pilot Program
at DOD has been successful in moving technology to a later stage of
development where Phase III mainstream procurement funding may be
available.\3\ (The program's title is something of a misnomer, though,
since it does not actually commercialize technologies.).According to
the Defense Department, the CPP has provided about 100 SBIR companies
(50 in the Navy and 25 each in the Air Force and Army) with about $100
million in development funding.\4\
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\3\ See National Research Council, SBIR and the Phase III Challenge
of Commercialization, National Academies Press, 2007.
\4\ U.S. Department of Defense, Small Business Innovation Research
Program, Commercialization Pilot Program (CPP), Report for Fiscal Year
2008, April 2009.
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While it is early to know with certainty, the CPP appears to be
successful in advancing some defense technologies to a higher level of
development. Programs such as CPP should be expanded to agencies such
as DOE and NASA, where technological innovations can be similarly
channeled toward consumption by the government itself, via the
mainstream procurement system.
The challenge remains, however, to balance early and later stages
of development funding within SBIR's finite budget. Selection processes
for later stage funding need to be rigorous, transparent, and
competitive. And the tradeoffs between enhanced funding for later stage
development and reduced funding for early stage development need to be
explicitly acknowledged.
Q2. New companies in my district find the Fast Track program extremely
valuable, and have even been launched based on a fast-track Phase II
award. The National Academies have also found that experimentation by
the agencies, such as the Fast Track program should be encouraged. Can
you expand on how we can further promote the Fast Track program within
SBIR/STTR?
A2. SBTC agrees with the NRC/NAS finding that agency experimentation in
pushing SBIR technologies forward should be encouraged. Fast Track,
Phase IlB, and CPP have indeed proven helpful. But, as noted above,
these and other such programs should not be expanded at the cost of
significantly reducing the number of Phase I and Phase II SBIR awards
that can be made.
Q3. Do you see a need to encourage larger companies to participate in
the SBIR/STTR program at an earlier stage? Would extending R&D tax
credits on a limited basis to larger commercial partners provide more
of an incentive for large companies to partner with a small firm that
may be operating at a zero net profit?
A3. As shown in the NRC/NAS reports, the SBIR program has been
remarkably successful in creating technologies that larger companies
want to access. Nearly 1,300 SBIR companies have been acquired by
larger firms. Partnerships between larger firms and SBIR companies now
number in the thousands, and hundreds of licenses have been sold by
SBIR companies to such larger firms. Indeed, the original design for
the SBIR Program depends on larger companies coming in at Phase III--as
buyers, investors and partners--in order for SBIR companies to
successfully commercialize innovations. Likewise, the STTR Program
partners small companies with universities, who may in turn seek to
link up with large companies to foster commercialization at the Phase
III stage of that Program.
But neither SBIR nor STTR should invite large companies in at an
earlier stage, in SBTC's view. There are several reasons for this.
First, SBIR has been described to the public as a small business
program for 25 years. Much of the Program's public support is rooted in
that still quite accurate characterization. Devaluing the ``SB'' of
``SBIR'' would not only endanger the empirical basis of the Program's
success, as has been shown in the NAS studies. It would also gravely
endanger public support for the Program.
Second, large companies already have access to other sources of
federal R&D funding--the 97.2 percent that isn't allocated to small
business through the SBIR and STTR Programs. Small companies don't have
that access. Even though small companies today employ six million
scientists and engineers--significantly more scientists and engineers
than either large companies or universities--and are producing more of
the top innovations than either of them (see pp. 7-8 of our
Subcommittee testimony), small companies still obtain only 4.3 percent
of federal R&D dollars. And SBIR/STTR accounts for over half of that.
If a group of SBIR applicants were to be backed by large companies,
they would be able to generate far more polished-appearing
applications, in far greater numbers, than smaller companies. This
would soon swamp many smaller companies. Deserving technological ideas
would lose out, as these deep-pocketed companies with large business
backing took over more and more of the Program.
Third, large companies have fundamentally different attitudes
toward innovation than smaller companies. Large companies have product
lines, sales channels, and customer bases to protect. Small companies
are looking for the breakthroughs that will generate entirely new
products and lines of business. Insert large companies into Phase I and
II of the SBIR Program, and they will inevitably imbue their SBIR
apprentices with far narrower and more guarded attitudes toward R&D.
Here again SBIR Founder Roland Tibbetts is eloquent:
``(The large company looks for] incremental innovations that
make its existing products a little better and a little cheaper
to produce. It looks for new products that are familiar and
comfortable. For large companies, ``re-defining'' types of
innovations are frightening. They upset settled ways of doing
business. The Nation needs both incremental innovations and
quantum-leap innovations, but right now and for the foreseeable
economic future, it needs those out-sized innovations the most.
SBIR can deliver sweeping innovations, but to do so it must
avoid taking on the coloration and biases of large companies.''
The question of R&D tax credits for larger companies requires a
careful balancing of tax, innovation, and budget priorities. But in
general SBTC would favor any reasonable incentive to promote the post-
Phase II commercialization of SBIR technologies that does not diminish
SBIR funds.