[Senate Hearing 109-968]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 109-968
 
                  STRENGTHENING PARTICIPATION OF SMALL 
   BUSINESSES IN FEDERAL CONTRACTING AND INNOVATION RESEARCH PROGRAMS 
=======================================================================
                                HEARING

                               BEFORE THE

            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 12, 2006

                               __________

    Printed for the Committee on Small Business and Entrepreneurship


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 senate

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            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                       ONE HUNDRED NINTH CONGRESS

                              ----------                              
                     OLYMPIA J. SNOWE, Maine, Chair
CHRISTOPHER S. BOND, Missouri        JOHN F. KERRY, Massachusetts
CONRAD BURNS, Montana                CARL LEVIN, Michigan
GEORGE ALLEN, Virginia               TOM HARKIN, Iowa
NORM COLEMAN, Minnesota              JOSEPH I. LIEBERMAN, Connecticut
JOHN THUNE, South Dakota             MARY L. LANDRIEU, Louisiana
JOHNNY ISAKSON, Georgia              MARIA CANTWELL, Washington
DAVID VITTER, Louisiana              EVAN BAYH, Indiana
MICHAEL B. ENZI, Wyoming             MARK L. PRYOR, Arkansas
JOHN CORNYN, Texas
                    Weston J. Coulam, Staff Director
                 Naomi Baum, Democratic Staff Director
















                            C O N T E N T S

                              ----------                              

                           Opening Statements

                                                                   Page

Bond, The Honorable Christopher S., a United States Senator from 
  Missouri.......................................................     6
Coleman, The Honorable Norm, a United States Senator from 
  Minnesota......................................................    15
Enzi, The Honorable Michael, a United States Senator from Wyoming    22
Isakson, The Honorable Johnny, a United States Senator from 
  Georgia........................................................    31
Kerry, The Honorable John F., Ranking Member, and a United States 
  Senator from Massachussetts....................................     3
Snowe, The Honorable Olympia J., Chair, and a United States 
  Senator from Maine.............................................     1
Vitter, The Honorable David, a United States Senator from 
  Louisiana......................................................    30

                           Witness Testimony

Bigger, Thomas J., president and chief executive officer, Paratek 
  Pharmaceuticals................................................   107
Sims, Steven, vice president, Field Operations Program, National 
  Minority Supplier Development Council..........................    56
Squillante, Dr. Michael, chairman, Small Business Technology 
  Council, New England Innovation Alliance.......................    93
Thorson, The Honorable Eric M., Inspector General, U.S. Small 
  Business Administration........................................    32
Watson, Eugene, program manager, Wyoming SBIR/STTR Initiative....    86
Wessner, Dr. Charles W., director for Technology, Innovation, and 
  Entrepreneurship, National Research Council, National Academies 
  of Science.....................................................    64
Wynn, Joe, executive officer, Task Force for Veterans' 
  Entrepreneurship, Vietnam Veterans of America..................    40

          Alphabetical Listing and Appendix Material Submitted

Bigger, Thomas J.
    Testimony....................................................   107
    Prepared statement...........................................   110
    Responses to post-hearing questions from:
        Senator Bond.............................................   153
        Senator Burns............................................   154
        Senator Enzi.............................................   154
Bond, The Honorable Christopher S.
    Testimony....................................................     6
    Prepared statement (with attachments)........................     8
    Post-hearing questions posed to:
        Thomas J. Bigger.........................................   153
        Dr. Michael Squillante...................................   151
        Eugene Watson............................................   143
Burns, The Honorable Conrad
    Prepared statement...........................................   134
    Post-hearing questions posed to:
        Thomas J. Bigger.........................................   154
        Steven Sims..............................................   141
        Dr. Michael Squillante...................................   153
        Eric M. Thorson..........................................   137
        Eugene Watson............................................   146
        Joe Wynn.................................................   140
Coleman, The Honorable Norm
    Testimony....................................................    15
    Prepared statement...........................................    16
Enzi, The Honorable Michael B.
    Testimony....................................................    22
    Prepared statement...........................................    24
    Post-hearing questions posed to:
        Thomas J. Bigger.........................................   154
        Eugene Watson............................................   148
Isakson, The Honorable Johnny
    Testimony....................................................    31
Kerry, The Honorable John F.
    Testimony....................................................     3
    Post-hearing questions posed to:
        Steven Sims..............................................   141
        Eric M. Thorson..........................................   136
        Joe Wynn.................................................   137
Sims, Steven
    Testimony....................................................    56
    Prepared statement...........................................    58
    Responses to post-hearing questions from:
        Senator Burns............................................   141
        Senator Kerry............................................   141
Snowe, The Honorable Olympia J.
    Testimony....................................................     1
Squillante, Dr. Michael
    Testimony....................................................    93
    Prepared statement...........................................    96
    Responses to post-hearing questions from:
        Senator Bond.............................................   151
        Senator Burns............................................   153
Thorson, The Honorable Eric M.
    Testimony....................................................    32
    Prepared statement...........................................    35
    Responses to post-hearing questions from:
        Senator Burns............................................   137
        Senator Kerry............................................   136
Thune, The Honorable John
    Prepared statement...........................................   107
Vitter, The Honorable David
    Testimony....................................................    30
Watson, Eugene
    Testimony....................................................    86
    Prepared statement...........................................    89
    Responses to post-hearing questions from:
        Senator Bond.............................................   143
        Senator Burns............................................   146
        Senator Enzi.............................................   148
Wessner, Dr. Charles W.
    Testimony....................................................    64
    Prepared statement...........................................    67
    Responses to post-hearing questions from Senator Burns.......   142
Wynn, Joe
    Testimony....................................................    40
    Prepared statement (with attachment).........................    43
    Responses to post-hearing questions from:
        Senator Burns............................................   140
        Senator Kerry............................................   137

                        Comments for the Record

Madsen, Marcia G., chair, Acquisition Advisory Panel (with 
  attachments)...................................................   156
Office of Government Contracting and Business Development, U.S. 
  Small Business Administration..................................   208
Rice, Patricia, director, Maine Procurement Technical Assistance 
  Center.........................................................   214
Tibbetts, Roland, former (retired) SBIR program manager for the 
  National Science Foundation....................................   216
Women Impacting Public Policy (WIPP).............................   222
Yancey-Wrona, Dr. Janet, director, Maine Office of Innovation, 
  Department of Economic and Community Development, and 
  Governor's Science advisor.....................................   231


STRENGTHENING PARTICIPATION OF SMALL BUSINESSES IN FEDERAL CONTRACTING 
                    AND INNOVATION RESEARCH PROGRAMS

                              ----------                              


                        WEDNESDAY, JULY 12, 2006

                      United States Senate,
  Committee on Small Business and Entrepreneurship,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 10:38 a.m., in 
Room 428, Russell Senate Office Building, Hon. Olympia J. 
Snowe, Chair of the Committee, presiding.
    Present: Senators Snowe, Bond, Coleman, Thune, Isakson, 
Vitter, Enzi, and Kerry.

  OPENING STATEMENT OF THE HONORABLE OLYMPIA J. SNOWE, CHAIR, 
SENATE COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP, AND A 
                UNITED STATES SENATOR FROM MAINE

    Chair Snowe. Good morning. The hearing will come to order, 
please. Good morning and welcome to today's hearing on 
strengthening the participation of small businesses and Federal 
contracting innovation research programs. I want to thank all 
of the small business representatives for being here today as 
we examine the small businesses' ability to succeed in the 
Federal procurement arena and the small business role in 
innovation through SBIR program.
    I particularly want to thank Inspector General Thorson for 
his appearance here today. It is his first appearance before 
this Committee since his confirmation. I want to welcome you.
    According to the SBA, the small businesses received a 
record-breaking amount of Federal prime contracts, $79.6 
billion in fiscal year 2005, a $10 billion increase from the 
previous year. Moreover, the SBA reports that these contracts 
represented 25.4 percent of Federal prime contracting dollars 
in 2005, surpassing the overall Government statutory goal of 23 
percent for the third consecutive year.
    This is welcome news. The oversight I have conducted in 
this Committee, however, strongly suggests that caution and 
corrective legislation is necessary before these numbers may be 
accepted at face value.
    It has been the President's goal that all agencies are fair 
in their procurement policies and unbundle those contracts that 
make it more difficult for small businesses to compete.
    Because small businesses drive our economic growth and job 
creation, it is critical that these policies are upheld so 
small businesses have a fair and equal opportunity to do 
business with the Government. Small businesses propel our 
economy by creating jobs, strengthening communities, empowering 
entrepreneurs, and assuring economic revitalization in America.
    With the help of Federal contracts, small firms create and 
retain almost half a million jobs in fiscal year 2004, and 
taxpayers have enjoyed a staggering $2.5 billion in savings 
since 1985 through the SBA's program to break out large 
contracts for competition among small firms.
    The Federal Government's record of meeting its promises to 
America's small contracts is decidedly mixed. On the positive 
side, some agencies have exceeded the statutory small business 
goal and the Government has surpassed the 5 percent goal of 
contracts for small, disadvantaged businesses. And the goals 
for aid for small, disadvantaged businesses.
    At the same time, Government data has indicated that small 
companies owned by women, service-disabled veterans, and those 
located in HUB Zones, historical under-utilized business zones, 
have not been given fair access to Federal contracts. 
Regrettably, these programs have not received the support they 
deserved.
    I am particularly troubled by the SBA's decisions earlier 
this year to close the office of Federal contract assistants 
for veteran business owners. Many in Washington assume that 
large firms churn out all the new ideas because they have more 
people or more money. The truth is that small businesses are 
our Nation's most innovative sector.
    The numbers are indisputable. America's small businesses 
hold 40 percent of our national patents. They obtain 13 times 
more patents per employee than large firms. And their patents 
are twice as technologically significant as large firm patents. 
Government agencies must be diligent about meeting the 
contracting goals and insuring that these contracts go to small 
businesses, not large corporations.
    It concerns me deeply to hear recent claims that the 
Government has included in the small business statistics 
billions of dollars in awards to some of the Nation's largest 
corporations. Documents released by the SBA's Office of 
Advocacy and the Office of Inspector General has confirmed that 
the Government has reported billions of dollars in contracts to 
large corporations. This type of misleading reporting must come 
to an end.
    Large firms posing as small must be aggressively prosecuted 
and debarred from Federal contracts and the Government must 
uphold its obligation to small businesses.
    We would be remiss if we simply accepted the status quo of 
the contracting environment for small businesses. Our economy 
flourishes when small businesses partner with the Federal 
Government.
    Today, we will address issues surrounding the vitality of 
the small business innovation research program, and its 
companion, the small business technology transfer program. 
Small businesses face barriers to commercializing their new 
technologies through Federal contracts and subcontracts, 
especially at the Department of Defense.
    In particular, there is a concern about the proper level of 
involvement for venture capital investment, and I hope that 
this hearing will enable all sides in this debate to achieve a 
reasonable compromise in this issue. And then we can resolve 
some of the questions at hand.
    As an original cosponsor of the SBIR program legislation, 
which was adopted in 1982, I am proud of the program's record 
of directing over $21 billion of Federal research and 
development funding to America's small businesses. 
Unfortunately, the small business share of Federal research and 
development dollars has historically amounted to less than 3 
percent.
    Practices that exclude small firms from Federal R&D lack 
foresight and hinder our competitiveness. The SBA proposes for 
a third year to eliminate two grant programs for rural outreach 
and Federal and State partnership, which assists States in 
preparing their local small innovators for SBIR competitions. 
These programs leverage the infrastructure of State technology 
agencies and nonprofit research incubators to increase the 
geographic diversity and competitiveness of small, high-tech 
firms for States such as Maine, which have comparatively low 
participation in Federal R&D efforts.
    Clearly, this is a step in the wrong direction, especially 
at a time when our key competitors, such as China, are 
aggressively expanding their technological base by copying the 
very programs the SBA is seeking to abolish.
    The President's contract bundling initiative is also 
presently on life support. According to reports prepared by the 
Government Accountability Office and the SBA inspector general 
report last year, most agencies claim confusion about what 
constitutes contract bundling. And the confusion is only 
compounded by the fact that the SBA failed to review over 80 
percent of the contracts identified as bundled.
    The future economic success of our Nation requires an 
environment that encourages risk taking and competition. And 
the programs that we will discuss here today with this panel 
are an integral part of that effort.
    With that, I will now recognize the Ranking Member of this 
Committee, Senator Kerry.

   OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY, RANKING 
     MEMBER, AND A UNITED STATES SENATOR FROM MASSACHUSETTS

    Senator Kerry. Well, Chair Snowe, thank you very much for 
having this hearing and for your leadership on the SBIR and the 
reauthorization effort.
    I hope that we will be able to do this in a bipartisan way 
and also in a sensible way, measuring some of the issues that 
are on the table and some of the information that we are 
anxious to get. For instance, the study that is being done, 
which we will talk about a little later, which I think is 
important to resolving some of these issues.
    But, let me just start out by saying that it is important 
that we are having this hearing on the SBIR, and the number of 
the witnesses that are here is evidence of the interest in it 
and some of the tensions that exist, with respect to the 
issues. This is important to everybody's State here, and that 
is why a number of Senators are here and interested in it. But 
I just want to say it has particularly been successful and 
important to Massachusetts, where we have had, literally, 
thousands of Massachusetts firms, including biotechnology firms 
that have been able to take advantage of this program and do 
well because of it. And it has helped the State and the 
country.
    We are second only to California in receiving the largest 
number of SBIR grants. 840 grants going to Massachusetts firms 
in 2004, bringing in about $300 million to small, high-tech 
firms. That is almost 14 percent of the $2 billion in SBIR 
grants annually.
    So, for obvious reasons, this is an important program to 
us. But I think it is important to the country and to the small 
businesses that benefit by it. And we need to keep in mind what 
the dynamic is between real small businesses and real start-up 
efforts and the purpose of the program as we go forward.
    I am a little apprehensive, Chair Snowe, about 
reauthorizing this program, during what is left of this year, 
for the simple reason that SBIR's authorization doesn't expire 
until 2008 and we have got a $5 million National Academy of 
Sciences study on SBIR that is due out later this year.
    It would be good to put that $5 million to good use before 
we jump ahead, and wait until we have the results of the study. 
I know that Dr. Wessner is going to address that today, but we 
ought to think about that, at least.
    Also, I am interested in the idea of working through some 
kind of compromise, and we can talk about that later as we go 
forward. There is a certain amount of controversy over the role 
of venture capital in the SBIR program.
    I want to assure both sides that I do approach this with an 
open mind, although with a certain set of principles that I 
think ought to guide all of us as we think about what this 
Committee, and what the SBA does, and about the needs of small 
businesses in this country.
    We ought to try to do what makes the most sense for small 
business and for the biotechnology and venture capital 
community. And there may be that there is a way to find a 
middle ground here that makes sense for everybody.
    Obviously, important work is being done by biotechnology 
firms, and I have been pleased to champion, as a matter of 
common sense, stem cell research, R&D tax credits, and other 
efforts to encourage their success.
    During the presidential campaign, I called for substantial 
increases in research for clean energy, for medicine, for 
advanced manufacturing, for nanotechnologies, stem cell 
research, and other priorities.
    I wish we were doing that today. Other countries seem to be 
more focused and intent than we are. I also called specifically 
for increases in funding for life sciences. The biological 
sciences, biotechnology, diagnostics, and for industrial 
biotechnology, such as synthetic biology, which could lead to 
biodegradable plastics, energy, fuels, chemicals based on 
agricultural waste rather than oil.
    And I have long supported greater Federal support for 
curiosity-driven, long-term high-risk research. That is what 
makes America different and great. So, we acknowledge here 
today that biotechnology has done a lot for us, and I would 
like to see a way for it, with Federal support, to flourish 
without undermining the small business aspect of the SBIR 
program, and we will dig into this a little bit today. We have 
to remember that whatever we do here to change the definition 
of small business with regard to SBIR is going to impact all of 
the SBA programs. And it would be interesting to hear what the 
SBA's head of size standards has to say about that issue. It 
would be interesting to have GAO's input.
    Their recent study concludes that the program is doing well 
even with the recent rule clarification by SBA. Beyond the 
definition of small business, there are a number of other 
issues related to SBIR that we need to address. Last year, 
Senator Snowe and I were successful in having an amendment 
adopted, during consideration of the Defense Authorization 
Bill, to create a new commercial pilot program to encourage and 
foster the use of SBIR technology by the Defense Department.
    This program has the potential of producing hundreds of 
millions of dollars to SBIR companies. We have 20 years of 
research and development, but we are still struggling to get 
the agencies to make the final investment and use the SBIR 
products.
    We also need to discuss increasing SBIR award sizes from 
$100,000 and $750,000. We need to discuss Senator Bayh's 
proposal to increase the 2.5 percent set-aside for SBIR 
projects, and how to increase the geographic diversity of the 
program.
    And let me just say something about Federal contracting, a 
subject that has come up in a number of hearings recently.
    The SBA is meant to be a watchdog for small businesses, 
with respect to Federal procurement policy, but evidently it is 
asleep or something is wrong. It is just not happening. Report 
after report speaks to loopholes in the regulations that allow 
large businesses to game the system, and they are, to the 
disadvantage of legitimate small business interests in the 
country.
    The SBA continues to drag its feet in correcting the 
problem, and this has been noted bipartisanly. Despite the 
President's stated strategy to unbundle contracts, they remain 
bundled because of procurement staffing deficiencies' and small 
businesses are left to suffer the consequences. Meanwhile, we 
read press releases that tout inflated numbers for the number 
of small business contracts as a supposed success story of the 
Administration.
    Yesterday, I filed an amendment to the Homeland Security 
appropriations bill, which I hope will be accepted, which will 
actually repeal the exemption given to the Transportation 
Security Administration from the Federal acquisition 
regulations, an exemption that was granted because we deemed, 
after 9/11, that we needed to get going immediately. Well, I 
think since then we have learned that we can actually meet 
those goals and not harm national security while doing so.
    And the fact is that when the Administration says that 25 
percent of all contracts are given out to small businesses, 
they are not even including TSA, which is a vast number of 
those contracts. So, we need to get that oversight, Chair 
Snowe, and I hope that we are going to do that and we can force 
that to happen.
    And finally, the SBA has a responsibility to look out for 
underserved communities, and that includes veterans who are 
returning from Iraq, Afghanistan, and elsewhere--disabled 
veterans, and woman-owned and socially and economically 
disadvantaged businesses. That is a purpose of the agency and 
of this program and of this Committee.
    But Federal contracting goals that have been established 
for these communities are never met, and they are disregarded 
completely by this Administration. The underserved communities 
are simply left wondering why these goals are established in 
the first place. It is just not acceptable.
    So, we have got to do a better job in enforcing those goals 
across the Federal Government to insure that everybody has got 
a fair shot at these dollars. Thank you very much, Chair Snowe. 
I appreciate it.
    Chair Snowe. Okay. Thank you very much, Senator Kerry. I 
appreciated that and I am looking forward to working with you 
on some of these major questions that important to small 
businesses.
    Now, I would like to recognize my predecessor on this 
Committee, as Chairs of this Small Business Committee, Senator 
Bond.

   OPENING STATEMENT OF THE HONORABLE CHRISTOPHER S. BOND, A 
              UNITED STATES SENATOR FROM MISSOURI

    Senator Bond. Thank you very much, Madam Chair, and I 
appreciate the opportunity to be back. It is nice to be home 
again in these hallowed halls of Small Business.
    Today I want to address particularly the biotechnology 
industry, and the ability or inability of it to participate in 
the SBIR program. Certainly we are the world leader in 
innovation in biotechnology due in large part to the Federal 
Government's 20-year partnership with the private sector to 
foster growth and commercialization, in the hope that one day 
we will uncover cures for diseases like cystic fibrosis, heart 
disease, cancer, multiple sclerosis, and AIDS.
    However, the biotech industry was dealt a major setback in 
2004, when the SBA determined that venture-backed biotechnology 
companies could no longer participate in the SBIR program.
    Prior to that decision, the SBIR program was an example of 
a highly successful Federal initiative to encourage economic 
growth and innovation in biotechnology by funding the critical 
start-up and development stages of a company.
    Now, traditionally, to qualify for SBIR, the small business 
applicant had to meet two requirements, have less than 500 
employees, and two, the business be 51 percent owned by one or 
more individuals. Now, according to the SBA, the term 
individual means natural persons only, whereas for the past 20 
years, the term individual included venture capital companies.
    As a result, biotech companies backed by venture capital 
funding in Missouri and throughout our Nation who were on the 
cutting edge of science could no longer participate.
    The biotech industry is like no other in the world because 
it takes many years and intense capital expenditures to bring a 
successful product to market. According to a study completed by 
the Tufts Center for the Study of Drug Development, it takes 
roughly 10 to 15 years and $800 million for a company to bring 
just one product to market.
    Now, these cutting edge companies must rely heavily on 
venture capital funding. It is not a luxury, it is a necessity. 
Consider Clorogen, a small biotech company based in St. Louis. 
Within the last 2 years, this early-stage company raised its 
first round of venture capital financing, but, due to the SBIR 
rules, Clorogen was forced to abandon an SBIR grant and, with 
it, the development of a bio-defense vaccine program that could 
have produced a new vaccine against anthrax.
    The company has fewer than 50 employees, but it is no 
longer considered a small business under the SBIR rules, 
because it had to get venture capital funding. This story is 
not unique. Madam Chair, a California company, trying to target 
discovery of a project of a diabetes metabolic syndrome, 
because they got venture capital funding, was ruled ineligible 
and they moved to Australia and they are doing it there.
    A New Jersey company delayed work on the development of an 
acting powder for inhalation of Cipro for use against anthrax. 
It could be vital, but they could not move ahead without 
venture capital funding.
    A Wisconsin company said that, due to SBIR rules, a project 
for air filtering method for production of synthetic genes had 
to shut down. Without the funding, these things just do not go. 
And I would like to submit these examples, Madam Chair, for the 
record.
    Chair Snowe. Without objection, so ordered.
    Senator Bond. Prior to 2003, 40 percent of private biotech 
companies had major venture capital funding SBIR grants. Since 
then, zero.
    The SBIR program has been very successful in developing new 
projects with the important Federal grants, and the venture 
capital firms play a vital role. I am disappointed to hear that 
there are some who say this would just be backing large 
businesses. That is just not true. Venture capital firms invest 
in biotechnology start-ups for the possibility of future 
innovation and financial return, not to take control or run the 
day-to-day operations.
    Dr. Zerhouni, director of the National Institutes of Health 
(NIH), has said that these rules undermine the NIH's ability to 
award SBIR funds to applicants who it believes are most likely 
to improve human health, which is the mission of the NIH.
    And this has widespread support from patient's groups and 
medical health advocates, biotechnology and medical device 
groups who have written to Speaker Hastert and Leader Frist 
and, Madam Chair, I ask unanimous consent that I be able to 
submit that record along with my full statement and questions 
for several of the witnesses for the record and I will relieve 
you of hearing all of my views, but you can read them if you 
wish.
    Chair Snowe. And we most certainly will, Senator Bond.
    Senator Bond. I know you will.
    [Laughter.]
    Chair Snowe. Without objection, so ordered.
    [The prepared statement of Senator Bond and the materials 
referenced above follow:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Chair Snowe. Senator Coleman.
    Senator Kerry. May I just correct Senator Bond on one 
thing, quickly?
    I think he said, and he may have misspoken on it, that they 
are not allowed to have venture capital, that firms cannot be 
SBIR eligible if they have venture capital backing. They are 
allowed, as long as it is 49 percent.
    Senator Bond. When you have the problems----
    Senator Kerry. It is majority owned.
    Senator Bond. Yes. Majority owned, but when you are talking 
about $800 million just to bring one product to market, the 
truly innovative, the major projects are----
    Senator Kerry. Well, I understand.
    Senator Bond. But 49 percent is, you know, that is a stump 
that is very easily jumped. It is the big investments that we 
have to take care of.
    Chair Snowe. Thank you. Senator Coleman.

   OPENING STATEMENT OF THE HONORABLE NORM COLEMAN, A UNITED 
                 STATES SENATOR FROM MINNESOTA

    Senator Coleman. Thank you, Madam Chair. We have a lot of 
witnesses. I am just going to just ask that my statement be 
submitted for the record, and I associate myself with the 
comments of my esteemed colleague from Missouri.
    Minnesota has medical technology. Our folks in medical 
technology have experienced the same challenges that Senator 
Bond has expressed regarding folks in biotechnology.
    So, I will associate myself with his opening statement, and 
then just briefly say that I do have deep concerns about the 
inspector general's report and the entire state of contracting. 
There are some issues that we have to discuss and I hope that 
we get to those today, but with that, I would just ask that my 
statement be submitted for the record as a whole.
    [The prepared statement of Senator Coleman follows:]

               Prepared Statement of Senator Norm Coleman

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Chair Snowe. Thank you, Senator Coleman.
    Senator Enzi.
    Senator Enzi. Thank you, Madam Chair. Since I am improperly 
seated here, I would defer to the others. I would like to make 
a statement, but would allow the people with more seniority on 
the Committee to--thank you.
    Chair Snowe. Could somebody go?

 OPENING STATEMENT OF THE HONORABLE MICHAEL B. ENZI, A UNITED 
                  STATES SENATOR FROM WYOMING

    Senator Enzi. Madam Chair, I do want to thank you for 
holding this hearing. Small business innovation and research 
programs, and the Federal contracting programs, are vitally 
important for strengthening small businesses starting today's 
small businesses.
    Your attention provides a bipartisan forum for something 
that we have talking about at tables from Massachusetts to 
Wyoming. And I thank you for allowing part of that discussion 
to be by Mr. Watson who is from Wyoming. He is an expert of the 
best kind. He is an expert by practice. His lifelong experience 
with successful start-up technology business in the recent 
years, the small business innovation research program has 
translated into his role as an advocate for the SBIR program to 
small businesses around the State of Wyoming.
    As an SBIR consultant to the University of Wyoming, Gene 
has consistently worked to make the SBIR program accessible to 
the rural small businesses of Wyoming. And he has been 
successful. During the first 17 years of this 24-year-old 
program, Wyoming small businesses received a total of $5.5 
million, or 10 percent of the national per capita average.
    In the last 7 years, since Gene has been working with it, 
Wyoming small businesses received a total of $23 million from 
the SBIR program, or 110 percent of the national per capita 
average.
    The reason for this is that Wyoming's small businesses are 
submitting good, competitive proposals. Unlike other programs, 
the SBIR program does not include formula funding, but funds 
the best proposals.
    I appreciate Gene's success in advocacy for the small 
businesses that the SBIR program was meant to serve and look 
forward to his comments.
    Though most of my comments and questions this morning will 
focus on innovation research programs, I want to say that the 
Federal contracting is vitally important to small businesses. 
To support our small businesses, it is in the best interest to 
introduce resources to our small businesses to help them grow. 
One of the most extensive resources is Federal purchasing of 
goods and services, and I appreciate Senator Snowe's comments 
about incorrect and improper accounting, as an accountant.
    However, most small business owners do not have the time to 
research the Government procurement process and access this 
resource. I have hosted numerous procurement conferences in 
Wyoming to introduce small business owners to the right 
contacts in the Federal Government to answer their questions 
and help them to understand how to obtain contracts.
    I look forward to working with Madam Chair and other 
members of the Committee to insure that small businesses have 
open access to Government contracts.
    In Wyoming, we are working to stabilize and steadily grow 
our small businesses through the utilization of the SBIR 
program. SBIR funds the critical start-up and development 
stages and it encourages the commercialization of technology, 
product, and service. By including qualified small businesses 
in the R&D arena, high-tech innovation has stimulated Wyoming's 
small businesses, and those in other rural States.
    Given the impact the program has had on Wyoming, I believe 
that any suggested change to this program that could alter its 
impact in rural States should be given serious thought. One 
suggested change would allow small businesses that are 
majority-owned by venture capital companies to participate in 
the SBIR program.
    Given the lack of venture capital investment in Wyoming, I 
have concerns that making this change would harm rather than 
benefit Wyoming's rural small businesses. Ideally, I would like 
venture capitalists to consider funding more Wyoming 
businesses, especially considering their record of achievement.
    Now, as Chairman of the Health, Education, Labor, and 
Pensions Committee, I also have directly heard the concerns of 
those industries that are unusually dependent upon venture 
capital for success.
    Under the current SBIR program, small businesses in such 
industries as biotechnology may have to make the difficult 
choice between another round of venture capital or continued 
eligibility for SBIR grants. It is a complex issue. I look 
forward to the testimony today, and hope that the stakeholders 
can get together and come up with a solution.
    Thank you, Madam Chair.
    [The prepared statement of Senator Enzi follows:]

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    Chair Snowe. Thank you, Senator Enzi.
    Senator Vitter.

   OPENING STATEMENT OF THE HONORABLE DAVID VITTER, A UNITED 
                 STATES SENATOR FROM LOUISIANA

    Senator Vitter. Thank you, Madam Chair. And I want to thank 
all of the witnesses for being here today. I look forward to 
their testimony, I will be brief in light of that. I also want 
to thank Bob Schmidt of ClevMed, who is in the audience, a 
leading small businessman that I have been working with on some 
of these SBIR and related issues.
    I bring two very focused, specific interests to this 
discussion today. One is the SBIR program. I think it is very 
important and has been fairly effective in the past. But I 
think in the debate and discussion, we need to have a very 
serious discussion about possible increasing the percentage of 
R&D budgets reserved for small businesses, perhaps from 2.5 
percent to 5 percent. I am actively working with members on 
that proposal. I would invite any reaction to that idea from 
any of our witnesses, but I am certainly widely interested in 
the SBIR program and that specific proposal in the context of 
the discussion.
    I am also very, very interested in small business 
contracting, particularly coming out of the, in many ways, 
frustrating experience of hurricane recovery with Hurricanes 
Katrina and Rita in Louisiana. Unfortunately, in so many 
instances we saw that a lot of programs and a lot of rules and 
regulations that were set up to help integrate small business 
in the recovery really did not work.
    I think we need to take a very hard look at revising 
certain programs and rules and regulations with that in mind. 
In so many instances, a lot of the work after the hurricanes 
was given to very large entities through very large, no bid, 
mega-contracts. And this was hurtful to the taxpayer, because 
billions, literally billions of dollars were wasted, and it 
certainly did not integrate small business adequately into the 
recovery process, which was very important for the recovery, in 
terms of getting the economy of South Louisiana and nearby 
States back up and running.
    A good example, for instance, are the blue roof contracts 
that were given out to very large entities. Again, no bid, 
mega-contracts. And what you had happen there, as in many, many 
other instances, you had layer upon layer upon layer of 
subcontracts built up under these no bid, mega-contracts. 
Literally, seven, eight, nine layers.
    At the end of the day, the smaller entity actually applying 
the blue tarp to people's roofs, first of all, was getting on 
the order of 3 percent of the full contract price that the 
prime got. Now, I know it takes something to manage a lot of 
entities underneath you to manage a large territory. It should 
not take 97 percent of the contract price. And just 3 percent 
going to the entity actually applying the blue roof to a home.
    The other thing that is startling about that example is 
that the price we paid per square of blue roof was more than 
the price of brand new permanent roofing, good quality roofing 
like is on my home. Not cheap stuff, but medium grade, good 
quality roofing.
    We paid more for a blue roof that is supposed to last 2 
months than it costs to put permanent roofing on. And 
unfortunately, there are plenty more examples that contracts 
for travel trailers where we are paying an average of $70,000 
per trailer, counting the cost of hook up, and on and on.
    Senator Kerry. Are they not sitting in another State?
    Senator Vitter. A lot of them are--have been.
    So we need to do far better in all of these regards. I have 
introduced a bill, the local disaster contracting fairness act, 
which would develop a new model, basically, a project manager 
model so we do not give out a huge mega-contract to a prime and 
allow as many layers of subs to be built up under it as they 
want, which inflates the cost. But we hire a project manager 
for a focused price, far smaller than the prime would get 
otherwise and then direct that project manager to hire local 
small businesses under it to cut down the layers of subs and 
get more work and more money at a cheaper cost directly to the 
local small businesses.
    So, Madam Chair, I am very interested in talking about both 
of those issues, that and SBIR, and I am interested in hearing 
from the witnesses.
    Chair Snowe. Thank you, Senator Vitter. I appreciate those 
comments and you explained the experiences that have been 
occurring in your State, regrettably so. And hopefully we can 
use the reauthorization process to identify some of those 
issues that we can address, as well, and incorporate those 
changes.
    Senator Isakson.

  OPENING STATEMENT OF THE HONORABLE JOHNNY ISAKSON, A UNITED 
                  STATES SENATOR FROM GEORGIA

    Senator Isakson. Thank you, Senator Snowe, and I appreciate 
very much your calling this hearing. Out of respect for this 
Committee and especially the distinguished panel, I am going to 
be very, very brief and will submit a formal statement for the 
record.
    I associate myself with the remarks of Senator Bond of 
Missouri and Senator Coleman with regard to having a keen 
interest in the SBIR funds and any unreasonable preclusion of 
access to those funds to a legitimate small business, simply 
because of the percentage of venture capital investment in its 
ownership.
    Having been a part of that in the past, a company that 
developed very small and participated in that, I think an 
arbitrary cutoff without some other criteria probably might 
penalize actual good quality research and development and 
ultimately, a product getting to the marketplace.
    I am very interested in hearing the testimony today and 
appreciate the opportunity.
    Thank you, Madam Chair.
    Chair Snowe. Thank you, Senator Isakson, and I want to 
welcome our panel here today.
    First, we have Eric Thorson, who is the inspector general 
for the SBA and he was unanimously confirmed by the Senate just 
on March 31st of this year and has had over 20 years of 
investigative experience.
    Next, we have Commissioner Joe Wynn, who is the Washington, 
D.C. regional director and a lifetime member of the National 
Association for Black Veterans.
    Next is Mr. Steven Sims, who is the vice president for 
Programs and Field Operations Program of the National Minority 
Suppliers Development Council.
    Next we have Mr. Charles Wessner. Mr. Wessner will be 
testifying for the National Academy of Sciences. He is 
currently directing a series of studies centered on Government 
measures to encourage entrepreneurship and support the 
development of new technologies.
    Followed by Mr. Gene Watson, a consultant to the University 
of Wyoming Research Office, and director to the Wyoming SBIR/
STTR Initiative.
    And then we have Dr. Mike Squillante, who is currently vice 
president for RMD.
    And finally we have Mr. Tom Bigger, who has been serving as 
president/chief executive officer and director of Paratek 
Pharmaceuticals since 1999.
    We welcome all of the panelists. We ask you to summarize 
your statement within 5 minutes and we will incorporate the 
entire statement in the record.
    And we will begin with you, Mr. Thorson. Welcome.
    Mr. Thorson. Thank you.
    Chair Snowe. Thank you.

STATEMENT OF THE HONORABLE ERIC M. THORSON, INSPECTOR GENERAL, 
               U.S. SMALL BUSINESS ADMINISTRATION

    Mr. Thorson. Chair Snowe and distinguished members of the 
Committee, I appreciate very much being invited today to 
discuss our concerns regarding the award of Government 
contracts to small businesses.
    I am appreciative of the assistance I have had of several 
of my staff behind me, particularly of our summer intern, 
Jessica Smith, who is making her first visit to the United 
States Senate, and we appreciate very much the opportunity for 
her to attend a hearing of this important Committee.
    The Small Business Act establishes a goal of awarding small 
businesses to not less than 23 percent of the total value of 
prime contracts issued Government-wide each year. The Act 
further recognizes SBA's advocacy role for small businesses and 
directs the SBA, in essence, to take all reasonable steps to 
promote opportunities for small businesses.
    However, as discussed in our report of SBA's top management 
challenges, flaws in the procurement process have allowed large 
companies to receive small business awards and agencies to 
receive small business credit for contracts performed by large 
businesses. My remarks today will focus on several problems 
affecting Government contracting opportunities for small 
businesses.
    First, regulatory loopholes are allowing large companies to 
perform small business contracts. Studies have found that 
agencies count towards their small business goals contracts 
performed by companies that have either been acquired by large 
firms or have outgrown small business size standards after 
obtaining the contract, but are exercising subsequent options 
or task orders as small businesses.
    This is a serious issue for two reasons. First, legitimate 
small businesses lose out on important contracting 
opportunities. And second, policy makers are deprived of 
accurate information needed to assess the effectiveness of 
those policies.
    Although the extent of such over reporting is really 
unknown, we believe the problem to be widespread. Another 
problem relates to multiple award contracts, under which 
agencies may obtain small business credit for using a firm 
classified as small, even if the firm is not designated as such 
for all of the procured goods or services.
    This is contrary to SBA regulations, which require that a 
contractor meets a size standard for each product or service 
for which it submits an offer.
    A second issue involves large companies fraudulently 
obtaining small business contracts or using small firms to hide 
the fact that a large business is actually performing the work. 
In the past 5 years, we have opened 69 cases involving 
Government contracting fraud and have obtained 24 criminal 
fraud convictions resulting in fines, restitutions, and 
settlements of over $17 million.
    However, we have yet to obtain criminal prosecution of a 
large business for misrepresenting its size status in order to 
obtain a small business contract. One reason for this is that 
prosecutors are reluctant to accept cases where it is difficult 
to show a financial loss to the Government.
    Unlike where a contractor has falsified invoices, in many 
cases of small business contracting fraud, the Government paid 
for and obtained a particular good or service that it sought to 
procure. The fraud occurred in how the business acquired its 
contract, not in its execution.
    Nonetheless, there is a definite programmatic and societal 
loss. A company that obtains a small business contract under 
false pretenses deprives the contracting opportunity for a 
legitimate small business.
    Another issue involves contracting officer error. Efforts 
to bring to prosecution cases of small business fraud have been 
undermined by contracting personnel at Federal agencies who do 
not comply or are simply unfamiliar with small business 
contracting requirements.
    Finally, there are the problems with the accuracy of the 
database used to develop and report Government-wide statistics 
to Congress on small business awards. We have received various 
complaints about large businesses being reported as receiving 
small business awards.
    Sometimes, the problem is related to a small business 
acquired by a large business, or a small business that 
subsequently grew large. But often it resulted simply from 
errors in entering information into the database.
    So, what can be done to address these problems? To its 
credit, in 2003, SBA did issue a proposed regulation to require 
contractors performing on multiple award contracts to annually 
recertify their small business size.
    We believe that this would provide a significant control 
over the accuracy and integrity of small business contracting. 
However, while SBA has since issued final regulations regarding 
agencies obtaining recertification as to size when a contract 
is sold to another company, it has now been more than 3 years 
since the proposed rule on annual certification has been 
issued. This rule needs to be finalized. Alternatively, 
Congress could amend the Small Business Act to require annual 
certification.
    SBA has also submitted proposed legislation recommended by 
the OIG to clarify that it has the authority to debar a 
contractor for size misrepresentation. This is important 
because in a recent case the agency was reluctant to proceed 
with the debarment, because it was uncertain whether it had the 
necessary authority to do so. We urge Congress to enact this 
proposed legislation.
    Congress could establish other control processes within 
SBA. For instance, legislation could create an office to 
monitor contract integrity, including determining whether 
procurement agencies are complying with small business 
contracting requirements, and whether the agencies are 
accurately reporting those goals.
    For our part, in order to ensure that all opportunities are 
pursued to help small and disadvantaged businesses obtain 
Government contracts, the OIG will continue to challenge SBA to 
improve Government-wide compliance with the goals of small 
business contracting, to aggressively pursue prosecutions and 
debarments where warranted, and to seek creative and effective 
ways to enhance the ability of small business to work with the 
United States Government.
    This concludes my remarks, and I look forward to answering 
your questions.
    [The prepared statement of Mr. Thorson follows:]

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    Chair Snowe. Thank you very much.
    Mr. Wynn.

   STATEMENT OF JOE WYNN, EXECUTIVE OFFICER, TASK FORCE FOR 
    VETERANS' ENTREPRENEURSHIP, VIETNAM VETERANS OF AMERICA

    Mr. Wynn. Good morning ranking member, Chairman Snowe, and 
other members of the Committee.
    Let me first say what an honor it is for me to have the 
opportunity to come before you today to share some of the 
collective views of thousands of veterans and service disabled 
veteran owners on the topic of Federal contracting and 
procurement.
    Though my time of service was many years ago, I still have 
very vivid memories of the military experience. For those that 
swore that oath to protect our freedoms here in America from 
enemies both domestic and abroad, to what do we owe them for 
their service? And especially those that returned with loss of 
limbs and other disabilities.
    Though I was fortunate and not commanded to report to 
combat zones like Iraq and Afghanistan, I do share in the 
experience of many men and women who survived. I still remind 
myself if not for the grace of God, go I.
    Over the years, there have been many good laws passed in 
recognition and support of those that served, but it was not 
until the drafting of the Veterans' Entrepreneurship and Small 
Business Development Act of 1999 that Congress found that: 
``Veterans of the U.S. Armed Forces have been and continue to 
be vital to the small business enterprises of the United 
States; they often face great risk to preserve the American 
dream of freedom and prosperity; that too little has been done 
to assist veterans, particularly service disabled veterans, in 
playing a greater role in our economy; therefore, the United 
States must provide additional assistance and support to 
veterans to better equip them to form and expand small business 
enterprises thereby enabling them to realize the American dream 
that they fought to protect.''
    While the framers of 106-50 did a good job of laying the 
foundation for a program to assist veterans interested in 
starting or expanding the owners of small businesses, it was 
not until the Veterans' Benefits Act of 2003, Section 308, that 
a Federal Procurement Program for veterans was actually 
created. Under Section 308, contract officers were given the 
authority to restrict competition to service disabled veterans.
    But even with the foundation of a great program and a new 
contract vehicle, it has taken an executive order from the 
President and follow-up letters from a member of this Committee 
to get agencies to start implementing the laws.
    As we approach the seventh anniversary of 106-50, many 
members of the veterans business community are still hopeful 
that institutions, programs or agencies created or directed to 
assist them will effect positive results. But while the VA 
Center for Veterans Enterprise has been progressing in its data 
collection and assistance efforts, the SBA seems to be 
declining in its support.
    There have been seemingly very little resources directed 
toward assisting veterans with Federal contracting. Few 
contract awards have been given to service disabled veteran-
owned businesses. A strategic plan that has yet to be completed 
and the operation of an office to assist veteran business 
owners with a staff of one, which only lasted for about 1 year.
    Even the SBA Office of Veterans Business Development, also 
created under the legislation, has reportedly received limited 
resources to provide assistance to educate veteran, business 
owners deployed with the Guard and Reserves.
    (We support Senate Bill 1014, Supporting our Patriotic 
Businesses Act of 2005, introduced by Chairman Snowe of this 
Committee.)
    And in another creation of the law, the National Veterans 
Business Development Corporation, after more than $12 million 
in appropriations over 5 or 6 years, and four leadership 
changes, it is still struggling to create an identity and make 
a difference in the lives of veteran business owners.
    Agencies and large prime contractors have yet to meet their 
3 percent mandatory goals for procuring goods and services from 
service disabled veterans. One of the biggest impediments to 
increasing contracts to service disabled veterans is the ``Rule 
of Two.'' Contracting officers are frustrated with the 
difficulty of awarding procurements directly to service disable 
veterans. They would like greater discretion in selecting 
service disabled veterans to meet their agency's goals.
    Some recommendations, eliminate the rule of two. Under the 
rule of two, service-disabled veterans suffer, the Government 
agency loses the opportunity to meet its goal.
    Create a level playing field for the veteran business 
owners. Make the order of priority for contracting among 8(a) 
and HUB Zone and service disabled vet programs equal, and tell 
contracting officers that they shall use service-disabled 
veterans.
    Do not include service-disabled veterans in the 8(a) 
program. The 8(a) program was created to help compensate for 
more than 100 years of wrongful discrimination and exclusion of 
minorities from the full benefits of American society, 
including the Federal marketplace.
    The service disabled vet program is intended to be 
inclusive of any American, regardless of race, who served in 
this country's Armed Forces, Guard, or Reserves. The service-
disabled program should retain its own identity for those who 
have borne the battle.
    Require agencies to recognize the collective past 
performance of service disabled vet teaming when they partner 
with other preference groups. This will help to expand and 
develop the pool of capable and qualified businesses.
    Small business subcontracting plans submitted by large 
prime contractors should be monitored more closely. Liquidated 
damages or the elimination of future contracts should be 
enforced for those companies that fail to demonstrate a good 
faith effort to comply with the plan.
    Also, extend the provisions of the proposed HR 3082 to 
allow the VA to establish a certification process for service-
disabled veterans.
    Let's provide a price evaluation preference of 10 percent 
for service disabled vets, in acquisitions conducted using full 
and open competition.
    Direct the use of mentor/protege programs in all Federal 
agencies.
    Require SBA to fully utilize its Prime Contracts and 
Subcontracting Assistance Programs that already exist now, and 
increase the number of procurement marketing reps and 
commercial marketing reps.
    And finally, increase the Government-wide small business 
goals from 23 percent to 28 percent. Why can't small businesses 
have a bigger piece of the pie? Wouldn't that really help more 
American?
    Again, thank you for the privilege to come before you and 
share these views. This concludes my statement, and I 
respectfully request that my written statement be submitted for 
the record. And I stand ready to assist you.
    Chair Snowe. Without objection, so ordered. And that will 
be true for all of the panelists, as well.
    [The prepared statement of Mr. Wynn follows with an 
attachment:]

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    Chair Snowe. Mr. Sims.

  STATEMENT OF STEVEN SIMS, VICE PRESIDENT, FIELD OPERATIONS 
    PROGRAM, NATIONAL MINORITY SUPPLIER DEVELOPMENT COUNCIL

    Mr. Sims. Good morning, Chairman Snowe, ranking member 
Kerry, and other members of Senate Small Business and 
Entrepreneurship Committee.
    Realizing how tough it is to stay within this 5-minute 
timeframe, I am going to try to be as brief as possible.
    For those of you that are not aware, the National Minority 
Supplier Development Council is a 34-year-old organization 
established by corporation America to provide access and 
opportunity for racial and ethnic minority groups to do 
business with corporations.
    We have most of the Fortune 1000 as members of our 
organization.
    Steve Rineman, chairman and CEO of PepsiCo, is the chairman 
of our board.
    John Patterson, vice president of worldwide sourcing for 
IBM, is our vice chair.
    And we provide services to our corporate members and to our 
16,000 certified minority businesses through a network of 39 
local operations councils around the country and in Puerto 
Rico.
    We are finding an increase in the number of corporations 
joining NMSTC, even in light of the mergers and acquisitions 
because of what they perceive is the value that we bring to the 
table.
    I would like to spend a brief time talking about five 
observations regarding the Small Business Association. I was at 
the hearing last week when you talked to the SBA administrator 
nominee. I do hope that, as he mentioned, his tenure will be a 
change, and a change for the positive for small minority 
businesses.
    First issue, contract bundling continues to be a serious 
challenge to the survival and growth of minority businesses. 
Not one Federal contract has been unbundled in the 18 to 24 
months since the President proclaimed support unbundling 
Federal contracts. And a GAO report came out saying that there 
has been no evidence of cost savings resulting from contract 
bundling.
    Procurement opportunities, as reported by Federal agencies 
point to less, not more, utilization of small minority 
businesses. I agree with Senator Kerry that the goals have not 
been reached over the last 5 years. The bulk of procurement 
opportunities are going to smaller and smaller contractors. A 
number of the contractors that tend to be larger and larger 
companies.
    A personal issue I have is certification of minority 
businesses. For years, we have accused SBA of their program of 
25 percent of their businesses being front companies. And 
because it is not monitored or managed, they have not been able 
to refute that.
    The failure of monitoring their database and utilization of 
self-certification process provides front companies ample 
entree into this program.
    And the chaos and turf wars that exist among the folks at 
SBA is also a barrier that restricts and retards the efforts of 
the agency to serve minority small businesses.
    Minority businesses are the fasted growing minority, and 
women-owned businesses, are the fasted growing area of small 
business, which purports to be the engine driving America. And 
I do not understand, if that is the case, how we can provide a 
census of these critical businesses only once every 5 years, 
and then delay another 2 years while the information is being 
compiled and analyzed before it is released to the public. 
There is no private corporation in America that would wait 7 
years to ask its customers how it is doing and what it needs to 
change.
    Focusing on recommendations, Federal agencies need to be 
unbundled. But not only focus on unbundling, but then focusing 
on increasing capacity.
    Secondly, SBA needs more tools and procedures which makes 
identification and contracting with small minority businesses 
easier and not more difficult. SBA needs a reliable, proved 
certifying body for minority businesses. What it has does not 
work. I have offered to debate whoever is in charge of 
certification at SBA. It has not worked. It will not work the 
way it is set up.
    SBA needs leadership with strong business acumen and, 
looking at Mr. Preston's background, hopefully he will bring 
that business acumen and leadership to the fore. The economic 
realities require at least a biannual, at minimum, survey of 
minority and women-owned businesses so that we can see what 
their issues are, what their challenges are, and what their 
successes are.
    Two items not referenced earlier that I would like to talk 
about is encourage SBA to continue its effort to establish a 
disaster response plan which is grounded in reality and 
utilizes organizations and procedures that promote small 
minority business participation with a focus on local content 
making local businesses and individuals involved in the 
process.
    And the other thing is, given the amount of money that is 
going down for the rebuilding effort, it seems to me the nature 
of the disaster requires something being done outside the usual 
methods. And the notion of greater transparency to make sure 
that the money given by the Federal Government to the States 
and the counties, et cetera, are actually going where it is 
supposed to go. And all individuals and communities are 
participating.
    Since the tragedy did not exclude anyone based on race or 
ethnic characteristics, then the clean up and rebuilding should 
not either.
    Finally, we wrestled on the minority business side with 
this issue of venture capital participation, and maybe in the 
question and answering, I could talk a little bit about how we 
addressed that and to continue to allow minority businesses to 
play in the game.
    Thank you.
    [The prepared statement of Mr. Sims follows:]

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    Chair Snowe. Thank you, Mr. Sims.
    Dr. Wessner.

 STATEMENT OF DR. CHARLES W. WESSNER, DIRECTOR FOR TECHNOLOGY, 
 INNOVATION, AND ENTREPRENEURSHIP, NATIONAL RESEARCH COUNCIL, 
                 NATIONAL ACADEMIES OF SCIENCE

    Dr. Wessner. Thank you, Madam Chairman. It is a pleasure to 
have the opportunity to address your committee today, and I 
would like on behalf of the National Academies to take a 
somewhat more conceptual approach to the SBIR program. One of 
the things I would like to talk about is how the SBIR program 
works and try to impart a better understanding of early stage 
finance in the United States. I want to talk a little bit about 
the Valley of Death, the role of SBIR in crossing that valley, 
and the expectations we should have for such a program.
    As all of you I am sure believe, markets are very good and 
very powerful institutions. They are certainly better than the 
alternative. That said, they are not perfect, and one of the 
things that is very important to keep in mind is that investors 
have less than perfect information.
    What I want to address is why do we have this program, and 
I think that can be very instructive for some of the issues 
that will be raised in the rest of the discussion.
    We have what our economist friends call ``asymmetric 
information.'' I asked one of my colleagues, a leading 
economist by the name of David Audretsch, what he meant by 
asymmetric information, and he said, ``Well, it means, Chuck, 
that it is often hard for small companies to get money.'' And 
that is, in fact, why we have the program.
    A point to keep in mind is that the development of new 
technologies within our national economy is not automatic. The 
rest of the world has understood that point. They are taking 
measures to attract and develop new industries while in this 
country we are rooted in myths about how the United States has 
developed only through market actions. The rest of the world is 
taking an infinitely more practical results-oriented approach, 
what I would actually call a ``practical Yankee approach'' of 
the sort that helped develop our country.
    Next, please.
    This Valley of Death is what the new entrepreneur 
encounters. Now, forgive me for this simple approach, but 
sometimes pictures represent a thousand words, and I do not 
have the time for the thousand words, nor do you have the 
patience. But the key thing is we are putting about $132 
billion in Federally funded research each year. We are spending 
only about $2 billion, unless you want to add in the $140 
million Advanced Technology Program, to get the results of the 
research across this valley and into the market.
    Now, you may think, well, don't we have venture capital? 
Won't the venture capitalists take care of that? Well, if you 
ask some policy people here in Washington, they will say it 
will. But if you ask the venture capitalists, you get a rather 
different answer. Now, why is that? Next, please.
    Well, the point is that although our venture capital 
markets are the best in the world, they are broad and deep, 
they nonetheless have limitations. Venture capitalists actually 
have very limited information on new firms. They are also prone 
to fashion. There are herding tendencies, as any of you who 
have witnessed the dot-com boom would remember. Things that are 
really good ideas, like Google, are not always obvious at the 
concept stage. Keep in mind, Google tried a number of venture 
capital firms, firms that refused to fund them (to their 
infinite regret), before they finally found one that would 
invest in them. My point is simply that these investment 
decisions are not so obvious either in the private or the 
public sector.
    So the point is that the venture capital market often lacks 
information on potential information and is not focused on 
early-stage firms. Next, please. And if you look at this 
breakout, less than 3 percent of the $20-plus billion goes to 
early-stage investments--and there are only about 3,000 deals 
overall. So, in fact, the SBIR program plays a really critical 
role in providing initial start-up funding. I think some of the 
gentlemen next to me who have actually started firms would 
affirm that it is your first million that is the hardest money 
to get. It is that first financing you need, to prove the 
viability of your ideas and that is the role that SBIR plays.
    Now, one of the other things I would like to talk about--
next chart, please--today is what role the SBIR concept plays 
in the U.S. innovation system as a source of finance for new 
ideas and new companies. What we need to avoid is the old 
slogan that ``It is not the Government's role to be picking 
winners and losers.'' With all respect, that is one of the most 
mindless expressions that we have on these topics. The irony is 
that the Government actually is quite good at picking winners. 
The losers will take care of themselves. Early-stage technology 
awards are a lot like shooting baskets.
    The point of SBIR is that the Government has needs, and 
then the companies come up with ideas to meet those needs, 
whether it is an idea to solve the problem of potential 
bioterrorism, whether it is an idea like the Silver Fox that we 
have in use in Iraq today. A Silver Fox is a very inexpensive--
running at $40,000 to $60,000 for a drone that is effectively 
supporting our troops.
    The set-aside funding--and I commend you, Senator Snowe. As 
a Congressman, you supported the idea of using a set-aside so 
that we have a reliable stream of funding for this program. It 
is one of the attributes of SBIR that has attracted attention 
around the world.
    I should just point out in a parentheses that while we 
debate whether we should be doing these things, Senators, the 
rest of the world is copying the program, often with larger 
awards. It is important to keep that in mind, that we do not 
live in a world where we determine the frame of competition. 
The rest of the world is determining what that competition will 
be.
    One of the things that is really important about this 
ingenious program is it has tremendous flexibility. It does not 
use a one-size-fits-all approach. Each agency's management gets 
to administer the program in the way they think best meets 
their needs.
    Next, please.
    Now, when we talk about what the program should be 
accomplishing, I am tempted to ask, Compared to what? What 
exactly should we be expecting from this program? If you look 
at biopharma, these are the big guys, lots of smart people, 
large numbers of people, billions of dollars put into new drug 
development, and you are all familiar, I trust with the 
dreadful X, the one that shows the cost of drug development 
going up dramatically and the one that shows results going down 
dramatically. So pharma has trouble getting new ideas developed 
and into the market. Because of this, you will hear, I think, 
later on, the importance that pharma attaches to these new 
SBIR-funded companies.
    How about private venture capitalists? I enjoy the joke, 
Madam Chairman, that, you know, the Government cannot pick the 
right company for awards, but the venture capital industry can. 
They bring the best and the brightest together; and they 
succeed 2 out of 20 times while those poor dumb Federal 
bureaucrats can only succeed 1 out of 10. So you see the 
difference.
    [Laughter.]
    Dr. Wessner. The point is that what we have to keep in mind 
here is what are the realities of early-stage finance. We have 
to recognize that there is a high skew in outcomes, that there 
will be few genuine mega successes, but those mega successes 
are absolutely important. During questions, if you wish, I can 
describe what some of those successes are.
    In addition to a few major successes, there will be a lot 
of just good work done with the SBIR awards. There will also be 
projects that do not succeed. But, you know, we learn from 
failure. Knowing that this is not a successful line of inquiry 
tells the Government you do not want to put hundreds of 
millions of dollars on this idea.
    Dr. Irwin Feller, a distinguished economist who is on our 
team of some 20 researchers looking at this program, describes 
the program as ``a low-cost, technological probe.'' It actually 
does lots of other things, but that is one very apt 
description.
    So I think what we need to do is to bring realistic 
expectations to what constitutes success for the SBIR Program. 
At the same time, we should recognize that the rest of the 
world thinks that this is one of the best U.S. programs. 
Countries as diverse as Sweden, Taiwan, Korea, the Netherlands, 
Finland, and the United Kingdom have all emulated this program, 
sometimes quite directly, and they are doing many other things 
to support high-tech companies. I appreciate the opportunity to 
appear before you, Senator, and I look forward to discussing 
our report with you in the future.
    Thank you, Madam Chairman.
    [The prepared statement of Dr. Wessner follows:]

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    Chair Snowe. Thank you, Dr. Wessner. That was a very 
interesting presentation, and it certainly speaks to the value 
of the program that we obviously, as you say, should be 
building on.
    Mr. Watson?
    Senator Kerry. Sounds like you have already done your 
report.
    [Laughter.]
    Dr. Wessner. Well, we have done these, sir.

STATEMENT OF EUGENE WATSON, PROGRAM MANAGER, WYOMING SBIR/STTR 
                           INITIATIVE

    Mr. Watson. Well, thank you, Chuck, and I rest my case.
    [Laughter.]
    Mr. Watson. However, I will take up my 5 minutes. Although, 
as Senator Enzi has said, I am a consultant to the University 
of Wyoming Research Office, the observations and opinions I am 
going to express today are my own.
    I appear before you as a confessed but unrepentant serial 
entrepreneur. Over the past five decades, I have participated 
as a founder in the formation and launch of eight technology-
based start-up companies, the most recent three receiving seed 
capital from the SBIR program.
    I have a short list of recommendations to further improve 
the program, including Senator Vitter's and Senator Bayh's 
proposals to increase the funding over the next 5 years, and 
adjusting the aware guidelines to keep pace with inflation. But 
due to time constraints, I will limit my comments to two 
critical areas: one is the effect, and the other is the cause.
    It is my conviction that a major threat is looming on the 
horizon in the form of S. 1263, the Save America's 
Biotechnology Innovative Research, or SABIR, Act. This proposed 
legislation has been characterized by a former chief counsel 
for advocacy at the Small Business Administration as the first 
effort in the 53-year existence of the SBA to redefine ``small 
business'' to include large businesses--an ominous slippery 
slope indeed. S. 1263 is devised solely to benefit businesses 
owned and controlled by large venture capital organizations, 
permitting them for the first time to participate in the SBIR 
program--in my opinion, a devastatingly bad idea. It abandons 
Congress' core definition of a small business established over 
a half-century ago, to wit: ``A small business is one that is 
independently owned and operated.'' Dozens of Federal laws and 
regulations are based on this clear and concise concept. Once 
an exception to this longstanding common-sense principle is 
adopted, others will surely follow.
    Further, the assertion that innovative biotechnology R&D is 
threatened and needs to be saved is unsupported. Total public 
and private biotechnology R&D spending this year will approach 
$100 billion. Contrasting this amount with the 2006 SBIR budget 
of $2.2 billion reveals the futility of assigning the role of 
savior to the SBIR program, even were one needed.
    But there is more. The implication that the SBIR program 
has been off limits to venture capital is just wrong, as untrue 
as the widely circulated misrepresentation that VC-owned 
companies, previous SBIR eligible, are now disenfranchised. 
With all due respect to those of differing views, let me be 
very clear. Companies owned and controlled by large 
organizations, including venture capital companies, have never 
been eligible for the SBIR competition. Companies with minority 
venture capital backing, however, have always been eligible, 
and a recent GAO report reveals that since 2002, an increasing 
number of SBIR awards have been made to these VC-backed firms. 
At NIH, such firms generally receive larger awards and a larger 
total share of SBIR funds. And VC-backed firms are receiving an 
increasing share of NIH's total SBIR dollars, up from 14 
percent in fiscal year 2001 to 21 percent in fiscal year 2004. 
Clearly, SBIR funding for VC-backed companies, at least at the 
NIH, is robust and growing.
    This trend, however, raises troubling issues. In many 
respects, the goals of the SBIR program are at odds with the 
priorities of the typical venture capital organization. SBIR 
provides seed capital to high-risk start-up companies, whereas 
VC investments are risk averse. And although often professing 
to be the funding source as the start-up gazelles of tomorrow, 
the facts tell a different story. According to the 
PricewaterhouseCoopers Money Tree report, over the past decade 
VC investment in start-up companies has gone from 20 percent to 
less than 2 percent.
    Equally troubling to this rural-State resident is the 
geographic concentration of VC investments. Money Tree reports 
that in first quarter 2005 nearly 60 percent of VC funds went 
to two States--California and Massachusetts, as we have heard 
from Senator Kerry. Ten States received 85 percent, with 15 
percent shared by the remaining 40 States. Fourteen States 
received no venture capital whatsoever. I note that 10 of the 
18 members of this committee represent States receiving either 
only one or no VC investment during this period.
    From these data, it is clear that as VC participation 
increases, the little guys, especially those from rural States, 
will be crowded off the playing field. SBIR is, after all, a 
zero-sum game.
    The tensions between SBIR and venture capital are numerous. 
Venture capital is risk averse; SBIR is indifferent to risk. 
Venture capital is inaccessible to start-ups; SBIR is congenial 
to start-ups. Venture capital is impatient; SBIR has no time 
constraints. Venture capital is geographically and 
demographically selective; SBIR has no geographic or 
demographic bias. Venture capital is technology focused; SBIR 
is open to all innovative concepts.
    Given these polar opposites of missions and priorities, it 
is clear that the goals of the SBIR program will be seriously 
compromised by allowing unlimited access to VC-owned and -
controlled firms, a serious, unintended consequence of adopting 
the SABIR legislation.
    Now, as to cause, it is my firm belief that the issue of 
allowing VC-owned companies unlimited access to SBIR funds has 
its origins in the recently established practice at the NIH of 
exceeding award guidelines, often by millions of dollars. An 
important component of the genius of the SBIR program is to 
provide award amounts sufficient to enable small businesses to 
develop their innovative concepts while at the same time 
capping the awards at a level below the threshold of interest 
of large organizations, such as venture capital companies. That 
this strategy was effective is proved in the breach. Only when 
NIH award levels began to routinely exceed the legislative 
guidelines did SBIR funding become a target of VC-owned and 
controlled companies. Awards exceeding the guidelines now 
account for more than 70 percent of the NIH SBIR dollars.
    I strongly urge this committee, through its oversight 
function, to work with the SBA and the NIH to bring SBIR awards 
back into compliance with the legislative guidelines. Doing so 
will resolve critical issues that are before this committee 
today.
    Thank you, Madam Chairman, for allowing me to speak.
    [The prepared statement of Mr. Watson follows:]

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    Chair Snowe. Thank you, Mr. Watson.
    Dr. Squillante.

 STATEMENT OF DR. MICHAEL SQUILLANTE, CHAIRMAN, SMALL BUSINESS 
      TECHNOLOGY COUNCIL, NEW ENGLAND INNOVATION ALLIANCE

    Dr. Squillante. Thank you, Madam Chair, Senator Kerry. I 
appreciate the opportunity to speak at the committee this 
morning. I am kind of nervous. This is my first time doing 
this, it is certainly exciting.
    I am vice president of research at Radiation Monitoring 
Devices, Incorporated, in Watertown, Massachusetts. At RMD we 
perform research on nuclear, biochemical, optical, and magnetic 
sensors, and we manufacture products based on these sensors. In 
the last few years, we have begun to apply our high-performance 
sensors to homeland security applications.
    I am also the chairman of the SBTC, and it is the SBTC that 
I am representing here today. SBTC is the Nation's largest non-
profit organization for high-technology businesses. It is a 
council of the National Small Business Association, which is 
the oldest advocacy organization for small businesses in the 
country, which serves over 150,000 companies. Since its 
founding in 1995, SBTC has been very involved in SBIR issues. 
More than 300 current members of SBTC have received SBIR 
awards. No other organization represents more SBIR companies 
than SBTC.
    SBIR has been extremely successful. Over the past 25 years, 
it has yielded over 45,000 patents, tens of billions of dollars 
of economic activity, and has solved thousands of technological 
problems for Federal agencies. The technologies that are 
invented and developed under SBIR are saving lives on the 
battlefield and saving lives in the operating room. 
Technologies are improving the quality of life of many millions 
of Americans.
    Today, more than half of the scientists and engineers 
employed in the private sector are employed by small technology 
companies. And as mentioned by Chair Snowe, they produce 13 
times more patents per employee than the patent-producing large 
corporations.
    It is this tremendous success of SBIR which brings me here 
today. It is an important program, it is working, and we need 
to keep it working in the future. Congress recognized the need 
to support small companies which have the flexibility, the 
talent, the innovation, and the creativity to solve problems 
when it enacted the SBIR law 25 years ago.
    Also, in regard to the SBIR, I would like to take the 
opportunity and SBTC would like to take the opportunity to 
thank you again for further improving the SBIR program with the 
pilot program, which is already having an effect in trying to 
improve the transition of technologies into use by the 
Department of Defense.
    Also, as was mentioned, the reauthorization is coming soon. 
This meeting will be a good first step to taking stock of the 
program, examining what is working well, looking at what needs 
improvement, and determining what should not be changed in the 
program.
    SBIR is successful because it funds--as we have heard, it 
funds small, high-risk, high-payoff, early-stage research. It 
does not try to pick the next blockbuster product. It tries to 
fund innovative research which will solve agency problems.
    The SBIR program is transparent and extremely competitive. 
It proceeds through the natural path of R&D: a small amount of 
funding for proof-of-concept research, further funding for 
further development and prototype development, and then finally 
it moves on to Phase III and commercialization. It does a good 
job of protecting intellectual property rights of small 
businesses, and it recognizes the parts of the innovation 
process that small high-tech companies do really well.
    But I am here because of a serious concern that there are 
proposals to make fundamental changes in the SBIR program, and 
the heart of this is whether or not large venture capital firms 
will be allowed to participate in a small business program. 
There are other larger program that venture capitalists can 
participate in, including at the NIH, which are larger and have 
more money than the SBIR program and which do not have 
restrictions on the size of the corporations that participate.
    But even in the SBIR program, venture-backed firms are 
receiving more than 20 percent of NIH funding. The number is 
not 0 percent. Currently, venture capitalists of any size that 
control less than 49 percent of a firm can participate in the 
SBIR program. If the venture capital meets the statutory 
guidelines of SBA and SBIR, they can control more than 49 
percent.
    The proponents say this change is necessary. We disagree. 
Not only is this change not necessary, it will have significant 
detrimental effects on the SBIR program. SBIR stands for 
``Small Business Innovation and Research.'' The proposed 
changes will take the ``small'' out of SBIR, and it will take 
the ``innovation'' out of SBIR.
    We believe that if these changes are implemented, it will 
make awards at NIH less competitive and less transparent. It 
will undermine the character of the Phase I awards as high-
risk, early-stage research. It will also, because of the size 
of the awards, dramatically reduce the total number of awards 
that NIH can make, making it that much harder. One in 11 Phase 
I awards are issued now. It will be much worse if these changes 
are made. It will inexorably shift the NIH focus away from new 
cutting-edge innovation and toward research to solving problems 
which have mass markets. It will crowd out many, if not most, 
of the small life science and biotechnology companies whose 
innovations are the key to the future health of the Nation. It 
also goes against the strong preferences of the vast majority 
of small companies that are participating in the SBIR program 
now, including many biotechnology companies.
    SBTC had a poll where we polled 2 years' worth of NIH award 
winners, and of those responding, 90 percent were opposed to 
these changes.
    We do understand that the venture capital firms have an 
important function and do critically important work. SBTC does 
not stand for Small Business Innovation Research Council. It 
stands for the Small Business Technology Council. We are 
willing to work, and we do work with anyone who has an interest 
in Federal R&D. We will work with the agencies, we will work 
the venture capital firms, we will work with their 
representatives. But we will not work with them to destroy the 
SBIR program.
    For 25 years, it has been the intent of Congress to capture 
the talent, creativity, innovation, and flexibility of small 
technology companies to efficiently and quickly solve 
technological problems. The costs to the Government of a 
scientist in a small company is less than 10 percent of the 
cost of an engineer or scientist at a large company. It is an 
extremely efficient, fast way to get research done.
    Again, please do not take the ``small'' out of SBIR and 
please do not take the ``innovation'' out of SBIR.
    Thank you.
    [The prepared statement of Dr. Squillante follows:]

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    Senator Thune. Madam Chair?
    Chair Snowe. Yes, Senator Thune.
    Senator Thune. I have a statement I could submit for the 
record.
    Chair Snowe. Absolutely. Without objection, so ordered. 
Would you care to make any comments?
    Senator Thune. No. I just thank you for holding the hearing 
as we lead up to the reauthorization, and I thank our panel for 
their excellent testimony.
    Chair Snowe. We appreciate it. Thank you.
    [The prepared statement of Senator John Thune follows:]
                Prepared Statement by Senator John Thune
    Madam Chair, other members of the Committee, I would like to thank 
you for holding this hearing today in anticipation of the upcoming SBA 
reauthorization. It is important that, as a Committee, we provide 
oversight to the many programs SBA uses to help create and strengthen 
small businesses across our country.
    The programs we are focusing on today are important to our small 
businesses. Although small businesses employ half of the private 
workforce and make up 99.7 percent of all employers, they would not get 
their share of government contract work without help. The SBA works to 
ensure that Federal contracts are not only going to the big guys, but 
the little guys as well. We need to make sure that small business 
contracting regulations and systems are up to date and effective, but 
not overly burdensome. There will always be a handful of bad actors who 
try to game the system, so we need to be vigilant to make sure these 
contracts are actually going to the small businesses as intended.
    We are also focusing on the Small Business Innovation Research 
Program (SBIR) and its effectiveness. I am glad to see that we have a 
witness from my neighboring State of Wyoming here today. Mr. Watson, 
thank you for coming to testify today about your experiences with this 
program. Unfortunately, when there are research and development dollars 
that need to be invested, rural America is not always the first place 
that comes to mind. Although I think people that live outside of the 
city limits are often some of the most innovative and entrepreneurial 
folks we have in this country, venture capital dollars and R&D 
resources rarely make their way out there.
    The SBIR program, which reserves a specific percentage of Federal 
R&D funds for small businesses, has helped reverse that trend somewhat. 
It is my hope that we can come to a consensus on how to best fashion 
the SBIR program so that it doesn't create a chilling effect in the 
biotech industry. And make sure it does not further shut out rural 
entrepreneurs from the already scarce R&D dollars out there.
    Finally, I would like to thank all the witnesses for their 
willingness to testify before the Committee before we begin the 
important work of reauthorizing the programs of the SBA. Your input, 
along with that of all of our constituents that we hear from day in and 
day out, gives us the information we need to make these policy 
decisions. Decisions that will hopefully help strengthen America's 
small businesses.

    Chair Snowe. Mr. Bigger, welcome.

 STATEMENT OF THOMAS J. BIGGER, PRESIDENT AND CHIEF EXECUTIVE 
                OFFICER, PARATEK PHARMACEUTICALS

    Mr. Bigger. Thank you. Chairwoman Snowe, Ranking Member 
Kerry, and members of the Small Business Committee, thank you 
for providing me with the opportunity today to testify before 
you. My name is Thomas Bigger, and I am the president and chief 
executive officer of Paratek Pharmaceuticals. Paratek is a 
privately held, venture-backed biopharmaceutical company 
located in Boston, Massachusetts. Paratek was founded in 1996 
by Dr. Stuart Levy, a professor at Tufts University School of 
Medicine, and Dr. Walter Gilbert, a Nobel Prize-winning 
professor emeritus at Harvard University.
    Paratek's primary mission is to develop novel antibiotic 
and anti-infective agents that overcome the critical worldwide 
problem of bacterial resistance. Today, however, I am here to 
testify on behalf of the Biotechnology Industry Organization, 
BIO, an organization representing more than 1,000 biotechnology 
companies like myself, academic institutions, State 
biotechnology centers, and related organizations in 50 U.S. 
States and 31 other nations. BIO members are involved in the 
research and development of health care, agricultural, 
industrial, and environmental biotechnology products.
    As a representative of one of the most innovative, high-
growth sectors of our Nation's economy, one in which the United 
States maintains a global leadership position, my testimony 
will focus on the urgent need for reforms in the current 
eligibility rules of the Small Business Innovation Research 
(SBIR) program. Senator Bond has introduced legislation, Senate 
bill 1263, the Save America's Biotechnology Innovation Research 
Act, which would make the necessary reforms to the SBIR 
program. These reforms are essential in providing early-stage 
biotechnology companies with the opportunity to compete for, as 
they did for over two decades, and participate again in the 
SBIR program. Without reform, we could seriously jeopardize 
America's innovation leadership and competitiveness in the 
global biotech marketplace.
    Small biotech companies often rely on SBIR Phase I and II 
grants to fund research in areas that most private investors or 
venture capitalists will not fund because they consider these 
areas to be either too early-stage to fund, too risky from a 
market opportunity standpoint, or simply lacking in sufficient 
commercial returns.
    For the first 21 years of the program, the SBA interpreted 
individuals to include individual entities or investment 
groups, as long as they are majority-owned by Americans. 
However, in 2001 and 2003, SBA changed the eligibility rules 
which denies majority venture-backed companies from 
participating in the SBIR program.
    Paratek has experienced firsthand the detrimental effects 
of this rules change. In 2003, due to the changes in the SBIR 
eligibility rules, we had to turn down a Phase II grant and 
shut down a key antibiotic therapy research program, where 
ultimately we had to lay off 10 employees. This program was 
originally started with Phase I SBIR grant funding in 2001, and 
the NIH had urged us to accept the grant despite the 
eligibility changes in order to continue this valuable 
research.
    Some have raised the question that biotechnology companies 
that are majority owned by venture capital companies are 
somehow no longer small businesses. Nothing could be further 
from the truth. Paratek, with 66 employees, is a small 
business, regardless of whether we get funding from a bank, 
from a venture capitalist, or from individuals. What separates 
biotechnology companies from less capital-intensive industries 
is the sheer amount of money, the length of time necessary for 
development, and the required FDA approvals to bring a product 
to market. As such, private investment is not an option. It is 
an absolute necessity.
    It is also critical to make it clear that venture 
capitalists invest in biotechnology companies and programs 
because they hope to realize a return on their investments. 
These managers invest in a wide range of companies so as to 
diversify their risk. Their job is managing money, risk, and 
return, not running a business, and certainly not running a 
business to obtain SBIR grants.
    As an example, at Paratek the management and individual 
investors own approximately 45 percent of the interest in the 
company. We have 15 different private investment groups who own 
at most 5 percent each. Only one of these firms out of the 15 
has a board seat, and we can safely say that Paratek's 
management controls the day-to-day management and direction of 
the science.
    Some have also argued that the recent changes in the SBIR 
eligibility rules are consistent with the goals of the SBIR 
program. The congressional record indicates otherwise. The SBIR 
statute and its legislative record demonstrate that Congress 
intended to encourage venture financing of SBIR awardees.
    Paratek embodies what Congress originally intended with 
respect to the SBIR program. We employ highly educated and 
skilled scientists that would like to make contribution to the 
treatment of diseases in areas where there are significant 
unmet needs, but where the commercial value is too low to 
justify private investment at early stages of research. We 
believe that we have the technology that can be put to use in 
areas such as the treatment of malaria, filarial disease, 
anthrax, spinal muscular atrophy--which is a severe disease 
that affects a small population of children--and other orphan 
and niche diseases. However, without SBIR funding to advance 
our research in these areas, it is unlikely that we will be 
able to pursue potentially compelling treatments. As a result, 
much of this innovative technology will sit on the shelf.
    So, really, the time is now for this committee to consider 
and support SBIR eligibility reform. Senator Bond has 
introduced Senate bill 1263. We urge all the members of this 
committee to support Senate bill 1263 and to include it as part 
of the SBA reauthorization act this year. SBIR reform is 
critical now in order that U.S. biotechnology companies can 
continue to innovate and remain competitive in the global 
marketplace.
    Thank you.
    [The prepared statement of Mr. Bigger follows:]

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    Chair Snowe. Thank you, Mr. Bigger, and I want to thank all 
the panelists here today. Obviously, we are addressing an array 
of issues as we proceed to the reauthorization of SBA, and as 
well, we hopefully will be able to resolve some of the issues 
here today I think reflected in your testimonies as well and 
your varying perspectives because these are, obviously, 
critical programs in the absence of support for small 
businesses.
    Mr. Thorson, let me just begin with you on the question of 
contract bundling. Obviously, we have heard your perspective 
here today as inspector general. There was a report that was 
completed, you know, prior to your taking this position back in 
March on the questions, and what you are speaking here today. 
And last time we received testimony from the Office of 
Government Contracting and Business Development contradicting 
some of the issues. And I would like to have you explain to us 
here today, because I think it is important. The contract 
bundling has been a vexing challenge for the small business 
community in America. It is problematic to me on a number of 
fronts, not the least of which, of course, is that the SBA has 
not reviewed these contracts, in spite of what I think has been 
said here in this testimony, which they claim that they have 
reviewed the preponderance of contracts before they were 
awarded. But I think that that is the question as to whether or 
not they were actually reviewed at that process or submitted 
and gone to OMB and already awarded and, therefore, never 
reviewed in terms of their compliance with the bundling 
obligation.
    Secondly, the President did say, you know, 18 months ago, 
that there is a huge problem with these contracts and the 
massive requirements. And it seems to me that agencies have 
really moved in a diametrically opposed position. They have now 
decided to avoid the requirements of contract bundling by 
claiming they are existing modifications or they are 
indefinite--I guess what you have described as indefinite 
delivery contracts and, therefore, do not qualify as new 
contracts, as a way of avoiding the whole contract bundling 
question.
    Could you speak to those issues here today? And, also, I 
would like to have you tell us what you think we ought to be 
doing in the reauthorization, because I do think we should have 
some severe penalties in law for those companies, those large 
companies, you know, that sort of masquerade as small 
companies, you know, using small businesses as fronts for 
getting access to these Federal contracts. And we have already 
had one company, Insight, which was a multinational, publicly 
traded corporation for misrepresenting itself as a small 
business for Federal contracts, and it had a workforce of 4,000 
employees and annual revenue of $3.3 billion. And its 
predecessor company had been misleading the Federal Government 
as to their small business status for over 10 years.
    How does this come about? And what can we do to resolve 
these questions once and for all?
    Mr. Thorson. On the bundling issue, first of all, we will 
take kind of a simplistic approach to a rather complex issue, 
and that is, we know that there were in one case over 200 
issues reported to OMB and about 20 to SBA. Now, the OMB 
reports are after the fact, as you pointed out, and in SBA you 
are reporting it beforehand because you are asking for an 
analysis and, in a sense, permission.
    At best, we felt that SBA ought to find out why there was a 
discrepancy. Clearly, there is something wrong here. The very 
best case is people have made a mistake in reporting the 
bundling, and I think in their statement they refer to the fact 
that we do not know this was bundling. Probably true. But find 
out. Why not find out?
    And if the IG can go find out and if the OIG can go find 
out in a very short period of time to see what was reported to 
OMB, our position was that SBA should really do the same.
    If it is a matter of an error, then we believe that some 
education is required to clear up this process, because there 
are reports of bundling that are incorrect.
    If it is not an error and those truly were bundled 
contracts that were reported to OMB, then we have another 
problem that is probably even bigger, and that is, the 
motivation as to why they did not come to SBA first. And I 
think the obvious reason there is they did not want to have to 
go through that particular process. We do not know that, but it 
is a good guess.
    So, again, going back, the simplistic view is our position 
is that SBA needs to find out where this discrepancy arose from 
and why it is there and what they can do about it.
    Chair Snowe. Well, you know, do these companies have to 
recertify each time they are submitting a bid? I mean, you 
know, if they are going to try to bypass the whole process in 
one way or the other, then obviously we have got a loophole and 
we are going to have to figure that one out. And the first 
question, Is there a requirement that they would have to 
recertify every time they submit a bid?
    Mr. Thorson. Well, the final ruling that SBA has issued is 
regarding companies that are sold to large companies, and at 
that point, they must recertify.
    Our position is we would like to see annual 
recertification. We think that exerts the best control. I do 
not believe SBA is 100 percent behind that particular 
viewpoint.
    Chair Snowe. Well, I guess what you are saying is 
essentially SBA is not being a strong advocate and certainly 
not being aggressive on this question, and that is why we have 
massive inroads into the current--you know, by large companies 
or otherwise that have really eroded small businesses' ability 
to even access these contracts.
    Mr. Thorson. That is right, and we do believe that there is 
better control over this by enforcing some form of 
recertification. Our position is 1 year because that is the 
tightest. If companies are required to do that, then it makes 
it very difficult for them to try and slip under the wire on 
some of these other things as other contracts come up.
    Right now I believe the issue is for 5 years, and so for 5 
years, assuming for sake of argument the first contract causes 
you to move into the large business category, for the next 
several years you are going to be able to continue to bid. And 
I think that is the point that was being made by our position 
on annual recertification.
    Chair Snowe. And why has the rule proposed by SBA language 
for 3 years? You know, what are the barriers there? Agencies? 
Other agencies?
    Mr. Thorson. The one that we referred to that has been 3 
years before?
    Chair Snowe. Yes.
    Mr. Thorson. I really cannot answer that. That question is 
one that we continue to ask.
    Chair Snowe. To which you have received no answer?
    Mr. Thorson. Yes.
    Chair Snowe. Okay. Also, on suspending or debarring 
companies from Government contracts based on violation of the 
SBA procurement size regulation, you have asked Congress to 
give SBA that authority. Frankly, I think that this is a 
direction that we obviously ought to move and incorporate some 
of these strong penalties within law. Yes?
    Mr. Thorson. I am sorry. I couldn't quite hear the 
question.
    Chair Snowe. Oh, I am sorry. It was concerning--you asked 
Congress to give SBA the authority to prosecute, to debar 
companies who engage in fraudulent activities and disguising, 
you know, their status as a small business company.
    Mr. Thorson. Right. On the debarment issue, first of all, I 
think there is a general reluctance to want to go down that 
road, anyway, on behalf of the agency. But the issue really 
became one of, well, do we really have the authority at SBA? Or 
is the procuring agency the one that needs to pursue that? And 
then each looks at the other to follow that path and nothing 
gets accomplished.
    What we are looking for here is a clearance so that SBA 
truly has the very clear understanding that they have that 
authority and that they can pursue it when it is warranted.
    Chair Snowe. But I gather on some of the--I mean, I think 
in terms of the promulgation of that rule, that some of the 
major agencies, such as GSA and Defense Department, had 
objected to it.
    Mr. Thorson. Yes. Actually, a lot of the definitions and 
the regulations and the issues as we read them, really do 
create an issue of unenforceability.
    If you are looking for a way not to pursue a difficult 
path--which certainly these are difficult--they are 
confrontational. They are sort of against the general trend of, 
``We are supporting the small business here.'' They do not 
necessarily want to get into that role. It is easy to duck it 
because of the fact that the regulations really are such that 
it is difficult to enforce.
    Chair Snowe. Yes, and I think that we really do have to 
strengthen the enforcement one way or the other. I think as 
your office indicated and your testimony, over 80 percent of 
these bundled contracts have not been reviewed. I think that is 
a startling statement. Now, they do not try to, you know, 
disagree with that, but I think the evidence is in the numbers. 
And the fact is it illustrates that we have got a serious 
problem and that small business being denied access to Federal 
contracts, you know, in many ways and in many forms.
    Mr. Sims, would you care to address this question at all?
    Mr. Sims. I was just going to say I support the notion of 
recertifying annually. And a parallel in the minority business 
side, we do certification for corporate America, and we have 
come across these new constructs of businesses where a major 
corporation will buy 49 percent of a minority-owned business; 
therefore, they get 100 percent of every contract they are able 
to bring in and 49 percent that the minority business brings 
in.
    We have sat down and put a task force together to look at 
the criteria to ensure that these new businesses meet not only 
the content of the law but the spirit of the law. And the 
notion of having someone come as a front--it is nothing more, 
nothing less--jeopardizes and threatens the integrity of the 
entire program. So we are looking at how do we go about 
ensuring for minority businesses that they remain in charge and 
remain in control of their own destiny. And I think that that 
is something that may be taken under advisement and 
consideration.
    Chair Snowe. I appreciate that, because I think that is a 
very critical point as well.
    Dr. Wessner, you offered some very interesting testimony 
and presentation on the value of the SBIR program, and 
obviously that is at the heart of the question here today, 
particularly the role that venture capital firms should play or 
could play in the SBIR program. And you illustrated the point 
in your presentation that large U.S. venture capital markets 
are not focused on early-stage firms. I would like to have each 
of you address this, because we are trying to figure out where 
is the middle ground here, making sure that we have venture 
capital firms that can play a role, but at the same time don't 
dwarf, you know, the smaller firms, the individuals, or the 
States that do not have large venture capital firms so that it 
inhibits their ability to participate in this program.
    Mr. Bigger, I know you represent pharmaceuticals, and, 
again, pharmaceuticals generally--it is a long-term investment, 
but generally it is in the later stages as Dr. Wessner 
indicated in his statement about the fact that large venture 
capital firms do not focus on early-stage development.
    Is it possible to create sort of a post-Phase II, you know, 
that concentrates perhaps more in-depth to the 
commercialization, the potential commercialization of a product 
and whether or not it would be able to be brought into market? 
And it would address your question, Mr. Bigger, without, I 
think, intruding on the value of the program and the essence of 
it originally and the way in which it was designed.
    Dr. Wessner, do you think that is possible? I mean, do you 
think that that would work?
    Dr. Wessner. Thank you, Senator.
    Chair Snowe. If you would answer that question, then we 
will defer to Senator Kerry because he has to go to the floor.
    Dr. Wessner. Certainly. One qualification first is that we 
are addressing here today the concept, its virtues, and how the 
markets actually work. I am sensitive to Senator Kerry's 
observation that our work is grounded in previous analysis that 
we have before us, but the report itself is not out.
    To answer your question, I can, therefore, only give a 
partial answer. The Academy is not yet prepared to make a 
recommendation, but there are two key points. One is that we 
have with the agencies, as a result of the interest that they 
have brought to this program, you have at NSF, for example, a 
Phase IIB program that brings in additional funds and a Phase 
IIB Plus, we like to joke, not to be confused with Phase III, 
of course.
    [Laughter.]
    Dr. Wessner. But it does seem to bring additional funds 
forward, and for the Phase IIB and the Plus, they are required 
to provide matching private sector funds. So that, I would 
simply suggest from our observation, shows one avenue forward.
    But if I may, Senator, the most disturbing thing about this 
debate is that it is characterized by the absence of research 
and data. And we have been in discussions with the NIH to try 
and get a better view on what the facts of the matter are. And 
I would say, without taking a view of either those who favor 
venture capital participation or those who do not, it would be 
very helpful if we knew what we were talking about. And I think 
the program is sufficiently important, the question is 
sufficiently important that we should encourage the NIH to 
engage in some research, which I think could be done in a 
fairly timely manner. It is not that hard, and I am distressed 
that it has not been done already.
    Chair Snowe. Yes, that is a good suggestion. I know that 
GAO did a study but did not evaluate the majority-minority 
participation.
    Dr. Wessner. It may not be a surprise to you, Senator, but 
we think the National Academies might be more qualified to 
carry out that study.
    [Laughter.]
    Chair Snowe. Okay. Thank you. Point well taken.
    Senator Kerry?
    Senator Kerry. Chair Snowe, thank you very much for 
accommodating me. I apologize to the witnesses, but there is an 
amendment on the floor that I need to go and be involved in. 
Let me press a couple of quick points, and then I will leave 
some questions for the record, if I can.
    Mr. Thorson, just coming to you quickly, first of all, 
thank you for your testimony and thank you for this oversight, 
which is important. Senator Snowe has already gone into the 
fraudulent component, so I will let that stand. But let me 
address your second point, the contracting officer error. You 
say that good cases have been undermined by contracting 
personnel at Federal agencies who do not comply or are just 
unfamiliar with small business contracting requirements.
    Now, how can you be a contracting officer and be unfamiliar 
with the requirements?
    Mr. Thorson. The small business regulations--well, first of 
all, you are correct. But, in fact, we find that there are 
contracting officers who deal regularly with very large 
corporations and----
    Senator Kerry. In which agencies?
    Mr. Thorson. Well, I hesitate to name any particular ones 
because as soon as I do that, I will end up----
    Senator Kerry. Well, isn't that your job? Aren't you 
supposed to name them?
    Mr. Thorson. But, there are those who do not know the small 
business regulations or the 8(a)----
    Senator Kerry. Well, that is just a fundamental function of 
leadership. I mean, if you do not--somebody has got to sit them 
down and say: Here is the protocol; you do not issue any 
contract without checking off this list.
    Mr. Thorson. Right.
    Senator Kerry. This is pretty simple.
    Mr. Thorson. Sometimes it is as simple as exactly that, and 
one----
    Senator Kerry. But it does not happen. Why?
    Mr. Thorson. I cannot tell you exactly why, but I do feel 
that part of what we have suggested is----
    Senator Kerry. I just find it shocking.
    Mr. Thorson [continuing]. That where this happens, the SBA 
needs to become involved in some kind of training aspect if 
this is really the problem we think it is.
    Senator Kerry. Why the SBA? Isn't each agency responsible 
for living up to these standards? You go through a list here, 
and I applaud you for it. But listen to this: Agencies accepted 
bids from contractors on small business contracts even though 
the contractors had not certified that they are a small 
business.
    Nobody who does not certify should even get it, period, end 
of issue.
    Mr. Thorson. Right.
    Senator Kerry. It is like going to get a bank loan. Without 
full disclosure, you do not get it. I mean, this is--it is sort 
of--I am sitting here and I am saying, ``What is going on 
here?'' Other errors have included failing to request size 
certification from a business.
    Mr. Thorson. Right.
    Senator Kerry. I mean, there just ought to be a fundamental 
checklist, and you do not go forward with your application if 
you do not check off the list. It seems like there is a willing 
complicity in this process, frankly.
    Chair Snowe, I think we have got to ask for something more 
from the leadership of these agencies and the administration. 
This is just unacceptable. This is why it goes on and on and on 
and on. Nobody enforces it. Nobody cares. Nobody puts it in 
place. This is not a joke.
    Mr. Thorson. And this is exactly why we specified these 
things in our testimony, because a lot of people, if you talk 
about these things, they just cannot quite believe it is that 
simple that people cannot follow these particular rules.
    Senator Kerry. It is just stunning to me.
    Mr. Thorson. And that is exactly why we have put this into 
the testimony, because we wanted you to see the kinds of things 
that we find.
    Senator Kerry. Has anybody been fired for failure to do 
these things?
    Mr. Thorson. Not that I am aware of.
    Senator Kerry. Well, they ought to be.
    Senator Kerry. Let me continue through your testimony. You 
say, ``What can be done to correct the problems with small 
business contracting?'' You talk about the final regulation. 
Then you say, ``However, it has now been more than 3 years 
since SBA issues its proposed rule on annual certification.''
    Mr. Thorson. Right.
    Senator Kerry. Three years.
    Mr. Thorson. In fairness--and this gets back to what 
Senator Snowe asked me also--there are a lot of agencies giving 
input into this, and this is a very controversial element to--
--
    Senator Kerry. Sir, with all due respect, we cannot take 3 
years to do these kinds of things. This is what drives the 
average citizen nuts. This is Washington.
    Mr. Thorson. Right.
    Senator Kerry. I mean, we cannot do that. Three years to 
decide about an annual certification, which is accountability.
    Madam Chair, I would like to ask you, I think we ought to 
ask for a deadline from the SBA as to when this is going to be 
either decided or not decided.
    Chair Snowe. Well, I would concur. I do not think there is 
any rationale for it, and GAO has, you know, even indicated it 
could improve certification for small businesses every year. It 
is very simple.
    Mr. Thorson. Right.
    Senator Kerry. Finally, you say, ``Congress could also 
establish control processes within the SBA.'' You know, we 
cannot--are we going to micromanage? I mean, this is crazy.
    Mr. Thorson. Yes, sir.
    Senator Kerry. You have to demand this. As the inspector 
general, you have to require that they are going to live up to 
the standard, and we in the oversight hearings ought to demand 
it, and we ought to have an oversight hearing on this and 
demand it. It is just--you know, I have been around here long 
enough to understand what can be done and what cannot be, and 
this is just unacceptable. It is a matter of administrative 
leadership. You bring your people in, you set the standards, 
you hold accountability, you measure the standards at the end 
of a month, at the end of 2 months, and people who do not meet 
them do not work anymore at that agency. That is how you run 
it.
    Mr. Thorson. Yes, sir.
    Senator Kerry. And somebody ought to do that.
    Mr. Watson, before I have to leave, I thought your 
testimony was succinct and very comprehensive, and it was 
terrific testimony. And I just want to ask you and Dr. 
Squillante to debate with Mr. Bigger here. It may be 
inadvisable to get into a debate with a guy by that name, but 
anyway.
    [Laughter.]
    Senator Kerry. You described S. 1263 in pretty Draconian 
terms. It is going to really undo the system. It is going to 
hurt. On the other hand, Mr. Bigger, you say, American 
competitiveness is at stake here, we have got a really 
divergent point of view.
    The Chair has appropriately pointed out this later-phase 
financing with respect to what VC gets involved in and does not 
get involved in.
    Isn't there a legitimacy to the notion that SBIR is getting 
people starting up and getting them to a point where, if they 
have got enough legitimacy and enough credibility in what they 
are doing, they are going to get VC money; but that you should 
not undo that already too small a pot of distribution to those 
entities that need it by creating competition for VC stage 
financing.
    I am asking that. I am not certain, and I am really trying 
to figure this out. But it is hard for me to understand how a 
company that can attract $78 million worth of VC investment has 
enough credibility to do that but it cannot go to the next tier 
with the next product, or whatever it is.
    So I want to hear you guys go at it a little bit, if you 
can.
    [Laughter.]
    Senator Kerry. I mean, what do you say--you have not 
responded to Mr. Bigger's testimony, so what is your response 
to his notion that this is going to hurt American 
competitiveness?
    Mr. Watson. Well, I understand that there is a problem that 
the biotech people have, which is to bring a pharmaceutical 
product to market takes tens, even hundreds of millions of 
dollars. But that is not a role that the SBIR program is 
equipped to address or satisfy. And if that is a real problem--
and I cannot say whether it is or not--but if it is real, it 
needs another solution, not the SBIR solution.
    Senator Kerry. And, Dr. Squillante, you sort of argued the 
same thing. You agree with that.
    Dr. Squillante. Yes. I think that it is clear that venture 
capitalist firms have a long, expensive road to go, but it is 
not what SBIR is about. And it is not the $100,000 and $750,000 
awards that these companies are after. They are after awards 
that are 10 times that size. They have access to other funding. 
They can participate in SBIR if they own less than 50 percent. 
If they only meet the statutory requirements that everybody 
else in the SBIR program has to meet, they can own more than 51 
percent. And I agree, these venture capital-funded firms have a 
lot of great ideas that could have an impact on the future 
health of the citizens of the country. But so do the eight to 
ten other small companies which will be eliminated from the 
SBIR program for each one of these very large awards that are 
awarded.
    Senator Kerry. Mr. Bigger?
    Mr. Bigger. Yes, I think what you need to do is really 
split this thing up in terms of where venture capital puts 
their money and what other research goes on. And I will speak 
to my own company, but it goes beyond just my company. I think 
we are just an example.
    Venture capital is basically supporting big ideas that they 
view as having large market potential, great returns to them as 
an investor. There are a lot of other programs. For instance, 
most of my money that I have raised for my company has gone to 
developing a broad-spectrum antibiotic for the treatment of 
bacterial infections that are resistant to current drugs. Okay? 
That is a huge opportunity. I have spent probably $50 to $60 
million already doing that. I am going to spend another $250 to 
$300 million bringing it through Phase III. So that is where 
the venture capital money comes in.
    However, there are instances, where my technology actually 
can be used in things other than infectious disease. For 
instance, tetracyclines now can be use for the treatment of 
multiple sclerosis. We plan on entering the clinic at the 
beginning of next year with a potential oral treatment for 
multiple sclerosis.
    How did we find that out? By using grants of $250,000 to 
$500,000 to do that basic research, not----
    Senator Kerry. Well, let me try to get at this a little 
bit. First of all, we are all anxious to go down those avenues 
of exploration, and we are all anxious to try to excite as much 
investment and exploration in those as possible. This is our 
future. Life sciences is one of the most, hopefully, promising 
job creators and solid parts of our economic future. But here 
is the dynamic.
    With a small pie to be divided up, is this the best use of 
that pie from this particular sector of our Government? Or do 
we need to be thinking in larger terms or a different term or, 
to pick up on what Senator Snowe said, is there some sort of 
alternative phase of financing that we might consider being 
engaged in and then pulling out of at a certain point? Is there 
a different way to skin this cat?
    Mr. Bigger. I actually believe there is. But I also believe 
that there are some real advantages to using a venture-backed 
company because there is information that has been developed. 
You can leverage the infrastructure to do things on other 
projects that typically would not be funded.
    For instance, a lot of the work that goes on in my company, 
we were able to do it for $250,000, $500,000 on these grants 
because we have leveraged the larger infrastructure that 
somebody paid money for from an investment standpoint.
    So I think you actually get more bang for your buck when 
dealing with some of these firms because they have 
infrastructure, they can do things that you typically cannot 
do.
    The other piece to this that deals with where the money 
goes, is that it does go outside of the Boston and California 
area, I can tell you that we had four SBIR grants. Every one of 
them involved a university helping us do some of the testing of 
the drugs (animal testing and in vitro testing). They were done 
at universities outside of Boston. One of them happened to be 
in Kansas; the other in Georgia; and one of them was in 
California.
    But, again, there is money that goes into other parts of 
the country other than just into these two areas, and it goes 
through, is funneled through the companies.
    Senator Kerry. Well, I appreciate it, Chair Snowe. Thank 
you for you----
    Mr. Watson. Could I add a comment?
    Senator Kerry. Yes, sir.
    Mr. Watson. SBIR takes 2.5 percent of the total funding; 
97.5 percent is at another door. My recommendation is that they 
look to that other door at the NIH, which NIH is the institute 
that is affected here. And we have already proposed or we are 
in the process of proposing a compromise solution that goes in 
that direction.
    Senator Kerry. Well, thank you very much, Mr. Watson. We 
are interested, obviously, in trying to work this through and 
be helpful, and I think Chair Snowe and I would like to see if 
there is a way to get a compromise here that does what we both 
want to do. We want to excite the biopharma field, and we also 
want to preserve SBIR's ability to work.
    Dr. Wessner, I know you were trying to get a comment in. I 
am trying to get to the floor. Competing interests.
    I trust, incidentally, when you are talking about Yankee 
principles, you are talking about Maine and Massachusetts, not 
the New York----
    [Laughter.]
    Senator Kerry. Not the New York kind of Yankee.
    Mr. Watson. I think now I can safely say yes, sir.
    Senator Kerry. Mr. Wynn, I cannot stay to hear the answer, 
but I am interested and maybe you could submit it for the 
record. I just really want to know what you think we can do to 
more effectively meet the service-disabled veteran procurement 
goals. I think that is really important.
    Mr. Wynn. By all means, sir.
    Senator Kerry. Thank you, sir. I appreciate it.
    Chair Snowe. Thank you, Senator Kerry.
    Senator Kerry. And thank you all very, very much. And, Mr. 
Thorson, I just want to say, I think what you did--when we 
asked those questions of you at your confirmation, whether you 
are going to draw the line between yourself and the SBA, I 
think you did that in this report, and we really appreciate it. 
And I think that is a great start, so thank you.
    Mr. Thorson. Well, thank you, sir.
    Chair Snowe. Yes, thank you.
    Dr. Wessner, did you want to continue? Did you have any 
comment to make?
    Dr. Wessner. Yes. If I may, I think the discussion we just 
had illustrated a point. You know, how many of these firms 
actually have venture capital? And how many of these firms have 
what sort of venture capital? And how many of them are working 
on the same thing for which they have the venture capital?
    I could go on, but I think you take my point. It is just 
simply we do not really have a very good grasp of the 
parameters of this issue.
    Chair Snowe. You know, it is an interesting question at 
this point as to whether or not we defer consideration of any 
changes until we can get a factual report that indicates 
exactly, you know, what are the numbers, who is participating, 
you know, how would it affect the whole program. And I think 
that is the question.
    On the other hand, SBA has made a decision, and, you know, 
we are concerned because, obviously, there is a difference of 
opinion on this committee. But I do not think it is, you know, 
so far apart that we cannot, you know, sort of resolve those 
issues. And the question is whether or not we proceed with that 
now.
    For example, Mr. Bigger, on the question of having venture 
capital participation, you know, with venture capital 
companies, not individuals, what about--as I think even Dr. 
Zerhouni said at the NIH, indicated in a letter that just 
having that requirement, allowing that requirement for venture 
capital participation, but to comply with the small business 
affiliation of 500 employees or fewer, how would you react to 
that?
    Mr. Bigger. Well, I think if you look at most venture 
capital groups, they are relatively small organizations. There 
are a few large ones. But in general, they own somewhere 
between 5 and 20 percent of a company they invest in, and even 
if you probably added up all the people that work in the 
venture capital companies that have invested in my company, you 
probably could not even come to 500 people, combining the 
employees of Paratek and all the investors employees. Venture 
capital people have a difficult time within their own firm 
agreeing on plans and coming up with the direction they would 
like to take with a company, never mind trying to convince 10 
other venture capitalists to all agree in terms of the 
directions of where their company could go.
    So I just do not think you can look at a venture investor 
as a big company. It is not. It is really individuals within a 
company who come and observe board meetings or participate on a 
board. It is not an organization of hundreds and hundreds of 
people, as venture capitalists are small organizations. And 
they do not run my company and their involvement in my company 
is not very different than they are with some other portfolio 
companies. They may have 20 companies in their portfolio, each 
one having a different area of expertise or whatever the case 
may be.
    Chair Snowe. Well, but they do have the ability now--I 
mean, NIH, for example, has the ability to waive the 
guidelines. DOD does. They can go to SBA to waive the 
guidelines. I think, Mr. Watson, you indicated--isn't it 70 
percent of the NIH grants that went to----
    Mr. Watson. Were in excess of the guidelines.
    Chair Snowe. Yes, were in excess of the guidelines, have 
gone above the guidelines, so there has been that flexibility.
    You know, Dr. Wessner is right. We do not have the facts on 
what companies and what size and so on, and that obviously 
would be very useful in this discussion. But what we do not 
want to do is to really undermine the original intent of the 
program when it was, you know, established, which was to allow 
the entrepreneur the innovation that needs--you need to nurture 
that, because otherwise that will be overwhelmed if, you know, 
potentially large companies can be involved in this process 
and, you know, change the form of the program. And it 
ultimately could. It could change the whole direction. I think 
it is a question of where do we find, you know, the right 
balance in this program to ensure that you get both. But at the 
initial stages, you certainly want the small business and you 
want to be sure that it is not always concentrated in just a 
few States across the country. I mean, very few States have 
large venture capital firms. You know, my State has maybe one 
or two small ones. But most of the, you know, venture capital 
is concentrated in very few States, about 10, as I think Dr. 
Squillante's testimony indicated, that about 85 percent of it 
in 10 States. That is a major concentration.
    Yes, Dr. Squillante?
    Dr. Squillante. Thank you. And following up on this point, 
I think that the question of affiliation and size is an area 
where we almost certainly have grounds based on these comments, 
where we can move forward on a compromise.
    I do want to point out that Senate bill 1263--take for 
granted that, let's say, you need to change SBIR. Let's assume 
that. That is not what Senate bill S. 1263 does. It does not 
change the rules on affiliation or numbers. What it does is 
Section 3 of that bill very specifically waives those 
requirements for venture capital firms. And to do that is to 
set special rules for a special group of people, and that is 
definitely wrong.
    Mr. Bigger. I think that that is where a compromise could 
be reached. I think it is important to understand that, you 
know, a lot of the research that is being done by companies 
like Paratek and so forth are truly entrepreneurial. You know, 
they are venturing into areas that venture capitalists are not 
going to put money into. And if you look at where venture 
capital is located, it is pretty much where all the major money 
markets of the country are and the world are. And so you just 
need to follow the money and find out where they are going.
    But if you attend a biotechnologies annual meeting, you 
will find that almost every State in the Union now is trying to 
attract biotechnology into their State, and they are very 
seriously trying to utilize the universities to do that. And I 
think it is a great way, and that is how I think you are going 
to get some diversity in terms of where money goes into States 
such as Wyoming and other States that do not right now have a 
lot of venture capital money.
    But I think it is unfair to exclude a company, just because 
you have venture capital investors. In order to develop a big 
drug for different diseases today, it takes a lot of money 
right from the beginning. And you can literally just by 
starting a company be over the 50-percent ownership of venture 
capital, and you have not done anything at that point in time.
    So I think there has got to be some way to define what the 
affiliation needs to be or that type of thing, and not just 
make a blanket rule that says any venture capital backed 
company that is 51-percent owned should not be that way. 
Because today, based on the rules, Madam Chairman, I could 
license myself as a management group, can start a new company, 
and call it Bigger Pharmaceuticals, license the technology out 
of Paratek, and then apply for a grant back to SBIR, have all 
the work done at Paratek, then give a royalty-free license back 
to Paratek, and no one would be the wiser. I would be legal in 
terms of what I did. But I think that is not what the intent of 
the law is or intent of what Congress wanted.
    I think it is important that we somehow compromise as to 
where we are and how we can maximize the money that the NIH has 
through the SBIR program. How do we maximize that? And I think 
it is a win-win for both groups. You know, I think we have a 
difference of opinion as to affiliations and venture capital. 
But I think in the end we are trying to improve the innovation 
and where the United States stands in terms of innovation 
worldwide.
    Chair Snowe. Well, would you agree with the affiliation 
requirement that they be 500 or fewer, the small business 
affiliation requirement?
    Mr. Bigger. But, again, how do you define that with 
multiple VCs that have multiple companies they invest in--do 
you combine all of their portfolio companies employees and say 
that is the 500?
    Chair Snowe. We obviously would have to come up with a 
definition?
    Mr. Bigger. Yes, I think that that is a way to go that 
would not penalize some small companies. Paratek is a 66-
pension company which has had to return three SBIR grants that, 
believe me, would not be funded by venture capital--one for the 
treatment of anthrax, one for the treatment of malaria, and 
another treatment for spinal muscular atrophy. But I have been 
forced to return the grants. And I think it wrong that because 
Paratek is 55-percent owned by venture capitalists, it does not 
qualify as a small company.
    Chair Snowe. These are not because of individual investors?
    Mr. Bigger. Yes, 45 percent of my investor base is 
individuals. If you look at it in terms of U.S. investors, 
including VCs and so forth, I am probably in the 65 percent 
range. So easily qualifying for the SBIR, but unfortunately, 
the 20 percent of the venture capital is not included because 
they are not individuals.
    Chair Snowe. Yes, Mr. Watson?
    Mr. Watson. I would like to remind everyone of the 
longstanding eligibility requirement that says ``independently 
owned and operated,'' and that has been the criteria. And I 
think it should stay that way.
    Chair Snowe. In the Small Business Act, yes.
    Mr. Watson. Absolutely.
    Chair Snowe. Yes. Dr. Wessner?
    Dr. Wessner. Just again a small observation. I think the 
line of questioning you have is intriguing. It underscores the 
need to know the dimension of the issue, as I have mentioned. 
But also one of the points that I think is relevant that we 
documented in this first volume is maintaining the flexibility 
of the program. You may want to--if the numbers are not large, 
there may be an opportunity for the agencies on a case-by-case 
basis to ask for some exemption. But that simply illustrates 
why we need to know more about the dimensions of the issue, my 
point being there may be some happy middle ground where we 
could work through that.
    Chair Snowe. I appreciate that. Yes, we try to find them 
these days, although not easy.
    Dr. Wessner, while we have you here, I wanted to ask you, 
obviously you spoke, I think very eloquently, to the value of 
this program and how, you know, other countries are emulating 
this program and possibly go beyond it. The Office of 
Management and Budget on their expectmore.gov website indicated 
that over half of the SBIR program has not demonstrated 
results.
    Can you speak to that issue at all? Do you think that OMB 
has the resources, the expertise to conduct the kind of quality 
assessment that is required?
    Dr. Wessner. Thank you, Senator. You ask penetrating but 
complicated questions there. I am not prepared to discuss 
specific recommendations of the Office of Management and Budget 
for reasons that you would understand. I think the question you 
are asking is a perfectly valid one. One of the things that we 
have documented here--and I do not mean to be self-serving, but 
this is the methodology that we are employing and it is public.
    There is sometimes the risk that an agency takes a view, 
and I think institutionally it is important to understand--and 
this is a personal opinion, not an Academy opinion--that the 
Office of Management and Budget likes a program that is in the 
budget that it manages. And the SBIR is not. So I am not sure 
you can institutionally expect love and affection from OMB with 
regard to this program.
    Chair Snowe. It may not be the exception, either.
    [Laughter.]
    Dr. Wessner. If I may, let me just very briefly, if I 
could, in a few paragraphs answer your question. One of the 
things that you have to recognize when they ask whether there 
has been significant accomplishment is the diversity, first, of 
what they are trying to do. Different agencies have different 
missions. They have different philosophies. They have different 
types of topics. They have different roles in the solicitation. 
And they have different expected outcomes. NSF is trying to do 
something dramatically different from the Department of 
Defense, and when we find those grouped--and if I am not 
mistaken, you may well be quoting from one of the studies of 
Defense. So there is this wide variety of things.
    When we say is it commercially a success, well, again, 
without trying to--what do we mean by ``commercial success''? 
For example, if a firm comes up with a new and better nuclear 
trigger, do we really expect that to be sold widely 
commercially? Well, probably not. We would not want to 
encourage that, I think.
    It is important to keep in mind that in some cases you can 
have a very significant accomplishment by the program in a 
Phase I. They answer the question. In some cases, they can come 
up with an algorithm that can have important security 
accomplishments, but the $100,000 Phase I solved that, done. 
There is no commercial--no apparent commercial application 
afterwards. And that illustrates an underlying problem. We talk 
about SBIR, but within the agencies these things are not 
stamped ``SBIR.'' As one researcher put out, there is no SBIR 
shrine either in the agency or necessarily in the company.
    I think one of the points that was illustrated is often a 
series of awards go to build a capacity in a company where the 
company then does something different than the project. So we 
can come along with our researchers: Did your project work? 
Were there any sales? No. If we do not ask anything else, he 
will not tell us, Oh, but that actually enabled us to do the 
thing we did succeed with.
    I do not want to be, seriously, an apologist for the 
program. Things can be improved. But it is very important to 
understand the complexity of what we are asking. And if I may 
just illustrate that with a recent real experience down in New 
Orleans with Governor Blanco, a very distinguished and 
intelligent State official from Virginia turned to me just 
before I spoke, and he said, ``Does this program really work, 
do you think?'' And then he got up and he wanted to talk about 
the new developments in Southern Virginia by a company called 
Luna Innovation--which, of course, was funded by SBIR. And I 
think that illustrates the sort of gap that we sometimes get.
    You know, ``It is my company, that one worked. But does the 
program work? I don't know.''
    So that type of thing I think has to be taken into account, 
and we will hopefully document it. But sometimes I think 
emulation, as I discussed earlier, is the highest form of 
flattery for a program and the fact the rest of the world is 
doing it may suggest we are on to something.
    Chair Snowe. And I think you make the point that you have 
to measure the original goal, and it is in our interest and the 
Federal Government's interest to encourage and nurture this 
culture for, you know, R&D that otherwise the Government cannot 
do, but to support it and hope the innovations can be, you 
know, applied, you know, whether it is in DOD or elsewhere, 
Department of Energy and so on, but in the commercial sector as 
well, depending on what it is all about. But I agree with you--
or a pharmaceutical. So, I mean, it is in our interest, and 
that is not measured, I think, by OMB. It just looks at the end 
result of whatever it is but not where it ends up going or, you 
know, what was the original purpose.
    Mr. Wynn, a final few questions here. On veterans 
contracting, do you think that there should be a formal 
certification for service-disabled veterans?
    Mr. Wynn. Chairman Snowe, that has been discussed among the 
veteran business community, and right now it is being supported 
by many of them to use the Department of Veterans Affairs to 
come up with a certification program for service-disabled-
veteran-owned businesses.
    Chair Snowe. And I think it is unfortunate about 
dismantling the Office of Federal Contracting Assistance for 
Veterans and the Advisory Committee as well for Veterans 
Business Development. So I gather you are recommending that we 
ought to reverse those decisions?
    Mr. Wynn. Well, we would like to see more Federal 
contracting support for veteran business owners out of the SBA, 
whether it be that office or now they are talking more about 
the Office of Veterans Business Development, which had already 
been there but had not been providing a great deal of 
assistance in Federal contracting. So we would like to see more 
support from there.
    Chair Snowe. Is that what you are recommending, 23 to 28 
percent?
    Mr. Wynn. Yes, ma'am.
    Chair Snowe. Yes. It may be a challenge, but I understand 
why you are recommending it. And I think that obviously we are 
going to have to really concentrate on, you know, what has gone 
wrong, as a matter of fact, in providing more support for our 
veterans, frankly, you know, especially when they return from, 
you know, serving in Iraq and Afghanistan, a lot of them small 
business owners and coming home. We need to provide them the 
assistance that they deserve, getting back on their feet and 
making, you know, that transition as well.
    Mr. Wynn. Could I make a comment on one other thing, too, 
if I may? If it is in some way possible to eliminate what we 
call the Rule of 2 to provide more ease of contracting with 
service-disabled-veteran-owned businesses, we believe that this 
would really increase the number of contracts awarded to 
service-disabled veterans. And it should not, in the opinion of 
many, be very difficult to do that.
    Chair Snowe. Okay. Thank you.
    Mr. Thorson, we just got a response from SBA that e-mailed 
us that on the 3-year delay of the rule, they are saying it is 
because the SBA inspector general--obviously not you since you 
just arrived, so you can breathe a sigh of relief. But what is 
the issue here? Because, obviously, we want to get to the 
bottom of it, and I think it is going to be absolutely 
essential that we do. But, you know, what would be the 
justification for their suggesting that it is the inspector 
general's office that is delaying the rule?
    Mr. Thorson. I am sorry, ma'am. For some reason I am having 
trouble hearing you. I apologize.
    Chair Snowe. Okay. The SBA e-mailed us saying that the 
delay in the promulgation of the rule, you know, that has been 
delayed for 3 years was because it was held up by the SBA's 
Office of Inspector General--not you, of course, because 
obviously you just arrived, but obviously the previous 
inspector general.
    [Pause.]
    Mr. Thorson. Obviously, I was not involved in that at this 
time so I am not real sure, but we do circulate those 
internally. But I really have a hard time understanding that 
they feel that we held that up.
    Chair Snowe. Right.
    Mr. Thorson. That is not our position.
    Chair Snowe. So you do not have any idea why they would 
have suggested--why the inspector general's office would have 
been responsible for that?
    Mr. Thorson. No.
    Chair Snowe. Okay. Well, obviously, we need to get more 
answers, and I think very aggressively so on these issues. I am 
very disturbed, frankly, by the violations of law, the fronting 
of companies. We have got, you know, large businesses that are 
fronting the small businesses, you know, replete with examples, 
and also the fact that people are just, you know, continuously 
violating flagrantly contract bundling. And we are just going 
to have to get to the bottom of it. And I think that have 
strong penalties in law and setting examples for prosecution is 
going to be essential. But I am just very--and even some very 
well established contractors, you know, have been named by the 
GAO as potential beneficiaries of fronting. I mean, they are 
fronting small businesses, I mean major contractors, which I 
think is extremely disturbing, and it just shows to me a 
flagrant violation and dismissive attitude, you know, about 
what the rules and regulations, not to mention the statute 
requires.
    So I am going to explore a legislative solution, and I 
think that your office should continue investigations regarding 
these issues. And I would do it immediately because we would 
like to move forward in trying to get to the bottom of it and 
we are able to make sure that this does not continue, this 
pattern of behavior.
    Mr. Thorson. Right. And to go back to Senator Kerry's point 
for a minute on the contracting error, when you involve the 
people from other agencies, that obviously hinders our ability 
to go into that. So we have been working with the other IGs and 
actually have created a Small Business Review Guide in order to 
help the OIGs of other agencies to be able to look at these 
situations as well. And I think that helps to address what 
Senator Kerry was talking about as well.
    Chair Snowe. Well, I agree, you know, and their statement 
that they submitted last night says that SBA's ongoing review 
of the underlying is that firms receiving these contracts were 
legitimate small businesses at the time of the award but great 
to be large or were acquired by large businesses over the life 
of the contract. And I am thinking, well, how long is the 
contract? I mean, that would all have to happen sort of 
quickly.
    Are you familiar with that argument? Are you, Mr. Sims? 
Have you heard that one before?
    Mr. Sims. Yes, I have heard that. But if you think it is 
bad for small businesses, when you get to minority businesses 
it is even worse.
    Chair Snowe. I can only imagine.
    Mr. Sims. I spent several months with folks at SBA looking 
at a third-party certification program. At the end of that 7 
months, somebody was transferred over--and this was in the last 
administration--from the White House, who sat in the room and 
designed a third-party certification program on their own with 
no experience. And when they had the bidders conference, there 
were only two organizations that had certification experience 
in the room: NMSDC and WBENC, the Women's Business Enterprise 
National Council. Everybody else was a minority supplier 
looking at a revenue stream, and the certification program set 
up by SBA was a failure. At one point they expected after the 
first year 30,000 businesses in their database. They had 3,000. 
They had to go to the Department of Transportation and get 
their folks and other agencies because it was an abysmal 
failure.
    Two years ago, they did another RFP on third-party 
certification. Ten days before they applications were due, they 
pulled it off and canceled it. And they recently, last year, 
came up with another third-party certification attempt. But the 
only people eligible were 8(a) firms. And so the craziness is 
that the notion of having one 8(a) firm looking at your 
financials, looking at your customer base, and then determining 
whether you are eligible, that is why I said there is chaos and 
turmoil over SBA. And I am not surprised at the tap dance of 
saying it is the inspector general's office that is holding 
this up. It is not surprising.
    Chair Snowe. Okay. Mr. Thorson?
    Mr. Thorson. It was a little surprising to us.
    [Laughter.]
    Chair Snowe. Welcome to your job.
    Mr. Thorson. The point that you also made as far as the 
companies growing and being recertified as to the issue of 1-
year recertification is controversial and we know that. I mean, 
there are positions that break down politically. There are 
positions that break down in any other ways as well. But the 
truth is, if you use that, that gives you the tightest rein of 
control on this. And whether companies are growing large or 
not, it really comes down to, with annual certification, you 
really do exercise a much better element of control.
    I think it also affects, frankly, some of the errors that 
we are talking about, and I keep coming back to Senator Kerry's 
question because I was taken aback by it because it was such an 
obvious one. Well, how can you not realize as a contracting 
officer that somebody has not certified one way or another? 
That was a hard question to answer. I do not know.
    Chair Snowe. It was too logical, that is why.
    [Laughter.]
    Mr. Thorson. And so those are the kinds of things that I 
think if the certification is required more frequently to the 
point of annually, then I think you do eliminate a lot of these 
things.
    Chair Snowe. I would agree with that. I think that is 
absolutely right. I think that is obviously a frustrating 
point, and I think we recognize some of the changes that need 
to be made very shortly, and I appreciate it. And I know it is 
frustrating, but I think you understand the tasks at hand in 
your department, do you not?
    Mr. Thorson. Yes.
    Chair Snowe. That is right. It is a great initiation. But I 
think that this is a good way to start in understanding the 
dimensions of the problem, hearing others here today speaking 
to these questions, and we would like to tackle it very 
shortly, if possible, and do as much as we can in the 
reauthorization, which we expect to accomplish by the end of 
this month. But, you know, so we hope that we can get your 
input to the degree that you can, and others' as well, as we 
proceed on these questions.
    I would also like to say that Senator Enzi had to meet with 
the leaders and that is why he had to depart, but I am going to 
submit questions on his behalf as well.
    I appreciate your input, your patience, your testimony, 
your guidance here today, and also sharing your perspectives of 
your experiences and background. It has been very helpful, and 
I am hopeful that we can resolve some of these questions here 
before this committee on these vital programs that certainly 
can and do make a difference. And we want to make sure that we 
can preserve the integrity of them as well. So I thank you all 
for being here today and for taking the time to participate and 
testify before this committee.
    With that, the hearing record will remain open until the 
14th of July for any additional questions or comments or 
testimony. In the meantime, this hearing is adjourned. Thank 
you.
    [Whereupon, at 12:53 p.m., the committee was adjourned.]

                      APPENDIX MATERIAL SUBMITTED

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

             Responses by Eric M. Thorson to Questions from
                         Senator John F. Kerry
    Question 1. Contracting Officer Failure. In your response to my 
question regarding the failure of contracting officers to comply with 
small business contracting requirements, you stated that you do not 
know why this occurs, that you can not understand why this type of 
negligence is allowed to continue unaddressed in Federal procurement 
procedures. You also commented that you have been working with 
Inspector Generals of other Federal agencies to remedy the problem.
     Will you formally commit to looking into this issue, and 
providing the SBA with recommendations on how this issue can be 
addressed?
    Answer. The OIG's Management Challenge 1 identifies that errors by 
contracting officers in small business procurement is an important 
issue that the Agency needs to address to improve small business 
contracting opportunities and prevent the performance of small business 
set-aside contracts by large businesses. Action Item 4 in that 
Challenge tasks SBA to ``Develop and take steps to provide reasonable 
assurance that agencies are providing adequate training to contracting 
personnel on small business contracting procedures.'' We are working 
with the Agency on steps to increase training that is provided to 
Federal contracting personnel. In addition, we have developed a small 
business procurement guide and provided that guide to other agency OIGs 
to encourage these offices to assess compliance with small business 
contracting requirements in procurement audits. We will continue our 
efforts to look into the reasons for contracting officer error and work 
with SBA to identify additional recommendations to solve this problem.

    Question 2. IG Role in Closure of the SBA Veteran's Contracting 
Office. In May, the SBA made the determination to close its Veteran's 
Contracting Office. This office served a vital need to the service 
disabled veteran small business community, and the decision did not sit 
well with the community.
     To what extent was your office aware of the decision to close the 
office?
     Since the office was shut down, has there been any effort to look 
into the impact of the decision? If not, do you intend to do this?
    Answer. Our office was not consulted on the Agency's plan to 
eliminate this office and did not become aware of the closure until 
after it was reported by the news media. We have not looked into the 
impact of this decision because the office, prior to its closure, had a 
staff of only one person, and because agency personnel have advised 
that the functions of that office are being transferred to the SBA 
Office of Veterans Business Development. Given our understanding of 
this matter, we do not plan to open a review of this decision at this 
time.

    Question 3. Relationship with New Administrator. In his 
confirmation hearing, Administrator Preston spoke to the importance of 
maintaining the independence of your office, and about his intention to 
work with you as a partner in policing and improving operations at the 
SBA.
     Has the new Administrator approached you about his intention to 
work closely with you and to enforce your findings and recommendations?
     Has he stated his intention to follow through on any of the 
recommendations made with respect to improving the SBA's ability to 
serve as a watch dog for small businesses in Federal contracting?
    Answer. I have met several times with Administrator Preston, who 
has advised that he values and respects the contributions of the Office 
of Inspector General and plans to work closely with my office in 
implementing OIG recommendations. I have presented our concerns 
regarding Federal small business contracting to Administrator Preston, 
and I am greatly encouraged by his significant level of interest in 
this important subject. We will continue to work with the Administrator 
to implement the OIG recommendations in this area.

    Question 4. Implementation of Women's Procurement Program. The SBA 
has dragged its feet for 6 years following Congress's enactment of a 
women's procurement program. Although regulations have been issued and 
are under review, there is some doubt expressed by the women's small 
business community as to whether this program will ever be implemented.
     Has your office looked into this delay and the reasons behind it?
     What is your understanding of why this program has not been 
implemented, and what can be done to ensure that it is?
    Answer. We are generally aware that the Agency has had studies 
performed regarding the nature of industries for which it would be 
appropriate to encourage women-owned business contracting, as required 
by Public Law 106-554, Section 811(m), and has issued for comment 
proposed regulations to implement the Women's Procurement Program. 
Beyond this, however, my office has not looked into the issue of the 
delays in the establishment of this program. The Agency would be in the 
best position to respond to questions about the timing of the program.
                                 ______
                                 
             Responses by Eric M. Thorson to Questions from
                          Senator Conrad Burns
    Question 1. SBIR Program.
    1. What efforts are underway at SBA, if any, to monitor SBIR awards 
given to venture-capital backed firms? Based on a recent GAO study, 
much of the impact of VCs occurred in NIH. What impact has this had on 
non-VC-backed SBIR applicants?
    2. Has the SBA considered, as some states have implemented, a Phase 
0 award, as a precursor to Phase I?
    Answer. My office has not looked into these issues. The Agency 
would be in the best position to respond to these questions.
                               __________
     Responses by Joe Wynn to Questions from Senator John F. Kerry
    Question 1. Closure of the SBA Veterans Contracting Office--The SBA 
decided in May to shut down the Veterans Small Business Contracting 
Office, which at the time had a full-time staff of only one. Given the 
Administration's stated commitment to veterans, this decision seems 
like another example in a line of decisions to save pennies on the 
dollar at the expense of an entire underserved community.
     Can you speak to how this decision affects the veterans community 
of small business owners?
     What services were provided through this office, and how are 
veteran small business owners adversely affected by the decision?
    Answer. The decision to dismantle the Office of Federal Contracting 
for Veteran Business Owners affects the veteran small business 
community tremendously. It leaves a void in a program that is still in 
its infancy and sorely needs a leader to ensure its implementation. 
While the Task Force for Veterans Entrepreneurship has been voluntarily 
performing the role of advocacy and oversight of the Veterans 
Procurement Program, as defined by PL 108-183, long before 2003; it was 
believed that the SBA, with the appointment of Ms. Lewis as an 
Assistant Administrator to this newly created office, had accepted its 
role as the Federal agency to ensure compliance.
    But after a whole year of operation, SBA never provided any 
additional staff to work with Ms. Lewis, and later reassigned her to 
other duties. While it may very well have been the prerogative of the 
new SBA Associate Administrator of the Office of Government Contracting 
to reassign the duties under her purview, it's appalling to find that 
Ms. Lewis was forced to abruptly change her career and receive a 
reprimand as a result after doing so much with so little. (Many TFVE 
members request that your office seek to remedy any wrongful complaint 
or persecution of Ms. Lewis).
    By restructuring the office, the SBA essentially took away an 
experienced contracting professional; who also happened to be a female 
veteran with years of experience with the SBA Minority Business Program 
and one who also participated in the development of the implementing 
regulations for the Veterans Procurement Program. Such an individual 
will be hard to replace. Ms. Lewis' dedication to the ideals of the 
program and proactive initiatives to educate agency personnel and 
veteran business owners were without parallel. She not only helped to 
match SDVOBs with procurement opportunities, she also was persistent in 
encouraging agencies to comply with the law.
    Below is a list of the primary services that were provided by the 
Office of Federal Contracting for Veteran Business Owners:

     Outreach to the veterans community, participating in small 
business and veterans' conferences, and providing information about the 
Veterans Procurement Program under PL 108-183 to SDVOBs.
     Provide briefings to agency procurement officials and contracting 
officers on the implementation of Section 308 of PL 108-183 of the 
Veterans Procurement Program.
     Oversee the implementation of each agency's strategic plans as 
defined by Executive Order 13-360 and report on their progress or lack 
thereof.
     Provide information about filing a protest if a contract is 
awarded to a small business that has misrepresented itself as a SDVOB.
     Coordination of SBA business development resources for veterans 
interested in starting or expanding a small business for Federal 
contracting.

    If the Veterans Procurement Program is to be successful, it has to 
have ownership by some agency or entity that will ensure that agencies 
are doing their best to meet the mandatory procurement goals. Oversight 
and accountability is necessary, whether it comes from the Office of 
Federal Contracting for Veteran Business Owners or some other agency.
    This program is not just about Federal contracting to another 
preference group. It's about providing for those ``who have borne the 
battle.'' As was referenced in the Congressional findings of PL 106-50, 
``the United States has done too little to assist veterans, 
particularly service-disabled veterans, in playing a greater role in 
the economy of the United States and thereby must provide them with 
additional assistance and support to better equip them to form and 
expand small business enterprises, such that they may realize the 
American dream that they fought to protect.'' The program needs a 
parent and a Champion to lead the cause!

    Question 2. Procurement Goal--As you stated in your testimony, the 
Veterans Benefits Act of 2003 made it mandatory for Federal Agencies to 
meet the goal of 3 percent procurement for service disabled veteran 
small businesses. Yet, despite instituting a set-aside program for this 
community, year-after-year the Federal government falls woefully short 
of attaining this goal. Last year, only .38 percent of Federal 
contracts went to service disabled small business owners.
     What explanation is given by the Administration to the service 
disabled community for the inability to reach this goal?
     What is the SBA doing to implement the Service Disabled Veterans 
Procurement Program under PL 108-183 and Exec Order 13-360?
     You presented several proposals to fix this problem that could be 
accomplished legislatively. Please explain how SDVOBs would benefit 
from eliminating the ``Rule of Two'' and how a level playing field 
could be created among SDV, 8a, and Hubzone Programs.
     What steps could be taken immediately by this Administration, in 
terms of staffing increases, outreach, etc. to ensure that these 
numbers increase?
    Answer. From the perspective of the Federal contracting community, 
the OSDBUs, the Contracting Officers, and the Procurement Officials, PL 
108-183 provided the contract vehicle that was missing in the previous 
legislation, PL 106-50. But even with the authority to restrict 
competition to SDVOBs, agency representatives say they are still unable 
to meet the goals because (1) they are unclear about the application of 
certain parts of the statute, i.e. when to use sole source versus when 
to use set-asides; (2) conflict over the use of ``may'' set-aside 
contracts for SDVOBs versus ``shall'' set-aside contracts for the 8a 
and Hubzone programs; (3) locating capable and qualified SDVOBs is too 
difficult and there is no directive to assist SDVOBs with business 
development; (4) many construction contracts are large so very few 
SDVOBs meet the bonding requirements; and (5) many contracting officers 
still don't know the SDVOBs that are out there.
    While there may be some validity to these reasons for not meeting 
the goals, it appears that the SBA is doing very little to help remedy 
the situation. They were directed by Executive Order 13-360 to (a) 
designate an appropriate entity within SBA to coordinate with the 
Veterans Affairs' Center for Veterans Enterprise, to provide 
information and assistance to SDVOBs with Federal contracting, (b) 
advise and assist heads of agencies implementing their strategic plans 
to increase contracting opportunities to SDVOBs; and (c) make training 
in Federal contracting law, procedures, and practices available to 
SDVOBs. But as was mentioned in response to question 1, the SBA started 
an office to assist veteran business owners with Federal contracting, 
but then dismantled it less than a year later.
    Since the designated agency to assist veteran business owners with 
Federal contracting, (the SBA) is lacking in its responsibility, it is 
hoped that the Senate Small Business Committee will support 
recommendations for the following legislative solutions: (1) Eliminate 
the ``Rule of Two''; (2) create ``Equal Parity'' among the use of SDV, 
8a and Hubzone programs; and (3) provide a ``Price Evaluation 
Preference'' of 10% for SDVOBs in acquisitions conducted using full and 
open competition.
    The Rule of Two as introduced under PL 108-183 is contained in Part 
19 FAR, and the Code of Federal Regulations (CFR) 13 CFR, Part 125. The 
Rule of Two states if a contracting officer knows of two or more SDVOBs 
that can do the work, then the requirement must be competed and a sole 
source award cannot be made. If sole source cannot be made, then the 
requirement may be competed among SDVOBs only under restricted 
competition.
    As stated in my testimony, contracting officers are often under 
pressure to get certain requirements awarded quickly, especially in the 
last two months of the fiscal year, and although there may be a SDVOB 
that can do the job, they routinely go to an 8(a) company using the 
non-competitive (sole source) authority under that program. Thus 8(a) 
firms can be rewarded for their self-marketing activities under FAR 
Part 19. There is no such authority under the SDV Program. In these 
cases, the Government does not have time to even consider restricted 
competition among SDVOBs because of time factors.
    Elimination of the Rule of Two under the SDV Program is also cited 
in recently passed legislation, HR 3082, ``Veterans Small Business and 
Employment Promotion Act of 2006'', Title I, Section 101, subparagraph 
(b) ``Use of Non-competitive Procedures for Certain Small Contracts,'' 
which states that, ``a contracting officer . . . may use procedures 
other than competitive procedures . . . for an amount less than the 
simplified acquisition threshold.'' And subparagraph (c) ``Sole Source 
Contracts for Contracts Above the Simplified Acquisition Threshold,'' 
which states that, ``for purposes of meeting the goals . . ., a 
contracting officer . . . may award a contract to a small business 
concern owned and controlled by veterans using procedures other than 
competitive procedures . . .''
    The technical changes to the Small Business Act to eliminate the 
Rule of Two from the SDV Program could be made in the following manner:
    In subparagraph 36(a)(1) of the Small Business Act (15 U.S.C. 
657(f)(a)(1)), strike the last portion of the subparagraph that reads: 
``and the contracting officer does not have a reasonable expectation 
that 2 or more small business concerns owned and controlled by service-
disabled veterans will submit offers for the contracting opportunity.'' 
The remaining subparagraph 36(a)(1) will read: ``(1) such concern is 
determined to be a responsible contractor with respect to performance 
of such contract opportunity;''
    To create Equal Parity among the SDV, 8a and Hubzone programs, is 
to give the same level of precedence to each. At present, many 
contracting officers consider the authority that says you ``Shall'' 
before those that say you ``May'' with regard to preference programs 
for small business contracting. So more contracts continue to go to the 
8a and Hubzone programs before being considered for the SDV program. 
The order of priority for contracting preferences among the three 
groups should be equal.
    The technical changes to the Small Business Act to create this 
Equal Parity could be made in the following manner: Amend subparagraph 
36(a) of the Small Business Act (15 U.S.C. 657(f)(a)(1)), by striking 
``may'' and inserting ``shall.''
    As for the Price Evaluation Preference, it could be implemented in 
the following manner: Beginning on the date of enactment of this Act 
the head of each Federal agency shall extend a 10 percent price 
evaluation preference in full and open competitions to any small 
business concern owned and controlled by service-disabled veterans. By 
eliminating the Rule of Two, creating Equal Parity, and implementing a, 
Price Evaluation Preference, the SDV Program would be strengthened by 
increasing contract awards, resources, and support without including 
SDVOBs into the 8a program. The 8a program was created to help 
alleviate the more than 100 years of wrongful discrimination and 
exclusion of minorities from the full benefits of American society, 
including the Federal marketplace. The SDVOB program is intended to be 
inclusive of any American who served in this country's armed forces, 
guard or reserves. The SDVOB program should retain its own identify for 
``those who have borne the battle.''
    In addition, there are steps that could be taken by this 
Administration now to increase the number of contracting opportunities 
to SDVOBs:

     More outreach to veteran and veteran business community. Create 
more opportunities to build relationships between agencies, primes, and 
SDVOBs.
     Require contracting officers to certify as to knowledge and 
implementation of the Service Disabled Veterans Procurement Program. 
The senior designated official under the agency's strategic plan should 
be the Chief Operating Officer or some other such official who also has 
command authority over the Chief Operating Officer. Managers should 
have written in their performance evaluations, progress toward SDVOB 
goals and should not receive any bonus, merit increase, or Presidential 
award.
     Provide funding to non-profit, Veteran Service Organizations 
within the community to educate, train, and assist veterans interested 
in participating in the Federal marketplace.
     Comply with the President's Executive Order 13-360 in its 
entirety. Complete the required Strategic Plans, evaluate their 
effectiveness on at least a semi-annual basis, and provide semi-annual 
reports to the public.
     Increase the use of Mentor-Protege Programs.
     Encourage and support the use of teaming and joint ventures among 
SDVOBs. Also recognize the past performance of the team and not just 
the past performance of the SDVOB prime.
     Increase the use of the SBA Commercial Marketing Representatives 
and the Prime Contracting Representatives for the Subcontracting and 
Prime Contracting Programs.

    Question 3. Certification--Discuss your position on the need for a 
certification program for SDVOBs and who should administer it.
    Answer. What is being referred to as a Certification Program for 
Service-Disabled Veteran Business Owners is really intended to be 
merely a ``Validation and Verification'' process. It is recommended 
that the status of the individual claiming to be a service disabled 
veteran be verified by the Department of Veterans Affairs and not by 
the SBA. The VA or DOD would provide documentation to validate the 
veteran's disability status and the percentage of disability 
compensation.
    It is not recommended that the VA take over the role of verifying a 
businesses eligibility to operate as a small business based on size or 
number of employees. Nor is it intended that the VA should verify the 
eligibility of ownership or business formation. Since SBA has already 
been performing small business certification functions, it is no reason 
why they should not continue to do so.

    Question 4. Subcontracting--Since large Prime contractors are also 
failing to subcontract a minimum of 3% of their work to SDVOBs, what 
can the agencies do to increase subcontracting opportunities to SDVOBs 
and to improve the performance of large Prime contractors?
    Answer. To increase subcontracting opportunities to SDVOBs, large 
Prime contractors must be held accountable for failing to comply with 
the subcontracting plans submitted as part of the contract proposal and 
award. Compliance with the plans should be reviewed by the Contracting 
Officers and OSDBUs on a quarterly basis with the results reported and 
made available to the public.
    Prime contractors who consistently fail to meet their 
subcontracting goals, should receive negative past performance 
evaluations and be required to correct any subcontracting defaults 
prior to any approval of contract options. Primes who consistently meet 
their subcontracting plans should be rewarded by receiving priority in 
future contracts and positive past performance evaluations.
    Prime contractors should be encouraged to participate in mentor-
protege programs with SDVOBs and those that do, should be given an 
incentive for doing so.
    We believe that prime contractors who blatantly disregard making a 
good faith effort to submit or implement subcontracting plans as 
required, should be barred from Federal contracting for a certain 
number of years and liquidated damages should be imposed if applicable. 
However, this is unreasonable and would be deleterious to the United 
States. Oversight should be established to ensure that Small Business 
Plan requirements in the Small Business Act, are carried out by 
Contracting Officers. Contracting Officers and OSDBUs should be held 
accountable for reviewing, reporting and enforcing compliance with the 
subcontracting plans.

    Question 5. Survivorship--Presently, a SDVOB will lose its 
preference status if the SDVOB majority owner passes and the new owner 
is not a SDV also. How is this issue impacting the SDV community? 
Please explain your position on whether a firm should maintain its 
status as a SDVOB after ownership passes to a non-SDV owner.
    Answer. We propose the following legislation:

    Treatment of Businesses After Death of Veteran-Owner--
    (1) If the death of a veteran causes a small business concern to be 
less than 51 percent owned by one or more veterans, the surviving 
spouse of such veteran who inherits ownership rights in such small 
business concern shall be treated as if the surviving spouse were that 
veteran for the purpose of maintaining the status of the small business 
concern as a small business concern owned and controlled by veterans 
for the period described in paragraph (2).
    (2) The period referred to in paragraph (1) is the period beginning 
on the date on which the veteran dies and ending on the earliest of the 
following dates:

    (A) The date on which the surviving spouse remarries.
    (B) The date on which the surviving spouse gives up an ownership 
interest in the small business concern.
    (C) The date that is ten years after the date of the veteran's 
death.
                                 ______
                                 
      Responses by Joe Wynn to Questions from Senator Conrad Burns
    Question 1. The assumption is often that the presence of venture 
capital--and the private confidence that it signified--is a good 
measuring stick for the viability of an idea. Good ideas tend to 
attract private funding. On the other hand, SBIR was designed to 
support good ideas that might not be attractive in the marketplace. How 
do we go about making SBIR as effective at choosing good ideas as 
possible while maintaining its ability to fund good projects that might 
not otherwise be developed?
    Question 2. Should the presence of venture capital factor into the 
likelihood of receiving an SBIR award?
    Response to Questions 1 and 2. I respectfully decline to offer any 
response to the above questions 1 and 2 from Senator Bums since I did 
not include any information in my testimony on SBIR. My testimony was 
confined to the Service Disabled Veterans Procurement Program and 
associated activities and/or programs. However, if there is additional 
time, other members of our Task Force for Veterans Entrepreneurship 
could share their views on SBIR.
    Thank you for allowing me the opportunity to further clarify my 
views and the views of the many members of the Task Force for Veterans 
Entrepreneurship on the above referenced issues which are so important 
to our veterans and veteran business owners. I am available for 
additional comments if needed.
                               __________
          Responses by Steven Sims to Follow-up Questions from
                         Senator John F. Kerry
    Question 1. What should be done to place ANCs on an equal playing 
field with other 8 (a) firms?
    Answer. The miraculous growth of contract dollars should have 
raised question some time ago. The leadership responsible should be 
prosecuted to set an example and so those tribes and individuals not 
responsible are not unjustly targeted. This solution is one the ANC's 
not part of this hoax should be recommending. Given the GAO report 
which speaks to ANC's being used as a past through, and those 
responsible not even showing the smarts to use other ANC's as 
subcontractors, so native peoples benefit in some way the punishment 
should be extreme. The Minority Business Summit Committee (a consortium 
of MBE business organizations) makes this recommendation reluctantly. 
ANCs should have their status in the world of 8 (a) be reduced to the 
same status and competitive entity as other 8 (a) firms.

    Question 2. Net worth threshold (NWT) for 8 (a) firms--Does the 
current NWT prevent legitimate SDB's from participating in the 8 (a) 
program?
    Comment. Before answering, I would like to raise a couple of 
issues:

    1. Because access to capital is so important and difficult for many 
small firms, particularly minority businesses, it is imperative that 
they have as strong a cash position as possible. Limiting their net 
worth appears to be more an impediment to growth than tool certifying 
the eligibility of small minority businesses to participate in this 
program.
    2. The income limits have neither been adjusted nor modified since 
the program's inception. This restricts and retards the opportunity for 
growth, development or success on the part of the minority business.

    Answer. Yes, the NWT does restrict or prevent legitimate SDBs from 
participating in the 8 (a) program. I would think that some research 
and then adjustment to income thresholds based on challenges of the 
industry and small business size standards would be Senate response 
useful. At the least, NWT should be tied to inflation over the period 
since the last adjustment. While not exactly leveling the playing 
field, it would provide some relief to those in or entering the 
program.
                                 ______
                                 
          Responses by Steven Sims to Follow-up Questions from
                          Senator Conrad Burns
    Question 1. Should venture capital factor into receiving an SBIR 
awards?
    Answer. I believe venture capital should be factored into the 
determination of an SBIR award. I do not believe the VC should be a 
majority owner and still receive the SBIR. My recommendation would be 
the same as NMSDC has implemented in the private sector for minority 
businesses needing venture capital to grow. The business must be 
certified as a small business or small minority owned business. Once 
certified, the business is allowed to hunt for institutional investors 
who might be interested in participating in the venture. The business 
is able to give up equity but not ownership of the venture and must 
remain in control of the business and must manage the business for it 
to receive and maintain the SBIR award. A true VC is interested in 
return on investment and not management also they come in looking for 
an exit strategy and thus is betting on the jockey not the horse in the 
race.
         Responses by Dr. Charles W. Wessner to Questions from
                          Senator Conrad Burns
    Question 1. The assumption is often that the presence of venture 
capital--and the private confidence that it signified--is a good 
measuring stick for the viability of a new idea. Good ideas tend to 
attract private funding.
    On the other hand, SBIR was designed to support good ideas that 
might not be attractive in the marketplace. How do we go about making 
SBIR as effective at choosing good ideas as possible while maintaining 
its ability to fund good projects that might not otherwise be 
developed?
    Answer. The question posits that the presence of venture capital is 
``a good measuring stick'' for the viability of an idea. While venture 
funding is certainly one measure of an idea's viability, it s not 
necessarily the only good measure. What is more, many venture supported 
business models do not succeed; hence the tautology that ``good ideas 
tend to attract private funding'' may be an overstatement. As the dot-
com boom demonstrated, many bad ideas can also attract private 
investment.
    It is also that there are good ideas that do not attract private 
investment. Nuclear power, GPS, and the Internet are examples of good 
ideas that certainly did not attract private funding at their origin, 
or indeed during their long gestation. Private markets are, of course, 
amazingly effective at exploiting these platform technologies but, 
historically, this has often been the case only after substantial 
Federal investments. A virtue of SBIR is that it can help create and 
signal information about new ideas, and in this way help private 
venture capital markets work better. The basic point is that Federal 
investments in research, combined with effective public-private 
partnerships, such as innovation awards, can help well regulated 
private markets create new welfare enhancing technologies.
    Making SBIR as effective as possible at choosing good ideas has to 
take into account the diversity of program objectives and agency needs. 
A virtue of SBIR is that in many respects it can act as a ``low cost 
technological probe,'' enabling the government to explore ideas that 
may hold promise. The second phase of the program enables the 
successful ideas to be developed further. Transitioning to the next 
phase of development sometimes occurs through the action of private 
markets, sometimes through procurement. Some government needs can be 
met by the ``answer'' provided through the successful conclusion of the 
phase I or phase II award with no further research required or a 
product (e.g. an algorithm or software diagnostic). Other awards can 
provide valuable negative proofs, identifying dead ends before 
substantial Federal investments are made. And yet other awards require 
substantial additional funds to meet testing and certification 
requirements. Recognizing this diversity and the need for flexibility 
is key to understanding the program and to its effective operation.

    Question 2. Should the presence of venture capital factor into the 
likelihood of receiving an SBIR award?
    Answer. The key determinant for receiving an SBIR award should be 
the quality of the research proposed and its correspondence to agency 
needs or interests.
    As emphasized during the testimony, additional research is needed 
to determine the number of companies that have received SBIR awards and 
have venture capital and the outcomes of these awards. This would 
enable us to have a better understanding of this relationship and 
therefore what new policies, if any, should be adopted. The absence of 
such data-driven analysis makes it hard to formulate effective policy 
on this question.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


         Responses by Dr. Michael Squillante to Questions from
                      Senator Christopher S. Bond
    Question 1. In your testimony, you refer to the ``unlimited venture 
capital presence'' in the SBIR program that you suggest S. 1263 would 
achieve. Yet does not my legislation limit any since venture capital to 
a minority stake in an SBIR company? Doesn't my bill specifically 
exclude venture capital companies that are controlled by big 
businesses, such as corporate venture funds? In addition, doesn't my 
legislation maintain the existing 500-employee limitation as well as 
the U.S. citizenship test? In fact, I believe my bill is a narrowly 
tailored approach that allows companies with multiple venture investors 
to participate in the SBIR--as these companies had for 21 years until 
the 2003 ruling.
    Therefore, my question is this: If you are confident in the 
scientific merits of your research, why does it appear that you are 
unwilling to compete on a level playing field against other companies? 
Do you have reason to believe that NIH awards SBIR grants on anything 
other than the scientific merit of the grant application?
    Answer. I appreciate the opportunity to testify before the Small 
Business and Entrepreneurship Committee and the further opportunity to 
provide additional information. We are all after the same goal: 
improving the SBIR Program.
    My concerns are that the proposed changes will alter the SBIR 
program, shifting its focus toward development and clinical studies and 
away from innovative research and scientific breakthroughs. I am also 
convinced that the change will result in many fewer, much larger NIH 
awards. This will make it very much harder for small companies that do 
not have access to other funding to receive SBIR grants. Thus, a change 
in the Affiliation Rule will precipitate a paradigm change in Small 
Business early stage support, thereby impacting the national economy by 
discourage the start-up and growth of small businesses that are 
demonstrated to be one of the most effective means of creating new 
jobs. Given the large contribution that small businesses are making to 
the nation's economy, a major change in the Affiliation Rule will have 
a negative impact on the economy over the long term.
    I have divided your first question into its several parts:
    First, as written S. 1263 very specifically does not limit venture 
capital firms and the small companies they control to 500 employees 
plus affiliates. Never, in the entire history of SBIR, have any firms 
with more than 500 employees including affiliates been legally allowed 
to participate, whether venture capital funded or not. S. 1263 would, 
for the first time, waive this critical affiliation rule. This is my 
most serious concern to S. 1263.
    One thing is very clear; a change in the Affiliation rules that 
permits large venture capitalists to take advantage of the SBIR Program 
for clinical trials and product development will unleash major paradigm 
shift in the means available for tech-based small businesses to get 
support for new innovative technology and R&D projects. As the pathways 
for small businesses are whittled down until the passageway is too 
narrow and unattractive, we will have effectively choked off one of the 
best engines for economic growth that the nation has going for it.
    If the intent of S. 1263 is truly to preserve the 500 limit, why 
does it specifically waive the affiliation rule for venture capital 
firms? Why only for venture capital companies, why not for other 
ownership?
    Second, in addition, some proponents of S. 1263 have publicly 
stated that they are not satisfied with $100,000 Phase I program and 
$750,000 Phase II programs. They state they need $1,000,000 in Phase I 
and $10,000,000 in Phase II. This will reduce the number of SBIR award 
by a factor of 10 to 12. If awards like this are routinely made, the 
odds of wining will plummet and it will drive 90% of small, high tech 
companies out of SBIR. SBIR will very quickly become the venture 
capital Supplemental Development Insurance Fund.
    Would you be willing to support a firm, absolute cap on the size of 
awards? Possibly the limit could be one and one half to two times the 
limit recommended in the legislation? For example, the present limit is 
$750,000 and the cap would be $1,125,000 to $1,500,000. If the limit is 
raised in the reauthorization to $1,000,000 then the cap would be 
$1,500,000 to $2,000,000. These would still be huge awards, but they 
would not cripple SBIR.
    Third, also, allow me, respectfully, to point out that if venture 
capital controlled firms participated in SBIR prior to 2003, they did 
so illegally. Venture capital controlled firms were never lawfully 
permitted to participate in SBIR. They did so prior to the ruling 
either because they did not provide the proper certifications (which 
violates the law) or agency administrators ignored the ownership of the 
firms either through laziness or negligence.
    Fourth, related to the question of multiple venture capital 
ownership, the question is not whether a venture capital firm owns less 
that 49%, it is whether or not the ``individual'' owns more than 50%. 
It is not clear how multiple venture capital ownership affects the 
question. However, I assume that no one would allow a company 
controlled by a foreign venture capital firm to participate. In the 
event that a company was controlled by multiple venture capital owners, 
and some of the them are foreign, how much SBIR funding should go to 
benefit foreign investors?
    Fifth, I am willing to compete with any companies ``on a level 
playing field'', that is as long as the same rules apply to me and to 
those I compete with. Section 3 of S. 1263 provides a special waiver to 
the affiliation rule only to venture capital funded companies. They 
would have a significant advantage over real small companies that do 
not have access to the capital and equipment that the venture capital 
firms provide. Do the venture capital firms need special rules that 
only apply to them in order to compete?
    SBIR is an intensively competitive program. Less than 1 out of 10 
NIH SBIR Phase I applications are funded. Increased participation by 
large venture capital firms will dramatically reduce this to 1 in 20 or 
fewer.

    Question 2. You make much of the GAO Report issued in April of this 
year. Yet, in that report the GAO admitted that it could not 
distinguish between companies that were majority and minority backed by 
venture capital funding. Further, the GAO report only looked at SBIR 
grants made between 2001 and 2004, yet majority-backed companies were 
allowed to receive SBIR funds until the ruling in 2003. So the figures 
you cite about the increase in venture funding and the SBIR program 
actually includes the majority-venture backed companies that are now 
ineligible.
    Given these facts, to you agree or disagree with the following 
Small Business Administration quote about the April GAO report: ``The 
data presented in the report has no bearing on program eligibility. For 
this reason, SBA finds the general discussion of SBIR eligibility to be 
unclear and potentially misleading.'' [See letter from SBA Associate 
Administrator for Government Contracting, Karen Hontz, dated April 
2006]
    Answer. First, the statement has been made by advocates of S. 1263 
that venture capital backed firms can no longer compete in NIH SBIR. I 
cited the GAO report because it clearly refutes this statement. The 
fact is that venture capital companies are participating at higher 
levels than ever before and that participation is increasing rapidly.
    Second, firms that were majority owned by venture capital firms 
were never legally allowed to participate in SBIR.
    Third, I believe that eligibility, as it applies to affiliation, is 
very clear and should apply equally to all participants.

    Question 3. How capital intensive is your business? Do you have 
revenue from products you are selling? Does your product have to go 
through anything like the 3-stage Food and Drug Administration approval 
process that drug development firms face?
    Would you say that the economics of your product development are 
fundamentally different from the economics of drug and medical device 
development, which can cost hundreds of millions of dollars and take a 
decade or more? Viewed in this light, isn't a reliance on venture funds 
understandable in the drug development world, if not in your line of 
business?
    Answer. I spoke at the hearing representing the Small Business 
Technology Council of the NSBA. Obviously this organization does not 
have products. The company I work for does sell products and, yes, some 
are medical products that require FDA approval. Thus, I do understand 
why venture capital funding is used to support pharmaceutical 
development. I also believe that this work is important and necessary 
and I know that the studies are long and expensive.
    The studies, however, are not ``innovation research'' and, as such, 
do not properly belong in the SBIR program. SBIR is supposed to fund 
innovations before they have reached the state of development where 
they can attract venture capital funding.
    This is not a problem faced only by venture capital funded firms. I 
have had several NIH SBIR applications rejected because the NIH 
reviewers felt that the technology was too advanced and no longer 
innovative. Just last year I submitted a proposal that was not funded. 
The reviewers found that ``The PI (Principal Investigator) is one of 
the leaders in the field'' and ``This is important research and the 
work could have a positive impact.'' However, they also noted: ``These 
studies are not very innovative'' and ``nothing revolutionary has been 
proposed.'' Obviously, this hurts, but it is the key criterion for 
funding SBIR research.
    I definitely believe that the NIH should have a program that 
supports clinical studies for drug development. This should not come 
out of the small 2.5% SBIR program. When SBIR is reauthorized, it would 
be a wonderful idea to have an additional allotment of funding, 
possibly 1% of the NIH extramural budget, to fund clinical studies 
related to technologies developed under SBIR. I would gladly work with 
you and the committee to develop a concept like this.
                                 ______
                                 
         Responses by Dr. Michael Squillante to Questions from
                          Senator Conrad Burns
    Question 1. The assumption is often that the presence of venture 
capital--and the private confidence that it signified--is a good 
measuring stick for the viability of an idea. Good ideas tend to 
attract private funding. On the other hand, SBIR was designed to 
support good ideas that might not be attractive in the marketplace. How 
do we go about making SBIR as effective at choosing good ideas as 
possible while maintaining its ability to fund good projects that might 
not otherwise be developed?
    Answer. I believe that venture capital funding does indeed give 
credence that an idea has huge commercial potential. It does not, 
however, mean that an idea has merit and can solve important medical 
problems. (This is obvious by the enormous resources that go into 
clinical studies for cosmetics.) If this were the only criterion for 
performing SBIR research, many diseases would not be investigated and 
many problems would never be solved.
    A very specific example is the research we carried out under an NIH 
SBIR program that led to an order of magnitude decrease in the 
incidence of stroke during open-heart surgery and has changed the way 
open-heart surgery is performed in hospitals throughout the United 
States. If commercial potential and venture capital involvement were 
important criteria, this would not have been funded and the incidence 
of stroke following open-heart surgery would be 10 times higher than it 
is today.
    In addition, the development of new technologies for medical 
research would come nearly to a standstill. SBIR is the primary 
mechanism today for technology development in medical research in the 
United States. For the most part, investigations into new tools for 
medical researchers would not get done. Large companies are not doing 
it, and venture capital firms obviously would not fund it.

    Question 2. Should the presence of venture capital factor into the 
likelihood of receiving an SBIR award?
    Answer. All SBIR proposals should be judged on their technical 
merit and the potential impact of the research.
    The issue of venture capital should be a factor relative to the 
size of the company and the total number of all of its affiliates.
                               __________
            Responses by Thomas J. Bigger to Questions from
                      Senator Christopher S. Bond
    Question 1. [The text for question 1 was not available at press 
time.]
    Answer. Biotechnology and medical device companies are 
disproportionately impacted by the new SBIR eligibility rules because 
these industries rely upon venture capital investments to fund research 
and development over long time horizons. By some accounts, it can take 
10-15 years and $800 million to develop a new biotech product. During 
this time, a small biotech firm will likely have no revenue from 
product sales. Hence, biotech companies are heavily dependent on 
venture capital backing, even at very early stages of product 
development.
    Question 2. [The text for question 2 was not available at press 
time.]
    Answer. Paratek has 66 employees. We are typical of the numerous 
biotechnology companies with fewer than 100 employees who find 
themselves majority venture capital backed due to the very capital 
intensive nature of biotech research and development. Like the vast 
majority of the biotech industry today, we are a small company.
    Question 3. [The text for question 3 was not available at press 
time.]
    Answer. We maintain day to day management of the company. Our firm 
is run by our management team, not by our venture capital investors. In 
general, venture capitalists are looking to invest in technologies that 
are promising. They are not looking to run their portfolio companies. 
In the case of Paratek, no single venture firm owns more than 5 percent 
of the company's stock.
    Question 4. [The text for question 4 was not available at press 
time.]
    Answer. We hear anecdotal evidence that promising research is being 
turned away by NIH due to the new eligibility interpretation. NIH has 
stated that the rules prohibit funding of research with the potential 
to improve human health, research that NIH would like to fund but 
cannot. According to a survey by the Biotechnology Industry 
Organization, roughly half of biotech companies with majority venture 
capital backing had cancelled or delayed a project due to the new SBIR 
rules.
    Question 5. [The text for question 5 was not available at press 
time.]
    Answer. The simple answer is that venture capital funding often 
goes to product development that is further along while SBIR dollars 
help to fund the earliest stage research. The SBIR eligibility rules, 
however, are not product specific, but instead look at the capital 
structure of the company. So a company that has become majority VC-
backed by virtue of funding for one product is no longer eligible for 
SBIR funds for different products at earlier stages of development.
    Question 6. [The text for question 6 was not available at press 
time.]
    Answer. In our case, we had to actually lay off employees due to 
the funding restriction. Under the new eligibility interpretation, not 
only is the public losing out on the benefits of research that could 
provide new therapies, but in some cases there is a direct negative 
economic impact to the community as well.
                                 ______
                                 
  Responses by Thomas J. Bigger to Questions from Senator Conrad Burns
    Question 1. [The text for question 1 was not available at press 
time.]
    Answer. My view would be to allow the agencies, NIH for example, to 
make the decisions as to what research gets funded. The eligibility 
rules should not screen out companies based upon whether or not they 
have raised private capital. The eligibility rules should be as neutral 
as possible so as to allow all small companies to compete. We should 
have confidence in the peer review process implemented by the agencies 
that participate in the SBIR program. Put simply, Congress should do 
what it can to ensure that SBIR funding decisions are made, to the 
extent possible, based upon the merit of the scientific research at 
issue.
    Question 2. [The text for question 2 was not available at press 
time.]
    Answer. The legislative history and statutory language of the bill 
creating the SBIR program indicates that Congress viewed the presence 
of private investment as a positive factor in the decision making 
process regarding Phase II SBIR awards. This represents a recognition 
by Congress that ideas that attract private funding are more likely to 
succeed. Viewed from this perspective, SBIR funds are more likely to 
result in commercialization of a new product where the ability of the 
firm to attract private capital is taken into account.
    Having said that, however, there are many worthwhile projects that 
could benefit from SBIR funds that have not attracted private 
investment. In our industry, in particular, a company may raise private 
funding for a specific product and may then apply for SBIR funding for 
different products that are too early stage to raise private funding. 
Whether the SBIR program should contemplate the fact that a company, or 
a specific product, has raised venture capital or other private 
investment funds is a policy decision that Congress will ultimately 
have to make.
                                 ______
                                 
Responses by Thomas J. Bigger to Questions from Senator Michael B. Enzi
    Question 1. [The text for question 1 was not available at press 
time.]
    Answer. This is a problem specific to companies that have long 
product development cycles in heavily capital-intensive fields of 
research. Biotech companies are a prime example of this situation, as 
are medical device companies.
    Question 2. [The text for question 2 was not available at press 
time.]
    Answer. NIH has been the agency most impacted by the new SBIR 
eligibility rules. However, other government SBIR participants, such as 
the Department of Defense, may want the ability to fund promising 
research and development by companies that are venture backed. Rather 
than making the solution NIH-specific, a preferable alternative would 
be to grant participating agencies the discretion to make awards to 
majority-backed firms where doing so would advance the mission of the 
agency's SBIR program.

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