[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]





                       FULL COMMITTEE HEARING ON
                        SBIR: AMERICA'S NATIONAL
                         TECHNOLOGY DEVELOPMENT
                               INCUBATOR
=======================================================================

                      COMMITTEE ON SMALL BUSINESS
                 UNITED STATES HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                            JANUARY 29, 2008

                               __________

                          Serial Number 110-68

                               __________

         Printed for the use of the Committee on Small Business


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



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                   HOUSE COMMITTEE ON SMALL BUSINESS

                NYDIA M. VELAZQUEZ, New York, Chairwoman


HEATH SHULER, North Carolina         STEVE CHABOT, Ohio, Ranking Member
CHARLIE GONZALEZ, Texas              ROSCOE BARTLETT, Maryland
RICK LARSEN, Washington              SAM GRAVES, Missouri
RAUL GRIJALVA, Arizona               TODD AKIN, Missouri
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
MELISSA BEAN, Illinois               MARILYN MUSGRAVE, Colorado
HENRY CUELLAR, Texas                 STEVE KING, Iowa
DAN LIPINSKI, Illinois               JEFF FORTENBERRY, Nebraska
GWEN MOORE, Wisconsin                LYNN WESTMORELAND, Georgia
JASON ALTMIRE, Pennsylvania          LOUIE GOHMERT, Texas
BRUCE BRALEY, Iowa                   DEAN HELLER, Nevada
YVETTE CLARKE, New York              DAVID DAVIS, Tennessee
BRAD ELLSWORTH, Indiana              MARY FALLIN, Oklahoma
HANK JOHNSON, Georgia                VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania             JIM JORDAN, Ohio
BRIAN HIGGINS, New York
MAZIE HIRONO, Hawaii

                  Michael Day, Majority Staff Director
                 Adam Minehardt, Deputy Staff Director
                      Tim Slattery, Chief Counsel
               Kevin Fitzpatrick, Minority Staff Director

                                 ______

                         STANDING SUBCOMMITTEES

                    Subcommittee on Finance and Tax

                   MELISSA BEAN, Illinois, Chairwoman


RAUL GRIJALVA, Arizona               DEAN HELLER, Nevada, Ranking
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana              STEVE KING, Iowa
HANK JOHNSON, Georgia                VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania             JIM JORDAN, Ohio

                                 ______

               Subcommittee on Contracting and Technology

                      BRUCE BRALEY, IOWA, Chairman


HENRY CUELLAR, Texas                 DAVID DAVIS, Tennessee, Ranking
GWEN MOORE, Wisconsin                ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York              SAM GRAVES, Missouri
JOE SESTAK, Pennsylvania             TODD AKIN, Missouri
                                     MARY FALLIN, Oklahoma

        .........................................................

                                  (ii)

























          Subcommittee on Regulations, Health Care, and Trade

                   CHARLES GONZALEZ, Texas, Chairman


RICK LARSEN, Washington              LYNN WESTMORELAND, Georgia, 
DAN LIPINSKI, Illinois               Ranking
MELISSA BEAN, Illinois               BILL SHUSTER, Pennsylvania
GWEN MOORE, Wisconsin                STEVE KING, Iowa
JASON ALTMIRE, Pennsylvania          MARILYN MUSGRAVE, Colorado
JOE SESTAK, Pennsylvania             MARY FALLIN, Oklahoma
                                     VERN BUCHANAN, Florida
                                     JIM JORDAN, Ohio

                                 ______

            Subcommittee on Rural and Urban Entrepreneurship

                 HEATH SHULER, North Carolina, Chairman


RICK LARSEN, Washington              JEFF FORTENBERRY, Nebraska, 
MICHAEL MICHAUD, Maine               Ranking
GWEN MOORE, Wisconsin                ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York              MARILYN MUSGRAVE, Colorado
BRAD ELLSWORTH, Indiana              DEAN HELLER, Nevada
HANK JOHNSON, Georgia                DAVID DAVIS, Tennessee

                                 ______

              Subcommittee on Investigations and Oversight

                 JASON ALTMIRE, PENNSYLVANIA, Chairman


CHARLIE GONZALEZ, Texas               , Ranking
RAUL GRIJALVA, Arizona               LYNN WESTMORELAND, Georgia

                                 (iii)























?

                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page

Velazquez, Hon. Nydia M..........................................     1
Chabot, Hon. Steve...............................................     2

                               WITNESSES

Doerfler, Douglas, MaxCyte, Inc..................................     3
Beall, Robert, Cystic Fibrosis Foundation........................     5
Borrus, Michael, X/Seed Capital Management.......................     7
Farrell, Lt. General Lawrence Doerfler, USAF (Ret.), National 
  Defense Industrial Association.................................     9
Bean, William, The College of William and Mary...................    11

                                APPENDIX


Prepared Statements:
Velazquez, Hon. Nydia M..........................................    27
Chabot, Hon. Steve...............................................    29
Altmire, Hon. Jason..............................................    30
Doerfler, Douglas, MaxCyte, Inc..................................    31
Beall, Robert, Cystic Fibrosis Foundation........................    39
Borrus, Michael, X/Seed Capital Management.......................    46
Farrell, Lt. General Lawrence Doerfler, USAF (Ret.), National 
  Defense Industrial Association.................................    52
Bean, William, The College of William and Mary...................    64
Attachments to testimony of Lt. General Lawrence Doerfler, USAF 
  (Ret.), National Defense Industrial Association................    78
Letter to Chairwoman from Mr. William Bean, The College of 
  William and Mary...............................................   210

                                  (v)



















 
                    FULL COMMITTEE HEARING ON SBIR:
                     AMERICA'S NATIONAL TECHNOLOGY
                         DEVELOPMENT INCUBATOR

                              ----------                              


                       Tuesday, January 29, 2008

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:06 a.m., in Room 
2360, Rayburn House Office Building, Hon. Nydia M. Velazquez 
[chair of the Committee] Presiding.
    Present: Representatives Velazquez, Cuellar, Braley, 
Clarke, Ellsworth, Johnson, and Chabot.

           OPENING STATEMENT OF CHAIRWOMAN VELAZQUEZ

    Chairwoman Velazquez. I call this hearing to order. This 
morning the Committee begins the process of reauthorizing the 
Small Business Innovation Research Program. This public/private 
partnership is key to the United States remaining a global 
leader in innovation and creating new jobs through all parts of 
the Nation. In fact, just last year, 5,000 small research 
firms, companies located in every State in the Nation received 
awards that total more than $2 billion.
    As recent data demonstrate, the current economy is showing 
signs of a potential recession. During the last slow down, it 
was the technology sector, led by small firms, that provided a 
foundation for stronger growth. SBIR, with its emphasis on 
next-generation products, can help us emerge from this weak 
economic time stronger than before. In order to play this role 
however, the initiative must stay in sync with the very 
technology it seeks to promote.
    When the Committee last authorized a program in 1999, the 
term Google was an obscure mathematical concept. Today, Google 
is one of the most well-known and largest companies in the 
United States. As technology changes, this program has to keep 
face. During this modernization effort, the Committee will make 
certain that the SBIR program is providing the resources for 
economically valuable technologies and not wasting its effort 
on second-rate science fair projects.
    In order to ensure the full development of promising new 
product, the program should be given the capability to provide 
larger amounts of capital. For businesses facing difficulties 
going to market, the necessary assistance should be made 
available. New efforts must also be taken to reach the next 
generation of small companies, whether they are located in 
Silicon Valley or rural America. Reducing the regulatory burden 
associated with the program and streamlining the application 
process is essential to increasing the competition for these 
important awards.
    Finally, Federal agencies need more flexibility to 
implement the program both in terms of being creative but also 
in using what they have learned. These improvements will 
ultimately benefit the taxpayers in terms of greater 
competition for awards and higher levels of innovation. 
Together these changes will create an SBIR program that is 
responsive to today's economic environment. This includes 
creating more high-paying jobs; reducing our trade deficit; and 
emphasizing the importance of math and science education to 
American students. If we are able to promote these very goals 
in the program, then we will be successful in our 
reauthorization efforts.
    Our Nation now more than ever needs a vibrant small 
business foundation to secure our economic future, and it is 
programs like SBIR that support this vision. With the prospect 
of a recession before us, entrepreneurial activity can provide 
a pathway to growth. It has done so before, and it will do so 
again. I want to thank all the witnesses for traveling here, 
and I look forward to your testimony. I now recognize Ranking 
Member Chabot for his opening statement.

                OPENING STATEMENT OF MR. CHABOT

    Mr. Chabot. Thank you very much, Madam Chairwoman.
    Good morning, and I want to welcome all of you to this 
hearing on the small business innovation research or SBIR 
program. I would like to extend a special thanks to each of our 
witnesses who have taken the time to provide the Committee with 
their testimony here this morning. We are anxiously waiting to 
hear from them. And a special welcome to Bill Bean, a professor 
and the director of Technology and Development Center at my 
alma mater, the College of William & Mary in Williamsburg, 
Virginia.
    So we especially welcome you, Mr. Bean.
    Today's hearing represents the beginning of the Committee's 
work to reauthorize the SBIR program which was last fully 
examined by this Committee back in 1999 and reauthorized in 
2000. Created in 1982, the SBIR program offers competition-
based awards to stimulate technological innovation among small 
private-sector businesses while providing government agencies 
new cost-effective technical and scientific technologies to 
meet their diverse mission needs.
    The development of this program is not only critical to the 
unique needs of each of the participating Federal agencies but 
also to our national economy. Small businesses renew the U.S. 
economy by introducing new products and lower-cost ways of 
doing business, sometimes with substantial economic benefits. 
They play a key role in introducing technologies to the market, 
often responding quickly to new market opportunities. Some of 
the great technological innovations in this country came about 
from small business owners tinkering in their workshops, 
including two very famous people from Ohio, my State, the 
Wright brothers.
    Several congressionally mandated and independently 
conducted research projects have closely examined the program 
to determine how well it is performing in relation to 
congressional dictates. A study by the National Research 
Council found that the SBIR program is performing well in the 
Federal agencies required to operate the program. According to 
the National Research Council Study, the SBIR program provides 
entrepreneurs with funding to investigate and commercialize new 
technologies without diluting ownership through equity 
investment or taking on additional costly debt. Since one of 
the purposes of the SBIR program is to serve the mission needs 
of Federal agencies, the process can also lead to greater 
Federal procurement opportunities for participants. In turn, it 
will accelerate growth of these small businesses.
    The SBIR program, as the National Research Council 
demonstrates, also provides significant benefits to Federal 
agencies by providing additional opportunities to solve 
operational needs. A program officer can post a solicitation 
that describes a particular problem and invites small 
businesses to propose research that will solve it. This 
contrasts with other Federal research awards where a researcher 
provides a proposal of personal interest. The nationwide scope 
of the program also ensures that the agency will investigate 
various research avenues.
    Finally, the program, by leading to commercialization of 
the research, diversifies the Federal Government's industrial 
base. Competition among suppliers will lower prices to the 
government and save tax dollars. That said, this study does 
point to some weaknesses within the program and makes several 
recommendations for the Committee's jurisdiction to consider as 
we reauthorize the program this year. As we continue this 
process, we must consider topics such as examining cycle times 
from solicitation through phase three; understanding and 
managing firms; winning multiple awards; and increasing and 
improving oversight and program evaluations by the agencies 
involved. We will also need to scrutinize the current award 
size and administrative costs of the program as we move forward 
with the reauthorization.
    Madam Chair, I look forward to working with you on this 
important issue. And again, I thank each of the witnesses for 
being here today, and I yield back the balance of my time.
    Chairwoman Velazquez. Thank you, Ranking Member Chabot.
    Chairwoman Velazquez. Our first witness is Mr. Douglas 
Doerfler. Mr. Doerfler is the President and CEO of MaxCyte, 
Inc., based in Gaithersburg, Maryland. Mr. Doerfler is 
testifying today on behalf of the Biotechnology Industry 
Organization. It represents more than 1,100 companies and 
organizations in the research and development of innovative 
health care, agricultural, industrial and environmental 
biotechnologies.
    Mr. Doerfler, welcome. There is a timer, and you will have 
5 minutes. When it is green, you can start. And then when it is 
red, your time is up. Welcome, sir.

 STATEMENT OF DOUGLAS A. DOERFLER, PRESIDENT AND CEO, MAXCYTE, 
INC., GAITHERSBURG, MD, ON BEHALF OF THE BIOTECHNOLOGY INDUSTRY 
                          ORGANIZATION

    Mr. Doerfler. Thank you, Chairwoman Velazquez, Ranking 
Member Chabot, and Mr. Johnson. Thank you for your time this 
morning. I am the president and CEO, as mentioned, of MaxCyte. 
I formed the company in 1999. I have about a 25-year career in 
developing biotech companies and biotech products around the 
world. My company is a small company. We are 20 employees. And 
what we do is we create drugs out of human cells, and we are 
involved in treating diseases like leukemia.
    We have a clinical trial going on right now at Baylor 
College of Medicine. We also have a clinical trial treating 
pulmonary arterial hypertension in treating humans. This is 
high blood pressure of the lungs, a very serious disease. We 
also have a number of pre-clinical programs for treating such 
diseases as cancer, cardiovascular disease and infectious 
disease. We also collaborate with major universities around the 
world, including Baylor, the University of Pennsylvania, Duke, 
Stanford, among others. And we were a proud recipient of a 2003 
SBIR-1 grant, and we are still eligible for the SBIR program in 
its current state.
    As you mentioned, I am testifying on behalf of the 
Biotechnology Industry Organization. I am on the board of BIO 
and involved in a number of their other programs. My oral 
comments are a summary of the written testimony that I 
presented to the Committee. Like my company, the majority of 
biotech companies are small companies. They are less than--
there are 50 employees. And what is typical is we have a lead 
product, one single lead product that we are developing. And 
behind that, there are two or three other, maybe five other 
products that are in pre-clinical testing, being tested in 
animals or maybe still on the lab bench prior to going into 
human testing.
    In my company, we raised about $5 or $6 million through 
friends and family until we were able to find large-scale 
venture funding. During that period, we also became eligible 
for SBIR. We put in an application with a very rigorous study 
section through NIH to get our program approved. And the 
program was a very risky project, and it is around using our 
technology to develop potential rapid deployment vaccines for 
biodefense applications. None of the venture capitalists would 
touch that.
    But when we went to the VC community, and we talked to them 
about what we were doing, they were really taken by the rigor 
of our science being able to get an SBIR award. That was issued 
in 2003. We received funding in 2004.
    The way the funding work, just a few minutes on this. We 
went out and went to a number of investors. They liked what we 
were doing. And we put together a group of investors that 
eventually owned, in total, slightly more than 50 percent. This 
was my doing. I went out and formed this group of investors. 
They want to have multiple investors in the deal because of the 
risk in our kind of a company. And I want additional investors 
in on my deal because I need to raise a lot more money to 
develop a product. These products take anywhere from 8 to 15-
plus years to develop. It is commonly held that it can cost 
anywhere from a half a billion dollars to a billion dollars to 
get a product to market. And what is amazing about this 
business--and I have to wonder why I am in it sometimes--is 
that 95 percent of the projects fail; 95 percent of the 
projects fail, so it is a very, very high risk endeavor. The 
SBIR program has been essential to companies like mine and 
quite frankly essential to the biotechnology community. This is 
the one--one of the industries that we really do excel in 
around the world. When the best and newest treatments for 
cardiovascular disease, cancer, HIV--they are invented and 
developed by companies in this country. And of the couple 
hundred products that were developed and approved by the FDA in 
the last 20 years, the companies who were involved in that, 
about a third of those companies received SBIR or STTR funding. 
So this is a vital piece of the foundation of this industry.
    And what has happened since I think 2003 or 2004, when 
there was a change in the regulations or the interpretation, a 
number of our companies are no longer eligible to participate. 
And what that does is it really eliminates a number of the 
companies who are best served to solve some of the Nation's 
problems that are directed by NIH to participate in this 
program. So we are very, very focused on regaining eligibility. 
We are not here asking for more money which might be something 
that is different from a lot of committees. We want to be 
eligible. We want to make this more competitive because more 
competition brings stronger companies to develop better 
therapies that will eventually help this Nation move forward.
    So thank you for your time.
    [The statement of Mr. Doerfler may be found in the Appendix 
on page 31.]
    Chairwoman Velazquez. Thank you, Mr. Doerfler.
    Our next witness is Mr. Robert Beall. Mr. Beall is the 
president and CEO of the Cystic Fibrosis Foundation. The 
foundation is a nonprofit organization dedicated to the cure 
and control of the disease and to improve the quality of life 
for those with the disease. Research developed through the SBIR 
program could prove invaluable to this effort.
    Welcome, sir.

STATEMENT OF ROBERT J. BEALL, PH.D., PRESIDENT AND CEO, CYSTIC 
                      FIBROSIS FOUNDATION

    Mr. Beall. Thank you, Congresswoman Velazquez. And thank 
you other members of the Committee.
    It is very important for me to have this opportunity to 
speak to you not only on behalf of the Cystic Fibrosis 
Foundation but on behalf of other patient advocates. In your 
introduction, you spoke about the important contributions that 
the SBIR programs are making to innovation and to jobs and 
technology. But the other thing that it does is it saves lives. 
And I think we can prove that great innovations in the SBIR and 
support of the SBIR program has served to save lives. The 
Cystic Fibrosis Foundation is a multifaceted research program. 
It has a multifaceted research program that strategically 
invests in basic research and in companies that are developing 
new therapies to treat cystic fibrosis.
    Our research model is described as venture philanthropy. 
This means that the foundation invests as much as venture 
capitalists would in very early stages of drug development. We 
have invested over $600 million in research and drug 
development. And this year alone, we will invest $28 million in 
biotechnology companies to bring new developments to cystic 
fibrosis. Other foundations are clearly moving in the arena of 
venture philanthropy, but they do not have the resources that 
are necessary to fill the gap that is so critical for us if we 
are going to be able to develop new therapies to treat the 
various diseases. The SBIR program reflects a fundamental 
philosophy of creating viable and creative partnerships to 
accelerate the development of new therapies, not just for 
cystic fibrosis but for many other diseases as well. SBIR 
grants are particularly important for companies that are 
pursuing early discovery phase of drug development, the most 
difficult kind, as Mr. Doerfler has just described, to secure 
funding.
    Let me give you an example of our experience. PTC 
Therapeutics is a New Jersey company and is one of our great 
partners in our efforts to develop new treatments for cystic 
fibrosis. The company has a promising new therapy. It is called 
PTC 124. And it is an innovative oral drug that treats the 
basic defect in cystic fibrosis. The company has other drugs 
that are in the pipeline, very important drugs that could treat 
disorders like Duchenne Muscular Dystrophy and Parkinson's 
disease. The company, like several of our partners, received 
early SBIR support for the discovery stages of the drug. The 
development of this groundbreaking therapy is dependent upon 
the SBIR program. In its earlier stages, the technology that 
they are using today was too risky to get venture capital. The 
SBIR program has certainly catapulted this into the mainstream 
and allowed it to become a potentially effective therapy in 
cystic fibrosis.
    SBIR grants, much like our own venture philanthropy 
efforts, provide the critical support companies need to approve 
their research concept. And it is with initial support of the 
SBIR program, the proof of concept that these companies are 
more willing and more likely to get capital funding necessary 
to move their products forward to development. For people with 
cystic fibrosis, this model allows us to continually add new 
drugs to our pipeline. We now have nearly 30 products that are 
in our pipeline.
    We urge that the SBIR program be reauthorized with minor 
but important modifications so that it can continue to foster 
the involvement of small businesses in research and 
development. There are substantial risks in any kind of 
research and development. We just talked about 95 percent of 
the programs fail. But for orphan diseases, the barriers are 
even greater because orphan diseases, by the way, are for those 
200,000 patients and less. The obstacles are greater because 
the rewards for the developer are certainly less because it is 
determined by patient size.
    This combination of factors in terms of small patient 
numbers, the cost of developing new drugs, presents a barrier, 
and we lose incentives for the creation for these small 
companies. The venture philanthropy efforts of the foundation 
and the SBIR programs are very important in attracting 
companies to CF research and other kinds of diseases. However, 
from our point of view, our support alone cannot make all this 
happen. And we have to continue to sustain the involvement of 
other individuals and other companies in cystic fibrosis 
research as well as other orphan diseases. I really want to 
emphasize that I spoke about the fact that we are going to be 
spending $25 to $30 million this year alone to put drug 
development in the biotechnology companies. But not all 
diseases have those kinds of resources to make those kinds of 
investment. We are very fortunate, and I really speak here from 
the orphan diseases community because there are so many orphan 
diseases that we know so much about at this point that will 
never be able to cross the finish line unless we continue to 
have the SBIR support.
    So the CF Foundation urges the Committee to set aside a 
portion of the SBIR funds at the National Institutes of Health 
for support of biotechnology companies that are focused on 
these orphan diseases and for the development of new drugs to 
be able to attack these important orphan diseases. We would 
recommend a set aside of 10 percent of SBIR grants for NIH for 
orphan diseases. This approach, we feel, is fully consistent 
with the fundamental goals of the SBIR program to increase the 
commercial application of federally supported research and to 
stimulate technology innovation in the private sector and at 
the same time attacking the diseases that have a very profound 
impact on our society. We also believe that the modest 
targeting of these funds to rare diseases might have the added 
benefit of encouraging applications for small business entities 
that have specific interest in rare diseases but have never 
applied for SBIR support.
    I want to return briefly to the PTC Therapeutics, the 
company I spoke about earlier. As its innovative PTC 124 drug 
moved through the development pipeline, the company applied for 
and received SBIR support, as I mentioned. However, they have 
subsequently applied for another grant, but they were not 
allowed to continue it because of the reinterpretation of the 
51 percent owner rules. As a result, the efforts in cystic 
fibrosis were curtailed for a short period of time until they 
were able to receive other sources of support, including those 
from the Cystic Fibrosis Foundation. We urge the Congress to 
rethink the current ownership rules to ensure that companies 
with the right capabilities, the right capacity and the right 
talent and a proven track record can pursue innovative projects 
with SBIR support grants.
    In conclusion, the CF foundation lends its strong support 
for the reauthorization of the SBIR program. This program 
clearly facilitates partnerships that are critical to the 
development of new therapies and new treatments for all 
Americans. In an age of limited Federal resources, we applaud 
the SBIR program for facilitating collaboration between the 
public and the private sectors. Thank you very much.
    [The statement of Mr. Beall may be found in the Appendix on 
page 39.]
    Chairwoman Velazquez. Thank you, Dr. Beall.
    Our next witness is Mr. Michael Borrus. Mr. Borrus is the 
founding general partner of X/Seed Capital, an early stage 
venture fund based in California's Silicon Valley. Mr. Borrus 
is also the author of three books and more than 70 articles on 
topics including management of technology, high technology 
competition and financial strategy for tech companies.
    Welcome.

 STATEMENT OF MICHAEL BORRUS, GENERAL PARTNER, X/SEED CAPITAL 
                           MANAGEMENT

    Mr. Borrus. Thank you, Madam Chairwoman, distinguished 
members of Congress.
    In addition to founding X/Seed Capital, I currently serve 
on the National Academies' Steering Committee on SBIR which, 
after nearly 5 years of work and 9 of these rather weighty 
tomes, has produced the first comprehensive assessment of SBIR 
in the program's near two and a half decade existence.
    In the interest of full disclosure, you should also note 
that at least two of X/ Seed's portfolio companies have 
received phase one SBIR awards, and several other applications 
are in process. In a sense, then, I wear multiple hats today. 
Except where I explicitly call out findings and recommendations 
of the Academies' SBIR studies, the views I express here and in 
my written testimony are my own.
    I have four points to make. First, as the Chairwoman's 
opening remarks and as both of the prior witnesses suggested, 
the SBIR program plays a specific role in promoting innovation 
by small businesses for which other sources of capital are 
usually unavailable, inappropriate or inadequate. It fills 
several major gaps in funding. Even in my own backyard, Silicon 
Valley, arguably the 50 or so most overcapitalized square miles 
on earth, even there SBIR dollars matter. They help seed new 
businesses. They help seed or advance innovative new ideas or 
approaches within established small companies. They help, very 
often, to sustain the very survival of innovative small 
businesses until they can find that, as I think almost all 
entrepreneurs would affirm, that often tortuous path toward 
commercial success.
    Let me don my National Academies' Steering Committee hat 
for my second point. Mr. Chabot did a very good job of 
summarizing many of the findings. The Academies' study of SBIR 
has concluded on the whole that the program is meeting its 
congressionally mandated objectives. There is a laudable 
inventiveness and diversity across the program within and 
between individual agencies, a laudable diversity that includes 
many best practices that ought to be emulated more widely 
across the program. The study also suggests program 
improvements which are necessary if the program's performance 
to congressional objectives is to be optimized. Some of those 
recommendations are spelled out in my testimony, like the need 
to eliminate the overly long processing delays between phases 
in the program, like the need for increased commercialization 
support. Many more are spelled out in these studies.
    If the Committee permits, I would like to incorporate, by 
reference here, as in my written testimony, the Academies' 
findings and recommendations, particularly of the summary 
study.
    Third point, among the most significant issues flagged by 
the Academies' studies is this: The SBIR program is 
insufficiently data-driven in the committee's view. It 
generates little hard data that would permit Congress to 
quantify and measure the program's performance to the various 
congressional objectives it serves. Because of this fact, it is 
really difficult to answer questions you may have, questions 
like to what extent the program ought to have a preferential 
claim on scarce Federal technology R&D resources. In my 
personal opinion, the program needs to be better quantified and 
measured. Improvements to that end are essential if Congress is 
to have a more objective basis on which future decisions about 
allocations of funds to SBIR can be made.
    Finally, taking off my Academies' hat and donning that of a 
venture investor, let me address one last issue. It is this: 
Should the SBIR program exclude small businesses that are 
majority-owned by venture capital investors? My answer, for 
reasons spelled out in my written testimony is this: If one of 
the most significant of Congress's goals for the SBIR program 
is to stimulate increased innovation by small business, 
innovation that can achieve commercial success and help to meet 
agency missions, then small businesses that otherwise meet all 
of the program's criteria should not be denied SBIR simply 
because they are majority owned by venture investors. I am 
happy to elaborate on all of these points and any other issues 
as the Committee members desire.
    Madam Chairwoman, thank you for your time and attention.
    [The statement of Mr. Borrus may be found in the Appendix 
on page 46.]
    Chairwoman Velazquez. Thank you, Mr. Borrus.
    Our next witness is Lieutenant General Lawrence Farrell. 
Mr. Farrell is the president and CEO of the National Defense 
Industrial Association. NDIA represents nearly 1,400 corporate 
members, almost 50,000 individuals from the entire spectrum of 
the defense and national industrial base.
    Welcome.

   STATEMENT OF LIEUTENANT GENERAL LAWRENCE P. FARRELL, USAF 
    (RET.), PRESIDENT AND CEO, NATIONAL DEFENSE INDUSTRIAL 
                          ASSOCIATION

    General Farrell. Thank you, Ms. Velazquez and Mr. Chabot. 
It is an honor to be here. NDIA, first of all, is passionate 
about the SBIR program because of its impact on our industry 
and the Department of Defense. We exist to advocate the best 
possible systems to be placed in the hands of our soldiers, 
sailors, airmen, Marines, coast guardsmen, and the SBIR program 
is integral to that mission.
    I have submitted comments for the record, and I have also 
given my notes to your counsel, but just briefly I would like 
to emphasize a couple of points. Number one, the SBIR program 
is highly leveraged. If you look at the statistics, over 45 
percent of the SBIRs in phase one transition into phase three, 
which is some sort of a commercialization. And that process 
only takes 2.5 years. It is a very small amount up front, 
$100,000 for phase one and $750,000 for phase two, but it 
enables these companies to leverage their private funds, and in 
many cases, it multiplies that manyfold. It really pays for 
itself. It is also important to the country. We know that small 
business is the most efficient at job creation, the most 
innovative and the most agile and the most efficient at value 
creation. We and the Department of Defense are most interested 
in the innovation part of that and the agility part. It is 
important to the Department of Defense because the Department 
of Defense basic research budget is about $1 billion. The SBIR 
portion of another $1 billion for the Department of Defense 
essentially doubles the basic research budget of the Department 
of Defense. Very important. We see lots of phase three 
successes.
    I have in this book before me Army, Navy, Air Force and 
Department of Defense success stories. And when you see this 
very impressive tome that the National Research Council has 
produced, and if you go through that, you stand back and you 
say, wow, this is a really, really important program. The R&D 
of the Department of Defense is increasingly squeezed. We have 
seen consolidation of the large primes, and where do the 
enabling technologies from supplier base come from? 
Increasingly they are coming from small business. The DOD share 
of SBIR, as you know, is over 50 percent, and it is about $1.3 
billion. That is very important.
    Now, why is it important to small business? If you look at 
small business, 42 percent of the phase one awards are to firms 
with less than 9 employees. And 25 percent of those receiving 
phase ones are startup companies. In other words, these are new 
companies entering the space. So it is leveraging their R&D 
capital, and it is making them attractive as suppliers to large 
primes and takeover candidates. And indeed it is life for small 
businesses. There are lots of successes. And if you go through 
all of the documentation, you stand back and you really are 
amazed at the high tech nature of what comes in.
    Just a few examples. Cybernet Systems, a woman-owned 
business, is providing an automated tactical ammunition sorting 
and classification system in Iraq today. The Army is really 
excited about this program. They think it is one of the best 
things they have ever seen. It takes the manual sorting of 
ammunition out of the soldiers' hands and puts it into 
something automated. The Small Arms Protective Inserts, the 
SAPI plates that you see our soldiers wearing, that comes from 
an SBIR project out of Armor Works, Inc.
    The Phraselators, these automatic translation devices that 
you see in Iraq and Afghanistan today, come out of a veteran-
owned company from an SBIR project, Marine Acoustics, Inc. 
There are over 5,000 of those in use today in Iraq and 
Afghanistan. This happened to be in phase two. When the Army 
saw a need for it, they asked them to accelerate it. In just a 
few weeks, they accelerated it from phase two into a commercial 
product and put it in the hands of the soldiers.
    The last example, Microphase Coatings, Inc., a small 
company, only seven employees, they make specialty coatings for 
all of the Department of Defense. But one of the specialty 
coatings is for the B-2 stealth bomber. As you know, that 
requires a lot of maintenance to maintain the stealth on the B-
2. That product is coming from a product with seven employees, 
SBIR.
    So if you look at the examples--there are many more. There 
are thousands. If you look at the United States Navy, a lot of 
their SBIRs result in advanced acoustics for sonar, advanced 
communications technologies, and you just can't say enough 
about the technologies that are coming out of this.
    We in NDIA are asking for four things: Number one, the 
reauthorization of the program; number two, we would like to 
see an admin fee above 1 percent, because we don't think 1 
percent is enough; number three, we would like to see that you 
don't change the set aside fee without talking to the 
Department of Defense, because that is a sensitive issue, not 
only in industry but with the department; And number four, we 
would like to see some flexibility in the award amounts. Right 
now they are $100,000 and $750,000. In some cases you need more 
than $100,000 and more than $750,000. We would like to see 
legislation give some flexibility to the program managers in 
using that. Thank you very much for your time, ma'am.
    [The statement of General Farrell may be found in the 
Appendix on page 52.]
    Chairwoman Velazquez. Thank you, Lieutenant General 
Farrell.
    And now I recognize Mr. Chabot for the purpose of 
introducing our next witness.
    Mr. Chabot. Thank you, Madam Chairwoman. I am pleased to 
introduce William E. Bean, who graduated from Oregon State 
University with a degree in electrical engineering. For over 30 
years he has been associated in various roles with technology-
based organizations ranging from startups to Fortune 1,000 
companies. His responsibilities have included those of 
engineering, sales and marketing management, general manager 
and president for domestic and international divisions of large 
international corporations, among other things. He later formed 
his own consulting company, R.B. Associates, which specialized 
in serving small technology companies.
    Mr. Bean has served on several boards of directors. He is 
currently the director of the Technology & Business Center at 
the College of William & Mary in Williamsburg, Virginia. He is 
on the executive Committee of the Hampton Roads Technology 
Council, and he chairs the HRTC Censor Science and Technology 
Forum and the Hampton's Roads research partnership's Censor 
Cluster Program.
    And we welcome you here, Mr. Bean.

 STATEMENT OF WILLIAM E. BEAN, DIRECTOR, TECHNOLOGY & BUSINESS 
  CENTER, DEPARTMENT OF ECONOMIC DEVELOPMENT, THE COLLEGE OF 
                         WILLIAM & MARY

    Mr. Bean. Thank you so very much. It is a pleasure to be 
here. Chairwoman Velazquez, Representative Chabot and members 
of the small business Committee, it is a pleasure to be here 
and have the opportunity to speak to you today. An exciting 
opportunity I must say.
    The Technology & Business Center at the College of William 
& Mary is part of the Department of Economic Development. And 
as such, we are the college's primary outreach with the 
community. We spend a lot of time working with area technology 
companies trying to help them grow, provide jobs for graduating 
students, link the faculty into these companies to help with 
projects, vice versa. So we spend a lot of time working with 
SBIR oriented type companies.
    And having worked with those companies, it is clear to us 
that the SBIR program has had a major influence on the growth 
of technology in Hampton Roads. And so that leads to several 
recommendations that we would make with regard to this program 
given its local success and major success within the State of 
Virginia. I think Virginia is number three in awards received 
over the life of the program. Over $1.2 billion has gone into 
the community of Virginia. I think the number is somewhere 
around 40,000 people in this State are employed by companies 
that have won SBIR rewards. So it has been extremely important 
here.
    One issue is the program itself. It seems kind of odd that 
something that has been as successful as this still has to go 
up for renewal. Therefore it seems to me that making this a 
permanent program would be a smart thing to do. It certainly 
has proved itself time and time again.
    The next two things are intertwined. It was just mentioned 
that the caps are $100,000 and $750,000, for phases one and 
two. Those caps were assessed in 1992. So certainly the ravages 
of inflation have driven down the amount of value that you are 
going to get from that amount of money. It has been recommended 
by the Senate Committee to increase that to $150,000 for phase 
one and to $1.25 million for phase two; we strongly recommend 
that this be done.
    Another issue is the ratio. With the phase one, not phase 
two but phase one, SBIR, the current ratio is two-thirds/one-
third. That means that the contractor that gets the award must 
keep two-thirds. They can if they want subcontract one-third. 
Again, given the current caps, one-third of $100,000 is 
$33,000, which is not much to do some kind of sophisticated 
feasibility study. Remember phase one is looking at really 
advanced state of the art. So you need enough money to be able 
to do that. And $33,000 is not much. Furthermore, if you are 
going to do that with a college, the college has to take out 
overhead, leaving only about $21,000 for professors. That is 
true at every college in the United States, essentially. 
William & Mary is not unique there. That does not leave very 
much money for the professors to work on. So we would recommend 
taking a look at that split. I am not quite sure where those 
numbers came from; change it to 55 percent/45 percent.
    If you then combine that with increasing the cap, now you 
have a reasonable amount of money to do some very serious 
research. In particular that comes into play when you have to 
use more than one collaborator. Sometimes there may be two 
collaborators with the prime contractor on a project. So that 
would be a very useful thing.
    In addition, it has been recommended by several bodies that 
the overall funding of the program be increased to 5 percent. 
It would seem reasonable to increase funding from its current 
2.5 percent of extramural funds to 5.5 percent in half percent 
increments over a period of years to get it up to a higher 
funding level. However, if you increase the current cap, the 
funding has to come out of somewhere. If you don't increase 
program size, ultimately you will reduce the number of awards. 
So increasing the total amount of money in the program would 
help offset that. And the next one is a recommendation that is 
a little exterior to the program but I think really important. 
There is a lot going on right now through a program called 
Commercialization Pilot Program. That is a program that is 
instructing the agencies to implement commercialization 
projects to help get from phase two into the commercialization 
phase. And some of those are very, very good projects, 
especially the one that is being done by NIH. John Williams, 
who runs the Navy program, has done an excellent job on that.
    But to my mind, that is not quite the issue, and of course 
we look at this from a college perspective. What we have found 
with the companies that we work with is that the issue is at 
the front end. It is really the phase one end. These are 
entrepreneurs. These are the high tech people, technologists, 
scientists. When they start their company, their real education 
in the process of business is minimal. And so many of them 
struggle mightily to try to get to a phase two. And when they 
ultimately get a phase two, they again struggle mightily to 
perform it. A very major reason for this is just a flat lack of 
real business education. We implemented at William & Mary what 
we call a modular education program. We ran it for eight 
companies last year. Six of them were SBIR winners. It went 
through five basic areas of business with them, and gave them 
access to professors following the program. We found it to be 
enormously successful. It gives them basic education so at 
least they know what they need to know. And when they get to 
the point where they are ready to start implementing more 
complex things, not only are they better able to do that but 
they now have a little bit of background on the right questions 
to ask and they have also built a link into the university so 
they can ask the professors to help them.
    That program can be funded through the FAST program which 
is the Federal and State Technology Partnership Program. I do 
not believe it is funded at the moment. That program, by the 
way, was instrumental in helping the Center for Innovative 
Technology (CIT) for the State of Virginia, which is our 
technology secretariat to implement their SBIR program and 
indeed allowed them to hire a fellow named Robert Brook, who is 
here today, who now runs that program very successfully for us. 
So we have seen the FAST program work. That is part of what 
helped drive this program that we implemented through CIT last 
year. I think that something could be implemented fairly simply 
and quickly through just about every college in the United 
States.
    So, again, thank you very much. There are other comments in 
the testimony that I have submitted to you, and I appreciate 
the opportunity to be here today. Thank you.
    [The statement of Mr. Bean may be found in the Appendix on 
page 64.]
    Chairwoman Velazquez. Thank you, Mr. Bean.
    Mr. Borrus, I would like to address my first question to 
you. A recent study concluded that more than 20 percent of 
companies that receive a phase two were funded entirely or in 
part due to the prospect of an SBIR award. This suggests that 
the SBIR awards have a strong effect on business formation. To 
what extent does this business formation translate to job 
creation?
    Mr. Borrus. Well, small businesses typically are a source--
a large source of new job creation. It is pretty clear that the 
program fills an important funding gap that permits small 
businesses to exist and then eventually to expand, and after 
that, if they are successful, to prosper. That progression 
leads to new job-creation.
    Chairwoman Velazquez. Mr. Doerfler, one challenge 
associated with the program is the need to increase the number 
of small businesses that are applying for SBIR awards. The NIH 
reports that the SBIR applications has been decreasing since 
2005. Agencies will need to grow their applicant pools in order 
to keep the awards as competitive as they have been in previous 
years. What steps can be taken to encourage more individuals 
and firms to apply for SBIR awards?
    Mr. Doerfler. Thank you. A couple of things, I believe. One 
is that--I think that the agencies can get the word out and 
tell more about what their goals are. Secondly, this rolling 
around majority ownership over 51 percent is eliminating a 
number of companies from even trying to participate. Thirdly, 
there is another--there is called the affiliation role where 
there is more than 500 employees in an affiliation. We have 
venture capital investors. Many of these investors invest in 
literally tens of companies at one time. And right now if--the 
way the rule is written is, if a venture capitalist--if they 
invest in another company, the number of employees in that 
company would count against our 500 employees. In the biotech 
space, we have--I have 20 employees. That same venture 
capitalist could have invested in 5 or 6 or even 10 different 
startups, and maybe one is a retail company where they have 
several hundred employees. It is virtually impossible for me to 
understand what our investors, who they are invested in and how 
many employees they have. So another critical part of this 
would be to fine tune that affiliation role so that it is 
easier for us to know when we can participate, because it does 
take time for us to focus in on this program, and we need more 
certainty around the application process.
    Chairwoman Velazquez. Mr. Bean, do you have any more 
recommendations as to how we can get more individuals to apply?
    Mr. Bean. To encourage companies to apply for the SBIR 
program? Again, I think a lot of that can be done through local 
programs. The Center For Innovative Technology does multiple 
training programs throughout the State. They have an annual 
conference that is available to companies and that has been 
quite successful. What we have been able to do is to educate 
throughout the communities in Virginia, through the local 
technology councils and other organizations like the Hampton 
Roads Research Partnership. I don't know how other States may 
be organized, but certainly through programs where you push it 
out through area technology councils and other economic 
development agencies, even town economic development agencies 
would help. I think you would find that they would be more than 
happy to support seminars and training programs to let 
companies know that these SBIR programs are available.
    Chairwoman Velazquez. Dr. Beall, I know that you mentioned 
you have a $600 million foundation.
    Mr. Beall. We have invested $600 million in medical 
research.
    Chairwoman Velazquez. From your testimony, it is apparent 
that the SBIR program is playing a critical role in developing 
potential cures for cystic fibrosis. Without this funding, 
where will the progress stand in the fight against the disease?
    Mr. Beall. Well, clearly it would not be where we are 
today. I say we have 30 products that are currently in clinical 
trials or late stage development for cystic fibrosis. I just 
reviewed--we have about 10 of these products that have received 
SBIR support in various stages over the years. I mention PTC 
directly. This is an oral drug that would not be where we are 
today that is treating the basic defect in cystic fibrosis. 
This is incredible. We wouldn't have an opportunity to have an 
effort in the area of gene therapy with a company in Ohio 
called Copernicus. We have another product that is in clinical 
trials that is also treating the basic defect with support to 
Parion pharmaceutical company. So all of these things are 
really important in our effort. We try to pick up as much of 
these things as possible. Many of the things that support--that 
SBIR supports in the early stage, we then come along and then 
hopefully it is leveraged to other companies. Again, the 
important thing to recognize--and I want to emphasize to you--
is that we are fortunate, we can make these kind of investments 
and create this pipeline. But we have an incredible opportunity 
in biomedical research today. We know the genes--so much about 
the genes, the basic defect of so many things. And unless we 
take this opportunity and use the SBIR programs to translate 
the information that we know at the basic research level to 
finding new therapies and move forward, this is what the SBIR 
does. It is really following with what the Congress has asked 
Dr. Zerhouni to do, and it is a perfect example of how we can 
take basic research and leverage it to new therapies. That is 
what the SBIR program does.
    Chairwoman Velazquez. Thank you.
    Mr. Doerfler, for life science firms undertaking such 
research, SBIR is often only one component of their funding. 
Given the high cost of developing and testing a health related 
product or technology, how important is it that life science 
firms have access to as many sources of funding as possible?
    Mr. Doerfler. It is very important. As I mentioned in my 
testimony, it is a very risky endeavor. It is a very expensive 
endeavor, and we need to be accessible to all forms of funding. 
We also want to ensure that the agencies have a certain amount 
of flexibility, for instance, NIH. We are not looking for any 
dollar hard caps. We think that, again, these programs need to 
be judged upon their merits. There have been some programs that 
actually got higher levels of funding because they were so 
profoundly important to moving some of these cures against some 
diseases. So, again, I think it is important that we have SBIR 
both one and two. In most cases if you get through a phase two 
SBIR, you can find and leverage that with private capital, 
which is a great thing for companies and great things for 
developing new medicines.
    Chairwoman Velazquez. Thank you. General Farrell, NASA and 
DOD have developed initiatives within their agencies, SBIR 
programs, to help facilitate partnerships, and in some cases 
mentoring between prime contractors and small firms that have 
received SBIR awards. How can we encourage more partnerships 
between prime contractors and firms that have been awarded SBIR 
contracts?
    General Farrell. Number one, everybody in the Department of 
Defense, in the industry and for NASA as well recognizes the 
power of the SBIR and the small firms that are part of that. So 
what you need is a lot more bringing together the large and the 
small firms and giving them the opportunity to have a 
conversation about what is going on inside the industry. In my 
association, as an example, we have a national small business 
conference once a year where we bring large and small firms 
together in a kind of match making. We also this last year for 
the first time got together with the Department of Defense and 
put on an SBIR conference where the subject of the conference 
was the SBIR program, and a lot of small companies with SBIR 
capabilities came, and they exhibited and we also had the large 
companies there. And in addition, the Department of Defense was 
there. We don't do--my association doesn't do that much with 
NASA, but those are the kinds of things that we need to do to 
get the word out. Also, one of our recommendations has to do 
with the admin fee. To the extent that somebody is managing an 
SBIR project, 1 percent admin fee doesn't allow you to do very 
much. But if you had a higher admin fee, it gives you a 
capability as a project manager to reach out more. And so that 
is one of the things that we think needs to be done.
    Chairwoman Velazquez. Thank you.
    Now I recognize Mr. Chabot.
    Mr. Chabot. Thank you, Madam Chair.
    Mr. Doerfler, I will begin with you. If bringing a 
biotechnology drug to market can cost, I understand, upwards of 
$1.2 billion sometimes, how does the $750,000 maximum phase two 
award in the SBIR program provide the needed capital for small 
biotech firms?
    Mr. Doerfler. It is a spark that allows this to happen. In 
many cases, if you have a lead program that is funded by a 
company, by a group of investors, it is very typical that that 
money is allocated solely for that one drug. If I wanted to 
work on another application of my technology for--in the case 
of orphan diseases, which aren't that well fundable because of 
the patient populations, I have to find financing for that. NIH 
has a list of diseases that they want companies like mine to 
try to get a spark, to try a new discovery. So it is critically 
important because it allows us to do the initial bench work. It 
allows us to do the initial proof of concept. It allows us to 
do the experiment and create the data that we can then convince 
investors to invest in the next stage of development. I believe 
frankly that without that initial money for sparking these 
innovations, that many of these diseases will not get the 
attention that they deserve.
    Mr. Chabot. Thank you very much.
    Dr. Beall, I will turn to you next if I can. I might just 
note that we--and I am sure the Chairwoman finds this as well--
we are inundated over time by many groups who come to our 
offices talking to us about various diseases, advocating 
funding for NIH and others for funding, and I know the cystic 
fibrosis folks have been in my office many times. And I 
happened to read a book many, many years ago by Frank Deford. I 
think it was called, "Alexandra: Life of a Child," which was a 
very moving book that I have never really forgotten. And so I 
always kind of look with a special kind of open mind when they 
come in to advocate on behalf of the folks that they try to 
help. So thank you for your work in that field.
    My question would be, did--some firms would argue that 
small businesses owned by venture firms don't need the capital 
infusion because to continue their research, they can rely on 
the venture firms for their capital. What would be your 
viewpoint on that?
    Mr. Beall. My reaction goes back to the concept, they need 
the spark. One thing that has happened in the last 10 years is 
that the window for venture capital has dramatically changed; 
10 years ago, if you had an idea, you could get venture capital 
support. Now, with the disappointments in biotech and the 
return on the investments and the fact that 95 percent fail, 
that window has moved up. It needs a product--or a product 
needs to be almost in phase two clinical development or phase 
three before venture capital is--is willing to make its 
investment. So you have what is frequently called the valley of 
death. It is that very idea of a proof of concept, phase one, 
very early stage issues. And that is where the SBIR program, 
that is where our venture philanthropy, we are filling in that 
particular gap. I will tell you that one of our programs that 
is in phase three, not the PTC--excuse me. It is in phase two. 
We had to put in $2 million the first year, but we got enough 
data that was leveraged eventually by venture capital support 
that originally went to $120 million and then the product was 
just purchased by another major pharmaceutical company for $350 
million. But it all started out with that spark, that one 
investment for us of a couple million dollars just to have the 
proof of concept. And that is what is so critical. That is what 
SBIR does. And that is what venture philanthropy is doing.
    Mr. Chabot. Thank you very much.
    Mr. Borrus, do you think that a venture fund owned by, say, 
Paul Allen, who is one of the co-founders of Microsoft, should 
they be allowed to own SBIR awardees? And if not, what would 
you consider to be the appropriate cap for allowing venture 
firms to own SBIR awardees.
    Mr. Borrus. I don't think it makes sense to exclude any 
class of venture-owned or financial investor-owned small 
businesses so long as they otherwise meet the program's 
criteria. Most of Mr. Allen's money--I don't want to speak for 
him--but let's imagine that most of his money is going to be 
deployed well past the phase where an SBIR would help to 
initiate something new--that spark that these gentlemen are 
talking about--and that much of his money will be directed to a 
particular outcome. If the entrepreneur, in a firm that he is 
backing, chooses to spend that money in, say, searching for 
something new that is not on the critical path for which his 
fund provided money, he is not going to be happy about it, the 
board is not going to be happy about it. The team is probably 
not going to be allowed to spend the money in search of that 
something new. SBIRs fund not just the new spark that initiates 
the new business, but in fact, very frequently, the critical 
spark that takes a company down a path that was unexpected, 
that was not in the original plan, and for which there is no 
existing available capital. Although there might be a lot of 
capital in the company, it just can't be spent pursuing this 
new direction. And it is often that new direction that actually 
leads to the breakthrough which leads to commercial success.
    Mr. Chabot. Thank you very much.
    General Farrell, you recommend that up to 3 percent of the 
SBIR funds should be set aside for managing the program. Would 
that not reduce the availability of funds for distribution of 
small businesses to perform research? How would you comment on 
that?
    General Farrell. Yes, sir, you are exactly right. It does 
reduce the amount of funds which it provided. However, we think 
at 1 percent--there are a lot of inefficiencies on how the 
program is being managed, outreach and things like that. We 
think we could be much more efficient in the way we manage the 
program with a little bit higher admin fee. I don't think it is 
unreasonable to go from 1 percent to 3 percent. That is an 
amount of money that would be subtracted, but it is not a large 
amount of money. But it is essential to the management of the 
program. So we think that overhead is needed. Thank you.
    Mr. Chabot. Thank you very much, General.
    And finally, Mr. Bean, some would argue that the Government 
should fund the best research proposals without regard to the 
size of the entity submitting the proposal. What would your 
argument be to support setting aside research money to 
specifically small businesses?
    Mr. Bean. Now, when you say "small businesses," are you 
referring to that definition of small business which is 500 or 
less, or the really small businesses which are the 25-to-30-
type size or less, which is by far the bulk?
    Mr. Chabot. I would say either, whichever way you feel most 
comfortable answering the questions.
    Mr. Bean. Again, if you look at the greater Hampton Roads 
area, which is where we are, there is absolutely no question 
that this research money which is set aside for investment into 
the SBIR program has been enormously successful. There are many 
cases of companies that have been started up by scientists and 
researchers coming out of NASA or local colleges, our own Old 
Dominion University, Norfolk State, so forth, that have started 
up companies either by themselves or maybe with one partner, 
and through the SBIR program have been able to start, as you 
said, that spark, and using that spark to be able to create the 
path of both technology and their business process for their 
companies. We have seen them grow, you know, from 1, 2 people 
up to 25, 30, 40. And as the SBIR program continues to invest 
in them, what it allows them to do is create an initial 
platform, expand that platform, expand that platform, and to 
continue to expand that platform.
    To give an example, there is one local company that has 
developed a virtual reality engine primarily on an Army SBIR 
program. They have been able to take that development and move 
it into the community college sector for job-training programs, 
workforce development-type projects that are becoming extremely 
successful. There are multiple examples like that.
    I think that in my mind there is certainly no doubt that 
taking that amount of money, that very small amount of money, 
it is 4.3 percent of total Federal investment, or 2.5 percent 
in Federal research investment, that produces something like, 
what, 40 percent of all of the patents that come out of the 
U.S. Therefore, just about any way that you look at that, there 
is a huge benefit to the SBIR program.
    Mr. Chabot. Thank you very much, and I thank all the 
witnesses for their response to my questions.
    Yield back.
    Chairwoman Velazquez. Mr. Johnson.
    Mr. Johnson. Thank you, Madam Chair, for holding this 
hearing, and thank you, panel members, for preparing and your 
testimony and coming to present it today.
    To go back to the question Mr. Chabot asked of Mr. Bean, I 
would ask you to comment on whether you think that the smaller 
businesses, 25 to 30 people, those businesses have been under-
served by the SBIR program. Would that be your opinion?
    Mr. Bean. No. You know, I don't think so. It certainly 
allows the awards to go to larger programs. But if anything, on 
the front end, and we were talking earlier about how to help 
companies and get them involved, it is often difficult for 
small companies to find help on how do you actually write an 
SBIR that would be acceptable to an agency. So the number of 
small companies that would be winning these various awards 
would go up if there were more such help like that available.
    I think the other issue is early stage education to help 
them go forward.
    Mr. Johnson. A mentoring program?
    Mr. Bean. Kind of a mentoring program. It could be involved 
even in the modular program that I discussed earlier where you 
could include as a portion of that perhaps sessions on how do 
you prepare SBIR-type responses.
    The other issue that comes to mind with that is a little 
bit tricky. There are a lot of topics published. I don't know 
the total number of topics that are issued by all of the 
agencies, but it is huge. The Department of Defense comes out 
with three listings a year. There is one STTR release; in fact, 
it came out this week. And there are hundreds upon hundreds of 
topics. So one of the issues is trying to find enough reviewers 
that are actually qualified enough to review what the 
submissions are. And when you are looking at phase 1, what this 
is for is really high-risk-type ventures. In fact, that is why 
DARPA is there. So if you are submitting something to DARPA, 
you can assume that it is some technology that is way out 
there, and trying to find reviewers that are really capable to 
understand what the submittal is is difficult.
    So part of the strengthening of the program would be to 
tighten up a little bit on how these ultimate proposals are 
reviewed. And I believe if that was done, you would increase 
the number of really small businesses that are successful in 
this program.
    Mr. Johnson. Yes, Mr. Farrell.
    General Farrell. Yes. Just to add to that, I said 
previously that about 42 percent of the phase 1 awards go to 
companies with less than 9 people. If you take it out to 
companies with less than 24 people at DOD, 70 percent of phase 
1 awards go to companies with less than 24.
    Mr. Johnson. Thank you.
    Mr. Borrus, in your written testimony, you make the point 
that inclusion of small businesses that receive venture capital 
investments doesn't come at the expense of those that don't. 
Can you explain how the Academy conducted this evaluation?
    Mr. Borrus. I mentioned also that the program doesn't 
generate in and of itself a lot of data that would permit one 
to reach these conclusions. One of the reasons it took the 
Steering Committee approximately 5 years to generate this 
amount of work was that we had to conduct original research. 
The Committee staff and the consultants to the Committee 
painstakingly assembled a wide range of data sets examining all 
of the issues that comprise these and the other five studies 
that the Academy has produced on this subject. Somewhere in all 
that data gathering is data that suggests, number one, that--
    Mr. Johnson. I won't ask you to pull it right now.
    Mr. Borrus. Please don't, because I am not exactly sure 
where I would find it. I would refer, though, refer the 
Congressman to it. First, throughout the program's almost 24-, 
25-year history, majority venture-owned small businesses have 
participated in the program. In fact, really, if you look at 
the life cycle of a venture-backed startup, over its life at 
some point in time while it still qualifies as a small 
business, it is likely to be majority-owned by its financial 
investors. And that is especially true for extraordinarily 
risky research like that financed by the National Institutes, 
by Dr. Beall's foundation, by members of BIO, that often 
literally require hundreds of millions of dollars to get to a 
product--or more these days--and 12 to 15 years to get a 
product eventually to market through FDA approval. Equally true 
these days in energy, where hundreds of millions of dollars are 
required if you are actually going to go into the production of 
a biofuel or if you are going to build a solar process 
production facility.
    So, you know, it is not at all surprising that eventually 
as they go down new pathways searching for new products, that 
venture-backed start-ups will be majority-owned by financial 
investors. Such companies have participated in the program 
historically, number one.
    Number two, throughout this extraordinary amount of 
evidence gathering, over 5 years, no evidence whatsoever was 
turned up that there was any crowding out of any other small 
businesses.
    Mr. Johnson. I got you.
    Let me ask a question, Dr. Beall or Mr. Doerfler. Actually, 
Mr. Doerfler, you are the one who spoke of the orphan diseases.
    Mr. Doerfler. We both did.
    Mr. Johnson. Dr. Beall, what are some of these orphan 
diseases, these rare diseases with 200,000 or less cases, and 
is that throughout the world?
    Mr. Beall. No. That is throughout the United States. It is 
cystic fibrosis is one of those. There are a number of blood 
disorders that exist, or rare disorders. Some of them don't 
even have names, quite frankly. They are syndromes and just--
you know, I think they estimate that there is about over 2,000 
rare disorders that exist.
    And again, the most important thing is that a few years 
ago, in 1999, when the human genome, the great accomplishment 
of Francis Collins and others, when we identified the genes, we 
really got clues on how to attack some of those other kind of 
orphan diseases that exist out there. And the important thing 
is that, you know, unless we start to get an infusion of 
dollars to those diseases, they are not going to ever be able 
to cross the finish line to find therapies. And I think the 
SBIR program is a great way to leverage our Federal investment 
in basic research in finding the gene, I think it is a great 
opportunity for us, take it and start to translate it to new 
therapies for these diseases, because many of those diseases 
just don't have the resources, like fortunately we do and so 
you have, to make that happen.
    And so I really do feel that it is very important that the 
SBIR program really be looked at, and Mr. Doerfler can probably 
add to that.
    Mr. Doerfler. There are a number of genetic diseases that 
are very, very rare that would never get the attention of any 
financial investor because it may only affect 100 people. Of 
course, there is a real passion in what we do. Many of us start 
these companies surely to make a living, but we are really 
passionate about developing new medicines to treat diseases 
that can't be treated any other way. And Biotech is uniquely in 
a position to do things like HIV/AIDS is a chronic disease now; 
20 years ago it wasn't. Arthritis, now people with severe 
arthritis can be treated with these biologics. I am one of 
those patients, frankly. I wouldn't be here without those kind 
of drugs. Cardiology drugs. A number of cancers, now it is a 
chronic disease; it is not a death sentence anymore. And these 
are the kind of diseases that are being attacked and driven by 
the biotechnology industry, and, again, that spark is 
critically important.
    Chairwoman Velazquez. The time is expired.
    Ms. Clarke.
    Ms. Clarke. Thank you, Madam Chairwoman and Ranking Member 
Chabot, for holding this important hearing this morning, and I 
want to thank all the witnesses for testifying today. After 
hearing all of your testimony, I have a much better 
understanding of the overview and priorities of this program. I 
would like to highlight, however, a recommendation by the 
National Academy of Sciences, which is that I would like to see 
improvements in outreach efforts to women- and minority-owned 
firms.
    My question is to Mr. Bean, and I think that there are a 
number of you here who can answer them. I am going to put all 
of them out there because time is of the essence here.
    Mr. Bean, according to a recent EPA press release, there 
are approximately 22 million small businesses in the United 
States that have more than 50 percent of their employees in the 
private workforce, and they develop the Nation's new 
technologies. The expectation is that many of these new 
technologies being developed will improve our environment and 
quality of life.
    Can you tell me what types of innovative, environmentally 
friendly technologies are being developed today and that may 
create jobs and economic growth in the low-income, working-
class, urban communities similar to my district? I come from 
Brooklyn, New York. And as a follow-up, how can we encourage 
the SBIR program to develop partnerships between biotech 
companies and State university medical schools and hospitals 
such as the incubator campus that has been created in my 
district, which is the SUNY downstate medical center? I heard 
discussion from Mr. Bean about Norfolk State. And how does this 
promote more economic development?
    Mr. Bean. Let us see. Do we have about an hour for this 
answer? That is a very big question with a lot of moving parts 
to it.
    One of the more interesting companies that are in the State 
of Virginia is a company recalled Luna Innovations. They have 
been able to build multiple platforms. They have come up with 
some very clever nanotechnology using carbon tubes that can be 
used to help with medical analysis, because these tubes, as I 
understand, don't stay in the body following X-ray, or 
radiographs, which is a dramatic improvement. They have 
developed some other technology that has to do with helping 
clean up Chesapeake Bay, a way of treating algae blooms and 
things like that.
    There are any number of companies out there doing 
technologies like that. At Virginia Institute of Marine 
Science, which is a campus of William and Mary, there is some 
technology being developed to measure really foul toxins that 
unfortunately are found around here because of the shipbuilding 
industries. It helps assess what the toxic levels are and can 
clean them up. They are in the process of commercializing that 
product. So there is any number of programs that are going on 
like that.
    With regard to programs of Norfolk State, for example, 
there is an effort going on right now to stand up a center that 
is going to specialize in transportation and other technology 
issues. We anticipate that that center will be a place where 
small companies can come to get support with the research that 
they need done, which, again, ultimately leads to 
commercialization, hopefully hiring of graduate students, 
providing them opportunities for employment once they leave the 
university.
    So there is any number of things that are going on locally 
that help support technology development. That was a fairly 
long question. Did I address all the parts, or is there 
something additional you would like to know?
    Ms. Clarke. I think Dr. Beall and other--
    Mr. Beall. One of the great things about Biotech is they 
are really experts at identifying things that develop academics 
and try to commercialize it. That is really one of the great 
resources that Biotech really has in terms of moving forward 
ideas that come out of academics.
    I am just looking at our pipeline. I refer to Copernicus, 
which is in Cleveland, that came out of Case Western Reserve 
University, the technology, they have licensed it to 
Copernicus. Obviously if it is marketed, funds will go back to 
the university, and this will be leveraged into a continuing 
investment into the infrastructure of the university. That is 
only going to leverage itself to more employees and continue to 
grow. And I think this happens all across our spectrum.
    Just looking here, of the seven or eight products that have 
got SBIR support, they originally were in academic 
institutions, identified by the biotech companies, and then 
commercialized through that process. So I think that is one of 
the real benefits of the SBIR program.
    Mr. Doerfler. Biotechnology Industry Organization 
represents companies outside of health care. We are actively 
involved in safe foods, bioremediation, biofoods, and all these 
companies are actively involved in developing these new 
technologies to solve some of the very problems you brought up. 
And again, these companies are small, they are 40, 50, 70 
people, and because of the capital structure, we can't 
participate in this program.
    Chairwoman Velazquez. Mr. Braley.
    Mr. Braley. Thank you, Madam Chairwoman, and thank you to 
all the members who came to our panel today.
    I chair the Contracting and Technology Subcommittee, which 
has specific jurisdiction over the issues we are talking about 
here today, and it has been very illuminating to hear you put a 
human face and voice on some of these important issues we are 
talking about.
    Lieutenant General Farrell, I want to start with you. One 
of the things we talk about frequently in this Committee is the 
disproportionate geographic allocation of Federal dollars to 
small businesses through a variety of different programs that 
the Small Business Administration offers. I am fortunate that 
the Rock Island arsenal is not technically in my district, but 
it is right in the middle of the Mississippi River between my 
district and Representative Hare's district, and it served as a 
great economic incubator for small business development. But 
when we look at the rest of the country, we see large pockets 
where Federal contracting dollars don't go, and specifically in 
DOD programs.
    So as someone who is very interested in thinking outside 
the box on what we can do to stimulate small business 
development through the SBIR program in areas of the country 
that don't have a major DOD installation near them, what types 
of creative things have you seen from members of your 
association given the fact that the technology that exists 
today should allow small businesses to provide services and 
goods and compete for these Federal contracts with the 
assistance of an SBIR program?
    General Farrell. That is an excellent question. When you 
see the lay down of DOD dollars, it tends by and large to 
follow large programs, like the B-2 program or the F-22; or 
shipbuilding programs tend to be scattered, too, but not as 
scattered as airplane programs or vehicle programs so that the 
dollars tend to follow the large programs, and large companies, 
large primes that do this. They make an overt attempt to spread 
the money around the country to make sure they got support for 
that program.
    So I think that is working pretty good. However, the 
problem with that is that the R&D dollars that go into those 
large programs are not the SBIR kinds of things, which is what 
you are interested in. Those R&D dollars go to develop that 
particular program. They don't go to the creative ideas that 
come out of phase 1s. But I think if we just look at large 
programs, we are missing the boat, because there is lots of 
manufacturing around this country, you know, basic 
manufacturing processes that we are kind of overlooking. So if 
we could kind of focus some of the SBIR into the manufacturing 
processes, I think you will do a lot.
    And if you look around the country, there is a thing up in 
Pittsburgh called the National Center for Defense Machining and 
Manufacturing. It is a not-for-profit, started with a little 
bit of money from Congress, but now they are getting money from 
industry to develop advanced manufacturing processes. And so I 
think you need to kind of stimulate and look at certain things 
like that. You got CTC up in Pennsylvania as well.
    There are certain parts of country that are kind of hotbeds 
for manufacturing right now, some places in Ohio, some places 
in Pennsylvania, Massachusetts, and we need to stimulate that 
more. But the kind of money that does that is really not 
recognized, like the manufacturing technology money coming out 
of the Department of Defense budget is very small right now. I 
think you need--personally I think you need kind of a national 
investment program that would address some of these. If you had 
a national program, then you could spread it across the 
country.
    Mr. Braley. Thank you.
    Mr. Borrus, I want to follow up on that, because part of 
the materials we received is the analysis of the State-by-State 
distribution of Federal program dollars, and I was very, very 
disturbed to see my State of Iowa ranked 43rd on this list 
despite the fact that we have a major research institution at 
the University of Iowa, we have lots of Department of 
Agriculture programs in our State. And as part of the ongoing 
work that the academies did, did you focus at all on this 
geographic disproportionality, and how we can try to look at 
ways of improving the program and make sure that it is actually 
having a positive impact throughout the country?
    Mr. Borrus. There was great variety across the various 
agencies, and some of them did a much better job of geographic 
outreach than others. One of the academies' conclusions is that 
it is really critically important to take approaches that work 
to solve problems, such as geographic outreach at one agency, 
and generalize them across the agencies to the extent possible, 
while maintaining the laudable flexibility in the program 
itself.
    The second recommendation was to experiment. Sometimes you 
don't know what works until you try it. And so another 
recommendation was a series of pilot programs that on a small 
scale could test new approaches that could address, for 
example, Representative Clarke's question about community 
outreach to her district. If those pilot programs work, 
generalize them and spread them more widely across the program 
as a whole. I am a fan of experimenting, trying by doing, 
learning by doing. Then, as long as you are generating the data 
that suggests you are performing, generalizing that and 
spreading the successful practices. That would, I think, 
benefit the program as a whole, including the geographic 
outreach.
    Mr. Braley. Did you become aware of any particular agencies 
that were, for example, pushing the envelope in that area and 
trying to do a better job of geographic outreach that may have 
fallen outside of their traditional areas of emphasis?
    Mr. Borrus. You know, the studies generate so much data, I 
can't, without possibly mis-quoting, point to specific 
agencies. It is somewhere in these reports, I promise you. I 
might recognize my fellow committee member, Ty Taylor here, who 
may have some input on that issue.
    Mr. Braley. I will have my legislative assistant contact 
you after the hearing, and maybe we could get some information.
    I want to talk to our two health care innovators that are 
here and talk a little bit about the importance of this 
program. In this same vein that I have been talking about, 
there is a lot of health care facilities around the country 
doing research. What more do we need to be doing to make sure 
that there are opportunities available to people under this 
program in parts of the country that have the ability to 
participate in research and development but maybe are not 
getting the same piece of the Federal pie right now? Do you 
have any thoughts that you can share on that?
    Mr. Doerfler. I think the first up, again, is clarity 
around some of these rules that have been preventing companies 
from getting involved in the program. Again, it takes a lot of 
preparation work to do so, and if your capital structure 
changes, you are no longer eligible, and that is a problem. So 
I think that is a great degree.
    I think a lot has to do with the agencies themselves. NIH 
is very aggressive across the country. Our organization 
represents biotechnology companies in all 50 States. So this 
science is, and in particular biotechnology, it is a very 
attractive industry. And so economic development groups across 
the States in almost every city is looking to bring our kind of 
companies into their geographic areas. It is a very attractive 
industry.
    Chairwoman Velazquez. Time has expired. Thank you.
    Mr. Chabot, do you have any questions?
    Mr. Ellsworth?
    I do have two other questions.
    Dr. Beall, your testimony suggests that small firms can 
make important contributions to advances in medical research 
because the firms are willing to explore new approaches. Given 
the SBIR programs' emphasis on commercialization, are you 
concerned that participating Federal agencies may not have an 
adequate incentive to fund high-risk research projects?
    Mr. Beall. You know, if you had asked me that question 20 
years ago, I would say I would have grave concern about that, 
because I think fortunately the NIH has done a terrific job in 
making sure that they have developed review processes that are 
set out to identify opportunities and new technologies and move 
forward. Initially when they had their review processes, it was 
mixed up with the regular peer-review process of regular 
research grants, and I think it provided some confusion to the 
reviewers. Now they have specialized panels that are looking at 
looking for innovation and new technology.
    So the fact that we have PTC 124 suggests to me the system 
is working. Nano particles, to look at gene therapy, suggests 
to me that the SBIR system is working at the NIH.
    So, again, we always have a concern at the NIH whether we 
are looking for innovation and so forth, but I really believe--
and I really commend Dr. Zerhouni and the staff for making sure 
they put mechanisms for being able to look for innovation and 
new opportunities.
    Chairwoman Velazquez. Mr. Doerfler, can we talk about the 
application process? Your company has applied for SBIR and won 
SBIR awards. Do you have any recommendations about how this 
process can be improved?
    Mr. Doerfler. Yes. I have been saying it several times. The 
key one is consistency and clarity in terms of who is eligible. 
And it is not around the change in your capital structure, 
which I think is an artificial way of judging a company's size. 
When we raised our money, we still are about 20 people, so we 
didn't change.
    I think the process is quite good, as Dr. Beall said. The 
peer review at NIH is superb. The people who are reviewing in 
those study sections really understand the area. They 
understand the mandate that NIH has to improve public health. 
So we are very comfortable. The only thing I would also add is 
that perhaps more flexibility at the agency level for them to 
provide different amounts if they feel that the science, again, 
and the opportunity warrants a larger amount.
    Chairwoman Velazquez. Do any of the other witnesses have 
any recommendations regarding the application process?
    Yes, Mr. Borrus.
    Mr. Borrus. Again, I would refer you to the Academy's 
findings. There were a number of programs at some of the 
agencies that involved electronic submission, electronic 
evaluation, which seemed to speed up the process significantly, 
and could be more widely adopted.
    Chairwoman Velazquez. Let me take this opportunity again to 
thank all the witnesses, and I know how important this program 
is for small businesses, for innovation and technology in our 
country and our economy, and for small businesses in 
particular. We will continue to give serious consideration to 
the reauthorization process.
    With that, I ask unanimous consent that Members would have 
5 days to submit statements and supporting materials for the 
record. Without objection, so ordered.
    Chairwoman Velazquez. This hearing is now adjourned.
    [Whereupon, at 11:35 a.m., the Committee was adjourned.]


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