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




 
                       FULL COMMITTEE HEARING ON
                       LEGISLATION TO REAUTHORIZE
                     THE SMALL BUSINESS INNOVATION
                        RESEARCH (SBIR) PROGRAM

=======================================================================

                      COMMITTEE ON SMALL BUSINESS
                 UNITED STATES HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 13, 2008

                               __________

                          Serial Number 110-79

                               __________

         Printed for the use of the Committee on Small Business


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
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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                   DAVID DAVIS, Tennessee
YVETTE CLARKE, New York              MARY FALLIN, Oklahoma
BRAD ELLSWORTH, Indiana              VERN BUCHANAN, Florida
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania
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               VERN BUCHANAN, Florida, Ranking
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana              STEVE KING, Iowa
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania

                                 ______

               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

                                 ______

            Subcommittee on Urban and Rural 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              DAVID DAVIS, Tennessee
HANK JOHNSON, Georgia

                                 ______

              Subcommittee on Investigations and Oversight

                 JASON ALTMIRE, PENNSYLVANIA, Chairman


CHARLIE GONZALEZ, Texas              MARY FALLIN, Oklahoma, 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


PANEL I:
Preston, Honorable Steven, Administrator, U.S. Small Business 
  Administration.................................................     4

PANEL II:
Greenwood, Honorable James, President and CEO, Biotechnology 
  Industry Organization..........................................    13
Heesen, Mr. Mark, President, National Venture Capital Association    14
Leahey, Mr. Mark, Executive Director, Medical Device 
  Manufacturers Association......................................    17
Skinner, Mr. Mark, Vice President, State Science & Technology 
  Institute (SSTI)...............................................    19
Matthews, Mr. Charles, Professor and Executive Director, Center 
  for Entrepreneurship, Education & Research College of Business, 
  University of Cincinnati.......................................    21

                                APPENDIX


Prepared Statements:
Velazquez, Hon. Nydia M..........................................    33
Chabot, Hon. Steve...............................................    35
Altmire, Hon. Jason..............................................    36
Preston, Honorable Steven, Administrator, U.S. Small Business 
  Administration.................................................    37
Greenwood, Honorable James, President and CEO, Biotechnology 
  Industry Organization..........................................    41
Heesen, Mr. Mark, President, National Venture Capital Association    46
Leahey, Mr. Mark, Executive Director, Medical Device 
  Manufacturers Association......................................    54
Skinner, Mr. Mark, Vice President, State Science & Technology 
  Institute (SSTI)...............................................    59
Matthews, Mr. Charles, Professor and Executive Director, Center 
  for Entrepreneurship, Education & Research College of Business, 
  University of Cincinnati.......................................    73

                                  (v)

  


                 FULL COMMITTEE HEARING ON LEGISLATION
                   TO REAUTHORIZE THE SMALL BUSINESS
                   INNOVATION RESEARCH (SBIR) PROGRAM
                              ----------                              


                        Thursday, March 13, 2008

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:00 a.m., in Room 
1539 of the Longworth House Office Building, Hon. Nydia 
Velazquez [chairwoman of the Committee] presiding.
    Present: Representatives Velazquez, Cuellar, Chabot, Graves 
and Buchanan.

           OPENING STATEMENT OF CHAIRWOMAN VELAZQUEZ

    Chairwoman Velazquez. Good morning. I am kind of 
disoriented because this is not our Committee room, and I am 
accustomed to the fact that Mr. Chabot is always on my right. 
Today he is on my left, and I do not know if there is a 
subliminal message here.
    [Laughter.]
    Chairwoman Velazquez. I call this hearing to order.
    Today we will examine legislation modernizing and extending 
the Small Business Innovation Research Program. SBIR is one of 
the government's largest sources of funding for innovation. It 
awards more than $2 billion in research grants every year, 
which enables the work of thousands of America's most 
innovative small firms.
    As science and technology evolve, however, so must this 
initiative. The authors of the program had great foresight. 
Twenty-five years ago they recognized early stage firms could 
make important contributions regarding technological 
development. SBIR made it practical for these small and 
innovative companies to conduct research on behalf of the 
federal government.
    This has yielded ground breaking advances, including 
unmanned aviation, needleless insulin patches, and a promising 
malaria vaccine.
    SBIR awards have supported R&D that has strengthened our 
country's national security and public health infrastructure. 
In the process, it has helped launch leading technology 
companies, such as Amgen, Qualcomm, and Symantec, employing 
thousands of Americans.
    From the Committee's perspective, continuing this success 
is dependent on three primary issues. First, the number of 
small firms that apply for SBIR awards must increase.
    Second, awardees must have access to financing of all 
types, including venture capital.
    Third, the commercialization of SBIR funded research 
projects must be more of a priority.
    The draft legislation we will consider this morning seeks 
to address each of these elements. In order for more firms to 
apply for SBIR, it doubles award sizes, providing more capital 
for important research projects.
    It also establishes a 90-day period for a decision on 
applications. This provision will enable small firms to get 
more capital more quickly and reduce the time it takes for 
research to go from the lab to the marketplace.
    Emerging economic sectors, including women, veterans, and 
minorities, are also brought into SBIR. This is achieved 
through the reauthorization and expansion of the Federal and 
State Technology Partnership Program. FAST will increase 
competition for federal research dollars giving the taxpayers a 
better value.
    While SBIR has been a successful program, one of the 
critiques we have heard is that it is difficult to take the 
next step. The legislation addresses this by establishing a new 
Primers Initiative which will provide the technical know-how 
and a system many small firms need.
    The draft bill also assures companies can choose from a 
wide array of external financing sources, and that the SBA does 
not make this decision for them.
    We have included a provision that is identical to the 
amendment offered by Ranking Member Chabot on the House floor 
last fall. This gives certainty that businesses can make their 
own financing choices. It also frees them from worrying about 
being second guessed by the government.
    SBIR funded research needs must reach the consumer, whether 
it is the government or the private sector, and this 
legislation places a greater emphasis on commercialization.
    The changes consolidate the existing fragmented effort and 
expanded government-wide wage benefits of research sectors, 
including health care, energy, and agriculture. This 
improvement will entice, enable, and permit more small 
companies to advance the innovations that have made our economy 
so diverse and vibrant. It will help insure that SBIR awards 
remain competitive, fund topnotch research, and produce cutting 
edge breakthroughs.
    As a result, the SBIR program will keep pace with the very 
innovation that it seeks to promote and will continue to foster 
next generation technologies and therapies. That also means it 
will solidify our efforts to increase U.S. competitiveness 
worldwide.
    I look forward to today's hearing, and I want to thank all 
of the witnesses in advance for their testimony. I now 
recognize Ranking Member Chabot for his opening statement.

                OPENING STATEMENT OF MR. CHABOT

    Mr. Chabot. Thank you.
    Good morning, and, Madam Chairwoman, I want to thank you 
for holding this hearing to review a Committee print of 
legislation reauthorizing and modernization the Small Business 
Innovation Research 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, and especially Dr. Charles H. Matthews, who 
has a Doctor of Philosophy in management from the University of 
Cincinnati. Dr. Matthews is a professor of entrepreneurship and 
strategic management at the University of Cincinnati's College 
of Business, and he is also the founder and Executive Director 
of the University Center for Entrepreneurship, Education and 
Research, and the Director of the university's College of 
Business Small Business Institute.
    We want to welcome you this morning, Dr. Matthews, and 
coincidentally Dr. Matthews and I happened to go to the same 
grade school, same class, St. Catherine's in Cincinnati, and 
the same high school, class of 1971. So we have known each 
other from a long, long time. He is here despite that, not 
because of that.
    And we also want to thank Mr. Preston for being here today. 
I know he has an extremely busy schedule. So I think it is very 
commendable that he is with us here today, and we really do 
appreciate that.
    Today's hearing is the third in a series designed to 
collect information and data to help this Committee draft 
legislation reauthorizing the SBIR Program. On January 29th, we 
held a hearing that reviewed how well the SBIR Program is 
performing.
    On February 13th, this Committee's Oversight and 
Investigation Subcommittee held a hearing to review the SBIR 
Program's role in the development and commercialization of 
innovative health care technologies.
    At each of these hearings, the Committee received valuable 
information from academics, small businesses, and trade 
associations on the performance of the program. Based on this 
input, the Committee developed draft legislation for the SBIR 
Program's reauthorization.
    We are working toward developing legislation that 
modernizes and strengthens the SBIR Program. The draft we have 
before us goes a long way toward achieving these goals. As the 
National Academies of Sciences noted in its report on the SBIR 
Program, there are not adequate measures of performance in the 
SBIR Program.
    The draft legislation before us addresses that issue by 
requiring agencies with an annual SBIR Program at $50 million 
or more a year to create an SBIR advisory board to review the 
program quarterly and recommend improvements in that agency's 
operation of the program. The creation of these advisory boards 
and the annual report to Congress will allow far greater 
oversight and better management of the program.
    The draft bill also mandates that agencies required to have 
an SBIR advisory board must complete evaluation of competitive 
SBIR proposals within specific time frames.
    Additionally, the legislation doubles the authorized SBIR 
Phase 1 and 2 award amount and makes numerous other technical 
but important positive changes to the program.
    That said, I do have some concerns with a few of the 
provisions in the draft before us. I am certain that the 
Chairwoman and her staff, as she and her staff have done since 
the beginning of this Congress, will work with me and with our 
staff in a bipartisan manner in an attempt to hammer out any 
differences that may come up as we continue with this process.
    To the Chairwoman's credit, as I have said many times, she 
has worked very cooperatively with the minority, and we expect 
nothing less in the future.
    Today we have excellent witnesses as I mentioned before 
here to provide us with discussion and comment on the draft 
legislation. We want to, again, thank you, Chairwoman, and 
thank you, Mr. Preston, for being here. We look forward to 
working with you on the improvement and reauthorization of the 
SBIR Program.
     And I yield back the balance of my time.
    Chairwoman Velazquez. Thank you, Mr. Chabot.
    And now I have the great pleasure of welcoming the 
Honorable Steven C. Preston, Administrator of the United States 
Small Business Administration. He has served in this capacity 
since July of 2006 and has testified several times before this 
Committee.
     Welcome, sir.

 STATEMENT OF THE HONORABLE STEVEN C. PRESTON, ADMINISTRATOR, 
               U.S. SMALL BUSINESS ADMINISTRATION

    Mr. Preston. Thank you very much, Chairwoman Velazquez, 
Ranking Member Chabot.
    SBA is very supportive of the Small Business Innovation 
Research Program. We look forward to working with the Committee 
as legislation moves forward to the sunset date on September 
30th.
    I also appreciate, Madam Chairwoman, the three points that 
you raised, increasing the number of firms in the program, 
making sure that these firms have access to financing, and your 
folks on commercialization. I think those are all very 
important priorities, and I appreciate your finding that as 
such.
    Since this program has been in place, as you commented, it 
has helped many firms get access to federal research and 
development funding. Today it is over $2 billion annually going 
to these firms to fund research and foster innovation and 
commercialization of products.
    Every federal department with an extramural R&D budget in 
excess of $100 million participates in SBIR. There are 
currently 11 federal departments that meet this criterion and 
participate in the program and we are at the SBA responsible 
for promulgating regulation and policy directives to govern the 
program while other federal agencies utilize the program to 
foster innovation.
    The purpose of SBA's regulations is to insure the benefits 
of SBIR reach small business entrepreneurs and that the R&D 
advances resulting from SBIR Program benefit our country.
    For a business to be eligible for participation in the 
program, they have to be organized for profit. They have to be 
at least 51 percent owned and controlled by one or more 
individuals who are citizens or permanent residents to the 
United States, or be at least 15 percent owned and controlled 
by another for profit business which may be a venture capital 
firm that is at least 51 percent owned and controlled by 
individuals and have including its affiliates not more than 500 
employees.
    In 2001 and in 2003, our Office of Hearings and Appeals did 
confirm the interpretation that an individual is a natural 
person, not a corporate entity. These decisions constituted 
neither a new eligibility rule nor a new restriction on the 
program. However, we do understand that the clarification 
provides some consternation in the industry.
    Concurrent, however, with these rulings, SBA decided to 
update its regulations to account for some of the more complex 
investment structures that have emerged in order to facilitate 
the funding required to launch new technologies. In 2004, SBA 
issued a rule providing the opportunity for future venture 
capital involvement under the SBIR program, and under that 
rule, a venture capital company may invest in 51 percent or 
more of the small business, and that small business can, in 
turn, receive SBIR awards provided that the venture capital 
firm is, in fact, 51 percent owned by individuals and meets the 
500 employee small business size standard.
    In other words, in these circumstances a venture capital 
firm can even wholly own an SBIR recipient. The issue is not 
for us the value of venture capital investing in innovation. 
Venture capital has been the financial fuel behind many of our 
most ground breaking advances in technology and health care and 
defense. As such, venture capital has enabled innovation and 
growth that has helped our economy keep strong and dynamic.
    We all understand the value of venture capital. It has 
great value to our SBIR firms. Many of them receive it today, 
and we encourage their getting funding from venture capital 
sources.
    From our perspective with the proposed legislation, the 
issue is much more limited. Two, point, five percent of 
extramural research dollars are set aside for a program that 
focuses on early stage small innovators. Ninety-seven and a 
half percent, or 82 billion in research dollars, is available 
for firms that are not considered small.
    So the issue is: should firms owned and controlled by large 
venture capitalists and universities be able to compete for 2.5 
percent or should this funding come from the 97 and a half 
percent? Effectively, where do we draw the line and what should 
that definition be?
    SBA's goal is to insure that the integrity of the program 
is maintained and that it remains program for small business.
    Beyond SBIR, and this is something I think we just need to 
clarify, we are concerned that changing the affiliation rules 
with regard to venture capital participation raises some other 
issues in the other programs, our procurement programs namely. 
Any changes to SBA's size standards could potentially affect 
our other programs, and federal programs targeted for small 
business could be open to a business concern that is controlled 
by what would be considered a large business.
    So we ask the Committee to proceed with caution on those. 
We just want to make sure that understand what your intention 
is and make sure that we clarify that.
    The administration is concerned with the proposed 
legislative change to the definition for purposes of venture 
capital, and while recognizing that a venture capital 
investment is crucial to small business growth, the 
administration is nonetheless concerned that the Committee 
print offers too broad of a definition to the affiliation 
standards.
    And once again, we also are concerned about other conflicts 
within the legislation.
    We are committed to continued improvement, to expanded 
monitoring of the SBIR Program. We hope to work with the 
Committee as well as other agencies in the administration to 
insure that small business is defined in a manner that 
effectively minimizes ineligibility of actual small businesses, 
while minimizing inadvertent eligibility of large businesses.
    So I appreciate the opportunity to share our views on it, 
and I look forward to clarifying these views and answering any 
questions you have.
    [The prepared statement of Mr. Preston may be found in the 
Appendix on page 37.]

    Chairwoman Velazquez. Thank you very much, Administrator.
    I would like to ask you about the draft legislation that we 
have before us, it includes provisions that reauthorize, 
modernize, and extend the Federal and State Technology 
Partnership Program. FAST, of course, is a program to encourage 
SBIR application from small firms located in areas that are 
under represented in the SBIR Program.
    My question is: will the SBA support reauthorization of 
FAST?
    Mr. Preston. We think FAST has a lot of value, and at this 
point I believe we will, but I am still clarifying that with 
some of my colleagues.
    Chairwoman Velazquez. Okay. In your written statement, you 
outline the legal basis for SBA support of current SBIR 
eligibility rules. Your statement does not, however, address 
the fact that leaders in both the public and private sector 
believe the SBA's eligibility rules are having a negative 
impact on the overall objectives of the SBIR Program.
    Keep in mind that the firms that are rendered ineligible 
for SBIR because of their ownership structure often have fewer 
than 25 employees. How would you respond to those, including 
people from your own administration like the Director of the 
NIH, argue that the current rules undermine the statutory 
purposes of the SBIR program?
    Mr. Preston. Well, I think there are a lot of issues 
inherent in that question, and the question I have in that is 
there are a few issues.
    First of all, the language as it is drafted right now 
defines a venture capital firm as being small if it has fewer 
than 500 employees. I think that will cover virtually every 
independent venture capital firm in the world. So really, you 
know, major multimillion dollar venture capital firms who do 
early stage investing may have 20 or 25 partners. So I think 
the important thing from my perspective is to understand what 
truly is a large firm.
    Now, I understand the other issue is I think this program 
focuses on two and a half percent of the dollars, and the 
question I have is why do we need to open up a program that has 
two and a half percent of the research dollars to firms that 
are supported by very large venture capitalists when 97 and a 
half percent or $82 billion is also available?
    I think it is important for us to keep the integrity of the 
small business nature of this program. Now, let me make one 
other comment, ma'am. I do believe that there may be a better 
way to look at size within the venture capital world, and I 
would love to roll up my sleeves and work with this Committee 
and with the industry and with other people in the executive 
branch to figure out if there is a better way, to make sure 
that good small businesses are not being excluded.
    But I do think the language as it is written right now 
would allow some very large venture capitalists in the program.
    Chairwoman Velazquez. So, we will work with you on the 
eligibility rules because what we are discussing here is the 
SBIR program and the objective of the program.
    Mr. Preston. The objective of the program as I understand 
it is to work with small businesses to seed early stage 
innovation that has a viable commercialization possibility, and 
so the question is: what is a small business, which I think is 
what you are asking?
    If it is a different question, I apologize if I did not 
answer it.
    Chairwoman Velazquez. Under current law, the Department of 
Defense is permitted to use available SBIR forms for expenses 
incurred through the administration of commercialization 
programs. In your written statement, you caution Congress to 
avoid refocusing the program in a manner that involves direct 
support for commercialization activities more appropriately 
performed by the private sector.
    Could you elaborate on what that means?
    Mr. Preston. Well, right now our program provides grants 
for Stage 1 and Stage 2 research. As a firm moves toward 
commercialization, they are available for other federal 
funding, but under the program as it is structured as I 
understand it, that Stage 1 and Stage 2 funding is SBIR. Once 
they get to Stage 3, they can seek other federal grant funding. 
Obviously they can seek venture capital funding.
    The other thing is once a firm gets its stage 2 grant, the 
ownership restrictions effectively recede and they are free to, 
you know, continue to raise money from wherever.
    Chairwoman Velazquez. Let me ask you, does the SBA oppose 
the Department of Defense commercialization pilot program?
    Mr. Preston. I am not familiar with their program in 
detail. I would be happy to answer that for the record though.
    Chairwoman Velazquez. Well, I am asking that question 
because in the draft bill we extend the commercialization pilot 
program to all the agencies, and this is important for me to 
know and for the Committee whether or not you support the 
Department of Defense's pilot program.
    Mr. Preston. So you are saying that the two and a half 
percent specifically in SBIR would now be able to be used for 
Stage 3. Is that what you are proposing?
    Chairwoman Velazquez. No.
    Mr. Preston. Okay.
    Chairwoman Velazquez. No. Let me go to the next question. 
The Defense Department's commercialization program allows the 
agency to use one percent of the SBIR set-aside for payment of 
administrative costs. This provision has the effect of--
    Mr. Preston. Oh, I see. Yes, I understand.
    Chairwoman Velazquez. So if the agency supports the pilot 
project, that is my question.
    Mr. Preston. Yes. We do not have an issue with your taking 
a portion of the money, and I know you have some funding. We do 
not have an issue providing funding to help support firms 
during that transition. I am more concerned with, you know, the 
essence of the grant program being shifted toward 
commercialization when we are trying to use it primarily to 
seed early stage innovation.
    Chairwoman Velazquez. My question is: do you support the 
use of money for agencies' expenses or will you oppose it, or 
it should be solely used for R&D?
    Because if we allow the Department of Defense to use money 
to cover administrative expenses, then we are taking money away 
from money that is supposed to go to R&D. We are just 
supporting the agency's bottom line.
    So what is your position regarding that issue? Should the 
money go just for research or should we allow for agencies to 
use the money to cover operating expenses, and administrative 
expenses?
    Mr. Preston. Okay. I am not familiar with the DoD program. 
I apologize. I would be happy to look into it and give you 
questions for the record.
    I do know you have some provisions in your language to 
support firms going through that process, and that is what I 
thought you were getting at, but I would just have to look into 
that further.
    Chairwoman Velazquez. Let me ask this last question, and 
then I will recognize Mr. Chabot.
    Congress has received testimony alleging that the SBA is 
not adequately meeting its responsibility under the current 
SBIR statute. One example is SBA's inability to collect and 
distribute meaningful data about the SBIR Program.
    Would you provide the SBA's Office of Technology with 
additional resources so that it can carry out its 
responsibility?
    Mr. Preston. Well, I think what I need to do is understand 
specifically what responsibilities you are talking about in 
detail, and then assess whether or not they are, in fact, not 
meeting those. So I would rather not make a--
    Chairwoman Velazquez. Well, the Office of Technology is 
charged with the collection of data, and they have not done 
that, and it went from 13 people, staff, to only four. So, do 
you think that the fact that they are not fulfilling their 
responsibility is because of manpower?
    I mean, would you assign more resources?
    Mr. Preston. Ma'am, I am not willing to accept that they 
are not fulfilling their responsibilities based on your 
statement. I am willing to work with you to understand what the 
concerns are and address them in a very hands-on way.
    Now, I will also tell you that we do expect to expand the 
technical system right now to provide much of the data that has 
been lacking in the program, and I believe that launch is going 
to be in the next six to eight weeks, but I would be happy to 
work closely with the Committee to keep you abreast of the 
advances we are making there and also understand any specific 
shortfalls so that we can address them.
    Chairwoman Velazquez. I welcome that.
    And I recognize Mr. Chabot.
    Mr. Chabot. Thank you, Madam Chair.
    Mr. Preston, you have already touched on this to some 
degree, but let me ask. What is the impact of the size 
standards as set forth in the previous legislation?
    And if there is a problem, would you be willing to work 
with the Committee to come up with a reasonable size standard 
in order to preserve this as a small business program and allow 
for venture capital investment in small firms?
    Mr. Preston. Oh, absolutely. And you know, a number of our 
SBIR recipients already receive venture funding. I think 
venture funding is an essential part of this program. I think 
what we are interested in is preserving the small business 
character of the program, and I fully accept that there may be 
a more enlightened way to define small business given the 
complexity of, you know, venture cap. ownership and venture 
cap. funding.
    I think it is a very different animal than a typical 
procurement program, and we should be looking at it in a way 
that specifically meets the needs of the program.
    Mr. Chabot. Thank you.
    With all of the rule changes that have taken place over the 
years, would you agree that the eligibility rules for venture 
capital companies have become too complex?
    Mr. Preston. I think they are complex, and I think there 
are ways that, you know, firms can go forward with a 
significant percentage of venture cap. ownership if they need 
certain subsidiary structure requirements, and I think it would 
be helpful for all of us to have a more simplified process in 
place, more simplified structure in place.
    Mr. Chabot. And where is the administration willing to work 
with the Committee to permit venture capital investment in 
small firms?
    Mr. Preston. Well, as I said before, Mr. Chabot, I think 
venture capital ownership is really essential to the success of 
this program. It's essential for these people to be able to 
commercialize their product. In many cases it's essential for 
them to be able to continue well before commercialization.
    And let me just say, you know, in my career before coming 
to this role, I have structured joint ventures with venture 
capitalists. I have been on advisory boards from private equity 
firms. I have taken biotech companies public. You know, I 
appreciate the value of venture cap in the world of innovation, 
and I do not think our country would be where it is today if we 
did not have that capital fueling innovation.
    And I think there is a very important role for venture 
capital in this program.
    Mr. Chabot. Thank you very much.
    Madam Chair, I will yield back the balance of my time.
    Chairwoman Velazquez. Mr. Graves.
    Mr. Graves. Thank you, Madam Chair.
    My questions have actually been addressed, but I do want to 
say for the record I want to thank you and Ranking Member 
Chabot for having this hearing. As you know, this issue is very 
important to me, and I have worked on it for some time, and I 
think it is very important to small business. I appreciate what 
the Committee is doing. I am looking forward to this.
    I think that we do need to change the eligibility 
requirements. Small businesses are the backbone of the economy 
in this country, and I think this program is just one of them 
that would go a long way, and I think we do need to fix this.
    But thank you both for doing this.
    Chairwoman Velazquez. Mr. Preston, I have some other 
questions now. In your testimony you indicate that SBA would 
like to develop quality metrics that can assist agencies in 
developing standards to limit the perceived effect of so-called 
SBIR mills. What is your view of the reporting requirements of 
the draft bill which require the SBA to report on our deeds 
that have won more than 15 Phase 1 grants and no Phase 2 grants 
over a five-year period?
    Mr. Preston. Well, I think your whole intention of 
providing greater transparency, greater metrics, greater 
reporting in the program is great. And I would really look 
forward to working with you and your staff and the industry to 
figure out what that should look like and specifically to make 
sure that that process goes forward effectively.
    Chairwoman Velazquez. Thank you.
    In January, a leading law firm issued an advisory 
indicating that participation in the SBIR Program creates 
significant risk for venture backed companies under the False 
Claims Act. Is the SBA concerned that its confusing affiliation 
rules are causing all venture backed companies, not just 
companies that are majority owned by venture firms, to forego 
participation in the SBIR Program?
    Mr. Preston. Well, I do not know the text of that advisory, 
but certainly if firms are going for these funds 
inappropriately they should be concerned, and I think we all 
should be concerned if firms are in any aspect of federal 
contracting not qualified as a small business and they are 
going for a small business program.
    That having been said, I am not familiar with the text of 
that discussion, and I think our affiliation rules are fairly 
straightforward. It is 500 employees in the affiliated group 
and 51 percent ownership by individuals.
    I do think that there are other structures that some people 
can use to avail themselves of the program that begin to get 
more complex, and that is what I think we should think about 
simplifying.
    But, you know, as I hear your statement, I think any firm 
that avails themselves inappropriately of a program should be 
concerned with--
    Chairwoman Velazquez. Well, I am not talking about firms 
that are illegally applying like those firms that have gotten 
contracts with the federal government claiming that they were 
small firms. I am not talking about that.
    I am talking about small firms that consider the 
affiliation rules so confusing that they are so concerned about 
getting venture capital money.
    Mr. Preston. Well, I have not heard that firms that qualify 
under the affiliation rules are walking away from the program 
because of confusion. You know, I would assume that that is 
focusing on firms that do not qualify.
    Chairwoman Velazquez. Well, that is a matter, I think, of 
concern, and maybe we should revisit this issue because for 
those companies that should go, especially those who finish 
Phase 1 and are willing and able to move to Phase 2, and in 
order to move to Phase 2 and to get into commercialization, 
they have to show that they can secure money from the private 
market, and these confusing rules will inhibit them from doing 
so.
    I hope that you are going to leave your staff here for the 
second panel, these are issues that we are going to discussed 
during the second panel.
    So it is not enough to say that those who are applying for 
this type of money are ineligible for SBIR. We are talking 
about people who are playing by the rules, companies that are 
playing by the rules.
    Mr. Preston. Well, I think that advisory you mentioned 
implies that companies are not playing by the rules, and if the 
text of that is different and there is any detail in there that 
would give us a better understanding of how to clarify those 
rules, we would love to look at that.
    Chairwoman Velazquez. Well, I guess what the statement 
implies is that the rules are so confusing that people are, 
companies are, concerned by the unintended consequences of 
violating the affiliation rules even when they are playing by 
the rules.
    Section 9 of the Small Business Act specifies that for an 
SBIR company to be eligible for Phase 2 awards, it should be 
able to demonstrate that it can secure private funding from 
non-SBIR sources. The SBA's current view, however, runs counter 
to this.
    How can you reconcile the program's statutory basis with 
your agency's current stand against venture capital 
investments?
    Mr. Preston. We do not have any stance against venture 
capital investment. Many of these firms get venture capital 
investment. The only stance we have is majority ownership by 
large venture capital firms.
    So I think it is important that we draw the line 
appropriately here. These firm get venture cap. They should get 
venture cap., and they are going to need it to grow.
    The other thing I would tell you is today in the program 
only ten to 12 percent of these firms have any venture cap. 
funding. So when you look at that ten to 12 percent and then we 
are talking about going to majority venture cap. funding before 
they even get these grants, I think we are talking about a 
relatively small subset of the firms.
    And then when you take it further to say we think they 
should be able to be majority owned by large venture cap. 
firms, I think you are getting into an even smaller subset.
    Chairwoman Velazquez. I believe that the way you structure 
the affiliation rules, you limit venture capital participation, 
and I guess that if you listen to the testimony and the 
discussion that we are going to have in the second panel, this 
is a real concern that cripples the ability of companies to 
move from Phase 1, Phase 2 to commercialization, and I guess 
that we have work to do on this issue.
    It is an issue. It is a problem, and it is just not enough 
to say that small firms that play by the rules can apply for 
grant money and there will be no unintended consequences.
    The draft bill grants federal agencies the express 
authority to increase the size of the SBIR awards they issue. 
It also includes provisions clarifying that agencies have the 
authority to issue more than one Phase 2 award for promising 
projects.
    What are the SBA's views on these provisions?
    Mr. Preston. We agree that it is time for the size of the 
grants to increase, and in fact, we have been working in house 
on a rule to address that. So I think, yes, it is time, and so 
we are supportive of an increase.
    Chairwoman Velazquez. Very good. Well, any other questions, 
Mr. Chabot.
    Mr. Chabot. Thank you. Just one final question, Madam 
Chair.
    In regard to the affiliation rules, would it make sense or 
more sense to apply an asset limit on venture capital 
participation as opposed to an employee numbers limit?
    Mr. Preston. You know, I think that is a possibility, sir. 
I would really on this size issue much prefer spending time 
with my colleagues at other agencies and people in the industry 
to come up with, you know, what we think is a fair standard.
    And so I don't know that I feel comfortable saying that an 
asset size or an equity under management or some other standard 
is going to be the right thing. It is possible, and we have 
batted around some of those concepts with other people. But at 
this point I am not ready to come out on one side or another on 
that issue.
    Mr. Chabot. All right. Thank you.
    I yield back the balance of my time, Madam Chair.
    Chairwoman Velazquez. Thank you, Administrator.
    Mr. Preston. Thank you.
    Chairwoman Velazquez. Thank you.
    Mr. Preston, if I may, who from the staff will be staying 
here?
    Mr. Preston. We have got two gentlemen from our SBIR 
Program, Edsel Brown and Ron Cooper, and are you staying as 
well? And one person from--
    Chairwoman Velazquez. Will you please identify yourselves 
for the record? Your names?
    Mr. Cooper. Ron Cooper.
    Mr. Preston. Ron Cooper and Edsel Brown.
    Chairwoman Velazquez. Thank you.
    I would ask the witnesses from the second panel to please 
take your seats.
    Sorry for the inconvenience of the room.
    Good morning, gentlemen, and it is always a pleasure to 
have the opportunity to welcome our former colleague, the 
Honorable James C. Greenwood, to our Committee. He is the 
President and CEO of the Biotechnology Industry Organization in 
Washington, D.C.
    Prior to his appointment as President of BIO in January 
2005, he represented Pennsylvania's Eighth District in the U.S. 
House of Representatives. BIO represents more than 1,150 
biotechnology companies, academic institutions, state 
biotechnology centers, and related organizations across the 
United States and in more than 30 other nations.
    Welcome, and each witness will have five minutes.

 STATEMENT OF THE HONORABLE JAMES C. GREENWOOD, PRESIDENT AND 
            CEO, BIOTECHNOLOGY INDUSTRY ORGANIZATION

    Mr. Greenwood. Well, good morning, Chairwoman Velazquez, 
Ranking Member Chabot, members of the Committee, ladies and 
gentlemen. As the Chairwoman said, I am Jim Greenwood, 
President and CEO of the Biotechnology Industry Organization, 
otherwise known as BIO.
    I am privileged to be here this morning on behalf of BIO's 
more than 1,000 member companies, academic institutions, state 
biotechnology centers, and related organizations in all 50 
states.
    The role the SBIR Program has had in bringing breakthrough 
therapies to the American people is a matter of public record. 
There are 252 FDA approved biologics that have been developed 
by 163 companies, and 32 percent of those companies have 
received at least one SBIR/STTR award.
    Despite its noble past, however, the ability of the SBIR 
Program to provide critical funding for medical research 
projects will remain hampered unless SBIR reauthorization 
updates the program to address the current realities facing 
small, innovative American companies.
    Congress created the SBIR Program in the early 1980s in 
order to utilize the capabilities of small, innovative, 
domestic companies to fulfill federal research and development 
needs. Congress recognized that some promising scientific 
research failed to be funded by private sector capital because 
it was viewed as too high risk. For 20 years the program worked 
well for U.S. life science companies engaged in high risk, 
cutting edge, medical research.
    However, in 2003, the Small Business Administration's 
Officer of Hearings and Appeals ruled that a biotechnology 
firm, Cognetix, did not meet the SBIR size standard because 
multiple venture capital investors in the aggregate owned more 
than 50 percent of the company's stock.
    The ruling, which is not based on statute nor based, in my 
opinion, on congressional intent at all ignores the realities 
of the marketplace where small biotechnology firms must raise 
tens of millions of dollars to conduct incredibly capital 
intensive research. The implementation of the SBA's decision 
has caused many small American companies that had participated 
in the program for 20 years and who were a fundamental part of 
the program's success to be suddenly deemed ineligible.
    Additionally, applications for the SBIR Program at NIH have 
decreased dramatically, and the number of new businesses 
applying is at the lowest level it has been in a decade.
    I commend Chairwoman Velazquez, Ranking Member Chabot, and 
the members of the Committee for their insight in including a 
remedy to the eligibility issues affecting many small life 
sciences companies in the reauthorization legislation soon to 
be introduced. It is the right thing to do, and this is the 
right time to do it.
    On behalf of America's biotechnology companies, I look 
forward to working closely with you to see this much needed 
change enacted into law this year.
    BIO also supports provisions in the bill that will allow 
agencies to maintain flexibility. Each agency should be able to 
administer SBIR grants based on scientific merit and each 
agency's unique needs.
    The provisions in the reauthorization providing agencies 
with the flexibility and authority to determine the amount and 
number of awards the project can receive will help accelerate 
the development of those projects with the most promising 
potential to improve human health.
    I would also like to commend the Committee for drafting 
legislation that reaffirms and fosters the original goals of 
the SBIR program, namely, the commercialization of new 
technologies by small, innovative, American companies. 
Specifically, BIO supports the modernization and 
reauthorization of the Federal and State Technology, or FAST, 
Program and the authorization of funds for agencies to develop 
and expand their commercialization programs.
    Finally, I would like to discuss the provisions in the bill 
aimed at addressing the concern that some companies are 
receiving multiple awards without progress towards 
commercialization. These provisions would require the SBA to 
release the names of firms that have received multiple Phase 1 
grants and zero Phase 2 grants and promulgate rules for the 
agency to address these awardees.
    We fully support this effort and would encourage the 
Committee to be even more vigilant in assuring that companies 
are not gaming the system.
    We look forward to working with the Committee to ensure the 
intent of these provisions is fully realized.
    Again, I thank you for the opportunity to testify today. I 
would be happy to answer any questions members of the Committee 
might have.
    [The prepared statement of Mr. Greenwood may be found in 
the Appendix on page 41.]

    Chairwoman Velazquez. Thank you, Jim.
    Our next witness is Mr. Mark G. Heesen. Mr. Heesen is 
President of the National Venture Capital Association. Before 
joining the National Venture Capital Association, Mark was an 
aide to a former governor of Pennsylvania and was the Deputy 
Director for Federal Funds reporting to the Texas legislature.
    NVCA's mission is to foster greater understanding of the 
importance of venture capital to the U.S. economy and support 
entrepreneurial activity and innovation.
    Welcome.

   STATEMENT OF MARK G. HEESEN, PRESIDENT, NATIONAL VENTURE 
                      CAPITAL ASSOCIATION

    Mr. Heesen. Thank you.
    Venture capitalists invest in small, high risk, emerging 
growth companies in areas such as life sciences and information 
technology, homeland security, and clean technology. Our goal 
is simple: to bring the best and most innovative new products 
and services to market in the most efficient manner.
    I must note NVCA's utmost frustration with SBA's campaign 
to exclude our industry from the SBIR Program. Doing so is a 
disservice to our country and denies government access to 
cutting edge technologies. We urge Congress to reauthorize the 
program with provisions that ensure venture backed companies 
have a fair chance to thrive alongside their non-venture backed 
counterparts.
    Doing so will only strengthen the future success of the 
program and correct a significant injustice that has gone on 
for far too long. NVCA strongly supports the draft Committee 
print which includes a provision allowing for venture backed 
firms to again participate in the SBIR Program. If the 
provisions which guarantee a level playing field for venture 
backed companies are removed or compromised in any way, NVCA 
will not support reauthorization of this program.
    For years SBA's policies regarding SBIR eligibility have 
been inconsistent, discriminatory, and based on serious 
misconceptions which they appear to have absolutely no interest 
in reexamining. I would like to debunk a number of myths 
employed by the SBA.
    First, venture backed companies do not need SBIR Program 
money because they are strong, fully funded entities. Make no 
mistake: these companies are small, fragile businesses, 
typically employing less than 25 people. The only distinction 
for a venture backed company is that it has demonstrated enough 
promise to attract an investor whose business it is to find and 
fund opportunities ready for commercialization.
    Second, venture backed companies have access to a 
bottomless pit of funds. In fact, financial controls at a 
venture backed company are likely to be much more stringent 
than their non-venture backed counterparts. Venture backed 
companies must focus on exclusive projects with narrow 
trajectories while consistently meeting or beating agreed upon 
milestones to continue to receive funding.
    Third, venture firms have unlimited cash. That, too, is a 
fallacy. Venture firms raise money in a closed end process. 
They have a contractually finite pool of resources that must 
stretch across multiple companies for many years.
    Fourth, venture backed companies are able to compete and 
win broader government R&D dollars. In reality venture backed 
companies turn to the SBIR Program for funding critical, early 
stage projects. If there were other avenues to obtain, these 
much needed funds after all these years of being discriminated 
against by the SBA, we would have found it by now.
    Fifth, the SBA assumes that venture capital firms are the 
equivalent to large corporations, and therefore, the companies 
they fund should be excluded from SBIR grants. We agree large 
corporate owned businesses should not be allowed to participate 
in the small business program, but venture firms are not large 
corporations. They're partnerships with typically less than a 
dozen professionals.
    SBA knows this, which is why they have gone to great 
lengths to manipulate the system and concoct a nonsensical 
formula to justify their position. Last September we testified 
before you regarding a portfolio company that was denied a 
small business waiver from SBA for a $900,000 FDA application 
fee. While the company employed seven people, the SBA 
affiliated every employee not only from the venture capital 
firm (which only had ten people), but also every company in 
that venture capital firm's portfolio to exceed the 500 people 
employee threshold.
    Aside from this maneuver being absolutely irrational and 
unjustified, SBA hurt a very small business and delayed a very 
promising drug discovery.
    Sixth, the SBA also wrongly assumes that venture backed 
companies are controlled by venture capitalists. While venture 
capitalists do participate on the board, they do not exert day-
to-day control of a company. Venture capitalists divide their 
time among all investment of a venture capital fund. It's 
impossible and impractical to spend that limited time on the 
day-to-day business decisions of one particular portfolio 
company.
    If control is equated to 51 percent ownership interest, SBA 
logic falls again. The 51 percent or more ownership of a 
company is typically met only when several venture capital 
firms have invested in the company. Ironically, SBA's policies 
particularly hurt the very regions that SBA programs are 
designed to support, like middle America. The scarce venture 
capital dollars in this region cause venture firms to join 
together to form a promising start-up. As each firm takes an 
equity stake in the company, the total venture ownership 
percentage can quickly rise to 51 percent.
    Venture backed businesses have been fighting this battle 
for far too long. If Congress intends the SBIR Program to 
generate significant commercial impact, it makes no sense to 
exclude the companies that empirically are among the most 
likely to have significant commercial success from the program.
    Current SBA practices impede the ability of agencies like 
DoD, NIH, and the Energy Department to solve serious issues in 
the homeland security, energy dependence, and quality health 
care areas.
    In closing, the venture capital industry is known for its 
patience when it comes to our investing, but our patience with 
SBA's campaign to penalize venture capital companies because of 
their success is at an end.
    We support this bill and reauthorization wholeheartedly, 
but only if we have an opportunity to contribute to its 
success.
    Thank you very much.
    [The prepared statement of Mr. Heesen may be found in the 
Appendix on page 46.]

    Chairwoman Velazquez. Thank you, Mr. Heesen.
    Our next witness, Mr. Mark Leahey. He is the Executive 
Director for the Medical Device Manufacturers Association. MDMA 
is a national trade association that represents independent 
manufacturers of medical devices, diagnostic products, and 
health care information systems.
    MDMA was created in 1992, and their mission is to promote 
public health and improved patient care through the advocacy of 
innovative research driven medical device technology.
    Welcome, sir.

  STATEMENT OF MARK LEAHEY, ESQ., EXECUTIVE DIRECTOR, MEDICAL 
                DEVICE MANUFACTURERS ASSOCIATION

    Mr. Leahey. Thank you, Chairwoman Velazquez and members of 
the Committee.
    On behalf of the more than 160 medical technology companies 
that MDMA represents across the country, I would like to thank 
you for your efforts to improve and reauthorize the SBIR 
Program. The Committee's draft legislation will help insure 
that small, innovative companies have access to the necessary 
resources to develop life sustaining and life enhancing 
products of tomorrow.
    Given the advancements in science, increasing regulatory 
requirements and market access challenges, significant 
investments from the government and the private sector are 
often needed to develop these technologies. In return, 
Americans live longer, healthier, and more productive lives.
    One of the cornerstones of the government investment in 
small medical technology companies has been the SBIR Program. 
Resources from the program, in addition to private investment, 
have greatly improved the quality of life for more than 20 
years.
    However, as you are aware, the Small Business 
Administration's reinterpretation of the definition of 
``individual'' significantly worsened the landscape for the 
private-public partnership envisioned by the SBIR Program.
    As a result, many promising technologies from smaller 
companies have not received SBIR support and patients are 
suffering as a result. Fortunately, this Committee has taken 
the necessary steps to correct the actions of the SBA and 
insure that the SBIR Program is restored to its critical role 
of providing promising entrepreneurial medical technology 
companies with the resources needed to develop the clinical 
solutions of tomorrow.
    With small companies responsible for the majority of 
medical technology advancements over the past 20 years, the 
SBIR Program has played an important role in assisting some 
companies. Unfortunately, since the SBA's reinterpretation, a 
barrier has been created for many small companies to receive 
SBIR assistance.
    The development of a medical device often involves 
collaboration of public and private investments, including 
resources financed by various venture capital investors. Since 
SBA's reinterpretation of ownership requirements under the 
SBIR, the number of medical technology companies applying for 
grants has significantly declined.
    For example, applications for SBIR grants at the National 
Institutes of Health, the most prolific grant of SBIR grants 
for medical technology companies, has declined by nearly 12 
percent in 2005 and by nearly 15 percent in 2006.
     In addition to reducing the number of companies receiving 
grants, one may conclude that the new interpretation has 
prevented SBIR from supporting those very projects that have 
the greatest potential for clinical benefit.
    The SBIR Program should support small companies with 
promising clinical technologies regardless of whether venture 
capitalists have partnered with the company. As the committee 
moves forward with the reauthorization of the SBIR Program, 
MDMA would like to reiterate our support for the SBIR Program 
and the support of the following improvements that will help 
reestablish the program's success.
    First, the reauthorization should include language to 
restore the participation of venture backed companies, 
especially redefining the ownership requirements for more 
business concerns. It is critical that this language be 
included so that small venture backed, medical technology 
companies are not excluded from this program.
    This will serve to provide SBIR grants to the most 
promising technologies which are likely to provide the greatest 
public and patient benefit.
    Second, MDMA believes that increasing the dollar amount of 
the Phase 1 and Phase 2 grants to 200,000 and 1.5 million, 
respectively, is critical to address the increasing 
developmental costs. In addition, it will help provide the 
necessary incentive to encourage more companies to apply for 
the grants.
    Given that the award levels have not been modified since 
1992, change is long overdue.
    Third, MDMA supports providing agencies with more 
flexibility to administer the SBIR Program. Specifically MDMA 
supports allocating a small percentage of the SBIR set-aside to 
be used for administering the program. These SBIR funds could 
be used to pay for activities including conferences that would 
assist small businesses in commercializing and competing in the 
marketplace.
    The funds could also be used to improve systems for 
assessing the program's effectiveness. These resources would 
help to administer the SBIR Program and assist agencies in 
making improvements without diverting funds from other programs 
or priorities.
    Finally, it would be beneficial to remove the requirement 
that a company must have applied for a Phase 1 grant in order 
to apply for a Phase 2 grant. If this rule would change, MDMA 
believes that small business participation in the SBIR Program 
would increase.
    Adopting the changes outlined above is consistent with the 
mission of the SBIR Program to insure that the nation's small, 
high tech, innovative businesses are a significant part of the 
federal government's research and development efforts. They are 
also consistent with the SBA's mission to strengthen the 
nation's economy by enabling the establishment and validity of 
small businesses.
    Thank you again for y our effort to improve and reauthorize 
this important program. MDMA appreciates the Committee's 
efforts and supports the reauthorization of the SBIR Program 
incorporating the important changes outlined above and included 
in the Committee's draft legislation.
    Thank you very much.
    [The prepared statement of Mr. Leahey may be found in the 
Appendix on page 54.]

    Chairwoman Velazquez. Thank you.
    And now I welcome Mr. Mark Skinner. He is the Vice 
President of the State Science and Technology Institute. Since 
1996, SSTI has assisted states and community as they build tech 
based economies and encourage cooperation among and between 
state and federal programs.
    Welcome.

  STATEMENT OF MARK SKINNER, VICE PRESIDENT, STATE SCIENCE & 
                      TECHNOLOGY INSTITUTE

    Mr. Skinner. Thank you very much for the opportunity.
    It seems much of my original testimony needs to be 
summarized only briefly because it appears that it is in much 
of the draft legislation, and we appreciate that.
    We also appreciate the support for FAST that has been shown 
by some of the other panelists.
    The Committee recognizes, it appears, the role and value 
that states and local governments play in outreach and 
assistance for SBIR firms. In fact, since the mid-'80s, the 
states have viewed SBIR as a tremendous opportunity for 
economic development through the growth of their high tech 
firms, and I can attest to that from my own personal 
experience.
    My first real job was to look at how SBIR was affecting the 
small businesses in Ohio through the Ohio Department of 
Development, and that was only in the first year of SBIR making 
awards back in 1983-84.
    An appendix to my testimony illustrates nearly every state 
has already established at least one program dedicated to 
supporting SBIR proposal development awareness and in many 
cases direct matching funds for SBIR awards. And additionally, 
there are probably 1,100 to 1,200 programs at the state and 
local level that are supporting technology growth through 
either university commercialization, Phase 3 Angel funds. I 
believe Mr. Matthews in his testimony, that I saw briefly, may 
provide a good example of some of the excellent work being done 
in the Cincinnati area.
    While the agency's perspective is that SBIR results need to 
be commercialized, most states recognize it needs to be 
commercialized within their boundaries, and many of the 
concerns that states brought to SSTI's attention regarding 
FAST, the original introduction of FAST, have also been 
addressed in the draft.
    So I'll direct the rest of my time on comments and initial 
reactions to the draft legislation which I saw this morning.
    This seems to be an awful lot of work for only a two-year 
authorization. Eight years was definitely too long, given the 
changes that have occurred in many industries in how R&D is 
conducted and how innovation occurs, but I believe two years 
will not give you enough time to identify that the changes you 
are making having the desired or potentially deleterious 
effects.
    So possibly something along the lines of five years in 
between would be useful. It also gets you off of the election 
cycle.
    As the National Academy of Sciences mentioned, state 
assistance, even the small FAST grants, seems to make a 
difference, and it does. The carrot that the federal government 
can provide helps direct limited resources toward particular 
audiences that may not get the attention otherwise based on the 
limited resources that states already have that they are 
investing in tech-based economic development.
    There are elements of the bill, however, that could be 
tweaked that would make FAST authorization much more meaningful 
for the small businesses that you are hoping to help.
    I noticed that the award size is set at $250,000. You do 
recognize the need for multi-year awards of three years or more 
to provide continuation or continuity in the programs and 
staffing level and staffing commitments.
    However, the authorization program is only for two years. 
So you're setting some programs up for failure or potential 
problems or challenges by making three-year awards for a two-
year program. So something that we can work out, I believe.
    Also, if the Committee means $250,000 for the full three 
years, then you're inadvertently crippling the programs. So I 
recommend that I think you mean $250,000 per year for the three 
years, which would be matched dollar for dollar by the state 
and local governments, and I think that is a much more 
meaningful value.
    As a result of that though, I recommend that you increase 
the authorization level to $20 million rather than the $10 
million so that you have enough money available to make more 
awards in more states, spreading the geographic reach of the 
program.
    I noticed the exclusion of commercialization activities 
from the list of potential uses of FAST funds, and I believe 
that is a mistake primarily because, based on the awards and 
the way the SBIR Program is set up, most companies will not win 
SBIR awards that receive assistance. So if we can provide a 
structure to help those communities or those companies get into 
the infrastructure that already exists through venture capital, 
Angel capital, then it is a much more meaningful program.
    And I have run out of time, but my other point is just that 
FAST did not work well under SBA in its first go-round. The 
states have recommended that it be moved to or transferred to 
NSF, which provides an environment that is much more conducive 
to the flexibility needed. NSF has the understanding already in 
place of supporting innovation companies.
    Thank you.
    [The prepared statement of Mr. Skinner may be found in the 
Appendix on page 59.]

    Chairwoman Velazquez. Thank you, Mr. Skinner.
    And now I recognize Mr. Chabot for the purpose of 
introducing our next witness.
    Mr. Chabot. Thank you, Madam Chair.
    And I am very pleased to introduce our next witness, and I 
already did that to some degree in my opening statement. I 
should probably mention that Dr. Matthews and I have literally 
known each other since the fourth grade. So it has been a long 
time, and he has been very successful obviously.
    Dr. Charles Matthews is a professor and Executive Director 
at the University of Cincinnati Center for Entrepreneurship, 
Education and Research. An award winning teacher, Dr. Matthews 
has taught over 5,000 students ranging from freshmen to 
doctoral students to executives, from individual instruction to 
classes of up to 540 students.
    He has facilitated over 500 faculty guided, student based 
field case studies, and has served as a consultant to numerous 
organizations, including many family businesses.
    In addition to his consulting practice, Dr. Matthews has 
entrepreneurial and family business experience in the 
automotive, photographic, and real estate industries.
    And we welcome you here, Charlie.

    STATEMENT OR DR. CHARLES MATTHEWS, Ph.D., PROFESSOR AND 
EXECUTIVE DIRECTOR, CENTER FOR ENTREPRENEURSHIP, EDUCATION AND 
     RESEARCH COLLEGE OF BUSINESS, UNIVERSITY OF CINCINNATI

    Mr. Matthews. Thank you very much, Congressman.
    It is a pleasure to be here, and I appreciate the comments. 
Our history does go way back to the fourth grade, but I must 
for the record say that your football career was much more 
distinguished than my football career.
    [Laughter.]
    Mr. Matthews. And you taught me well to avoid the hits.
    Madam Chairwoman, Congressman Chabot, members of the 
Committee, distinguished guests, it is with great enthusiasm 
that I present this testimony in regard to the reauthorization 
of the Small Business Innovation Research Grant Program. It is 
not often one has the opportunity to speak about a government 
program that meets and in many cases exceeds its expectations, 
but in this case I believe the SBIR Program does do that.
    The SBIR Program creates a climate for scientific and 
commercial innovation. It leverages existing resources in the 
community, and consistently provides critical support that is 
often unavailable in the private sector. In short, it works.
    Quite simply, in order to create the future and to reach 
the many and considerable goals of enhancing and improving 
commerce, science and society, we must take the first steps of 
that journey today. It is not enough to say that we want a 
better and brighter future, a more robust economy, a cure for 
cancer, or an improved quality of life for future generations. 
We must take positive and proactive steps to reach those goals. 
We must continue to create an environment that supports the 
pursuit of not only the foundational science needed, but the 
translation and application of that science to productive uses 
in business and society.
    The Small Business Innovation Research Program was 
conceived for just such a purpose. It creates and supports an 
environment that encourages scientific and commercial pursuits 
that are needed and necessary to advance the applied 
technologies fundamental to the attainment of goals that 
benefit the United States and, indeed, the world. It creates an 
environment that supports and encourages innovation.
    Based on data from both the private and public sectors and 
research education, I can testify first hand to the strong, 
positive impact that the SBIR Program has had in southwestern 
Ohio. In the four-county Region V area of Ohio, Butler, 
Clermont, Hamilton and Warren Counties, in 2004 and 2005 there 
were a total of 105 Phase 1 and 2 SBIR grants for 92 different 
ventures totaling nearly $27 million. These SBIR grants cut 
across a broad range of scientific and commercial applications, 
including, but not limited to, biology, chemistry, engineering, 
health care, nanotechnology, and physics, to name but a few.
    The Hamilton County Business Center is an integral part of 
the Hamilton County Development Center, and is one of the most 
successful public incubators in the U.S. Over a dozen current 
and graduate HCBC companies have been able to advance both 
scientific and commercial goals, as well as grow their business 
with an assist from funding connections and processes 
associated with the SBIR Program.
    A brief sample of these ventures include the Maverick 
Corporation, which provides cutting edge materials, 
technologies, setting industry standards for service, and 
developing advanced materials and technologies of the chemical, 
industrial, missile, and space industries, the Modal Shop 
providing structural vibration and acoustic sensing systems to 
engineers worldwide, Sheet Dynamics whose expertise lies in the 
field of mechatronics, which is the synergistic combination of 
mechanical and electrical engineering, and the Advance 
Biological Technologies, which is developing a proprietary 
advanced technology process in diabetes analysis.
    The Hamilton County Business Center not only sees the SBIR 
Program as a strong component of the overall capital strategy 
for the early stage research companies, but also recognizes the 
value to the stability and vitality of many early stage small 
business ventures. The competitive processes of the SBIR 
Program provide companies with a difficult to secure but 
increasingly needed funding to enhance the innovation and 
commercialization processes of these early stage ventures.
    To quote Mr. Pat Longo, Director of the HCBC, without SBIR 
dollars, the number of HCBC best success stories would not have 
made it to being successful product driven, market focused 
companies they are today.
    In addition to the Hamilton County Business Center, 
Southwest Ohio is fortunate to have a state of the art life 
science incubator located on the University of Cincinnati 
campus, BIOSTART. Under the leadership and direction of 
BIOSTART President, Carol Frankenstein, the past ten years bear 
witness to the leveraged success of the creation of an that 
fosters creativity and innovation at the nexus of science and 
commerce.
    The SBIR Program enables these life science companies to 
conduct initial proof of concept and preclinical and clinical 
field studies to move their products to market. To quote Ms. 
Frankenstein, "This is a niche that even early stage funds are 
reluctant to fill because of the high risk and long time to 
market."
    Clearly, the SBIR Program is making a strong and sustained 
difference in advancing these scientific and commercial 
opportunities.
     Finally, I would like to comment on a program which I had 
a hand in helping to start, Cincinnati Creates Companies. 
Together with the University of Cincinnati, the College of 
Business, Engineering and Medicine, and the UC Center for 
Entrepreneurship, Children's Hospital Medical Center, BIOSTART, 
CincyTech USA, and the Hamilton County Business Center, put 
together a hands-on, outcome oriented program that supports 
innovation through the development of people, tools, and the 
infrastructure needed to connect new scientific discoveries to 
practical and commercial applications.
    Overall, the program has worked with over 150 applicants, 
accepting 47 nascent technology ventures into the program 
involving 100 participants. I would like to comment that the 
process here has resulted in a number of companies that have 
received SBIR funding, and that four of the companies are now 
at BIOSTART. I will not go into the details on those companies, 
but those four companies have done quite well.
    It takes a dedicated effort to create and sustain an 
environment that encourages and facilitates the ideation, 
conceptualization, formulation, and implementation of 
technology ventures. The mission mantra for the Center for 
Entrepreneurship is quite simply to remove barriers and create 
gateways for the next generation of entrepreneurs.
    I encourage you to fully consider the vital role that the 
SBIR Program plays in removing barriers and creating gateways 
for future entrepreneurial activity. The SBIR Program 
encourages today's entrepreneurs to aim high and dare to create 
a vibrant future built on foundations of science and commerce.
    Thank you for the opportunity to provide these comments.
    [The prepared statement of Dr. Matthews may be found in the 
Appendix on page 73.]

    Chairwoman Velazquez. Thank you, Dr. Matthews.
    I would like for any of the witnesses to comment on my 
first question. Mr. Preston made the point that small companies 
that are majority owned by venture capital firms can apply for 
97.5 percent of all federal government's R&D dollars. For this 
reason, according to Mr. Preston, these small companies should 
be barred from SBIR participation.
    How would you respond to Mr. Preston's comment? Mr. 
Greenwood?
    Mr. Greenwood. I would respond that while that statement 
may be technically accurate, the fact of the matter is that, 
yes, 97.5 percent of the NIH's budget, and I will speak 
specifically of the NIH, is available to universities and 
businesses, exactly .4 percent of that goes to businesses.
    So the Administrator said 97.5 percent is available; 97.1 
percent continues to go to the universities, and only .4 
percent to businesses. So our companies do not have success. 
The universities are well entrenched, and of course, as we know 
in the case of the NIH, even though we doubled the budget, it 
has been flat since then, and so universities are scrambling to 
try to maintain their existing R&D programs.
    So I do not see, even if Congress continues to increase 
slightly the budget, I do not see a lot, if any, being left for 
small businesses.
    Chairwoman Velazquez. ?Thank you.
    Mr. Heesen. I totally agree with Mr. Greenwood, but I will 
take it from the other side, let's say, the DoD or the 
Department of Energy perspective. You know, if we have a 
venture backed company, once again, it may be 15 employees. 
Realistically, are they able to go up against Lockheed? Are 
they able to go up against Exxon?
    It is totally impractical. These are 15 people companies, 
you know, in the wind, in the solar area. They are not going to 
be able to compete. First of all, they do not have resources to 
even start that process, and then are they really going to have 
a realistic ability to go up against these multinational 
corporations? It is unrealistic.
    Mr. Leahey. In addition to the two previous comments, I can 
only speak to practically what our member companies are saying 
to us, and time and time again, they are coming back and 
saying, ``Do you know what? Because of this new interpretation 
we do not have access to these funds.''
    And I think it is also important, with all due respect to 
Mr. Heesen and his members and some of which are members of 
ours, venture capitalists are looking for, you know, an ROI, 
and there may be certain applications of a technology that may 
not be as profitable, but may serve the greater public good, 
and these are the ones simply because of this investment 
mechanism that will be left on the shelf, and really that is 
the great tragedy here.
    Chairwoman Velazquez. Any other member want to?
    Thank you.
    We should recess now. We have two votes. We will go to vote 
and right after we will come back. So the Committee stands in 
recess.
    [Recess.]
    Chairwoman Velazquez. The Committee is called back to 
order.
    Mr. Skinner, one of the objectives of the SBIR Program is 
to foster and encourage participation by minorities and women 
in the SBIR Program. Despite this fact, a National Academies of 
Science report recently concluded that agencies do not have a 
uniformly positive record funding research by women and 
minority owned firms.
    How will the Federal and State Technology Partnership 
Program, as it is reauthorized in the draft bill, help federal 
agencies address this concern?
    Mr. Skinner. I believe it is very smart of the Committee to 
include in the legislation a requirement that the FAST awards 
specifically address how they are going to identify two 
particular groups: those geographic areas that are not served 
well, and populations that do not win awards. It is going to 
require the state programs and the local programs involved to 
demonstrate what they are already doing in those target 
audiences, but increase or set aside additional funding to 
address particular ways to reach women scientists and engineers 
that they may not be doing currently.
    But I think that is one of the advantages of FAST, is it 
takes advantage of the 1,100 to 1,200 organizations already in 
existence around the country to help the agencies reach into 
places that they cannot reach from their installations or their 
centers.
    Chairwoman Velazquez. Thanks.
    Dr. Matthews, the guidance for Phase 1 and Phase 2 grant 
sizes has not increased since 1992. The Committee print doubles 
the grant size guidelines to $200,000 for Phase 1 and $1.5 
million for Phase 2. Given what you do with small, innovative 
companies, how do you expect larger average awards will impact 
increases in the commerce solicitation rates of SBIR funded 
research?
    Mr. Matthews. That is an excellent question because 
obviously things have changed over a period of time, and costs 
have gone up across a number of sectors and in a variety of 
areas.
    Specifically with regard to the amount of money that is 
needed especially in early, early stages, which is, I think, 
one of the hallmarks of the strengths of SBIR, has escalated 
over time. Especially a lot of them have long lead times. There 
is a need for more capital expenditure at the front end of that 
period. So I would support those increases.
    Again, I think this is a leverage program. I do not think 
it ever can stand all by itself. It has to be used in 
combination with other sources of capital, and the source of 
capital is a broad continuum from friends, families, and 
founders all the way up to venture capital, and SBIR falls 
within that continuum. So I would definitely support that 
increase.
    Chairwoman Velazquez. Thank you.
    Mr. Heesen, an important component of small firms' efforts 
to commercialize the research can be the receipt of an 
investment from firms such as those that you represent. Why do 
initiatives that help small firms develop the research to a 
greater degree of commercial readiness before they graduate 
from SBIR encourage more VC firms to invest in SBIR graduates?
    Mr. Heesen. As Mr. Leahey said, we are not in this totally 
for altruistic purposes. We are in this to make money at the 
end of the day, and so the more certain you are of a company's 
trajectory, the more likely you are to invest in it.
    And so if you see the commercial viability of an entity 
being much greater because you have basically grown that 
company to the point where it is just better to see what the 
future is, you are going to be more apt to invest in that 
company, just as you will be more apt to know if it has good 
patent protection, if it has a good management team, if it has 
an ability to grow a business long term because it understands 
global competition.
    All of these things are part and parcel of growing a 
company. So if you are able to make these companies more 
professional, frankly, and more apt to understand the nuances 
of working in a fast changing environment, we are more likely 
to invest at the end of the day.
    Chairwoman Velazquez. Thank you.
    Mr. Greenwood, my understanding is that venture capital 
investments are often tied to the development of companies' 
lead therapies or technologies. In your industry, this means 
that companies cannot use the investment to fund research and 
development of secondary applications of the lead therapy.
    If the SBIR eligibility provisions included in this bill 
became law, how would small firms with venture capital backing 
be better able to explore secondary applications of their 
firm's lead research?
    Mr. Greenwood. Thank you.
    That is an important question. What frequently will happen 
is if you can imagine a small company that might have spun out 
of the university from NIH granted research and develop a 
molecule that it thinks is a very good candidate to, let's say, 
cure prostate cancer, and they make enough progress with the 
help of, among other things, SBIR grants, and then the venture 
capital companies see them and say, ``This company really shows 
some progress with this molecule. Let's invest in it.''
    And so they invest, and they invest in that particular 
molecule to cure that particular kind of cancer. Meanwhile, 
back in the laboratory, there may be a scientist who says, ``Do 
you know, I think from my research that same molecule might be 
able to cure brain cancer?`` or, ``we have another molecule or 
another protein here that we think can do something else.''
    The venture capitalist may say, ``That is very nice, but 
that is not why we invested. We watched the progress on that 
first compound or molecule, and we want you to keep our money 
there.''
    Under the current system, since the Administrative Law 
Judge ruling, that company cannot go back to the SBIR and say, 
``How about you fund this new idea?'' Under your proposed draft 
they will be able to, and that is critical because having that 
opportunity to then get some data with that new molecule, to 
get some advancement in their research. Then they can achieve 
the kind of milestone or proof of concept that then will 
attract the venture capitalists or other venture capitalists to 
come and say, ``Okay. Now, that one is worth investing in as 
well.''
    And at the end of the day, this is about whether we do or 
do not cure brain cancer, and that is why in my view the bottom 
line of this entire program is we put all of that money in the 
NIH because we want to cure disease, and we ought to construct 
a system for small businesses, whether they are backed by 
venture capital or not backed by venture capital, that gets us 
to the goal: cure disease. We need to keep our eye on that 
ball.
    Chairwoman Velazquez. Thank you.
    Mr. Greenwood. Thank you.
    Chairwoman Velazquez. I now recognize Mr. Chabot.
    Mr. Chabot. Thank you, Madam Chair.
    Mr. Greenwood, I will begin with you if I can, and as the 
chair mentioned before, we want to welcome you back here.
    Mr. Greenwood. It is a pleasure.
    Mr. Chabot. You have testified before, and in your years 
here as a member of Congress, you were one of the more 
respected members on both sides of aisle because of your 
integrity and working across party lines.
    Mr. Greenwood. That is very kind to have you say that.
    Mr. Chabot. So it is good to have you here. It is very 
true.
    Mr. Greenwood. Thank you.
    Mr. Chabot. Now I will ask you the tough questions.
    [Laughter.]
    Mr. Chabot. No.
    Mr. Greenwood. And I will try to make a good answer.
    Mr. Chabot. Although it does come up in several other 
industries, the venture capital issue seems to come up and I 
think it is most prevalent in the biomedical field, and could 
you explain why that is the case?
    Mr. Greenwood. Yes. This is a highly, highly risky 
business. I was at Amgen's facility. Amgen is one of the 
biggest, if not the biggest, biotech companies in the world. I 
was at their facility in Boulder, Colorado last week, and they 
went through a presentation. They will take 150 different 
compounds or molecules and begin to try to bring each and every 
one of them to a place where it can cure a disease. The 
attrition of the process of success and failure is such that 
one of those 150 ultimately makes it to the FDA.
    This is hard science, and it is risky science. And what 
happens is, typically as I said, an academician will develop 
something. They spin off a little company, and they find 
themselves squarely in the valley of death because they know 
they have a good idea. The brilliant scientists really believe 
in this product, this compound, this molecule, but Mr. Heesen's 
people are going to be skeptical. They have lots of 
opportunities, and they are risk takers, but they are not 
extraordinarily foolish risk takers.
    So the public-private partnerships, be it SBIR grants, be 
it state programs that nurture these little companies, are all 
there for the purpose of helping these entrepreneurial 
scientists get through the valley of death, prove or not prove 
that they have something here, and then that is the point that 
the venture capitalists will come in.
    And I can tell you and Mr. Heesen can tell you when you 
talk to investors today, they are not rushing into the biotech 
space. They know all kinds of policies that the state and 
federal governments can adopt. They can contribute to our 
success or failure.
    We cannot do this without the venture capital 
contributions, and as I have said before, you know, it is clear 
from the congressional record that congress said years ago when 
a company attracts venture capital, it is a very good sign that 
some very smart and skeptical people think they are onto 
something, and we want to reward companies that can achieve 
that level of credibility, not punish them.
    Mr. Chabot. Thank you very much.
    Mr. Heesen, I will go to you next if I can. Would you 
expound upon why you consider the SBA, or Small Business 
Administration's position on independent ownership and control 
unacceptable as it applies to venture capital firms?
    Mr. Heesen. Sure. As stated in my testimony, when you look 
at a venture capital firm, it is normally about a dozen 
individuals that are employed by that firm, sometimes literally 
only two or three. You know, you look at the ones in your 
hometown. Blue Chip is the largest, and if they have ten people 
I would be surprised, and yet they have a major impact on the 
Cincinnati economy.
    So these are very small entities. Now, over the process of 
having a fund, they may invest in 20 companies. That is high. 
Maybe 15 companies. Now, when you invest in those companies 
early on, they may have five, six, ten employees. What you want 
to do as you are investing in these companies is to grow those 
companies, of course.
    So hopefully you will have companies at the end that have 
several hundred employees because you have grown those small 
companies just like you want to. So if you start to aggregate a 
venture capital firm and all of the other venture capital firms 
that you are going to co-invest with because you do not invest 
in a biotechnology company on your own; you do not have that 
much money, particularly in the Midwest. You are going to get 
four or five venture capital firms who are going to put their 
resource together and invest in that biotechnology company.
    So you have four or five who have ten employees. So that is 
50, but then they all have different portfolio companies out 
there. I might have 15. Another person might have ten. Another 
firm might have eight, and they all have, you know, seven to 
ten employees, but you also have some of those growing 
companies.
    It is very easy to get to that 500 person, and of course, 
that is what you want. You want to be growing these companies. 
So the idea that you are aggregating all of these companies and 
they could be biotechnology companies; they could be clean tech 
companies; they can be IT companies because a venture 
capitalist invests in lots of different areas. They might have 
absolutely no correlation, but under what the SBA is doing is 
literally aggregating all of those employees and saying, ``You 
now are a large entity and, therefore, that one particular 
company that is in the portfolio cannot get an SBIR grant.''
    It just does not make sense at the end of the day.
    Mr. Chabot. Okay. Thank you very much.
    Mr. Leahey, I hope I am pronouncing that correctly.
    Mr. Leahey. Yes, you are.
    Mr. Chabot. Okay. Could you explain further why you believe 
it is important that the award amounts be increased?
    Mr. Leahey. Certainly. Well, I think as Dr. Matthews had 
stated as well, you know, since 1992 obviously the landscape 
has changed significantly, and although the SBIR funding is not 
the only source of funding, obviously, it is part of that 
public-private relationship. I do not think you will find 
anyone who will argue about the increasing regulatory 
requirements that are needed at the FDA as it relates to user 
fees, things of that nature.
    The clinical data that is required to satisfy the payer 
community, both the private insurers and the CMS; so throughout 
the research and development and life cycle of an early stage 
company, before they get to commercialization, they are looking 
ahead and saying, ``Okay. I have got to meet all of these 
endpoints here to satisfy the FDA, to satisfy CMS or the 
private payers, to satisfy the markets,'' and not having that 
move at all since 1992, I do not think sensitizes or appreciate 
the changing landscape.
    That being said, there is a lot of promise ahead, but I do 
not think anyone can argue that some of the hurdles have been 
increased. And so increasing that threshold, I think, coupled 
with increasing or allowing small companies regardless of their 
venture capital investment structure to have access to these 
funds, I think, will really, as Mr. Heesen said, achieve the 
objective insuring that the government and the private sector 
work together to develop the best technologies to really 
deliver the care that is needed in the future.
    So I commend the committee for the draft for increasing 
those limits.
    Mr. Chabot. Thank you.
    Mr. Skinner, would you comment on the geographic disparity 
of awardees and why in your opinion some areas of the country 
are getting more SBIR grants than some others?
    Mr. Skinner. Yes, thank you.
    Some of it is inherent to the population centers. More 
demographically large states are going to receive more awards 
than some of the other states. There is also, at least in my 
experience, as one moves away from Washington and certain 
research centers around the country, one does not think of the 
federal government as a source of funding for this type of 
work, or they do not think of it as a friend actually for the 
most part.
    And this is particularly the case and is reported to me by 
folks in New Mexico, even though they have the large federal 
labs. They will say companies just do not even think of 
applying for it.
    In the other situations there is not the infrastructure 
necessarily there to support an environment that encourages 
entrepreneurship, and that is why states are making an 
investment to try to encourage that kind of thinking, that kind 
of risk taking, and that is where SBIR and outreach and 
assistance efforts can be helpful.
    Mr. Chabot. Thank you very much.
    And finally, Dr. Matthews, what role does the SBIR program 
have in Cincinnati that creates companies, that project and any 
other programs or projects that you would like to mention?
    Mr. Matthews. Thank you.
    First of all, I am very impressed by the testimony and the 
wide range of issues that have been brought up here because I 
am more at the early, early, early, early, early, early--did I 
get six in there?--early stage.
    [Laughter.]
    Mr. Matthews. I live in the ideation/conceptualization 
world more than a lot, but I completely support what Mr. Heesen 
is saying in terms of venture capital backed ventures, and that 
is where Cincinnati Creates Companies came into play. We 
identified this gap that exists at that early stage, very early 
stage, where we have individuals who are extremely interested 
in moving forward science and technology, but just do not know 
how to do it, do not know what to do or how to go about it.
    We conceived Cincinnati Creates Companies around that very 
notion, and it is a three-part program. The first part is a 
very rigorous ten-week educational program. We put them through 
their paces. It is kind of an advanced boot camp, if you will, 
over ten weeks; a 15-week structured mentor relationship. So we 
actually have a mentor come in and work with them oftentimes 
from the Angel or VC community on a volunteer basis.
    Then we have a competition because nothing motivates people 
like getting together and trying to compete against each other 
in these situations because that is what they are going to be 
doing from that point forward.
    And so they compete and they get some funding from that 
what I call trouble money because it is not enough to really do 
anything with but get them in trouble, but that is a good thing 
because that really propels them forward.
    SBIR becomes a critical component of that as they move 
through that process, as they become aware of it, especially as 
I mentioned for some of our BIO life ]science companies that 
are at the BIOSTART incubator. This has been particularly 
critical for them, and some have been very successful at moving 
from the bench forward, which again I apologize. I think it was 
Mr. Heesen or Mr. Greenwood said that people are not rushing to 
fund a lot of these things at that early, early stage. So SBIR 
is critical at that point to make that happen, and I certainly 
saw that with Cincinnati Creates Companies.
    Now, we had NSF funding for that program over three years, 
and we had a one-year extension. We put four cohorts through 
that program. We are trying to keep it going at CincyTech. 
CincyTech now is trying to use some of their Third Frontier 
money in Ohio to keep that program alive and moving forward.
    So I would very much like to see SBIR play a key role in 
that, and I keep in touch with the 47 graduates of the program 
very extensively and just was in conversation with one, Dr. 
George Weber, who is working on a molecule for cancer, a very 
good example, and I see him as prime, prime to get an SBIR to 
move his process forward.
    He just competed very successfully at the Purdue Life 
Sciences Business Plan competition. So, yes, critical, just 
very critical.
    Chairwoman Velazquez. Would the gentleman yield?
    Mr. Chabot. I would be happy to yield.
    Chairwoman Velazquez. Dr. Matthews, we created a program 
for Phase 1 and 2 primer that will provide technical assistance 
for Phase 1 and then on Phase 2, for those, you know, Ph.D. 
researchers that have something really good, but they do not 
have the skill in terms of how to run a company. So you will be 
supportive of that?
    Mr. Matthews. Absolutely. Again, in the academic world you 
have professors who are very adroit and adept at the science 
side, and you have those that are very adroit and adept at the 
business side, but they rarely exist in the same space So 
getting those folks together or getting one trained on the 
other side is critical.
    A great case in point, in my graduate MBA class I often 
have engineering students. Four or five years ago I had an 
engineering student show up in my spring quarter class. He is 
an engineer through and through. You know, business was not in 
his vocabulary, but he was a co-patent holder on some type of 
MEMS-based technology that was very promising in the liquid 
cooling side of the house for electronic applications. He went 
through my regular MBA program. He graduated and actually 
applied to and was part of our Cincinnati Creates Companies 
Program, and he has moved that program forward tremendously at 
this point.
    Now, he is being incubated out at the Siemens Business and 
Technology Park in San Francisco. He will probably be applying 
for an SBIR in the not too distant future. I would be a little 
concerned that now he has gotten a little bit of backing that 
he would be excluded from that, but you know, without that 
training, he would not be in the position that he is in now.
    Mr. Chabot. Yes, Mr. Greenwood.
    Mr. Greenwood. There is a point that I failed to make in 
response to Mr. Chabot's question, which is why our industry is 
so particularly reliant upon venture capital. If you are a 
small business and you make widgets, it is not a very long 
period of time until you can start selling your widgets, and 
then you derive revenues from those sales, and you can become 
completely self-sufficient.
    In the biotechnology world, once you get a patent for your 
molecule, let's say, you have a ten to 12 to 15-year long 
period for you to develop that to the point where you can test 
it in animals and then do Phase 1 clinical trials in humans and 
Phase 2 and Phase 3 and take it to the FDA.
    And throughout all of that period, throughout all of that 
time, and by the time you get to the FDA you have spent 
hundreds of millions of dollars, you have to raise all of that 
money usually without a penny of revenue from sales, and you 
cannot get there without at some point becoming more than 50 
percent owned by venture capital. There is just no other way to 
do it.
    And that is why this rule is so nonsensical.
    Mr. Chabot. Thank you.
    Madam Chair, I want to commend you for putting together 
such a fine panel here, and it was extremely informative, and 
we appreciate the testimony of all the witnesses, and I will 
yield back the balance of my time.
    Chairwoman Velazquez. Thank you.
    I have two more questions or maybe three. Mr. Greenwood, 
the draft bill includes provisions that require federal 
agencies to establish an SBIR advisory board that includes 
private sector representatives. The bill also requires agencies 
to release regular research solicitations and to issue a final 
decision on an SBIR application within 90 days after the agency 
received the application.
    How will these provisions impact the small research firms 
that are members of your organizations?
    Mr. Greenwood. Well, I think it would be useful. I think 
the one sensitivity I would raise is that in some of these 
agencies already have peer review panels, and so what you want 
to do is be careful to avoid redundancy there, but I like the 
idea that you would have two representatives from small 
business there to make sure that the review gets that 
perspective, and I certainly think anything that gives you 
certainty with regard to the turnaround time of your 
application would be very helpful.
    Chairwoman Velazquez. Thank you.
    I want to ask the question that I engaged the Administrator 
regarding the use of one percent of funds set aside for SBIR 
research to pay for administrative costs associated with 
commercialization programs, and current law authorizes the 
Department of Defense to use it.
    The draft legislation takes a different approach, and I 
would like either Mr. Leahey or Mr. Greenwood to comment on 
this.
    Instead of re-purposing scarce research dollars, it 
authorizes an appropriation to the SBA equal to approximately 
one percent of the set-aside for a fund that federal agencies 
can draw on to support new commercialization initiatives. Do 
you support this approach to funding federal agency efforts to 
help small firms commercialize SBIR funded research?
    Mr. Leahey. Madam Chairman, yes, we do. I think it is an 
important mechanism. Again, it supports the overall objective 
of the SBIR Program. So to the extent that these funds could be 
used to administer or provide additional commercialization or 
training activities to help educate these entrepreneurs, I 
think, is consistent with the overall objective of the program, 
and certainly something we could support.
    Mr. Greenwood. I think very straightforwardly, if the 
Congress is able to authorize the appropriations of these funds 
to cover the administrative costs, it is more money left for 
R&D, and that is what the program is all about.
    Chairwoman Velazquez. Yes. Well, I want to thank all of the 
witnesses. It has been quite an insightful hearing today, and 
we will continue to work on this reauthorization and expect to 
mark up the bill soon and in consultation with, of course, the 
minority, Mr. Chabot.
    And I ask at this point consent that members will have five 
days to submit a statement and supporting materials for the 
record. Without objection, so ordered.
    This hearing is now adjourned. Thank you.
    [At 12:21 p.m., the Committee hearing was adjourned.]

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