[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]



                     THE ROLE OF THE SBIR AND STTR
                   PROGRAMS IN STIMULATING INNOVATION
                     AT SMALL HIGH-TECH BUSINESSES

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

                                HEARING

                               BEFORE THE

               SUBCOMMITTEE ON TECHNOLOGY AND INNOVATION

                  COMMITTEE ON SCIENCE AND TECHNOLOGY
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 23, 2009

                               __________

                           Serial No. 111-20

                               __________

     Printed for the use of the Committee on Science and Technology


     Available via the World Wide Web: http://www.science.house.gov

                                 ______


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                  COMMITTEE ON SCIENCE AND TECHNOLOGY

                   HON. BART GORDON, Tennessee, Chair
JERRY F. COSTELLO, Illinois          RALPH M. HALL, Texas
EDDIE BERNICE JOHNSON, Texas         F. JAMES SENSENBRENNER JR., 
LYNN C. WOOLSEY, California              Wisconsin
DAVID WU, Oregon                     LAMAR S. SMITH, Texas
BRIAN BAIRD, Washington              DANA ROHRABACHER, California
BRAD MILLER, North Carolina          ROSCOE G. BARTLETT, Maryland
DANIEL LIPINSKI, Illinois            VERNON J. EHLERS, Michigan
GABRIELLE GIFFORDS, Arizona          FRANK D. LUCAS, Oklahoma
DONNA F. EDWARDS, Maryland           JUDY BIGGERT, Illinois
MARCIA L. FUDGE, Ohio                W. TODD AKIN, Missouri
BEN R. LUJAN, New Mexico             RANDY NEUGEBAUER, Texas
PAUL D. TONKO, New York              BOB INGLIS, South Carolina
PARKER GRIFFITH, Alabama             MICHAEL T. MCCAUL, Texas
STEVEN R. ROTHMAN, New Jersey        MARIO DIAZ-BALART, Florida
JIM MATHESON, Utah                   BRIAN P. BILBRAY, California
LINCOLN DAVIS, Tennessee             ADRIAN SMITH, Nebraska
BEN CHANDLER, Kentucky               PAUL C. BROUN, Georgia
RUSS CARNAHAN, Missouri              PETE OLSON, Texas
BARON P. HILL, Indiana
HARRY E. MITCHELL, Arizona
CHARLES A. WILSON, Ohio
KATHLEEN DAHLKEMPER, Pennsylvania
ALAN GRAYSON, Florida
SUZANNE M. KOSMAS, Florida
GARY C. PETERS, Michigan
VACANCY
                                 ------                                

               Subcommittee on Technology and Innovation

                      HON. DAVID WU, Oregon, Chair
DONNA F. EDWARDS, Maryland           ADRIAN SMITH, Nebraska
BEN R. LUJAN, New Mexico             JUDY BIGGERT, Illinois
PAUL D. TONKO, New York              W. TODD AKIN, Missouri
DANIEL LIPINSKI, Illinois            PAUL C. BROUN, Georgia
HARRY E. MITCHELL, Arizona               
GARY C. PETERS, Michigan                 
BART GORDON, Tennessee               RALPH M. HALL, Texas
                 MIKE QUEAR Subcommittee Staff Director
        MEGHAN HOUSEWRIGHT Democratic Professional Staff Member
            TRAVIS HITE Democratic Professional Staff Member
         HOLLY LOGUE PRUTZ Democratic Professional Staff Member
             DAN BYERS Republican Professional Staff Member
                  VICTORIA JOHNSTON Research Assistant















                            C O N T E N T S

                             April 23, 2009

                                                                   Page
Witness List.....................................................     2

Hearing Charter..................................................     3

                           Opening Statements

Statement by Representative David Wu, Chair, Subcommittee on 
  Technology and Innovation, Committee on Science and Technology, 
  U.S. House of Representatives..................................     8
    Written Statement............................................     9

Statement by Representative Judy Biggert, Acting Ranking Minority 
  Member, Committee on Science and Technology, U.S. House of 
  Representatives................................................     9
    Written Statement............................................    11

Prepared Statement by Representative Harry E. Mitchell, Member, 
  Subcommittee on Technology and Innovation, Committee on Science 
  and Technology, U.S. House of Representatives..................    12

                               Witnesses:

Dr. Robert M. Berdahl, President, Association of American 
  Universities
    Oral Statement...............................................    12
    Written Statement............................................    14
    Biography....................................................    17

Mr. James C. Greenwood, President and CEO, Biotechnology Industry 
  Organization (BIO)
    Oral Statement...............................................    18
    Written Statement............................................    20
    Biography....................................................    23

Dr. Sally J. Rockey, Acting NIH Deputy Director, Extramural 
  Research, National Institutes of Health, U.S. Department of 
  Health and Human Services
    Oral Statement...............................................    23
    Written Statement............................................    26
    Biography....................................................    28

Mr. Jere N. Glover, Attorney and Executive Director, Small 
  Business Technology Council, Washington, DC
    Oral Statement...............................................    29
    Written Statement............................................    31
    Biography....................................................    46

Discussion.......................................................    81

              Appendix: Answers to Post-Hearing Questions

Dr. Robert M. Berdahl, President, Association of American 
  Universities...................................................   112

Mr. James C. Greenwood, President and CEO, Biotechnology Industry 
  Organization (BIO).............................................   115

Dr. Sally J. Rockey, Acting NIH Deputy Director, Extramural 
  Research, National Institutes of Health, U.S. Department of 
  Health and Human Services......................................   118

Mr. Jere N. Glover, Attorney and Executive Director, Small 
  Business Technology Council, Washington, DC....................   123

 
  THE ROLE OF THE SBIR AND STTR PROGRAMS IN STIMULATING INNOVATION AT 
                       SMALL HIGH-TECH BUSINESSES

                              ----------                              


                        THURSDAY, APRIL 23, 2009

                  House of Representatives,
         Subcommittee on Technology and Innovation,
                       Committee on Science and Technology,
                                                    Washington, DC.

    The Subcommittee met, pursuant to call, at 2:35 p.m., in 
Room 2318 of the Rayburn House Office Building, Hon. David Wu 
[Chair of the Subcommittee] presiding.


                            hearing charter

               SUBCOMMITTEE ON TECHNOLOGY AND INNOVATION

                  COMMITTEE ON SCIENCE AND TECHNOLOGY

                     U.S. HOUSE OF REPRESENTATIVES

                     The Role of the SBIR and STTR

                   Programs in Stimulating Innovation

                     at Small High-Tech Businesses

                        thursday, april 23, 2009
                          1:00 p.m.-3:00 p.m.
                   2318 rayburn house office building

I. Purpose

    On Thursday 24 April, the Subcommittee on Technology and Innovation 
of the Committee on Science and Technology will hold a hearing to 
examine the role of the Small Business Innovation Research (SBIR) and 
the Small Business Technology Transfer (STTR) Programs in supporting 
innovation at small high-tech firms and how, in turn, this promotes the 
economic welfare of the Nation.

II. Witnesses

Dr. Robert Berdahl is the President of the Association of American 
Universities.

Mr. James Greenwood is the President and CEO of Biotechnology Industry 
Organization (BIO).

Dr. Sally Rockey is the Acting NIH Deputy Director for Extramural 
Research at the National Institutes of Health (NIH).

Mr. Jere Glover is the Attorney and Executive Director at the Small 
Business Technology Council.

III. Hearing Issues

          How could the SBIR and STTR effectiveness be improved 
        in promoting innovation in today's global R&D enterprise?

          Are the current SBIR (2.5 percent) and STTR (0.3 
        percent) set asides appropriate?

          How effective are the SBIR and STTR programs at 
        stimulating innovation at small high-tech firms?

          What is the role and importance of small high-tech 
        firms to the US innovation cycle and to foster economic growth?

          Should small high-tech businesses with venture 
        capital investment be allowed to participate in the SBIR and 
        STTR programs?

IV. Background

SBIR
    Congress has demonstrated an ongoing interest in the small business 
sector. Addressing issues related to economic growth and 
competitiveness, special consideration has been given to small, high 
tech firms for several reasons, including the fact that data indicates 
such companies tend to be highly innovative, play a significant role in 
technological advancement, and contribute to a high standard of living 
in the United States. Such was the rationale behind legislation 
creating the SBIR program, reflecting an effort to increase that 
portion of the federal research and development (R&D) budget provided 
to small enterprises for work associated with the mission 
responsibilities of government departments and agencies. Believing that 
small companies were under-represented in government R&D activities, 
P.L. 97-219 established agency SBIR programs to guarantee this sector a 
portion of the government's research and development budget to 
compensate for what was viewed as a federal contracting preference for 
large corporations.
    Current law requires that every federal department with an 
extramural R&D budget of $100 million or more establish and operate a 
SBIR program. Generally, a set percentage of that agency's extramural 
research and development budget--currently set at 2.5 percent--is to be 
used to support mission-related work in small companies. To be eligible 
to compete in the program, a company must be independently owned and 
operated; not dominant in the field of research proposed; for profit; 
the employer of 500 or fewer people; the primary employer of the 
principal investigator; and at least 51 percent owned by one or more 
U.S. citizens or lawfully admitted permanent resident aliens.\1\ 
Subsidiaries of SBIR-eligible companies are also eligible to 
participate as long as the parent company meets all SBIR requirements.
---------------------------------------------------------------------------
    \1\ The House passed H.R. 5819 altered the previous eligibility 
requirements to permit majority venture capital ownership of small 
firms in the SBIR and STTR programs.
---------------------------------------------------------------------------
    Agency SBIR efforts involve a three-phase activity. In the first 
phase, awards up to $100,000 (for six months) are provided to evaluate 
a concept's scientific or technical merit and feasibility. The project 
must be of interest to, and coincide with, the mission of the 
supporting organization. Projects that demonstrate potential after the 
initial endeavor may compete for Phase II awards of up to $750,000 
(lasting one to two years) to perform the principal R&D. Phase III 
funding, directed at the commercialization of the product or process, 
is expected to be generated in the private sector. Federal dollars, but 
not SBIR funds, may be used if the government perceives that the final 
technology or technique will meet public needs. P.L. 102-564 directed 
agencies to weigh commercial potential as an additional factor in 
evaluating SBIR proposals.
    As of FY 2008, 11 departments administer SBIR programs, including 
the Departments of Agriculture, Commerce, Defense (DOD), Education, 
Energy, Health and Human Services (HHS), Homeland Security, and 
Transportation; the Environmental Protection Agency; the National 
Aeronautics and Space Administration (NASA); and the National Science 
Foundation (NSF). Each agency's SBIR activity reflects that 
organization's management style. Individual departments select R&D 
interests, administer program operations, and control financial 
support. Funding may be disbursed in the form of contracts, grants, or 
cooperative agreements. Separate agency solicitations are issued at 
established times.
    The SBA created broad policy and guidelines under which individual 
departments operate SBIR programs. The agency monitors and reports to 
Congress on the conduct of the separate departmental activities.

STTR
    A pilot effort to encourage commercialization of university and 
federal laboratory R&D by small companies was created by P.L. 102-564 
and reauthorized several times through FY 2009. The STTR program 
provides funding for research proposals that are developed and executed 
cooperatively between a small firm and a scientist in a research 
organization and fall under the mission requirements of the federal 
funding agency. Up to $100,000 in Phase I financing is available for 
one year; Phase II awards of up to $750,000 may be made for two years. 
Currently funded by a set-aside of 0.3 percent of the extramural R&D 
budget of departments that spend over $1 billion per year on this 
effort, the Departments of Energy, Defense, and Health and Human 
Services, NASA, and NSF participate in the STTR program.
    The SBIR program has been extended several times and was scheduled 
to terminate on September 30, 2008. In the 110th Congress, several 
bills were introduced to reauthorize and alter the SBIR initiative. 
H.R. 5819 passed the House on April 23, 2008, and S. 3362 was reported 
from the Committee on Small Business and Entrepreneurship on August 22, 
2008. Although no specific legislation reauthorized the program, the 
Small Business Administration determined that P.L. 110-235 temporarily 
extended the SBIR activity through March 20, 2009. P.L. 111-10 provides 
another extension of the program through July 31, 2009.

110th Congressional Hearings

    Hearings were held in the 110th Congress on April 26, 2007 and June 
26, 2007 (Serial Nos. 110-23 and 110-43, respectively).
    The first hearing\2\ focused on several important issues for the 
future of the SBIR and STTR programs, including: the degree to which 
the current programs are meeting their objectives; the adequacy of the 
award levels; strategies to maximize small businesses participation and 
increase participation by women and minority owned small businesses; 
the programs' effectiveness in promoting product commercialization; 
covering administrative costs; and the appropriate role for venture 
capital-backed small businesses.
---------------------------------------------------------------------------
    \2\ The following is taken from the Summary of Activities of the 
Committee on Science and Technology U.S. House of Representatives for 
the One Hundred and Tenth Congress, 4.6(c).
---------------------------------------------------------------------------
    Chair Wu opened the hearing by discussing the benefits of the SBIR/
STTR programs, such as the stimulation of high-tech innovation and 
strengthening U.S. competitiveness. He then invited witnesses to 
address topics such as the size of the awards, broadening the 
participation of small business, creating funding within the program 
for administrative costs, and determining the extent of participation 
by venture capitalists. Both Chair Wu and Ranking Member Gingrey 
emphasized the role that these programs have in moving ideas from the 
laboratory to the marketplace, particularly innovative work on health 
care issues such as diabetes and Alzheimer's research.
    Mr. Held, the Director of the Force Development and Technology at 
the RAND Arroyo Center at RAND Cooperation, stated that the DOD SBIR 
program could benefit from changes that would make the program more 
effective in generating technology and products that are utilized by 
the Armed Forces. He suggested that more flexibility in the 
solicitation and funding process would enhance the program. He called 
for increases in the minimum awards for Phase I and Phase II and 
advised a set-aside for administrative expenses.
    Mr. Baron, the Executive Director of the Coalition for Evidence-
Based program Policy at the Council for Excellence in Government, 
opened with examples of SBIR successes in the computer and biomedical 
fields and said that the program had led to multiple scientific 
breakthroughs and commercial successes. He cited GAO and DOD data that 
suggests that the projects which fail to meet commercial success are 
often in firms lacking entrepreneurial capabilities, and recommended 
that SBIR consider methods to build up entrepreneurial skills. In 
response to a question by Chair Wu regarding using a portion of funding 
for administrative costs, Mr. Baron as well as Mr. Schmidt and Mr. 
Held, cautioned that an administrative set-aside could draw funds away 
from program goals and create disincentives for good management.
    Mr. Schmidt, the founder and Chairman of Cleveland Medical Devices 
and Orbital Research Inc., expressed concern that the U.S. was falling 
behind in the creation of technological products and jobs. He described 
some benefits of SBIR and STTR such as helping universities to 
strengthen commercialization and job creation at small high-tech firms. 
He cautioned against proposals that would give SBIR funds to large 
companies or blur its research focus and recommended a gradual doubling 
of the programs.
    Dr. McGarrity, the Executive Vice President of Scientific and 
Clinical Affairs at VIRxSYS Corporation, explained that biotechnology 
research takes a lot of time and a large initial expenditure. He 
criticized the SBA decision to exclude some venture capital (VC) backed 
businesses from SBIR and stated that his firm had to abandon promising 
research in cystic fibrosis and laid off employees as a result of the 
ruling. He stated that his company is willing to compete with VC backed 
companies for SBIR funds on the basis of scientific and technical 
merit, and believes that science suffers from the exclusion of firms 
that have a commercialization track-record. In response to a question 
by Mr. Wu about the impact of the SBA ruling, Dr. McGarrity argued that 
the SBA rule led to ineligibility of businesses based not on the number 
of employees of their own business, but on the number of employees in 
their VC backing firms.
    Mr. Ignati, the President and CEO of Synapse Biomedical Inc., 
recommended that the minimum award for Phase I and Phase II be 
increased from their 1992 amounts and that the agencies administering 
the SBIR program be granted more flexibility making administrative 
decisions. He also recommended that companies be allowed to apply for 
Phase II grants without having first received a Phase I grant. He then 
expressed his concern that the SBIR program is not able to increase 
participation of innovative high-tech firms as a result of the SBA 
ruling excluding VC backed firms. He recommended that all VC backed 
firms be allowed to participate in SBIR.
    The second hearing\3\ focused on the following issues: program 
trends; outreach to encourage new applicants and reaching out to a 
diverse pool of applicants; program data and tracking; and the role of 
procurement in enabling commercialization. Chair Wu opened the hearing 
by discussing the large growth of the SBIR and STTR programs, which are 
now the largest government programs supporting research and development 
at small companies. He emphasized the programs' duties to promote 
efficiency in operations and maximum public benefit. In Ranking Member 
Phil Gingrey's opening statement, he explained that every department 
and agency with an R&D budget exceeding $100 million must provide 2.5 
percent of this budget for research at small companies, resulting in 
more than $2 billion in funds across the agencies. The goal of these 
programs, he said, is to stimulate competitiveness and innovation. He 
was optimistic about past achievements of the programs and the prospect 
of future success.
---------------------------------------------------------------------------
    \3\ The following is taken from the Summary of Activities of the 
Committee on Science and Technology U.S. House of Representatives for 
the One Hundred and Tenth Congress, 4.6(e).
---------------------------------------------------------------------------
    Mr. Caccuitto, the SBIR and STTR Program Coordinator at the Office 
of Small Business Programs and the DOD, said that the SBIR and STTR 
programs at the DOD are crucial in seeding innovation for defense 
technologies. Each ``constituent'' military department and defense 
agency has its own program, with centralized oversight and 
decentralized management, with the total DOD SBIR/STTR budget across 
all military departments at over $1.26 billion. DOD funds about one in 
seven SBIR Phase I proposals and one in five STTR proposals.
    Ms. Goodnight, the SBIR and STTR Program Coordinator at the Office 
of Extramural Research of NIH at HHS, emphasized that program 
flexibility is the key to fulfilling SBIR and STTR goals at NIH. She 
noted that the programs have not grown at the rate of other NIH 
programs due to firms losing eligibility, going out of business, or 
perceived lack of participation incentives. She discussed NIH's 
development of Performance Outcome Data Systems for data tracking that 
help to monitor achievements of awardees. In response to a question by 
Ranking Member Gingrey about the effect of the 2003 SBA ruling on 
venture capital-backed companies' participation in the program, Ms. 
Goodnight stated that the nature of biotechnology research requires 
venture capital to fund expensive trials. She described some cases 
where important research was halted as a result of the ruling.
    Mr. James, the SBIR and STTR Program Manager and Acting Director at 
the Small Business Research Division at the DOE, said that, like at the 
DOD, the Department of Energy has a balance of centralized and 
decentralized management for their SBIR and STTR programs. He explained 
that the Department hosts State-sponsored events to reach out to small 
businesses. These small businesses have excellent science skills but 
lack business skills; thus, DOE provides these professionals with 
assistance in designing business plans. He stated that in the past 24 
years the DOE has invested almost $1.5 billion, 60 percent of the 
companies have had sales of more that $1.6 billion.
    Mr. Comstock, the Director of the Innovative Partnership Program 
Office at NASA, noted that the SBIR and STTR programs were recently 
moved from NASA's four mission directorates to an agency-wide mission 
support office that reports to the Administrator's Office in response 
to the Innovative Partnerships Program of 2005. This more integrated 
approach helps to illuminate technology gaps and future technologies 
which will be infused into NASA, helping to reach mission goals. He 
cited Phase III authority to enter into sole source contracts as a 
benefit for NASA's programs. He stressed that NASA's outreach efforts 
have been successful in providing a fresh applicant pool. In response 
to a question by Chairman Wu on whether the agencies have adequate 
funding for administration, Mr. Comstock, as well as Mr. James and Ms. 
Goodnight, stated that administrative funding is not adequate to allow 
the optimal level of commercialization assistance.
    Mr. Narayanan, the Director of the Division of Industrial 
Innovation and Partnerships in the Directorate for Engineering and NSF, 
stated that SBIR plays a critical role in moving discovery to 
innovation at NSF. He explained that in addition to the SBIR/STTR 
grants, NSF has pioneered a Phase II supplement for funding, providing 
greater incentive for third-parties to invest in the awardees' 
projects. He stated that follow up of 400 NSF SBIR grantees has shown a 
significant impact; however, limited funds prevent program managers 
from providing hands-on mentoring.

Summary of the SBIR/STTR Reauthorization Act (H.R. 5819)

    H.R. 5819, the SBIR/STTR Reauthorization Act, a bill that would 
have reauthorized and made several significant changes to the SBIR and 
STTR programs, passed the House on April 23, 2008. Among these changes 
were:\4\
---------------------------------------------------------------------------
    \4\ The following points were all taken from the CRS Report The 
Small Business Innovation Research Program: Reauthorization Efforts, 
April 29, 2008.

          The termination date for the SBIR program was 
        extended from September 30, 2008 to September 30, 2010, while 
        the STTR activity was reauthorized through September 30, 2010 
---------------------------------------------------------------------------
        rather than the current sunset date of September 30, 2009.

          The bill increases the level of awards made under the 
        SBIR and STTR programs from $100,000 to $300,000 for Phase I 
        awards and from $750,000 to $2,200,000 for Phase II awards.

          A recipient of a Phase I grant from one federal 
        agency would be permitted to apply for a Phase II award from 
        another agency to pursue the original work. A small business 
        would be allowed to switch between the SBIR and STTR programs. 
        In addition, a small company would have been allowed to apply 
        for a Phase II award without first obtaining and successfully 
        completing a Phase I grant as currently required. The bill also 
        would have permitted sequential Phase II awards for a project.

          For the SBIR and STTR programs, H.R. 5819 would have 
        allowed majority venture capital ownership in a small business 
        if not more than 50 percent of the firm is owned by one venture 
        capital company and the employees of the venture capital 
        company are not a majority of the small firm's board of 
        directors. If the venture capital company is controlled by a 
        business with more than 500 employees, the small business would 
        have been eligible if not more than two large venture capital 
        companies have ownership interest in the small firm, these 
        large venture capital companies do not collectively own more 
        than 20 percent of the small business, and the venture capital 
        companies ``do not collaborate with each other to exercise more 
        control over the small business concern than they could 
        otherwise exercise individually.''

          The bill would have directed agencies to focus on 
        certain research areas for ``special consideration'' including 
        energy-related work, R&D in the area of rare diseases, 
        transportation-related topics, and nanotechnology.

          The bill would have mandated that each agency that 
        administers $50,000,000 or more in SBIR grants establish a SBIR 
        Advisory Board comprised of agency employees, private sector 
        representatives, veteran small business owners, and others 
        deemed appropriate. The Advisory Board was to make 
        recommendations to the agency on programmatic topics including, 
        among other things, mechanisms to encourage a broad range of 
        applicants and commercialization efforts. An annual report was 
        to be required.

          The bill would have reauthorized and made changes to 
        the Federal and State Technology Partnership (FAST) program, 
        which provides grants to organizations to provide outreach 
        designed to encourage increased participation in the SBIR 
        program.
    Chair Wu. I want to welcome everyone to this afternoon's 
hearing on the Small Business Innovative Research, or SBIR, and 
Small Business Technology Transfer, or STTR, Programs. This is 
the third hearing that this subcommittee has held on these very 
important programs.
    Both of them were created over 25 years ago, designed to 
support and encourage small high-tech entrepreneurial firms and 
play a more important role than ever in the economy that we 
live in today.
    Almost a year ago the House passed an SBIR Reauthorization 
Bill, H.R. 5819, which included the first significant changes 
to the program since its inception. This bill reflected not 
only the cost of research today but also reflected the 
international competitive market American high-tech firms face 
and the recommendations of various research bodies that have 
put about SBIR.
    Much has changed over the past 12 months. Today we are 
looking to small, high-tech firms to create the new products, 
services, and technologies that can rejuvenate our economy and 
make us more competitive internationally.
    When the SBIR and STTR Programs were created, we didn't 
fully appreciate the power of small entrepreneurial high-tech 
firms to create economic growth. Companies such as AMGEN, 
Apple, Genentech, and Microsoft all started as small 
entrepreneurial firms and now employ thousands or tens of 
thousands. Other companies started small and stayed small. All 
were innovators and drove economic growth.
    When SBIR and STTR were created, these companies were 
either in their infancy or didn't yet exist. In part because of 
SBIR and STTR today the United States is a world leader in IT 
[Information Technology] and in biotech.
    As the testimony indicates, SBIR and STTR-supported 
companies are still driving innovation in the IT and biotech 
fields. The authorization for SBIR and STTR expires at the end 
of July, and given the current economic situation, we need to 
ensure that we structure these programs to reflect the current 
economy and the globalization of R&D. We can't afford to think 
we are the only country with first-class science and 
engineering talent. We need to foster the innovation that 
creates economic growth, jobs, and new products and services 
right here at home.
    Maintaining the status quo of programs created a quarter 
century ago makes neither good business nor policy sense. We 
must always keep in mind that it is the American taxpayer who 
pays for these programs. In these difficult economic times we 
need to ensure they receive the highest return on their 
investment.
    We have a varied panel of witnesses here today representing 
small business and the NIH [National Institutes of Health], 
which provides the second largest amount of SBIR funding of any 
federal agency. I hope they can tell us more about the economic 
challenges facing those firms and their thoughts on the 
program. At over $2 billion per year the SBIR and STTR Programs 
are now far and away the largest technologic development 
programs or transfer programs in the Federal Government.
    I want to thank our witnesses for appearing before us 
today.
    And now I would like to turn to our Ranking Member, the 
gentlewoman from Illinois, for her opening statement.
    [The prepared statement of Chair Wu follows:]
                  Prepared Statement of Chair David Wu
    I want to welcome everyone to this morning's hearing on the Small 
Business Innovation Research (SBIR) and the Small Business Technology 
Transfer (STTR) Programs. This is the third hearing the Subcommittee 
has held on these programs. Both of these programs, created over 25 
years ago, were designed to support and encourage small high-tech 
entrepreneurial firms.
    Almost a year ago, the House passed a SBIR reauthorization bill, 
H.R. 5819, which included the first significant changes to the program 
since its inception. This bill reflected not only the cost of research 
today, but also reflected the international competitive market American 
high-tech firms face.
    Much has changed over the past 12 months. Today we are looking to 
small high-tech firms to create the new products and technologies that 
can rejuvenate our economy.
    When the SBIR and STTR programs were created we didn't fully 
appreciate the power of small high-tech firms' ability to create 
economic growth. Companies such as AmGen, Apple, Genentech, and 
Microsoft all started as small entrepreneurial firms and now employ 
thousands. Others stayed small. All were innovators and drove economic 
growth. When SBIR and STTR were created these companies were either in 
their infancy or had yet to exist. In part because of SBIR and STTR, 
today the United States is a world leader in the IT and biotech 
industries. And as the testimony indicates, SBIR and STTR supported 
companies are still driving innovation in the IT and biotech fields.
    The authorization for SBIR and STTR expires at the end of July. 
Given the current economic situation, we need to ensure that we 
structure these programs to reflect the current economy and the 
globalization of R&D. We can't afford to think we're the only country 
with first-class science and engineering talent. We need to foster the 
innovation that creates economic growth jobs and new products and 
services here at home.
    Maintaining the status quo of programs created almost 30 years ago 
makes neither good business nor policy sense.
    We must always keep in mind that it's the American taxpayer who 
pays for these programs. In these difficult economic times we need to 
ensure they receive the highest return on their investment.
    We have a varied panel of witnesses here representing small 
business and the NIH, which provides the second largest amount of SBIR 
funding of any federal agency. I hope they can tell us more about the 
economic challenges facing those firms and their thoughts on the 
program. At around $2 billion a year, the SBIR/STTR programs are now 
far and away the largest technological development programs in the 
Federal Government. I want to thank our witnesses for appearing before 
us today.

    Ms. Biggert. Thank you, Mr. Chair, and thank you for 
holding this hearing today on the role of SBIR and STTR 
Programs in stimulating innovation at small businesses. As you 
know, our Ranking Member Smith was unable to be here at this 
moment. He might be in a little bit later, but he had an 
immoveable conflict, but I am pleased to have the opportunity 
to take his place as we examine this important program today.
    On this committee we are, of course, well aware of the 
importance of innovation to economic growth and improved 
quality of life, particularly as we work our way through this 
recession. We recognize that advances in science and technology 
will help to enable short-term economic recovery as well as 
sustain prosperity over the long-term.
    To this end the SBIR and the STTR Programs play a key role 
as an important part of an overall federal R&D portfolio, 
serving to facilitate increased private sector 
commercialization of promising ideas, while leveraging the 
unique capabilities of small business to help the government 
advance its R&D goals and meet its technological needs.
    Today's hearing represents a continuation of the SBIR 
reauthorization efforts undertaken by this committee and the 
House Small Business Committee during the 110th Congress. As 
such it will focus on two primary changes under consideration 
last year. One is whether or not to increase the research set-
asides that fund SBIR and STTR, and two, whether or not to 
relax restrictions on participation by venture capitalist-
backed small businesses.
    These are very important issues that this hearing provides 
an opportunity for us to hear from the key stakeholders 
involved. With respect to the set-aside, it is important to 
remember the unique funding structure through which the SBIR 
and STTR Programs are funded. Through an assessment on 
extramural national, extramural federal research that is 
carried out by our universities and national labs.
    As a result an increase set-aside comes at the expense of 
basis and applied research performed at universities and the 
National labs, and because of the large base from which the 
funding is derived and even what might appear to be a minor 
increase in the set-aside from two and a half to three percent 
for SBIR and from .3 to .6, that would be 0.3 and 0.6, percent 
for STTR, would result in a rough reduction of roughly $650 
million to core agency research programs.
    For this reason and because SBIR and STTR budgets have 
grown substantially over the last 10 years, I am strongly 
opposing--I am strongly opposed to increasing this set-aside. 
The issue of eligibility of majority venture capitalist-based 
small businesses is significantly more complicated but no less 
important. The origin of the dispute over this eligibility is 
due to the lack of clarity in and changing interpretations of 
the existing statutory definition of a small business.
    Regardless of what side of this issue one is on, I think we 
could agree that the solution is to define small business in a 
manner that maximizes the eligibility of legitimate small 
businesses while minimizing the inappropriate eligibility of 
large businesses. To this end I am concerned that the current 
SBIR rules may unreasonably exclude many legitimate small 
businesses, particularly in the biomedical sector due to its 
high dependence on venture capital to advance drugs and 
therapies through the regulatory approval process.
    I hope this is something that we will address in this 
upcoming legislation. This committee and the Full House built a 
solid record of work on SBIR reauthorization during the 110th 
Congress, so I anticipate that we will be able to work 
cooperatively and swiftly to extend the SBIR Program before its 
July 31 expiration.
    However, I hope and expect that we can do so through 
regular order so the Committee Members have an opportunity to 
review any changes to the legislation from last year and offer 
input and amendments as necessary.
    And I thank your witnesses for being here today and waiting 
for us. We had those pesky votes, as you know, and I look 
forward to a productive discussion.
    And I yield back.
    [The prepared statement of Ms. Biggert follows:]
           Prepared Statement of Representative Judy Biggert
    Mr. Chairman, thank you for holding this hearing today on the role 
of SBIR and STTR programs in stimulating innovation at small 
businesses. As you know, Ranking Member Smith was unable to make this 
hearing due to an immovable conflict, but I am pleased to have the 
opportunity to take his place as we examine this important program 
today.
    On this committee we are of course well aware of the importance of 
innovation to economic growth and improved quality of life. 
Particularly as we work our way through this recession, we recognize 
that advances in science and technology will help to enable short-term 
economic recovery as well as sustained prosperity over the long-term.
    To this end, the SBIR and STTR programs play a key role as an 
important part of the overall Federal R&D portfolio, serving to 
facilitate increased private sector commercialization of promising 
ideas while leveraging the unique capabilities of small businesses to 
help the government advance its R&D goals and meet its technology 
needs.
    Today's hearing represents a continuation of the SBIR 
reauthorization efforts undertaken by this committee and the House 
Small Business Committee during the 110th Congress. As such, it will 
focus on the two primary changes under consideration last year: (1) 
whether or not to increase the research set-asides that fund SBIR and 
STTR; and (2) whether or not to relax restrictions on participation by 
venture-capital backed small businesses. These are both very important 
issues with potentially far-reaching impacts, so I am pleased that this 
hearing provides an opportunity for us to hear from the key 
stakeholders involved.
    With respect to the set-aside, it is important to remember the 
unique funding structure through which the SBIR and STTR programs are 
funded--through an assessment on extramural federal research that is 
carried out by our universities and national laboratories. As a result, 
an increased set-aside comes at the expense of basic and applied 
research performed at universities and national laboratories, and 
because of the large base from which funding is derived, and even what 
might appear to be a minor increase in the set aside--from two and a 
half to three percent for SBIR and from 0.3 to 0.6 percent for STTR--
would result in a reduction of roughly $650 million to core agency 
research programs. For this reason, and because the SBIR and STTR 
budgets have grown substantially over the last 10 years, I am strongly 
opposed to increasing the set aside.
    The issue of eligibility of majority venture-capital backed small 
businesses is significantly more complicated, but no less important. 
The origin of the dispute over this eligibility is due to lack of 
clarity in--and changing interpretations of--the existing statutory 
definition of a ``small business.'' Regardless of what side of this 
issue one is on, I think we could agree that the solution is to define 
``small business'' in a manner that maximizes the eligibility of 
legitimate small businesses while minimizing the inappropriate 
eligibility of large businesses.
    To this end, I'm concerned that the current SBIR rules may 
unreasonably exclude many legitimate small businesses, particularly in 
the biomedical sector due to its high dependence on venture capital to 
advance drugs and therapies through the regulatory approval process. I 
hope this is something that we will address in this upcoming 
legislation.
    This committee and the Full House built a solid record of work on 
SBIR reauthorization during the 110th Congress, so I anticipate that we 
will be able to work cooperatively and swiftly to extend the SBIR 
program before its July 31St expiration. However, I hope and expect 
that we can do so through regular order so the Committee Members have 
an opportunity to review any changes to the legislation from last year 
and offer input and amendments as necessary.
    I thank our witnesses for being here today and I look forward to a 
productive discussion.

    Chair Wu. I thank the gentlelady and would just add that it 
is fully my intent to move legislation on this very important 
subject through regular order, but as the gentlelady fully 
understands, sometimes we have our intentions changed for us.
    If there are Members who wish to submit additional opening 
statements, your statements will be added to the record at this 
point.
    [The prepared statement of Mr. Mitchell follows:]
         Prepared Statement of Representative Harry E. Mitchell
    Thank you, Mr. Chairman.
    Today we will examine the role of the Small Business Innovation 
Research (SBIR) and Small Business Technology Transfer (STTR) Programs 
in supporting innovation at small high-tech firms.
    Small businesses are continuously growing in Arizona, especially 
those in the biotechnology field. Many biotechnology and other small 
firms are centered in my home district and frequently work with one of 
the largest universities in the country, Arizona State University.
    ASU often partners with small businesses to apply for Small 
Business Innovation Research (SBIR) and Small Business Technology 
Transfer Program (STTR) grants. Through this partnership, businesses 
are able to benefit not just from grant money, but also the tools, 
facilities, and knowledge that ASU offers.
    I look forwarding to hearing more from our witnesses about the 
effectiveness of the SBIR and STTR programs and how these programs 
could be improved.
    I yield back.

    Chair Wu. I just want to note that I will be stepping away 
for a few minutes at about three o'clock, and I believe that 
the gentlelady from Maryland will be available to step in the 
chair for awhile. Thank you very much.
    At this point it is my pleasure to introduce our witnesses. 
Dr. Robert Berdahl is the President of the Association of 
American Universities [AAU]. I would like to add a proud former 
Duck for almost 20 years. The Honorable Jim Greenwood is the 
President and CEO of the Biotechnology Industry Organization 
and well represented Pennsylvania for a dozen years, and I 
always thought that was such a long, long time, but I am 
hitting the dozen mark soon myself, and it is amazing how 
perspective changes. Dr. Sally Rockey is the Acting NIH Deputy 
Director for Extramural Research at the National Institutes of 
Health. And finally Mr. Jere Glover is the Attorney and 
Executive Director of the Small Business Technology Council. 
Welcome one and all. Your full written testimony will be 
included in the record of the Subcommittee. Please if you will 
summarize your written testimony. You will each have five 
minutes for your spoken testimony, and when you complete your 
testimony, we will hopefully have plenty of time for questions, 
and each Member will have five minutes to answer questions.
    Dr. Berdahl, please proceed.

 STATEMENT OF DR. ROBERT M. BERDAHL, PRESIDENT, ASSOCIATION OF 
                     AMERICAN UNIVERSITIES

    Dr. Berdahl. Good afternoon, Chairman Wu, Congresswoman 
Biggert, and Congresswoman Edwards. It is a great privilege to 
present our association's views on the Small Business 
Innovation Research Program and the Small Business Tech 
Transfer Program. I have to note at the outset that I had the 
privilege of being a faculty member and an administrator at 
both the University of Oregon and the University of Illinois, 
and so I have some familiarity with the role that those 
universities play in the economies of those respective states.
    Chair Wu. Your attempt to carry a favorable impression has 
been very successful.
    Dr. Berdahl. All right. Very good. Well, let me begin my 
testimony by stating that the AAU supports SBIR and STTR 
programs as they are currently structured. We agree with the 
National Academy's assessment of these programs as being sound 
in concept and effective in practice. In the early years of 
SBIR many of our campuses were critical of the program, viewing 
it as coming at the expense of funding that would have 
otherwise supported university basic research.
    In recent years, however, as our universities and faculty 
have become--they have become much more interested in 
commercializing new technologies, our universities have come to 
support SBIR and STTR Programs as they currently exist.
    To drive this point home I would like to highlight a SBIR 
success story from Chair Wu's home State of Oregon and my 
former university, the University of Oregon. Electrical 
Geodesics Incorporated, EGI, was a University of Oregon spin-
off company. It was founded by U of O neuroscientist Don Tucker 
to develop advanced, non-invasive ways to visualize brain 
activity. Over the last decade SBIR grants have played a key 
role in fueling EGI's maturation, growth, and expansion. As a 
direct consequence of SBIR support, EGI's geodesics sensor net 
can now be found in more than 350 laboratories in 28 countries 
around the world.
    Given the success of EGI and other SBIR firms, it is clear 
that the SBIR and STTR Programs have played an important role 
in stimulating innovation at small high-tech firms throughout 
the country. The specific degree to which these programs are 
responsible for innovation, however, is not easy to assess due 
to a lack of sufficient data. According to the National 
Institutes of Standards and Technologies [NIST], more than 26 
billion has been spent on SBIR and STTR grants, yielding 84,000 
patents and attracting more than $36 billion in venture capital 
for more than 17,000 SBIR-funded companies.
    Despite the success of these programs, the NRC [National 
Research Council] report makes significant recommendations 
about the need for better data collection and systematic 
assessment of SBIR and STTR Programs, and we commend those 
recommendations to you.
    In your letter of invitation you asked us to assess the 
current SBIR and STTR set-aside percentages. While supportive 
of the current set-aside, we oppose any increases in the SBIR 
set-aside because there is no indication that highly-qualified 
SBIR proposals are currently being rejected for lack of 
sufficient funding.
    Moreover, we question whether there is enough small 
business research and of sufficient quality to merit an 
increase in the SBIR set-aside, especially if such funding were 
to come at the expense of peer reviewed, basic, and applied 
research programs, where success rates have hit all-time lows 
in recent years.
    Our view is that the best way to increase the amount of 
funding available to these programs is to provide steady and 
sustained funding increases for federally-supported basic 
scientific research. As research funding increases, the dollars 
available to these programs will also increase.
    At this point the only modification we would encourage 
would be the slight increase recommended by the NRC in the 
percentage of set-aside that would be used for program 
management from the .03 percent to .05 percent.
    You also asked our views about venture capital and SBIR. 
AAU supports the Subcommittee's view that firms with 
significant venture capital funding should be allowed to 
compete for SBIR and STTR awards. However, the current 
regulation effectively disqualifies small companies that have 
received significant venture capital or are owned by another 
company with significant venture capital investment from 
competing for SBIR or STTR funds.
    The AAU shares the view of the NRC that venture capital 
investment in companies seeking SBIR funding confirms the 
quality of those projects and would raise the quality of the 
applicant pool overall.
    You also asked for thoughts concerning ways to improve the 
effectiveness of these programs. In responding to this request 
I would commend to you the recommendations made by the National 
Research Council in its 2008 report.
    There is one related issue that we would ask the 
Subcommittee to examine in reauthorizing the SBIR Program, Mr. 
Chair. Even with today's existing SBIR Program, there is a 
funding gap that often prevents universities from moving new 
research discoveries and technologies quickly into the 
marketplace. This bridge funding often crossing the ``Valley of 
Death'' as it is called, would be very, very important.
    Let me conclude, I see my time is up here, let me conclude 
my remarks with a statement that I made earlier in my testimony 
that these are sound and effective programs. It is clear that 
these programs are at their core good programs that help foster 
successful entrepreneurial opportunities for our nation's 
scientists, engineers, and innovators. These programs were 
created well over 20 years ago. They can be improved by 
adopting some of the NRC's recommendations. I also believe that 
it might be time to consider supplementing these programs with 
a new program aimed at providing additional gap funding.
    Mr. Chair, Members of the Subcommittee, once again, I thank 
you for the opportunity to share AAU's thoughts. I look forward 
to your questions.
    [The prepared statement of Dr. Berdahl follows:]
                Prepared Statement of Robert M. Berdahl

Introduction

    Good afternoon Chairman Wu, Ranking Member Smith, and Members of 
the Subcommittee. I am Robert Berdahl, President of the Association of 
American Universities (AAU). I appreciate the opportunity to present 
AAU's views on the Small Business Innovation Research (SBIR) and Small 
Business Tech Transfer (STTR) programs to you today.
    AAU is the association of 60 leading U.S. public and private 
research universities, and we also have two Canadian university 
members. AAU's 60 U.S. member institutions perform 60 percent of 
federally funded university-based research and award more than half of 
all Ph.D. degrees earned in our country.

I.  AAU supports the current SBIR and STTR programs and set-aside 
                    percentages.

    Let me begin by stating that AAU supports the SBIR and STTR 
programs as they are currently structured. We agree with the National 
Academies assessment of these programs as being ``sound in concept and 
effective in practice.'' Both programs play an important role in the 
Nation's overall innovation ecosystem by transforming cutting-edge, 
innovative ideas and research into viable, market-ready products for 
the American consumer.
    In the early years of SBIR, many on our campuses were critical of 
the program, viewing it as coming at the expense of funding that would 
have otherwise supported university-based basic research. In recent 
years, however, as our universities and faculty have become more 
interested in commercializing new technologies, our universities' 
attitude towards the SBIR and STTR programs has become more positive.
    Indeed, the SBIR and STTR programs are now widely viewed by many 
faculty and research administrators as an important tool that can help 
them transform the research generated in our university laboratories 
into new industrial products, goods, and services. As a result, more 
and more of our faculty are directly engaged in research funded through 
these two programs.
    When the National Research Council (NRC) surveyed SBIR recipients 
for its 2008 report, ``An Assessment of the SBIR Program,'' more than 
half of respondents reported that university faculty were involved in 
their SBIR-funded projects. Clearly, SBIR and STTR are encouraging 
university faculty to start or work with small companies in an attempt 
to commercialize their research results.
    The NRC found that the SBIR and STTR programs not only provide a 
vehicle for commercialization of research but also stimulate scientific 
and technological collaboration between faculty and industry that 
yields a variety of ``knowledge outputs.'' These ``knowledge outputs'' 
can take the form of ``data, scientific and engineering publications, 
patents and licenses, analytical models, algorithms, new research 
equipment, prototype products and processes, and spin-off companies.'' 
\1\
---------------------------------------------------------------------------
    \1\ National Research Council, Assessment of the SBIR Program, 
National Academies Press, p. 3.
---------------------------------------------------------------------------
    To elaborate on this point, I would like to highlight an SBIR 
success story from two of our AAU universities.
    The first example comes from Chairman Wu's home State of Oregon. 
Electrical Geodesics Inc. (``EGI''), a University of Oregon spin-off 
company, was founded by UO neuroscientist Dr. Don Tucker to develop 
advanced, non-invasive ways to visualize brain activity. Over the last 
decade, SBIR grants played a key role in fueling EGI's maturation, 
growth and expansion. As a direct consequence of SBIR support, EGI's 
Geodesic Sensor Net can now be found in more than 350 laboratories in 
28 countries around the world, supporting human neuroscience research 
on topics ranging from child development to psychopathology to 
neuroeconomics. EGI's Geodesic Sensor Net has become an icon of 
advanced neuroscience technology, appearing on the covers of National 
Geographic and Newsweek. Electrical Geodesics has been a past winner of 
the Tibbetts Award for excellence in the SBIR program. This innovative, 
university-born small business--whose research, development and 
manufacturing provide high-quality employment to scores of Oregonians 
in the City of Eugene--received recognition as Oregon's Bioscience 
Company of the Year in 2006, and received the Emerald Award for 
Innovation from the Eugene Chamber of Commerce in 2008.
    The second example comes from Nebraska, where, in 2002, GC Image, 
LLC, a Lincoln based company was incorporated based on software 
developed by a University of Nebraska-Lincoln Computer Science 
Professor, Dr. Stephen Reichenbach. GC Image delivers industry-leading 
software solutions for visualizing, analyzing, and reporting on 
scientific data from comprehensive two-dimensional gas chromatography 
and comprehensive two-dimensional liquid chromatography. The company 
has been awarded $1.5 million in SBIR and STTR Phase I and II awards 
over the last five years from the National Science Foundation and the 
National Institutes of Health. GC Image continues to grow and build on 
its successes through strategic partnerships to deliver software 
products in diverse markets.
    So, to address the first of the questions posed by the 
Subcommittee, clearly the SBIR and STTR programs have played an 
important role in stimulating innovation at small high-tech firms in 
Oregon, Nebraska, and throughout the country. The specific degree to 
which the programs are responsible for innovation, however, is not easy 
to assess because of a lack of sufficient data.
    According to the National Institute of Standards and Technology 
(NIST), more than $26 billion has been spent on SBIR and STTR grants, 
yielding 84,000 patents and attracting more than $36 billion in venture 
capital for more than 17,000 SBIR-funded companies. The NRC report 
cites Small Business Administration (SBA) data indicating that nearly 
15,000 small companies received at least one Phase II SBIR grant 
between 1992 and 2005.
    Despite the success of these programs, the NRC report makes 
significant recommendations about the need for better data-collection 
and systematic assessment of SBIR/STTR, and we commend those 
suggestions to you. We would agree with the NRC that is difficult to 
truly assess the economic and innovation impact of SBIR and STTR 
because there has not been systematic data-gathering on the part of 
sponsoring agencies. Requiring such data collection and program 
assessment and providing the resources needed to finance these 
activities would be one positive action that this subcommittee and the 
Congress could take to enhance the SBIR and STTR programs.
    You also asked us to assess the current SBIR and STTR set-aside 
percentages. In response to this question, AAU is supportive of the 
current SBIR set-aside of 2.5 percent of R&D spending for major 
research agencies and the 0.3 percent set-aside for the STTR program.
    While supportive of the current set-aside, we oppose any increases 
in the SBIR set-aside because there is no clear justification for such 
increases. We question whether there is enough small business 
research--and of sufficient quality--to merit SBIR funding that would 
come at the expense of peer-reviewed basic and applied research 
programs at agencies such as NIH and NSF, where success rates 
unfortunately have hit all-time lows in recent years. In our view, 
increasing the set-aside would reduce even further the number of 
successful research grants that are awarded by federal research 
agencies.
    This is not to suggest that we do not favor increasing the amount 
of funds going to SBIR and STTR. Our view is that the best way to 
increase the amount of funding available to these programs are to 
provide steady and sustained funding increases for federally supported 
research. Indeed, we hope to work with the small business community to 
increase research budgets across all of the major research agencies, 
which would result in significant funding increases for the SBIR and 
STTR as well as other important research programs.
    As for modifications to the set-aside, the only modification we 
would encourage would be the slight increase recommended by the 
National Research Council in the percentage of the set-aside that could 
be used for program management and assessment from .03 percent to .05 
percent of the total program funding.

II.  AAU supports allowing small businesses with significant amounts of 
                    venture capital investments to participate in the 
                    SBIR and STTR programs.

    AAU supports the Subcommittee's view that firms with significant 
venture capital funding should be allowed to compete for SBIR and STTR 
awards. As you know, current Small Business Administration (SBA) 
regulations limit participation in these programs to companies that are 
at least 51 percent owned by individuals, rather than companies or 
other entities. This regulation effectively disqualifies small 
companies that have received significant venture capital investment or 
are owned by another company with significant venture capital 
investment from competing for SBIR and STTR funds. We would note that 
this was not always the case. Before 2001 and 2003 SBA administrative 
law judge rulings, companies with venture capital were allowed to 
participate in the SBIR program.
    As then-NIH Director Elias Zerhouni said in a 2005 letter to the 
SBA, ``this rule dries up Federal funding for early stage ideas from 
small companies that, by attracting substantial [venture capital] 
funding, show strong signs of likely success.'' AAU shares the view of 
the NRC that venture capital investment in companies seeking SBIR 
funding confirms the quality of those projects and would raise the 
quality of the applicant pool overall.

III.  Recommendations on how the SBIR and STTR programs can be 
                    improved.

    You also asked for thoughts concerning ways to improve the 
effectiveness of the SBIR and STTR programs. In responding to this 
request, I would commend to you the recommendations made by the 
National Research Council in its 2008 report, which we fully endorse.
    Program Evaluation: We agree with the NRC that the agencies should 
conduct regular evaluations of their SBIR and STTR programs. As part of 
this overall evaluation process, we support the idea of agencies 
providing annual reports to Congress on the successes or 
disappointments of their programs, as well as developing a form of 
external evaluation of the programs' effectiveness.
    SBIR Award Sizes: We also support the NRC recommendation that award 
sizes be adjusted. Currently, SBIR/STTR Phase I awards are limited to 
$100,000 at NSF and $150,000 at NIH, and Phase II awards are limited to 
$750,000 at NSF and $850,000 at NIH.\2\ The statutory amount of SBIR 
and STTR Phase I and II awards should be adjusted to reflect the 
effects of inflation over the years and, more importantly, to make the 
awards more attractive. In its report, the NRC calls for a one-time 
adjustment in award sizes increasing Phase I awards from $100,000 to 
$150,000 and Phase II to $1 million.\3\ Embedded within this 
recommendation is the notion that standard award sizes simply serve as 
guidance for the agencies and that agencies should be given the 
flexibility to exercise their own judgment when determining the size of 
the award needed to meet the mission and goals of the SBIR project.
---------------------------------------------------------------------------
    \2\ National Research Council, An Assessment of the SBIR Program, 
National Academies Press, p. 44; pp. 95-97.
    \3\ National Research Council, An Assessment of the SBIR Program, 
National Academies Press, pp. 84-85.
---------------------------------------------------------------------------
    Post Phase II Awards: Another NRC recommendation that AAU supports 
is that agencies be given the flexibility to develop follow-on SBIR 
funding mechanisms beyond Phase II. NIH has improvised to provide such 
funding with its ``competing renewal'' mechanism for especially 
promising projects, and the Navy has a similar ``Phase IIb'' option. 
NSF also has a mechanism to match supplemental industry funding for 
Phase II awards. We agree with the NRC that such follow-on SBIR and 
STTR funding would enable small companies with highly promising 
projects to traverse ``the ``Valley of Death'' between the end of Phase 
II research funding and the commercial marketplace.'' This is the 
single greatest challenge for SBIR and STTR-funded companies.
    Additional ``Gap'' Funding: There is one other related issue that 
we would ask the Subcommittee to examine in reauthorizing the SBIR and 
STTR programs. Even with the existing SBIR and STTR programs, there 
still exists a funding gap which often prevents universities from 
moving new research discoveries and technologies quickly into the 
marketplace. SBIR and STTR funding presumes there is already sufficient 
evidence that a particular research advance or technology has enough 
commercial value to attract further investment for commercialization. 
Often times, however, there is not the funding available within our 
universities, or from other sources, to push these technologies across 
the ``Valley of Death'' to that point.
    The current economic climate has left companies, angel investors 
and venture capitalists even less willing to invest in the proof-of-
concept, scaling up, and modeling required to explore the commercial 
value of such advances. While the current SBIR program partially 
addresses this issue, it often still falls short of providing enough 
funding to allow emerging technologies to reach the level of 
development required for investment or adoption by the commercial 
sector. AAU would welcome the opportunity to work with the subcommittee 
to explore innovative new ways that would allow our universities to 
extend the horizon for development of research advances and new 
technologies, thereby making the end product easier to transfer to a 
small business and improving the success rate of these businesses.

Conclusion

    If there is a consistent theme in these recommendations, it is that 
the SBIR and STTR are, at their core, good programs that help to foster 
successful entrepreneurial opportunities for our nation's scientists, 
engineers, and technology innovators. However, these programs, which 
were created well over 20 years ago, can stand to be improved by 
increasing award sizes, providing flexibility in program administration 
and management, and providing beyond Phase II award opportunities. We 
also believe that it might be time to consider supplementing these 
programs with a new program aimed at providing additional gap funding.
    Chairman Wu, Ranking Member Smith, and Members of the Subcommittee, 
thank you for the opportunity to share AAU's thoughts and perspective 
on the SBIR and STTR programs. We would welcome the opportunity to work 
with you in fleshing out some of the recommendations we have made 
today. I look forward to any questions you may have at this time.

                    Biography for Robert M. Berdahl
    Robert M. Berdahl became President of the Association of American 
Universities (AAU) in May 2006. Prior to this position, Berdahl served 
as Chancellor of the University of California, Berkeley from 1997 to 
2004. As Chancellor at Berkeley, he led the campus in a major effort to 
renew its infrastructure. During his tenure, more than $800 million was 
invested in a comprehensive plan to renovate and seismically upgrade 
numerous buildings, rendering them more suitable for modern scientific 
research and teaching. He worked to restore library collections to a 
preeminent position and undertook the construction of two new library 
buildings. Under his leadership, two new major interdisciplinary 
initiatives were undertaken: the Health Sciences Initiative and the 
Center for Information Technology Research in the Interest of Society. 
An advocate of enhancing and humanizing undergraduate learning, Berdahl 
expanded the highly popular Freshman Seminar Program, in which senior 
faculty teach small freshman classes. To integrate student life more 
fully with a challenging academic environment, six new residence halls 
were constructed. As the first Berkeley Chancellor to cope with the 
decline of minority enrollment after the elimination of affirmative 
action in California, Berdahl strengthened campus outreach programs for 
disadvantaged students in the public schools. Following his tenure as 
Chancellor at Berkeley, Berdahl remained as a faculty member. Prior to 
going to Berkeley, Berdahl served as President of the University of 
Texas at Austin from 1993 to 1997. While at Texas, he initiated a 
master plan for the physical development of the campus, worked to 
introduce data-driven planning in the allocation of resources to the 
academic colleges and schools, and endeavored to build a stronger sense 
of community within a large, diverse campus. While at the University of 
Texas and at Berkeley, Berdahl was an active member of AAU, including 
service as its Executive Committee Chair. Berdahl began his academic 
career in the History Department at the University of Massachusetts 
Boston in 1965. He joined the history faculty at the University of 
Oregon in 1967 and served as Oregon's Dean of the College of Arts and 
Sciences from 1981 to 1986, when he left Oregon to become Vice 
Chancellor of Academic Affairs at the University of Illinois at Urbana-
Champaign. Berdahl received his B.A. from Augustana College in Sioux 
Falls, South Dakota, his M.A. from the University of Illinois, and his 
Ph.D. from the University of Minnesota, which also awarded him an 
honorary Doctorate of Science in 1997. He is recipient of numerous 
honors and awards, including an honorary doctorate and distinguished 
alumnus award from Augustana College, a Fulbright Research Fellowship, 
and an NEH Independent Study and Research Fellowship. He has been a 
Research Associate at the Institute for Advanced Study in Princeton and 
at the Max Planck Institute for History in Goettingen, Germany. Berdahl 
was elected to the American Academy of Arts and Sciences in 2001. He is 
the author of one book and the co-author of another, and has written 
numerous articles dealing with German history. Berdahl was born in 1937 
in Sioux Falls, South Dakota. He and his wife Margaret (Peg) have three 
married daughters, Daphne (deceased), Jennifer, and Barbara, and six 
grandchildren.

    Chair Wu. Thank you, Dr. Berdahl. We very much appreciate 
AAU's input into this process.
    Dr. Berdahl. Thank you.
    Chair Wu. Mr. Greenwood, please proceed.

    STATEMENT OF MR. JAMES C. GREENWOOD, PRESIDENT AND CEO, 
           BIOTECHNOLOGY INDUSTRY ORGANIZATION (BIO)

    Mr. Greenwood. Good afternoon, Chairman Wu and 
Congresswoman Biggert and Members of the Committee. I am Jim 
Greenwood, President and CEO of the Biotechnology Industry 
Organization, BIO, and I am privileged to be here this morning 
on behalf of BIO's more than 1,200-member companies, academic 
institutions, State biotechnology centers, and related 
organizations in all 50 states involved in health care, 
agricultural, environmental, and industrial biotechnology.
    Congress created the SBIR Program in the early 1980s 
because it recognized that all too often promising early-stage 
scientific research lacked adequate funding and as a result 
perished in the ``Valley of Death.'' The importance of 
advancing science through the ``Valley of Death'' has never 
been more important than it is right now.
    In fact, in just the last several months at least 25 of our 
companies have either placed drug development programs on hold 
or cut programs altogether. This includes therapies for HIV/
AIDS, cervical cancer, multiple sclerosis, and diabetes. 
Roughly a third of small publicly-traded biotechnology 
companies are now operating with less than six months of cash 
on hand, which is a 90 percent increase relative to this time 
in 2007. The total capital raised by the industry in 2008 is 
down 55 percent compared to last year. As such, it is more 
important than ever that government funding opportunities such 
as SBIR are made more accessible to America's cutting-edge 
companies.
    My recommendation to strengthen and improve the SBIR 
program can be grouped under the following three general goals. 
First, increase competition and foster innovation and 
commercialization by the best small companies. For 20 years 
domestic biotechnology companies competed for SBIR grants. 
However, in 2003, the Small Business Administration's [SBA] 
Office of Hearings and Appeals ruled that a biotechnology 
company, Cognitics, did not meet the SBIR size standard because 
multiple venture capital investors in the aggregate, and that 
is more, that is important, in the aggregate, owned more than 
50 percent of the company's stock.
    The ruling, which is not based on the statutory language, 
ignores the reality of the marketplace where small 
biotechnology firms must raise tens of millions of dollars to 
conduct incredibly capital-intensive research. The SBA's 2003 
ruling to exclude majority venture-backed companies inhibits 
the SBIR's Program's access to the most competitive pool of 
applicants possible, and it stifles the ability of SBIR to 
carry out its mission to fund projects that will have the most 
commercial potential.
    The NIH's acting director recently reported that the number 
of SBIR applications has dropped over 40 percent since 2004, 
which is about the same time the SBIR-participating agencies 
implemented the new SBA restriction and majority VC [Venture 
Capital]-financed companies.
    BIO respectfully requests that the Committee reinstate the 
eligibility of small VC-backed biotechnology firms to compete 
for SBIR awards. This will ensure the most competitive pool of 
applicants and that grants will be awarded based on projects 
that show the most promise in bringing breakthrough therapies 
to the public.
    Second, Congress should clarify the SBA eligibility rules 
to make the application process more straightforward and more 
user friendly. It is equally important the authorization 
clarify SBA affiliation regulations. Under current SBA 
regulations when determining the size of a business, the SBA 
considers the number of direct employees at the business as 
well as affiliated business employees. These affiliation rules 
create a situation where a small company with 50 employees 
could be affiliated with hundreds of other employees of 
companies with which the small company has no relationship 
whatsoever, simply because the companies share a common 
investor, even where the investor owns a minority stake in the 
business in question.
    BIO recommends the Reauthorization Bill provide language to 
clarify that minority investment by a venture capital investor 
does not make the company an affiliate of another company for 
the purposes of determining size. This is a commonsense measure 
that will provide clarity and peace of mind for small business 
entrepreneurs looking to participate in the SBIR Program.
    Third, Congress should maintain adequate agency flexibility 
within the SBIR Program. One of the great strengths of the SBIR 
Program is that Congress has provided participating agencies 
with flexibility in how they administer the program. 
Maintaining flexibility is supported by a National Research 
Council 2007 report, which states, ``Flexibility is a positive 
attribute in that it permits each agency to adapt its SBIR 
Program to the agency's particular mission, scale, and working 
culture.''
    BIO does not believe that a hard dollar cap should be 
applied to the SBIR grant amounts. Agencies should be the best 
judge of how to use their SBIR funds to advance science and to 
commercialize new innovations. By making necessary reforms to 
the SBIR Program, Congress can continue to support the USA 
biotechnology community by allowing the government to partner 
with small biotechnology companies that have promising science 
but need additional resources at key stages of development.
    Thank you.
    [The prepared statement of Mr. Greenwood follows:]
                Prepared Statement of James C. Greenwood
    Good morning Chairman Wu, Ranking Member Smith, Members of the 
Committee, ladies and gentleman. I am Jim Greenwood, President and CEO 
of the Biotechnology Industry Organization (BIO). I am privileged to be 
here this morning on behalf of BIO's more than 1,200 member companies, 
academic institutions, State biotechnology centers and related 
organizations in all 50 states involved in health care, agricultural, 
environmental and industrial biotechnology.
    The role of the SBIR program in bringing breakthrough therapies to 
the American people is a matter of record. There are 252 FDA approved 
biologics that have been developed by 163 companies. Thirty-two percent 
of those companies have received at least one SBIR/STTR award. Despite 
its noble past, the ability of the SBIR program to provide critical 
funding for medical research projects will remain hampered unless SBIR 
reauthorization updates the program to address the current realities 
facing small, innovative American companies.
    As you know, Congress created the SBIR program in the early 1980's 
because it recognized that promising, early stage scientific research 
all too often failed to be funded through the markets because it was 
viewed as too high-risk. This failure of the markets is often referred 
to as the ``Valley of Death.'' The importance of advancing science 
through the ``Valley of Death'' has never been more important than it 
is right now as numerous small biotechnology companies are being forced 
to shelve promising therapies as result of the current economic crisis. 
In fact in just the last five months, at least 25 U.S. public biotech 
companies have either placed drug development programs on hold or cut 
programs all together. These programs include therapies for HIV, 
cervical cancer, Multiple Sclerosis, and diabetes.
    For twenty years small, domestic biotechnology companies competed 
for SBIR grants. In addition to providing funding, these grants were a 
powerful signal to the private sector that a company's research was 
compelling and possessed scientific and technical merit. However, in 
2003 the Small Business Administration's Office of Hearings and Appeals 
(OHA) ruled that a biotechnology company, Cognetix, did not meet the 
SBIR size standard because multiple venture capital investors, in the 
aggregate, owned more than 50 percent of the company's stock. The 
ruling, which is not based on the SBIR statutory language, ignores the 
realities of the marketplace where small biotechnology firms must raise 
tens of millions of dollars to conduct incredibly capital-intensive 
research. It is estimated that it takes between 8 and 12 years to bring 
a biotechnology therapy to market and costs between $800 million and 
$1.2 billion. These small biotech firms typically have fewer than 50 
employees, no products on the market and must raise considerable funds 
through a combination of angel investors and venture capital firms to 
make a therapeutic commercially available to patients.
    The impact of the current economic crises on small biotechnology 
companies has been and continues to be severe. According to the latest 
available data, 30 percent of small, publicly-traded biotechnology 
companies are now operating with less than six months of cash on hand, 
a 90 percent increase relative to 2007. Forty-five percent of these 
companies have less than one year of cash remaining. The total capital 
raised by the industry in 2008 has seen a steep decline (down 55 
percent in 2008 compared to 2007).
    The SBIR program has always been critical to helping innovative 
biologic therapeutic development programs traverse the ``Valley of 
Death'' and move towards a publicly-available product. This is a role 
that has never been more critical than it is today. A recent joint 
study by BIO and Thompson Reuters found that the current economic 
crisis has forced over 80 percent of biotech investors to change their 
investment approaches. They can no longer afford the high-risk 
characteristic of investment in biotech. The decline of the biotech 
industry jeopardizes not only America's patient population, but also 
America's competitive edge in the 21st century global economy. The 
importance of restoring eligibility to small biotechnology companies 
has never been more clear.
    SBA has stated that the ownership rule is meant to be a proxy for 
determining that a company is domestic. However, the use of capital 
structure as a proxy for determining domesticity and the subsequent OHA 
ruling has had the unintended consequence of excluding a sizable 
portion of U.S. biotechnology companies that would otherwise be 
eligible to participate in the program. Even more alarming is the fact 
that NIH SBIR applications have decreased 40 percent since 2004, about 
the time that SBIR-participating agencies implemented the new SBA 
restriction on majority VC-financed companies.
    A small biotechnology companies is generally engaged in several 
projects with one lead product and an average of five other therapies 
or candidates in early stage/pre-clinical research. Typically, a 
biotechnology company will begin fundraising for its lead product in 
development. Companies generally raise between $5 million and $15 
million in their first round of venture financing, an amount that often 
results in multiple venture capital companies collectively owning more 
than 50 percent of the company. This is especially the case with very 
young companies whose valuation may reflect their high-risk, early 
stage nature. However, it is typically the case that no single venture 
capital company will own more than 15 to 25 percent of the company's 
equity.
    Despite the extensive fundraising a biotechnology company 
undertakes for its lead product, these funds are tied to very specific 
milestones to support the lead product's development. As such, in order 
to develop secondary or tertiary candidates/therapies a company has to 
find secondary sources of fundraising capital. At the very earliest 
stages of development other sources of financing, such as SBIR grants, 
have been instrumental in advancing research and development in 
biotechnology.

Opportunity to Strengthen/Restore SBIR Program

    I appreciate the opportunity to discuss much-needed changes to the 
current SBIR program. I believe these changes would strengthen the 
program and ensure that it is funding the best small biotechnology 
businesses which are working on innovative programs that have the most 
potential to benefit the public. My recommendations can be grouped 
under three general goals. First, increase competition for SBIR grants 
and, as such, foster innovation and commercialization by small 
companies with the most promise. Second, clarify SBIR eligibility rules 
to make them easier to understand and increase transparency regarding 
the program's operation. Third, maintain agency flexibility to make 
certain the SBIR program continues to serve the needs of individual 
agencies.
    I will briefly discuss each of these important goals.

Increase Competition and Foster Innovation and Commercialization by the 
                    Best Small Companies

    SBA's 2003 ruling that excludes majority venture-backed companies 
inhibits the SBIR program from receiving the most competitive pool of 
applicants possible and stifles the ability of SBIR to carry out its 
mission to fund projects that will improve public health and have the 
most commercial potential.
    The current SBA interpretation would deem eligible a public company 
with 499 employees and significant--perhaps hundreds of millions--of 
dollars in revenue. However, a private company with 20 employees, no 
annual revenue and $8 million in venture capital by multiple venture 
capital funds equaling 56 percent of the company's equity--even though 
no one venture capital firm has more than 30 percent of total equity--
is ineligible. A significant number of BIO's emerging companies are 
ineligible, the majority of which would apply to SBIR if able. These 
companies are working on breakthroughs for the treatment of diseases 
such as cancer, Alzheimer's, lupus, and leukemia.
    The National Institutes of Health (NIH) have documented disturbing 
trends since the 2003 ruling. Applications for SBIR grants at NIH have 
declined by 11.9 percent in 2005, 14.6 percent in 2006, and 21 percent 
in 2007. Additionally, the number of new small businesses participating 
in the program has decreased to the lowest proportion in a decade.
    Small biotechnology companies have high and intense capital needs 
(over $1 billion) and an unusually long development time of five to 
twelve years. The vast majority of biotechnology companies raise 
between $5 million and $15 million in their first round of venture 
financing for their lead product(s), an amount that usually results in 
the venture capital firms collectively owning more than 50 percent of 
the company. However, the investment group usually consists of several 
firms, none of which owns more than 15-25 percent of the company.
    SBIR plays a critical role in aiding small biotechnology companies 
in their early stage research to navigate through the ``Valley of 
Death'' where the concept is too high-risk for private market support. 
This has never been more important as the ``Valley of Death'' is only 
getting wider and deeper in these difficult economic times.
    BIO respectfully asks the Committee to reinstate the eligibility of 
small, VC-backed biotechnology firms to compete for SBIR awards. This 
will ensure the most competitive pool of applicants and that grants 
awarded will be based on projects that show the most promise in 
bringing breakthrough therapies to the public.

Clarify SBIR eligibility rules to make the application process more 
                    straightforward and user-friendly.

    It is equally important that the reauthorization clarify SBA 
affiliation regulations. Under current SBA regulations, when 
determining the size of a business, the SBA considers the number of 
direct employees at the business as well as affiliated businesses' 
employees. Businesses are affiliates of each other if the SBA 
determines that another business has either affirmative or negative 
control. Current regulations state that a venture capital company that 
holds a minority share in another business can be considered an 
affiliate of that business. If the SBA determines a venture capital 
company is affiliated with the business, not only are the employees of 
the venture capital company included in the size determination but so 
are the employees of other businesses in which the venture capital firm 
is invested.
    As a result of these affiliation rules, a small company with 50 
employees could be deemed to be affiliated with hundreds of other 
employees of companies with which the small company has no relationship 
whatsoever, simply because the companies share a common investor. It is 
important to note that this can be the case where the VC investor owns 
a minority stake in the small business applying for SBIR.
    Not only are these affiliation rules nonsensical, the manner in 
which they are applied is often a mystery to the small business 
applying for the SBIR grant. As a result, a small company may certify 
in good faith that it is eligible for an SBIR grant, only to later find 
out that the SBA has affiliated it with a large number of employees at 
other unrelated companies, thus making the small business ineligible.
    BIO recommends the reauthorization bill provide language to clarify 
that minority investment by a venture capital operating company does 
not make that company an affiliate of another company for the purposes 
of determining size. This is a common sense measure that will provide 
clarity and peace of mind for small business entrepreneurs looking to 
participate in the SBIR program.

Maintain Agency Flexibility

    BIO also supports maintaining agency flexibility in the SBIR 
program. One of the great strengths of the SBIR program stems from the 
fact that Congress provided the affected departments and agencies with 
flexibility in establishing the program. Maintaining flexibility in the 
program is also supported by a National Research Council 2007 report 
which states, ``. . . flexibility is a positive attribute in that it 
permits each agency to adapt its SBIR program to the agency's 
particular mission, scale and working culture.''
    The reality is that various government agencies may structure their 
SBIR programs in different ways to meet differing agency needs. This is 
a good thing, so long as the original goals of the SBIR program are 
preserved. Certain agencies, for example, may need the flexibility to 
award larger grants, if projects they are funding are in an area where 
research is typically more expensive. This is sometimes the case for 
biotechnology companies researching therapies that are especially novel 
or cutting-edge. For this reason, BIO does not believe that a hard cap 
should be applied to the SBIR grant amounts. Agencies should be the 
best judge of how to use their SBIR funds to advance science and 
commercialize new innovations.
    Additionally, any caps on SBIR grants, if imposed, should apply to 
particular SBIR phases and should not apply to the entire amount that 
the agency spends on a particular project. The NIH, for example, has 
chosen to implement a commercialization assistance program for those 
companies that may need extra funding before they can attract private 
dollars. A hard dollar cap in the SBIR program could threaten such a 
program and this would be, in BIO's opinion, very unfortunate.

CLOSING REMARKS

    Congress can continue to support the United States biotechnology 
community by allowing the government to partner with small 
biotechnology companies that have promising science but need additional 
resources at key stages of development not readily available in the 
private capital markets. SBIR should be an aggressively competitive 
program that fulfills federal research and development goals of 
bringing breakthrough public health discoveries to the public.

                    Biography for James C. Greenwood
    James C. Greenwood is President and CEO of the Biotechnology 
Industry Organization (BIO) In Washington, D.C., which represents more 
than 1,200 biotechnology companies, academic institutions, State 
biotechnology centers and related organizations across the United 
States and in more than 30 other nations. BIO members are involved in 
the research and development of innovative health care, agricultural, 
industrial and environmental biotechnology products. BID also produces 
the annual BIO International Convention, the world's largest gathering 
of the biotechnology industry, along with industry-leading investor and 
partnering meetings held around the world.
    Since his appointment in January of 2005, he has markedly enhanced 
the trade association's capacity increasing both its staff and budget 
by nearly fifty percent. BIO is now a world class advocacy organization 
playing a leading role in shaping public policy on a variety of fronts 
critical to the success of the biotechnology industry at the State and 
national levels as well as internationally.
    Mr. Greenwood represented Pennsylvania's Eighth District in the 
U.S. House of Representatives from January 1993 through January 2005. A 
senior member of the Energy and Commerce Committee, he was widely 
viewed as a leader on health care and the environment.
    From 2001 to 2004, Mr. Greenwood served as Chairman of the Energy 
and Commerce Committee Subcommittee on Oversight and Investigation with 
oversight authority over issues In the Full Committee's vast 
jurisdiction. He led hard-hitting investigations into corporate 
governance at Enron, Global Crossing and WorldCom; terrorist threats to 
our nation's infrastructure; and waste and fraud in Federal Government 
agencies.
    Prior to his election to Congress, Mr. Greenwood served six years 
in the Pennsylvania General Assembly (1980-86) and six years in the 
Pennsylvania Senate (1986-1993).
    Mr. Greenwood graduated from Dickinson College in 1973 with a BA in 
Sociology. From 1977 until 1980, he worked as a caseworker with abused 
and neglected children at the Bucks County Children and Youth Social 
Service Agency.
    Mr. Greenwood resides in Upper Makefield, Pennsylvania with his 
wife and three children.
    BIO represents more than 1,200 biotechnology companies, academic 
institutions, State biotechnology centers and related organizations 
across the United States and 31 other nations. BIO members are involved 
in the research and development of health care, agricultural, 
industrial and environmental biotechnology products.

    Chair Wu. Thank you, Mr. Greenwood.
    Dr. Rockey, please proceed.

 STATEMENT OF DR. SALLY J. ROCKEY, ACTING NIH DEPUTY DIRECTOR, 
   EXTRAMURAL RESEARCH, NATIONAL INSTITUTES OF HEALTH, U.S. 
            DEPARTMENT OF HEALTH AND HUMAN SERVICES

    Dr. Rockey. Good afternoon, Chairman Wu, Congressman 
Biggert, and other Members of the Subcommittee. Thank you for 
the opportunity to discuss the NIH SBIR/STTR Programs, and the 
role they play in stimulating innovation at small high-tech 
businesses.
    NIH [National Institute of Health] is one of the largest 
funders of the SBIR/STTR Programs and the largest supporter of 
biomedical research that focuses on extending healthy life and 
reducing the burdens of illness and disability. The SBIR/STTR 
Programs are poised to fund early-stage, high-risk, high-
quality research from which important medical advances can be 
developed. In fiscal year 2009, the total SBIR/STTR set-aside 
will be about $672 million.
    I would like to begin by highlighting several SBIR 
innovations that have made differences and can make differences 
in people's lives. Altea Therapeutics, a Georgia company, 
developed a needle-less infusion patch called the passport 
system for a painless and controlled delivery of drugs such as 
insulin or vaccines such as hepatitis B antigen through the 
skin. Three Rivers Holding, an Arizona company, focused on 
assistive technology, developing better wheels for wheelchairs. 
This smart wheel optimized wheelchair route to route out the 
cause of chronic pain in the shoulder, hand, or wrist of 
wheelchair users.
    SIG Technologies Inc. in Oregon developed a small molecule 
inhibitor, a small pox virus replication. While small pox has 
essentially been eradicated, it remains a formidable biowarfare 
threat. And finally, Biopsy Sciences in Florida developed 
hydroMARK, a novel water containing site marker used in breast 
cancer procedures. This technology is helping patients by 
replacing lengthy mammogram-guided localization wire procedures 
with a quick and accurate and more comfortable ultrasound 
localization. As a breast cancer survivor, I have personally 
experienced the excruciating procedure that this new technology 
can replace. I find it very satisfying that the NIH and the 
small business community contributes to helping women who are 
battling a life-threatening disease have one less painful 
procedure in what can be a grueling treatment regime.
    Stories such as this come from companies all over the 
United States and underscore the importance of SBIR to our 
mission. In support of the goal to increase commercialization 
of federally-supported R&D, NIH has designed programs such as 
the Phase I, Phase II Fast Track Program and competing renewal 
award to help our awardees negotiate the agonizing period 
between discovering commercialization or as we heard mentioned, 
the ``Valley of Death.''
    In addition, NIH offers commercialization assistance by 
facilitating matchmaking. It is our version of match.com, with 
the NIH pipeline to partnerships. This is a virtual space where 
SBIR and STTR awardees can showcase their technologies, and it 
allows for potential strategic partners, licensing partners, or 
investors to find them on this virtual space. And currently we 
have over 100 technologies in this database.
    NIH is pleased that a recent study conducted by the NRC, 
the National Research Council, found that 40 percent of NIH 
SBIR-funded projects are commercialized. Further, using a 
dynamic monitoring system that enables NIH to document the 
continuing achievements of its SBIR awardees over time, we have 
found that about 50 percent have achieved sales. Other factors 
such as FDA approval, strategic partnerships, and investments 
also demonstrate our program's success.
    We attribute the success and effectiveness of the program 
to several factors. The most significant of this is the 
existing flexibility in our administration of the program to 
address the changing nature of biomedical research and 
accommodate the needs of multiple industries and diverse 
product outcomes.
    Examples include the ability of companies to propose their 
own project ideas and an opportunity to resubmit unfunded 
applications. And the ability to exceed the award guidelines in 
justified cases.
    Simply stated, one size does not fit all. Flexibility is 
critical at a time when science is changing rapidly, becoming 
much more complex, and evermore expensive. Despite these 
program flexibilities and enhancements, as you already heard, 
what we have observed is there have been some troubling trends. 
Specifically, the numbers of our applications have declined 
from 2004 through 2008 by nearly 40 percent. Though the reasons 
are not fully understood for this decline, it is a 
disconcerting trend--this disconcerting trend may be related to 
certain distance incentives that are either rendering worthy 
companies ineligible or driving them away for other reasons.
    For some the award amounts or the current phase structures 
are not sufficient incentives for applying. For others the 
process appears too competitive. New companies may find the 
process daunting or aren't sure how to match their skills with 
our research areas. Some firms have lost their eligibility or 
may be confused by the eligibility criteria.
    For many biomedical technology companies the SBIR Program 
is an important source of seed funding for early-stage ideas of 
unproven feasibility, but venture capital financing is the only 
realistic way that their innovative product will enter the 
marketplace. Research and public health in biotechnology is 
characterized by high and intense capital needs, as you know, 
and to see these products from idea to market usually have very 
long development times, exceptionally high burn rates for 
investment funds, and often multiple rounds of financing to 
fund the extensive and essential clinical research. Individuals 
alone simply cannot finance the hundreds of millions of dollars 
for necessary clinical phases to bring the product to market.
    The NRC study of the SBIR Program noted that the synergies 
between SBIR funding and venture capital are useful. As the 
innovative process is not linear, even small business 
benefiting from venture funding may well seek SBIR funding as a 
means of exploring a new idea. For example, a new drug 
candidate. Keeping the pipeline full of new ideas is important 
because in today's high-risk biomedical research environment, 
the reality is that fewer than one percent of the innovative 
promising projects reach the marketplace.
    Therefore, I believe appropriate incentives can be--can 
strengthen the role of small businesses in stimulating 
technological innovation.
    In conclusion, I want to reemphasize the NIH's commitment 
to supporting small businesses and maintaining the integrity of 
the SBIR/STTR Programs. We look to small businesses to 
stimulate technological innovation, help us face new 
challenges, and to produce benefits for the public. We look 
forward to working with Congress on ways to reinvigorate the 
program, incentivize America's small businesses to participate, 
and create an environment enabling commercialization of health-
related products and services that will sustain our national 
economy.
    That concludes my statement. I look forward to answering 
any questions you have.
    [The prepared statement of Dr. Rockey follows:]
                 Prepared Statement of Sally J. Rockey
    Good afternoon, Chairman Wu and Members of the Subcommittee. My 
name is Dr. Sally Rockey. I am the Acting Deputy Director for 
Extramural Research at the National Institutes of Health (NIH), an 
agency of the Department of Health and Human Services. Thank you for 
the opportunity to discuss the NIH Small Business Innovation Research 
(SBIR) and Small Business Technology Transfer (STTR) programs and the 
role they play in stimulating innovation. Among the 11 federal agencies 
that participate in the SBIR program, the NIH is one of the largest 
funders of this program, and the largest Federal supporter of 
biomedical research.

IMPORTANCE OF SBIR PROGRAM AT NIH: IGNITING IMAGINATIONS AND SPURRING 
                    NEW DISCOVERIES

    The NIH SBIR Program is ideally suited for creating research 
opportunities for U.S. small businesses to stimulate technological 
innovation. Part of a complex innovation system, the NIH SBIR program 
provides dedicated funding for small businesses to conduct early-stage 
research and development to explore the feasibility of innovative ideas 
that may eventually result in products or services that will lead to 
better health for everyone. The NIH SBIR program is one means by which 
the NIH Institutes and Centers (ICs) accomplish their R&D objectives. A 
unique feature of the SBIR program is a focus on commercialization of 
the outcomes of research. Thus, the program serves to supplement the 
more basic and applied research programs of NIH.

TYPES OF RESEARCH NIH SUPPORTS UNDER SBIR

    Examples of the types of research that NIH supports through the 
SBIR program include, but are not limited to, drug discovery, medical 
devices, biosensors, nanotechnologies, proteomics, imaging, 
bioengineering, behavioral research, and technologies that reduce 
health disparities. Investigator-initiated ideas are the cornerstone of 
the NIH research portfolio, including projects supported by the SBIR 
program. Thus, while we solicit projects on specific topics, we also 
encourage small businesses to propose their own innovative research 
ideas that are relevant to our mission.

NIH SBIR PROGRAM OVERVIEW

    The NIH, in accordance with statute, must set aside 2.5 percent of 
its extramural research and development budget for a SBIR program. In 
fiscal year (FY) 2008, the NIH SBIR set-aside was about $580 million. 
NIH awarded 806 new Phase I and 288 new Phase II SBIR projects to small 
businesses working in many different technology areas across the 
country. Funding decisions are based on several factors: 1) ratings 
from the scientific and technical evaluation process; 2) areas of high 
program relevance; 3) program balance among areas of research; 4) 
available funds; and 5) the commercialization status, when a small 
business concern has received more than 15 Phase II awards in the prior 
five fiscal years (FYs).

EMPLOYMENT EFFECTS ON NIH SBIR AWARDEES

    Since the program's inception in 1982, the NIH has invested more 
than $5 billion in more than 19,000 projects to over 5,000 small 
businesses. Past studies of the SBIR program conducted by the NIH\1\ 
and the National Research Council (NRC) \2\ have shown that small 
businesses are seen as sources of economic vitality and are especially 
important as a source of new employment. In looking at job growth of 
SBIR awardee firms since the receipt of their award, the NRC found the 
mean employment gain was 29.9 FTEs. In addition, respondents estimated 
as a result of their SBIR projects their companies were, on average, 
able to hire 2.7 full time employees (FTEs), and to retain 2.2 FTEs 
that might not otherwise have been retained. Although the employee size 
limit for firms receiving an SBIR award is 500, the median size of 
companies receiving NIH SBIR awards is actually relatively small: 10 
employees. Sixty percent were found to have 15 or fewer employees at 
the time of the NRC survey. These data suggest that the SBIR program 
has positive employment effects on small business job creation and 
growth.
---------------------------------------------------------------------------
    \1\ National Institutes of Health, National Survey to Evaluate the 
NIH SBIR Program: Final Report, July 2003.
    \2\ National Research Council Phase II Survey, An Assessment of the 
SBIR Program At the National Institutes of Health, 2009.

PROGRAM EFFECTIVENESS: BRINGING IDEAS TO LIFE

    The SBIR program seeks to fund the most scientifically promising 
projects for which private and public funds are not traditionally 
available. As noted from the few examples below, the program has shown 
that tangible scientific benefits can result from a small investment in 
early-stage ideas with commercial potential.
    NIH SBIR projects are stories of discovery. Following are a few 
examples of how SBIR products are touching people's daily lives:

          An anti-viral drug, Tyzeka, under the generic name of 
        telbivudine, is used to treat chronic hepatitis B in adults.

          A needle-less infusion patch called the PassPortTM 
        System is capable of delivering drugs such as insulin. This 
        novel technology bypasses metabolism in the intestinal tract 
        which typically results in low bioavailability of oral drugs.

          A new cholesterol test, called the VAPTM (Vertical 
        Auto Profile), can identify twice the number of people at risk 
        for heart disease than traditional cholesterol tests developed 
        in the 1970s.

          The HydroMARKTM, a novel, visible marker used in 
        ultrasound, is addressing an unmet clinical need and has helped 
        patients by replacing lengthy mammogram guided wire 
        localization procedures with quick, accurate ultrasound guided 
        localization procedures that are more comfortable.

          The LifelineTM, which is tissue engineered blood 
        vessels comprised entirely of the patient's own living cells, 
        is targeted to help hemodialysis patients, lower limb 
        amputation candidates, pediatric patients with cardiac defects 
        and coronary bypass candidates.

    Examples such as these demonstrate ways the SBIR program is 
stimulating technological innovation and underscore why the NIH SBIR 
program is important to our mission and to the entire innovation 
process.

PROGRAM FLEXIBILITY IS KEY: ONE SIZE DOES NOT FIT ALL

    NIH is continually focused on ways to address the needs of a 
diverse business community, multiple industries, different technology 
sectors, and diverse product outcomes. NIH attributes the success and 
effectiveness of its program to several factors, the most significant 
of which is flexibility in our proactive administration of the program 
to accommodate the changing nature of biomedical and behavioral 
research while increasing the efficiency and effectiveness of the 
program.
    Examples of program flexibility include the ability to propose 
research projects in fields that have the most biological potential; 
the ability for an applicant to resubmit an unfunded application; and 
the ability to exceed the Phase I and Phase II award guidelines when 
the science proposed warrants such a deviation to produce successful 
outcomes. The SBIR median award size in FY 2008 was $151,440 for Phase 
I and $841,381 for Phase II projects. For STTR, the median award size 
was $149,711 for Phase I and $907,970 for Phase II.
    In addition, we have developed programs to help companies address 
funding gaps between Phase I and Phase II and programs to help them 
negotiate the agonizing period between discovery and commercialization. 
For example, the Phase I/Phase II Fast-Track award and Phase II 
Competing Renewal award are aimed at accelerating research projects 
that have great potential to produce products; and, our 
commercialization assistance programs are targeted to the specific 
needs of small businesses funded by NIH.
    For many biomedical technology companies, the SBIR program is an 
important source of seed funding for early-stage ideas of unproven 
feasibility, but a venture capital financing strategy is the only 
realistic way that their innovative product will enter the marketplace. 
Research in public health and biotechnology is characterized by high 
and intense capital needs to see a product from idea to market (e.g., 
it takes an average of $1.2 billion to bring a drug to the market); 
unusually long development times (i.e., five to twelve years); 
exceptionally high ``burn rates'' for investment funds; investment by 
venture capital companies (VCCs), many of whom are not owned at least 
51 percent by individuals; and often, the necessity for multiple rounds 
of financing to fund the extensive and essential clinical research. 
Individuals, alone, simply cannot finance the hundreds of millions of 
dollars for necessary clinical phases to bring products to the market 
that will improve the health of Americans.
    The NRC's study of the SBIR program noted the synergies between 
SBIR funding and venture capital are useful and their study underscored 
the notion that the innovation process often does not follow a linear 
path. So, even small businesses benefiting from venture funding may 
well seek SBIR funding as a means of exploring a new idea or, for 
example, a new drug candidate. Keeping the pipeline full of new ideas 
is important because, in today's high-risk biomedical research 
environment, especially in areas such as drug development, drug 
discovery, and therapeutics, the reality is that fewer than one percent 
of the innovative, promising projects reach the marketplace.
    Simply stated, one size does not fit all.
    Flexibility is critical at a time when science is changing rapidly, 
becoming more complex, more interdisciplinary, and ever more expensive.
    Throughout the SBIR program's history, small businesses, including 
those companies with venture capital funding, have applied for and 
received SBIR funding in areas that help to advance our mission. The 
National Research Council's study found no evidence that participation 
of companies with multiple VC ownership was harmful to the program or 
that other small businesses have ever been crowded out by the 
participation of small businesses that are majority-owned by VCCs.

KEY TRENDS

    Overall, the SBIR program has complemented NIH's mission to advance 
science while reducing the burden of illness on public health. In spite 
of our commitment to small businesses and our proactive enhancements to 
the NIH SBIR program, the program has not increased participation of 
applicants at the same rate observed for other sectors of the NIH 
extramural community at NIH. Specifically, the numbers of SBIR 
applications and new firms participating in the program declined from 
fiscal years 2004 through 2008. Though the reasons for this near 40 
percent drop in applications are not fully understood, this 
disconcerting trend appears to be the result of disincentives in the 
program that are either rendering worthy companies ineligible or 
driving them away for other reasons.

CONCLUSION

    In conclusion, I want to reemphasize the NIH commitment to 
supporting small businesses, maintaining the integrity of SBIR program, 
and ensuring that technology developments will help improve the health 
and extend the lives of all people. We are looking to small businesses, 
primarily through the SBIR program, to stimulate technological 
innovation, help us face new challenges and to produce not only new 
knowledge but also tangible benefits that touch the lives of every 
individual. We are hopeful that our continuing outreach efforts and 
actions to modernize the SBIR program will be helpful in that regard. 
Finally, we continue to believe strongly that flexibility within the 
SBIR program is essential to achieving greater successes in these 
programs. This concludes my statement. I will be pleased to answer any 
questions you may have.

                     Biography for Sally J. Rockey
    Dr. Sally Rockey has spent the majority of her career in the area 
of extramural research administration and Information Technology. She 
received her Ph.D. in Entomology (1985) from Ohio State University and 
held a post doctoral appointment at the University of Wisconsin. In 
1986 she joined the U.S. Department of Agriculture's extramural 
research arm, the Cooperative State Research Education and Extension 
Service (CSREES), as a program officer for entomological grant 
programs. She quickly moved up in the organization and became Deputy 
Administrator for the Competitive Research Grants and Award Management 
Unit where oversaw extramural competitive research, education and 
extension portfolio. In 2002, Dr. Rockey became CSREES's Chief 
Information Officer where she applied her breadth of government 
knowledge to IT by aligning state-of-the-art information technologies 
with the goals and objectives of CSREES. In 2005 Dr. Rockey was 
appointed to the position of Deputy Director of the Office of 
Extramural Research (OER) within the Office of the Director, National 
Institutes of Health (NIH). OER serves as the focal point for policies 
and guidelines for extramural research administration within NIH where 
Dr. Rockey applied her experience in research and grants administration 
to public health. She also served as Acting Director of the Office of 
Research Information Systems in OER where she again used her CIO 
experience to oversee the eRA (electronic research administration) and 
OER reporting activities. Among her many other responsibilities Dr. 
Rockey serves as the NIH Agency Extramural Research Integrity Officer 
managing research misconduct issues for NIH extramural programs and 
Directed the OER Office of Planning and Communications. In 2008 Dr. 
Rockey became Acting NIH Deputy Director for Extramural Research and 
Acting Director of OER and will again apply her many skills to leading 
the extramural activities at NIH.
    Rockey is a skilled public speaker and has given hundreds of 
presentations on extramural research priorities and policies, 
grantsmanship, the competitive peer review process, scientific 
integrity, and IT. She is active on a number of federal 
intergovernmental committees related to science, research, grants 
management and electronic government and collaborates closely with 
academic and scientific communities. She has been honored by receiving 
the Presidential Rank Award in 2004.
    Dr. Rockey has actively participated in the science education of 
young children by giving presentations on insects to local elementary 
schools where she was known as the ``Bug Doctor'' coordinated her local 
pool's swim team, is an avid Bridge player and sings and plays the 
guitar.

    Chair Wu. Thank you, Dr. Rockey. We are very grateful for 
NIH's continuing support for SBIR and STTR.
    Mr. Glover, please proceed.

    STATEMENT OF MR. JERE N. GLOVER, ATTORNEY AND EXECUTIVE 
  DIRECTOR, SMALL BUSINESS TECHNOLOGY COUNCIL, WASHINGTON, DC

    Mr. Glover. Mr. Chairman, Congresswoman Biggert, other 
Members of the Committee, I want to thank you for the 
opportunity to be here. I am Jere Glover, Executive Director of 
the Small Business Technology Council of the National Small 
Business Association. We represent the 7,000 SBIR companies 
that are active in the SBIR Program today.
    America is certainly not doing enough to promote 
innovation, especially given the state of competition from 
foreign countries that are graduating more scientists and 
engineers than we are and the state of our economy today. Our 
share of the global technology market is declining.
    Ten foreign countries have copied the SBIR Program. Major 
countries. Witness after witness, GAO [Government 
Accountability Office] study after GAO study, report after 
report say the program is working remarkably well and has for 
26 years. Please don't mess it up.
    The SBIR Program isn't broken. It doesn't need fixing. 
Please make changes that are limited and monitored carefully 
and make sure the agencies, the GAO, and the National Academy 
of Sciences report fully on those changes and how they affect 
the program and how they affect the technology community. 
Asking small business to trust the government to allow the 
agencies to be flexible, to allow the government to change or 
modify the program that is small businesses' only real portal 
or access to the federal R&D dollars is like waving a red flag 
in front of small business.
    Thirty years of experience with the government has proven 
that small business will come out on the short end. Little has 
changed in the federal R&D marketplace in the last 30 years. 
Small businesses' share of the federal R&D market was 3.5 
percent in 1978. It has now increased to 4.3 percent in 30 
years.
    But the technology marketplace has changed, and changed 
significantly. In 1978, small business employed only six 
percent of the scientists and engineers in America. Today, 
according to the National Science Foundation's Science 
Indicators that number has gone up to 38 percent. Small 
businesses receive 38 percent of all U.S. patents, and SBIR 
companies have received over 60,000 patents and are patenting 
at the rate of basically 5,000 patents per year.
    Where do innovations come from? One of the more surprising 
studies recently is looking at where the innovation comes from. 
According to the R&D top 100 innovations, small business has 
gone from zero SBIR companies--from zero in 1980, '82, when the 
program started to now having 25 percent of all American key 
innovations. At the same time large firms have dropped from 40 
innovations per cycle down to under ten. So small business is 
where the job creation is really happening.
    Let me just mention that there is a lot of discussion to 
where the SBIR Program should be focused. It has always focused 
on the first three basic parts of this; basic research, applied 
research, and development. The commercialization has always 
been beyond the SBIR Program, and it should be.
    For example, the entire HHS [Health and Human Services] 
budget would not fund one single drug going through their 
application [process at FDA]. My friend, Jim Greenwood, has 
pointed out that it takes $800 million. The HHS entire budget 
would not even fund one. We have to be realistic. When you get 
in the commercial arena, this program and the Federal 
Government simply don't have the funds to pick enough winners 
to make it work.
    The economic impact of the SBIR Program, the job creation, 
just as a small business, if you look at this indication, small 
business has led us out of every recession, and they are doing 
a--will continue to do that. The economic impact of the SBIR 
Program, if you will look in the back of my testimony, you will 
see green pages, and they have information on each specific 
Congressional district or the states of the various Members. 
What is important to point out is that this SBIR Program, using 
a random selection of states, those represented on this 
subcommittee, have received $6.5 billion of SBIR awards. 
Currently in the last five years there are almost $2 billion 
involved, and those companies have created over 100,000 jobs, 
or maintained, I should say. Created--maintained 100,000 jobs 
and they filed 14 times just for the Members in the states that 
are represented on this subcommittee.
    It is a wonderful program. It has worked extremely well. 
The universities and small businesses have worked well 
together, and that has been improving and working well. We are 
starving the most productive sector of the small business 
economy; the high-tech small business companies and 
underfunding the most prolific scientists and engineers. That 
in a nutshell, ladies and gentlemen, is why we are losing in 
the international market, market share, and what we need to do 
to improve our economy. We can't continue down this road with 
small business receiving less than five percent of the federal 
R&D dollars and expect technology innovation to lead out of the 
recession and into a larger share of the global technology 
market.
    Thank you.
    [The prepared statement of Mr. Glover follows:]
                  Prepared Statement of Jere N. Glover
    Chairman Wu, Ranking Member Smith, Members of the Subcommittee, 
thank you for the opportunity to appear here today to discuss the 
importance of technological innovation to the United States and the 
reauthorization of the SBIR and STTR Programs. I am Jere W. Glover, 
Executive Director of the Small Business Technology Council (SBTC) of 
the National Small Business Association in Washington, DC. I have been 
involved in federal science and technology innovation programs since 
1978, when, as Counsel to the House Small Business Committee, I helped 
convene the first joint House-Senate hearings on the subject.\1\ I 
subsequently testified before Congress regarding small business and 
innovation on numerous occasions, as Deputy Chief Counsel for Advocacy 
at SBA during the Carter Administration and as Chief Counsel during the 
Clinton Administration.\2\
---------------------------------------------------------------------------
    \1\ The 1978 hearings showed that, despite their demonstrated 
superior efficiencies at innovating, small companies received only 3.5 
percent of federal R&D contract dollars. Today, with far more science 
and engineering talent at their disposal, and a far more widely 
acknowledged record of innovations, small companies still receive only 
4.3 percent of those R&D contract dollars. And SBIR/STTR accounts for 
more than half of that.
    \2\ See ``Small Business and Innovation,'' Report of the Joint 
House and Senate Small Business Committees, August 9 and 10, 1978. As 
an example of my testimony on the subject, see Testimony of Jere 
Glover, Chief Counsel for Advocacy, Small Business Administration, 
Senate Small Business Committee, August 4, 1999, http://www.sba.gov/
advo/laws/test99-0804.pdf
---------------------------------------------------------------------------
    An outgrowth of the White House Conference on Small Business in 
1995, SBTC is the Nation's largest association of small, technology-
based companies in diverse fields, and represents more companies that 
are active in the federal Small Business Innovation Research (SBIR) and 
Small Business Technology Transfer (STTR) Program than any other 
organization. SBTC also serves as the Technology Council of the 
National Small Business Association, the Nation's oldest nonprofit 
advocacy organization for small business, which represents over 150,000 
small companies across the United States. I appear here today on behalf 
of both organizations.
    This hearing comes at a critical time. For more than a decade, 
other nations have been chipping away at the U.S.' global leadership in 
technological innovation. Now a second powerful threat is upon us--the 
worst recession since the Great Depression.
    As the chart below shows, our global market share in this key 
economic area is declining:



    While the pie is getting bigger, the U.S. share is getting smaller.
    Another way of looking at this is to plot the balance of trade. Our 
trade surplus in advanced technology exports has disappeared; we now 
have a deficit:



    The global challenge also shows up in U.S. patent statistics. Here 
again, the pie is getting larger, as more patents are issued each year. 
But here again, the U.S. share of the pie is shrinking. U.S. patents 
issued to Americans have fallen from two-thirds of all those issued in 
1980, to less than half today.
    Over the past seven months, technological innovation has faced a 
new menace: a deep global recession that is drying up both the supply 
of capital and the demand for technological goods and services. 
Unemployment is increasing.
    To help restore our economy and strengthen our place in the world, 
we must encourage the growth of technology and innovation. As I hope to 
show in my testimony, small business generally, and the SBIR Program 
specifically, offer extremely efficient ways to meet the challenges we 
face. Of course, SBIR alone cannot do all that is needed. Programs such 
as the Department of Commerce's Advanced Technology Program (ATP) and 
the Technology Innovation Program (TIP) of the National Institute of 
Standards and Technology should be expanded, and new efforts to 
encourage and commercialize innovation should be explored. Likewise, we 
need to promote early-stage investments in technologies, like those 
provided by ``angel'' investors. We should also provide assistance for 
small businesses in filing foreign patents.
    In this testimony, however, I want to concentrate on a few key 
themes:

        1)  Small business has a well-established track record of 
        creating most new jobs in the U.S. economy, and particularly so 
        when the economy is coming out of recessions. For purposes of 
        today's discussion, what's especially important about small 
        business job creation is that small business has now become the 
        largest single source of employment for U.S. scientists and 
        engineers, outstripping large business, universities and 
        government.

        2)  Small business also has become the Nation's leading source 
        of technological innovations, particularly breakthrough 
        innovations, as measured by several indicators.

        3)  As demonstrated by the recent National Academy of Sciences 
        reports and an array of earlier analyses, the SBIR Program has 
        become uniquely and powerfully effective in harnessing these 
        small business scientists and engineers, as well as their 
        breakthrough innovations, to the task of meeting federal agency 
        R&D needs.

        4)  While some modest adjustments in the SBIR Program would be 
        helpful--such as those recommended by the National Academy 
        studies--overall Congress should renew the Program without 
        major design changes. An increase in the Program's allocation 
        of federal funds would yield important benefits to the Federal 
        Government and to the Nation's economy and global 
        competitiveness.

        5)  The STTR Program, while newer and smaller than SBIR, shows 
        great promise in uniting small business and university 
        capabilities in innovation, and deserves to be expanded.

    Let me expand on each of those points.

SMALL BUSINESS AND JOBS

    For the past 40 years, small companies have created 60-80 percent 
of all net new jobs, on average.\3\ In other words, add up all the new 
jobs created, subtract the jobs lost when businesses close their doors, 
and you find that, year in and year out, small business supplies our 
country with two-thirds to three-quarters of all the new jobs. This 
tempo may even be increasing. Recent data from the U.S. Bureau of 
Census and the Office of Advocacy, U.S. Small Business 
Administration,\4\ shows that small businesses (with less than 500 
employees) created 93 percent of the net new jobs in the U.S. during 
the period 1989 to 2005.
---------------------------------------------------------------------------
    \3\ U.S. Small Business Administration, Small Business FAQ's, 2009.
    \4\ SBA Office of Advocacy, from data provided by the U.S. Bureau 
of the Census, Statistics of U.S. Business. See: http://www.sba.gov/
advo/research/dyn-b-d8905.pdf. This data series 
runs from 1989 through 2005 only.



    As striking as these figures are, the role of small business as a 
job creator during recessions is even more remarkable. The year-by-year 
table (based on the same data sources) shows the impact.



    As Figure 2 shows, in the recession years of 1990-1 and 2000-2002, 
small businesses created all net new jobs. In fact, one can say that 
small businesses created more than 100 percent of all net new jobs, 
since large companies were actually shedding jobs during these periods. 
In 2001-2, at the trough of the recession, more than two million net 
jobs disappeared at large companies.
    Moreover, this pattern of large business job loss persists until 
well after the country has ended its recession by statistical measures. 
In 1992, large companies continued to shed jobs. In 2002-3, they shed 
more than a million of them. Small businesses offset all of these large 
business job losses in 1992 and again in 2002-4. For these years, small 
business created 124 percent of all net new jobs, by offsetting the 25 
percent loss in large business employment.



    In other words, if recent history is any guide, we can look to 
small businesses to do most of the hiring in this recession for now and 
the foreseeable future.
    This strongly suggests that supporting small businesses in stimulus 
legislation is likely to have the maximum short-term and medium-term 
payoffs on Main Street, and more broadly, on the population as a whole. 
(The population as a whole seems to grasp this. According to a recent 
Zogby Poll, 63 percent of the public believes that ``small business and 
entrepreneurs will lead the U.S. to a better future'' while only 21 
percent believe that ``large corporations and business leaders'' will 
do so.\5\ )
---------------------------------------------------------------------------
    \5\ WE Media Zogby Poll, 25 February 2009, http://www.zogby.com/
news/ReadNews.cfm?ID=1678
---------------------------------------------------------------------------
    There are obviously many worthy objectives to be supported in the 
economic stimulus legislation. It's unfortunate, however, that much of 
the legislation seems to have overlooked this major point of economic 
leverage.

SMALL BUSINESS AND SCIENCE AND ENGINEERING

    Our focus today is on one aspect of how small business supports the 
broader economy--its role as a technological innovator.

1. SCIENCE AND ENGINEERING EMPLOYMENT
    One reason why small business seems to be getting better and better 
at technological innovation is that it employs more and more scientists 
and engineers. The trend over the past generation is shown in the chart 
below.\6\
---------------------------------------------------------------------------
    \6\ National Science Foundation, Science and Engineering 
Indicators, 2007.



    Strikingly, there are now more scientists and engineers working in 
smaller companies (38 percent) than in any other sector. Some 27 
percent of U.S. scientists and engineers currently work for large 
companies, 16 percent for universities, 13 percent for government, and 
six percent for non-profits.\7\
---------------------------------------------------------------------------
    \7\ Ibid. (For a very thoughtful and nuanced analysis of this 
shift, see the White Paper by SBIR Founder Roland Tibbetts that is 
attached as an annex to this testimony.)
---------------------------------------------------------------------------
    The SBIR Program, which may be at least partly responsible for 
small business' growing science and engineering firepower, has deployed 
it to remarkable effect.

2. PATENTS
    Since a major consideration at today's hearing is stimulating the 
economy through science and engineering innovations, consider an 
important but often overlooked measure of wealth and poverty--patent 
productivity.
    For a striking illustration of the relationship between patents and 
wealth, we can turn to a recent economic study for the Federal Reserve 
Bank by Paul Bauer, Mark Schweitzer and Scott Shane.\8\ The authors 
measured eight determinants of personal income growth per capita, in 
the 48 contiguous states of U.S., from 1939 to 2004.
---------------------------------------------------------------------------
    \8\ ``Altered States: A Perspective on 75 Years of State Income 
Growth,'' Federal Reserve Bank of Cleveland, Annual Report 2006. For 
more detail, see Paul Bauer, Mark Schweitzer, Scott Shane, State Growth 
Empirics: The Long-Term Determinants of State Income Growth, Working 
Paper 06-06, Federal Reserve Bank of Cleveland, May 2006. 
www.clevelandfed.org/research/Workpaper/2006/wp0606.pdf
---------------------------------------------------------------------------
    By far the most important growth determinant for the 1939-2004 
period proved to be knowledge stocks. For this, the authors used three 
indices: high school and college attainment rates, and patents per 
capita. Upon closer examination, the overwhelmingly dominant indicator 
of income growth proved to be patents per capita.
    The chart\9\ below shows the power of this indicator in each of the 
48 states studied:
---------------------------------------------------------------------------
    \9\ Ibid., p. 46.
    
    

    Broadly speaking, the above chart can be read from left to right. 
States with lagging growth over the period studied are on the left; 
those with higher growth, on the right. Remarkably, the patent 
indicator is the top predictor of both wealth and poverty. States with 
low patents per capita tend to be poor. Those with higher patents per 
capita tend to be affluent.
    Overall, patents are more closely associated with economic growth 
than education, industry structure, or any of the other variables 
tested.
    This finding underscores the importance of an earlier study of 
patent productivity, which showed that small technology-based companies 
produce 13 times more patents per employee than larger technology-based 
companies, and that these smaller company patents are twice as likely 
to be among the most cited in other patent applications.\10\
---------------------------------------------------------------------------
    \10\ Diana Hicks, Small Serial Innovators: The Small Firm 
Contribution to Technical Change, CHI Research, 2003, produced under 
contract to the Small Business Administration, contract SBA01C-0149.
---------------------------------------------------------------------------
    Firms in the SBIR Program are among the most prodigious producers 
of patents in the United States. Figure 6 below, provides a 
glimpse.\11\
---------------------------------------------------------------------------
    \11\Innovation Development Institute, 2009, from U.S. Patent and 
Trademark Office data.



    As of today, more than 60,000 patents have been issued to SBIR 
companies--despite the fact that the program is only 25 years old. A 
relatively modest program, representing only 2.5 percent of extramural 
R&D spending at 11 federal agencies, SBIR nevertheless is accounting 
for 40 percent more patents than all U.S. universities combined, and is 
generating new patents at an average speed of 13 a day.
    SBIR also does a remarkable job of spreading contract dollars, and 
therefore the resulting patents, around the country. By way of 
contrast, in 2005 about 70 percent of venture capital investments went 
to just five states--versus only 45 percent of SBIR contract dollars. 
The ``middle 20'' states--those ranked 15-25 in SBIR contract dollars--
obtained 25 percent of SBIR dollars but only six percent of VC dollars. 
Although venture capital investments exceed SBIR funding by about ten 
to one, there were still 15 states that received little or no venture 
investment--and five states that received virtually none. SBIR dollars 
reach virtually every state.\12\
---------------------------------------------------------------------------
    \12\ SBIR data from U.S. Small Business Administration, 
www.sba.gov/sbir/2004SBIRStateChart.xls Venture capital data from 
National Science Foundation, Science and Engineering Indicators, 2006, 
Table 8-42.

3. INNOVATION QUALITY
    Is the quality of SBIR innovation output matched by its quantity? 
Are these innovations really ground-breaking and economically 
significant?
    From the perspective of the Federal Government, for whom the SBIR 
research is performed, the quality would appear to be quite high. The 
U.S. Government Accountability Office has studied the SBIR Program on 
at least ten occasions since the program began, and offered positive 
assessments in each case.\13\ So have several earlier reports by the 
National Academy of Sciences and the National Academy of 
Engineering.\14\
---------------------------------------------------------------------------
    \13\Federal Research: Assessment of Small Business Innovation 
Research Programs, GAO Report RCED89-39, January 23, 1989; Federal 
Research: Small Business Innovation Research Program Shows Success But 
Could Be Strengthened, GAO Report T-RCED 92-3, October 3, 1991; Federal 
Research: Interim Report on the Small Business Innovation Research 
Program, GAO Report 95-59, March 8, 1995; Federal Research: 
Observations on the Small Business Innovation Research Program, GAO 
Report RCED 98-32, April 17, 1998; Small Business Innovation Research, 
GAO report 06-565, April 2005; Federal Research: Observations on the 
Small Business Innovation Research Program, GAO Report GAO-05-861-T, 
June 28,2005.
    \14\ Conflict and Cooperation in the National Competition for High 
Technology Industry, National Academy of Sciences, 1996; Small Business 
Innovation Research Program: Challenges and Opportunities, Board on 
Science, Technology and Economic Policy, National Academies of Science 
and Engineering, 1999; SBIR: Assessment of the Department of Defense 
Fast Track Initiative, STEP Board, National Academies of Science and 
Engineering, 2000.
---------------------------------------------------------------------------
    One indication of the importance of a patent is the number of times 
that it is cited in other patent applications. A study of companies 
that were ``serial innovators'' (with 15 or more patents over five 
years), found that over one-third were small companies, many of them 
SBIR companies. Patents from these small ``serial innovators'' were 
cited 28 percent more often by other inventors, were twice as likely to 
be among the top one percent of the most widely cited patents, and were 
twice as closely linked to scientific research than were the patents 
from the large ``serial innovators.'' \15\
---------------------------------------------------------------------------
    \15\ Hicks, Small Serial Innovators: The Small Firm Contribution to 
Technical Change, op. cit.
---------------------------------------------------------------------------
    From a different perspective, the Information Technology and 
Innovation Foundation recently analyzed the annual lists of the 100 
most technologically-important innovations, as selected each year by a 
panel of judges for R&D Magazine.\16\ In the chart below (Figure 7), 
the authors compared the performance of innovations from SBIR companies 
on these annual assessments, with those from Fortune 500 companies and 
universities.
---------------------------------------------------------------------------
    \16\ Fred Block and Matthew Keller, Where Do Innovations Come From? 
Transformations in the U.S. National Innovation System 1970-2006, 
Information Technology and Innovation Foundation, July 2008.



    As the chart indicates, for the past decade, about one-fourth of 
the most important technological innovations in the Nation have been 
---------------------------------------------------------------------------
coming from the SBIR Program. Or, as the authors themselves put it:

         ``The results show that these SBIR-nurtured firms consistently 
        account for a quarter of all R&D 100 award winners--a powerful 
        indication that the SBIR Program has become a key force in the 
        innovation economy of the United States.'' \17\
---------------------------------------------------------------------------
    \17\ Ibid., p. 15.

    It perhaps bears repeating that this is surely a unique level of 
---------------------------------------------------------------------------
economic performance for such a relatively small federal program.

4. WHY?
    The metrics suggesting both the value and the profusion of SBIR 
innovations raise a very important question: Why? Why would a modest 
program produce such outsized results?
    The National Academy of Sciences team studying the SBIR Program 
wondered about that, too.
    Part of the answer, the NAS says, can be found in the scrupulously 
meritocratic design of the SBIR Program. SBIR is founded on 
competition, peer review, and the milestones of Phase I, Phase II and 
Phase III that are gated by rigorous demonstrations of scientific 
validity and commercial potential.
    In their recent report on the SBIR Program at the National Science 
Foundation, the Academy also suggests that a new and different model of 
innovation appears to be emerging from the SBIR Program.\18\
---------------------------------------------------------------------------
    \18\ An Assessment of the SBIR Program at the National Science 
Foundation, National Academy of Sciences, 2008, page 17. See: http://
www.nap.edu/catalog/11929.html. As noted in Footnote 13 of this study, 
``This view was echoed by Duncan Moore: `Innovation does not follow a 
linear model. It stops and starts.' '' See also National Research 
Council, SBIR: Program Diversity and Assessment Challenges, Charles W. 
Wessner, ed., Washington, DC: The National Academies Press, 2004, p. 
24.
---------------------------------------------------------------------------
    Figure 1-1 below shows the ``Linear Model of Innovation'' that is 
presumed to occur in most R&D programs, whether public or private: 
basic research gives way to applied research, which in turn is 
developed and commercialized.
    The NAS believes that something very different is happening in 
SBIR.
    Figure 1-2, just below 1-1, attempts to describe the new process--
as a ``Feedback Model of Innovation.'' At each step of the way between 
basic research and commercialization, feedback loops evolve, altering 
the previous and succeeding steps. These loops recalibrate and revise 
innovations, delivering much more commercializable end products. But 
the process doesn't end there. The commercialization step itself, 
rather than being the end point, is the source of yet another feedback 
loop--leading to new characteristics, tradeoffs, and unanticipated 
applications. Thus, while the ``Feedback Model'' appears to be more 
complex than the ``Linear Model,'' it is actually far more efficient at 
delivering usable innovations.



    Notably, the NAS extracted this analysis and schematic from its 
report on the National Science Foundation and reiterated it in the 
final report on the SBIR Program as a whole.
    Further insights into the why the design of SBIR Program seems to 
work so well are provided throughout the Academy reports on the various 
federal agency SBIR Programs, as well as in the White Paper on the SBIR 
program written by its founder, Roland Tibbetts, which is attached to 
this testimony as an annex. The Tibbetts paper, in particular, focuses 
on the way in which SBIR is aligned with the motives of scientists, 
inventors, and investors. (Tibbetts also comments on how changes that 
were proposed by H.R. 5819 of the last Congress would have weakened the 
foundations of the SBIR Program's success since 1982.)

THE NAS EVALUATION OF THE SBIR PROGRAM

    This committee was instrumental, during the last SBIR 
reauthorization cycle, in directing that the National Research Council 
should conduct a broad scientific review of the SBIR Program. This 
ambitious effort, which the NRC assigned to the National Academy of 
Sciences, cost over $5 million and took more than five years. The 
result was a series of agency studies, and a broad program overview, 
that offers the most comprehensive analysis of SBIR--and for that 
matter virtually any federal science and technology program--ever 
undertaken.
    Completed just this past January, the NAS findings paint a 
remarkably positive portrait of the Program. The studies and even the 
summaries are extremely rich and detailed, and worth careful 
consideration. SBTC's own precis of the research, which we hope and 
believe is a fair overview of the studies, follows:

The SBIR program is sound in concept and effective in practice.

    The SBIR is an efficient program that is successfully achieving 
important public objectives.

SBIR's results meet the key Congressional objectives for the Program.

(1)  Stimulating technical innovation.

    The NRC study found that, by a wide variety of metrics, the program 
is contributing to the Nation's stock of new scientific and technical 
knowledge.

(2)  Using small business to meet federal research and development 
needs.

    The NAS study found that the SBIR program objectives are aligned 
with, and contribute significantly to, fulfilling the mission of each 
of the studied agencies. This is also true across a wide variety of 
metrics. The inherent flexibility of the SBIR Program makes it 
especially valuable to agencies with widely-varying missions.

(3)  Increasing private sector commercialization of innovations.

    SBIR is successfully commercializing innovations. Commercial 
success includes sales, license revenues, R&D investment, research 
contracts and the sale of equity. The average sales per Phase II 
project were $2.4 million and the average investment for Phase II was 
$1.5 million. Given the inherent technical risks involved, ``the fact 
that a high proportion of the projects reach the market place in some 
form is significant, even impressive.''

(4)  Supporting the growth of a diverse array of businesses.

    SBIR provides market access, funding, and recognition to a wide 
array of businesses, including those owned by women and minorities.

Conclusions:

    The program is achieving its goals of successfully increasing 
innovation, encouraging participation by small companies in federal 
R&D, providing support for small firms owned by minorities and women, 
and resolving research questions for mission agencies in a cost-
effective manner.

Recommendations:

          No fundamental changes should be made to the program.

          The basic Phase I, Phase II, Phase III structure 
        should be preserved. Allowing firms to apply directly for Phase 
        II would be detrimental to the program.

          Experimentation by the agencies, such as the Fast 
        Track program should be encouraged.

          Agencies should be encouraged to develop pilot 
        programs to experiment with potential improvements to the SBIR 
        program.

          Funding mechanisms beyond Phase II, such as the NSF 
        Phase IIB program and NIH continuation awards, could be adopted 
        at other agencies.

          Any such ``Phase IIB'' type program should be 
        carefully monitored and evaluated to ensure the result is 
        positive.

          The standard limits on award size have not changed 
        since 1995. The Phase I limit should be increased to $150,000 
        and Phase II should be increased to $1,000,000.

          The processing periods for awards vary substantially 
        by agency. Agencies should also specifically report on 
        initiatives to shorten decision cycles.

          Multiple award winners do not appear to be a problem. 
        Awards should be based on merit. Setting an arbitrary limit to 
        the number of awards that a company receives is neither 
        necessary nor desirable in light of the contributions made by 
        these firms.

          Additional attention should be paid to outreach 
        efforts, including the existing FAST and Rural Outreach 
        programs, and further outreach to women and minorities.

          Some internal tracking mechanisms should be upgraded, 
        and Congress should consider a provision for additional program 
        funds for management and evaluation.

          Should Congress decide to allocate additional funds 
        to the SBIR Program, those funds could be utilized effectively.

   SBTC RECOMMENDATIONS FOR THE REAUTHORIZATION OF THE SBIR AND STTR 
                                PROGRAMS

    Congress could take no action with a better promise of stimulating 
the U.S. economy over the short-, medium-, and long-term than to 
reauthorize and strengthen the SBIR Program.

SBTC specifically recommends that Congress:

1. Make the Programs permanent. SBIR has just been given a strong 
endorsement by one of the most extensive studies of any federal program 
ever undertaken by the National Academy of Sciences. This follows three 
previous studies by the NAS and the National Academy of Engineering 
that positively evaluated SBIR, as well as ten favorable GAO studies.
    SBIR is now the largest single source of patents in the United 
States, accounting for 40 percent more patents annually than all U.S. 
universities combined. It is also the source of a quarter of the most 
important technological innovations in the United States each year. It 
is generating, directly or indirectly, billions of dollars in wealth, 
far outstripping its cost.
    It has stimulated the creation of thousands of successful 
companies, provided the Nation with a host of vital defense, homeland 
security, and life sciences technologies, resulted in billions of 
dollars in economic activity, and created tens of thousands of high-
paying jobs.
    If this is not a successful and cost-effective federal program, one 
may reasonably ask what is.
    SBIR should not have to re-justify its existence every three or 
four years. Delays in Congressional approval of reauthorization that 
were totally unrelated to SBIR caused the Program to temporarily shut 
down in 2000. Uncertainty about its future, as each reauthorization 
looms, puts thousands of jobs, and hundreds of companies, in jeopardy. 
SBIR has proved its worth. Congress should make it a permanent program, 
conduct normal cycles of Congressional oversight and management 
hearings, and make occasional adjustments as needed to the Program's 
legal framework.

2. Increase the allocation of R&D dollars going into the Program. As 
the foregoing data have shown, SBIR has become a vital contributor to 
the Nation's technological development and wealth creation. The Program 
leverages federal R&D resources in uniquely efficient ways. Given the 
global competitive challenges faced by the United States, SBIR should 
be given the resources to access America's untapped innovation 
resources. SBTC recommends that the SBIR share of federal R&D dollars 
be gradually increased from today's two and a half to five percent, at 
the rate of .5 percent per year. At a five percent level, smaller 
companies would still be receiving less than one-sixth of the dollars 
that their numbers of scientists and engineers, and their patent 
production, should entitle them to. Today they receive less than one-
seventh. A portion of this increase should be allocated to expanding 
SBIR commercialization programs in the federal agencies, such as the 
Defense Department's highly-successful Commercialization Pilot Program 
(CPP).

3. Take the steps recommended by the National Academy of Sciences to 
strengthen the Program.
    The NAS studies include several valuable recommendations for 
strengthening the management of SBIR Programs in the various agencies, 
and for improving SBIR outreach, among other subjects.
    The NAS also recommends that SBIR Phase I awards be increased to a 
limit of $150,000 and the Phase II awards to $1.25 million limit, to 
adjust for the inflation and cost increases that have occurred since 
the last such adjustment 14 years ago.
    At the same time, the Academy correctly notes, Congress must be 
careful not to extend the dollar limits too high. Companies with 
promising technologies will be driven out of the Program if fewer firms 
and fewer innovations absorb more of the available dollars in each 
funding cycle. (Multiple awards to single firms in single funding 
cycles would have a similar effect.) Awards in excess of statutory 
limits, or multiple awards to a single company during a single award 
cycle, should be approved in advance on the basis of a written 
justification and a higher level of review. They should be monitored 
and compared to the performance of other contract awards.
    SBTC agrees with the Academy on giving federal agencies ample space 
to experiment with ``Phase IIB'' and similar development efforts.

4. Maintain the integrity of SBIR as a small business program.
    At various times in the past, legislation has been proposed that 
would allow large firms and universities, either alone or acting 
through intermediaries, to have unrestricted access to the SBIR 
Program.
    Such an action would violate the foundation of small business law 
in this country, and more than half a century of legal precedents. It 
would also violate the ``common sense'' understanding of most citizens 
about the proper definition of a small business and the proper use of 
taxpayer dollars intended for small business.
    The most persistent controversy in this area has been about the 
conditions under which venture capital companies can participate in the 
SBIR Program.



    SBIR receives only 2.5 percent of extramural federal R&D. SBTC sees 
no reason to divert any of these funds to large companies that are 
eligible for the other 97.5 percent. We have, however, repeatedly 
offered to work with the large venture capital companies that are 
seeking innovation funding from Congress, to try to address their 
concerns in other ways. The matching of VC investments in biotechnology 
with funds from the National Institutes of Health, which the VC and 
biotechnology industries reportedly are seeking from Congress and NIH, 
represents one such path.
    A further danger, should large VCs be permitted to hold majority 
interests in SBIR companies, is that absent extensive monitoring and 
evaluation, such VC control could quickly shift from be allowed to 
being required, as a selection criteria for SBIR contract awards. A 
concentration of large VC influence in the SBIR Program would also skew 
SBIR dollars more toward the handful of local areas, such as Boston and 
San Francisco, where most VC investments tend to be directed. As noted 
on page 7, above, the SBIR Program is far more egalitarian in its 
investments.

SBIR/STTR and the Universities--expanding a successful partnership

    The STTR Program, enacted in the 1990's, provides an important 
adjunct to SBIR by facilitating partnerships between small, technology-
based businesses and Universities. Like SBIR, STTR offers an important 
venue for public-private, and nonprofit-private, partnerships in 
pursuit of technological innovation. SBIR researchers often have ties 
to universities, and STTR researchers always do. The National Academy 
of Sciences report found that SBIR collaboration and subcontracting 
with universities was widespread. The STTR program has allowed this 
collaboration to grow.
    In a separate and revealing study, the New England Innovation 
Alliance (NEIA) surveyed in depth 17 of its members that are 
participating in the SBIR Program. The NEIA study found that these 17 
SBIR companies had 175 subcontracts with 101 different universities 
worth over $28 million, while employing 243 university professors and 
graduate students.
    So this avenue of collaboration offers the promise of a classic 
win-win situation.
    Together, SBIR/STTR companies and the Universities can:

          Identify University R&D with potential downstream 
        commercial applications, strengthening this awareness and 
        focus,

          Develop new revenue streams for the Universities 
        through R&D sales and licensing,

          Supplement the income of University-based researchers 
        that work on SBIR and STTR projects, thus aiding the 
        Universities in attracting and retaining talented faculty,

          Expose students who work on SBIR/STTR projects, or 
        intern at SBIR/STTR companies, to the world of commercial R&D, 
        and

          Jointly transfer valuable technology to the Nation as 
        a whole.

    As the shift in science and engineering talent from large companies 
to small ones makes clear (see Figure 4), large firms are a declining 
source of employment for university science and engineering graduates. 
In fact, large firms out-source many of these jobs to foreign 
companies.
    At the same time, however, the growth in science and engineering 
talent in small businesses makes SBIR companies a crucial source of 
future employment opportunities for University science and engineering 
graduates. Such attractive and realistic opportunities to collaborate 
with leading-edge technology companies can help Universities attract 
students to science and engineering careers in the first place.
    Moreover, the STTR program is a locus of contracts and subcontracts 
that provide financial support to Universities.
    A more robust STTR Program would hold significant promise of 
reinvigorating the growth in University patents (see Figure 6) and in 
improving University performance in developing key innovations (see 
Figure 7).
    To enhance cooperation between Universities and small, technology-
based companies, SBTC further recommends that the STTR share of federal 
R&D dollars be increased from the current 0.3 percent to 0.6 percent in 
FY 2010 and 0.9 percent in FY 2011 and thereafter.


Annex 2: Jere W. Glover Biographical Statement

    Jere Glover is an attorney with the Brand Law Group in Washington, 
DC, representing small businesses on SBIR-related issues. He also 
serves as the Executive Director of the Small Business Technology 
Council (SBTC), a group of small high tech companies most of whom are 
involved in the Small Business Innovation Research (SBIR) program. He 
served on the Board and the investment committee of the 
Telecommunications Development Fund and is a Board member of Homeland 
Ventures Partners. In 2006 Jere was selected as SBIR Man of the Year.
    As one of the creators of the SBIR program, Jere's experience with 
SBIR is extensive. He was Counsel to the House Small Business 
Committee, where he directed an extensive set of hearings on small 
business and innovation that laid the ground work for SBIR in 1978. He 
was also the lead-off witness before Congress in 1982 when SBIR was 
first proposed. He was later Counsel to the Senate Small Business and 
Entrepreneurship Committee, where he worked on Small Business 
Technology Transfer (STTR) Program Reauthorization. Throughout SBIR's 
existence, he has been one of its most active supporters.
    Jere has a unique blend of private and public sector experience. A 
former CEO and attorney in private practice, Jere also spent many years 
in government service, most of it focused on minimizing the regulatory 
burden on business. For more than six years, he was the Federal 
Government's lead defender of small businesses in the regulatory 
process. In that capacity, he systematically analyzed hundreds of 
regulatory actions by federal agencies, identifying flaws and 
shortcomings in many of those actions and helping the affected 
businesses seek relief, without undermining the broad public purposes 
of the regulations. The work that Jere directed saved the private 
sector more than $20 billion in annual regulatory costs, and it cut a 
wide swath across many types of businesses--including mining, fishing, 
telecommunications, transportation, financial services and agriculture. 
He has testified before Congress over 30 times and appeared in over 100 
agency proceedings, including rule-makings, adjudications, and 
enforcement proceedings.
    In the private sector, Jere previously was the CEO or principal of 
a biotech company, a medical technology company and a group of medical 
clinics. Since re-entering the private sector last year, he has become 
the managing director of another medical technology company and counsel 
to a variety of SBIR and technology companies.
    Jere obtained his undergraduate and law degrees from the University 
of Memphis and an L.L.M. in Administrative Law and Economic Regulation 
from George Washington University.

Annex 3: SBIR White Paper, by SBIR Founder Roland Tibbetts

REAUTHORIZING SBIR: THE CRITICAL IMPORTANCE OF SBIR AND SMALL HIGH TECH 
        FIRMS IN STIMULATING AND STRENGTHENING THE U.S. ECONOMY

                            Roland Tibbetts
                    SBIR Program Manager, 1976-1996
                      National Science Foundation
    The proposed Small Business Innovation Research (SBIR) 
reauthorizing legislation (H.R. 5819) is of great concern to thousands 
of small technology-based firms and should be of similar concern to 
Congress.
    The bill would significantly weaken the basic elements of the SBIR 
program by:

(1)  Cutting the number of awards, probably in half. Far larger SBIR 
awards would be allowed. Companies could receive multiple development 
awards. Agencies could waive even the higher award caps. Yet the 
overall size of the program would not be increased. Together, these 
steps would eliminate funding for a large number of innovative and 
breakthrough ideas.

(2)  Allowing firms to avoid SBIR's competitive ``proof of concept'' 
step and move directly to much larger ``development'' awards. This is 
an irresponsible policy for a program that is funding very high-risk 
ideas. The ``proof of concept'' requirement, Phase I of SBIR, is 
necessary to weed out ideas that are not feasible, so that large sums 
of taxpayer dollars aren't wasted on them.

(3)  Substituting SBIR's R&D funding for private investment capital in 
the commercialization phase of SBIR (Phase III). Phase III is a market-
based reality check. A project that can't attract private-sector 
funding or mainstream government procurement contracts at that point 
should not be pushed forward with more R&D funding from SBIR.

(4)  Threatening the integrity of SBIR as a small business program by 
weakening the safeguards against large business access to SBIR funds.

    With each of these changes, the needs of the SBIR Program, and the 
history of its best practices, call for doing exactly the opposite of 
what the bill proposes.

What SBIR Is Designed to Do

    SBIR was created to address a need that is still critical: to 
provide funding for some of the best early-stage innovation ideas--
ideas that, however promising, are still too high-risk for private 
investors, including venture capital firms. As happened with Microsoft, 
Apple and hundreds of other firms, technology innovations can mushroom 
into major products and businesses once private sector investors make a 
commitment. But they'll only make that commitment once the innovation 
is well along. In 2005 only 18 percent of all U.S. venture capital 
invested went to seed and early stage firms while 82 percent went to 
later stages of development that are lower risk.
    The positive role of innovative small technology firms in the 
economy is evident not only in the dozen or so geographic strongholds 
of tech entrepreneurship across the Nation, but also in the increased 
productivity of the companies that buy and use the innovations. That is 
perhaps the most compelling reason to maintain a strong, effective SBIR 
Program.
    SBIR addresses a paradox at the heart of innovation funding: 
capital is always short until the test results are in. At the idea 
stage, and even the early development stage, the risks are too great 
for all but a few investors. But innovations can't get beyond that 
stage without funding.
    There is another paradox, too. The Federal Government has R&D needs 
that, for a variety of reasons, will never interest private sector 
investors. The business models of most investors focus on generating 
many sales to many customers. When the government is the only buyer, 
and buys on a one-time or very occasional basis, investors get 
skittish.
    Large government contractors typically aren't interested in such 
R&D, either. The amounts involved are too small, and most large 
contractors don't have early-stage R&D capabilities anyway.
    So needed innovations in fields like defense, space exploration and 
homeland security may not occur. The same can be true for innovations 
in science, especially the health sciences, when the projected patient 
populations are small or the innovation may only be needed once per 
person (such as with a vaccine).
    SBIR was designed specifically to solve both of these paradoxes:
    First, it provides a transparent, competitive and reliable source 
of early-stage funding for R&D, based entirely on scientific merit. 
Today, SBIR is the Nation's largest source of such funding.
    Second, it allows the government itself to obtain needed R&D that 
the private sector could not otherwise provide.

Why SBIR Has Been Successful

    SBIR's success, as recently documented by the major National 
Research Council/National Academy of Sciences study, is rooted in a 
number of the program's characteristics.

Drawing on small business scientific talent. SBIR draws on the six 
million scientists and engineers that are now employed by small firms. 
That compares to the five million employed by medium-sized and large 
firms. In fact, small business employs more scientists and engineers 
than large business, universities, federal labs, or nonprofit 
organizations. A great many of these small business scientists and 
engineers are entrepreneurial. To see the entrepreneurial zeal of these 
technology-based small companies, one has only to look at the extent to 
which the SBIR Program and the Nation's venture capital companies--the 
only important sources of risk capital for such companies--are swamped 
with proposals. Or one can look at patents granted. The SBIR Program 
accounts for more than 50,000 of them. Currently, it accounts for an 
average of seven patents a day, which is more than all U.S. 
universities combined. SBIR has given us Qualcomm, Symantec and dozens 
of other highly successful technology companies.

Providing the primary source of government R&D funding for small 
business. Despite their huge numbers of scientists and engineers, and 
despite their well-documented science and technology successes, small 
businesses have virtually no access to federal R&D contracts outside of 
the SBIR Program. According to the National Science Foundation's annual 
Science Indicators report, large firms receive 50.3 percent of federal 
R&D, universities receive 35.3 percent, non-profits 10 percent, and 
small businesses just 4.3 percent. SBIR accounts for over half of that 
4.3 percent. This is an astonishingly small figure for a nation that 
expects technological innovation to lead it to new economic heights, 
but there it is. For small companies, SBIR remains the only game in 
town, just as it was in 1983, when it began.

Adopting best practices.
    In designing the SBIR program, I drew on my own experience as a 
founder, director and treasurer of Allied Capital here in Washington 
and as operational VP for two small tech firms, one of which grew to 
600 employees before being sold to TRW. I read about 50 articles on 
innovation and R&D management. I talked with a few dozen economists and 
directors of research in large firms and universities. I met with ten 
or so venture capitalists. I asked them, and others like the DuPont R&D 
advisory committee, about best practices.

Best practices 1: managing portfolio risk. One thing everyone agreed on 
was the need to manage R&D portfolio risk through diversification. With 
the high risk involved in early-stage R&D, there is need to diversify 
the federal investment by betting on many, rather than fewer, 
technologies and ideas. (The R&D risk is high not only because of the 
technical challenges but also because cutting-edge R&D requires 
expensive equipment. Such R&D is the furthest away in time from the 
market, and the market may change during that period.)
    The size of SBIR awards and thus the dollars at risk per innovation 
was therefore a major topic. Most of those I worked with in developing 
SBIR agreed that the technologies involved were such inherently high 
risks that smaller bets should be made on many projects before making a 
few larger bets.

Best practices 2: making the largest number of awards possible. Making 
many smaller awards was not only good risk management practice. 
Virtually everyone I spoke with argued, and my own 20-year experience 
as an SBIR Program Manager subsequently confirmed, that the economic 
payoffs would be higher this way. Many smaller awards mean that more 
ideas can be evaluated for their potential. More and better choices for 
further development become available.
    Probably a few thousand CEO's of small tech firms have talked with 
me about SBIR over the years. In general, they liked almost everything 
about SBIR, except the terrible odds against winning an award. Many no 
longer submit proposals because of the large investment of time and 
cost required to prepare a competitive proposal when only one in 15-20 
receive the larger Phase II funding. Others still compete because there 
are almost no alternative sources of such funding.
    If there are fewer SBIR awards in the future, not only will fewer 
technologies get evaluated and funded. Fewer companies will compete, 
because the odds against winning will get even higher. I believe we 
have been seeing some of this occur already at the National Institutes 
of Health, where larger award sizes and fewer awards have been 
accompanied by a fall off in applicants.

Best practices 3: creating scientific gates and milestones. Another 
best practice that we adopted for SBIR was the use of science-based 
gates and milestones before letting projects obtain more funding. Often 
an idea can be found to be infeasible through the Phase I ``proof of 
concept'' process. Other ideas show only a low probability of success. 
No further expenditures should be made on such technologies.
    Unfortunately, some companies always came to us seeking to obtain 
as much SBIR funding as possible in both Phases I and II. Indeed, 
during my 20 years as an SBIR program manager, we frequently heard such 
requests from both the companies and the agency scientists and 
engineers. However, no proposer was ever allowed to go directly to 
Phase II. Even if they had done relevant work earlier, we expected 
Phase I to show further progress. Our strict policy on this point 
proved to be a good thing. The companies that argued that they had 
already done the early R&D, and therefore should be able to go directly 
into Phase II, almost always were unsuccessful when faced with 
competition. Their requests had been sales ploys. A company's success 
on earlier projects was no guarantee that its newest idea was 
competitive. It is important to always remember that SBIR provides 
funding for ideas, not for companies. Competitive, science-based 
gateways are vital for identifying the best ideas.

Best practices 4: making SBIR a powerful economic development tool.

The past. The roots of SBIR actually go back to Congress' concern over 
the ``Rust-Belt Recession'' of the 1970's. Unemployment in Detroit was 
high, due to the growing sales of new smaller automobiles and machine 
tools from Japan and Germany. The question was asked whether National 
Science Foundation research was focused on economic needs. The result 
was a new NSF program in applied research called ``Research Applied to 
National Needs'' or RANN. For the first time in NSF history, ten 
percent of a program budget--the RANN program budget--was set aside for 
small business. This was the basis for the design and initiation of the 
Small Business Innovation Program at NSF in 1977. That program grew 
each year. Its successes led to legislation in 1982 that required all 
agencies with an extramural R&D budget over $100 million (today 11 such 
agencies) to participate. There were some early successes, such as 
Symantec, that gave us confidence in the basic design of the program.
    A little background here: Individuals and small firms are the 
primary source of category-creating inventions and technical 
breakthroughs. It is not the successful wagon company that invents the 
automobile. And it's not the large business that risks up-ending its 
business model and its product lines. Small company major economic 
breakthroughs include the digital computer, microchips, the personal 
computer, software, the successful cell phone, the internal combustion 
engine, diesel engine, steam turbines (steamships and railroads), the 
electric motor, typewriter, telephone, refrigerator, electric 
transmission, phonograph, incandescent lights, vulcanized rubber, 
pneumatic tire, photo plate, airplane, motion picture, anesthesia, x-
ray MRI; and even earlier the cotton gin, power looms, the sewing 
machine, the mechanical reaper, and other agricultural machines.
    Fast forward a few generations: The great technology-based economic 
successes of the late 1970's and 1980's--along the Route 128 corridor 
near Boston and in Silicon Valley--as well as the communications and 
information technology companies that have proliferated since the 
1990's, were the result of tens of thousands of scientists and 
engineers annually opting to start or join small firms. Often this 
included many of the best and brightest, the most creative, the most 
entrepreneurial, and the shrewdest risk takers: exactly the qualities 
that private sector investors, particularly venture capital companies, 
were looking for.
    Think about what happened as Internet-based businesses grew in the 
90's. It wasn't all boom and bust. The core of the ``dotcom'' era was a 
series of rapid and related breakthroughs in new and emerging 
technologies. Most of the breakthroughs came from startup companies. 
Five ``dotcom'' era startups are now in the ``20 Most Widely Held 
Stocks in the U.S'': Intel (microchips), Microsoft (software), Apple 
(personal computers), Oracle (relational databases) and Cisco Systems 
(networks). In 2007 alone, their combined sales were $166 billion and 
they employed 221,000. Add to this the thousands of smaller new firms 
with directly related new products and services, both in the U.S. and 
worldwide. Overall, the ``dotcom'' era was probably the largest 
economic growth breakthrough in history.

The future. Just as we have seen small-business-driven technological 
breakthroughs throughout our history, we can see them again in the 
future. There are a whole series of new and emerging technology areas 
where innovations could have powerful economic impacts. They include:

          global warming and other environmental areas, such as 
        water purity;

          alternative energy and energy conservation;

          all kinds of security--national, military, 
        commercial, and economic;

          ever-changing communications;

          health care improvements and cost reduction measure;

          disease prevention;

          more effective education;

          improved transportation;

          agricultural challenges addressed;

          nano- and miniaturization technology;

          automated manufacturing; and many more.

    All of these needs represent potentially large markets. Today, the 
technological risks are still too great for most private investors. But 
the technologies still need funding. SBIR is perfectly situated to 
explore ideas in these areas.
    SBIR funding is necessary because large firms, despite their public 
relations, do not in fact invest extensively in these areas. Big 
companies do not take major risks on unproven technologies, except with 
massive government funding, such as in defense, NASA, and nuclear 
power. Large firm R&D budgets focus on improving product 
competitiveness and the processes for fabricating their goods, solving 
specific problems, and overall growth in sales and profits. 
Universities and non-profits also cannot raise high-risk money for 
private sector technological innovations.

The mechanism. Generally only small high-tech firms can raise 
sufficient amounts of high-risk capital to pursue commercially and 
economically relevant innovations. The key reason for this is that only 
small companies can realistically offer the promise of their stocks 
multiplying dozens of times. It's the prospect of that exponential 
growth in stock value which makes the rewards worth the risks to 
investors.
    When SBIR is guided well, it fosters breakthroughs by such small 
companies. These breakthroughs get the technologies to the point where 
they can deliver great economic benefits.
    At that point, when the scientific evidence is starting to come in, 
innovations attract not only additional VC investments, but also 
investments by individual ``angels,'' mutual funds, insurance 
companies, endowment funds, and others. Longer-term bank lending 
becomes possible. All of that financing lays the foundation for stock 
offerings. Then these stock offerings attract more capital. This 
business growth, plus the revenues from subsequent product sales and 
spin-offs, is the money that stimulates the economy.
    Successful SBIR-funded technologies can thus generate many 
multiples of their federal investments, often in a much shorter time 
frame than traditional investments.
    Again, the key steps are: casting the net as widely as possible, 
attracting entrepreneurial individuals and small companies, insisting 
on technical feasibility in a competitive and transparent environment, 
and then moving to a commercialization phase that requires private 
sector investment equaling or exceeding the federal investment.

What To Avoid in the Future

Avoid needless disruptions to the SBIR Program.
    SBIR has proven itself over 25 years. It is known and understood by 
hundreds of thousands of scientists and engineers, most of them in 
small firms, but many of them also in the 11 participating federal R&D 
agencies, in universities, in venture capital companies, in larger 
firms, in Congress and in other parts of government, including the 50 
State governments and a number of foreign countries. SBIR is 
successful. The National Research Council/National Academy of Sciences 
comprehensive assessment of the SBIR program last year confirmed the 
effectiveness of SBIR along the broad general lines that it exists 
today. Other studies, too, such as those by GAO and by Professor Josh 
Lerner of Harvard Business School have been highly favorable. No 
reputable independent study in the past 25 years has called for major 
changes in SBIR.
    Rather than implementing the constructive recommendations offered 
by the NRC/NAS study, the House-passed bill (H.R. 5819) mandates a vast 
upheaval in SBIR. Such a re-write of the program would make the NRC/NAS 
changes far more difficult to execute. How, for example, can the agency 
Advisory Committees that the study recommends do their work when 
agencies in the program would be spending the next few years redrafting 
all their SBIR program rules and retraining all their personnel?
    Worse, the extensive reworking of the program would confuse 
everyone who uses the program--all those people in the small firms, 
universities, VC firms, large companies, State programs, and Congress 
that tap into the program. It would lead to lengthy award delays as the 
program is retooled in one agency after another.
    Small technology-based companies will suspect, probably correctly, 
that all these changes will self-destruct and that SBIR will have to be 
re-tooled again in a few more years. So they'll hold back and shift to 
other activities. This will intensify the upheaval.
    And for what? H.R. 5819 is designed to sharply increase the amount 
of SBIR funding that goes to maybe half the current number of 
companies, and to explore perhaps half as many promising ideas. This 
bill is more like special interest legislation than national interest 
legislation.
    All available evidence suggests the major changes proposed by H.R. 
5819 would be highly detrimental to SBIR's mission and effectiveness. 
Congress has never examined the full implications of these changes and 
should not embark on them without doing so. Unraveling SBIR now, at a 
time when the Nation urgently needs the economic boost that the program 
can provide, would be a national tragedy.

Avoid excessive increases in award sizes.
    SBIR is not intended to pay for the entire R&D costs required for 
every project. Some ideas could require tens of millions and even 
hundreds of millions of dollars ultimately. The purpose of SBIR, as 
stated earlier, is to lower the R&D risk to the levels that can attract 
private investment.
    H.R. 5819 triples the Phase II award cap, making it $2.2 million. 
The bill would also allow agencies to make multiple Phase II awards, 
and even to waive the $2.2 million cap. One effect of doing all this 
will be to divert tremendous amounts of energy to negotiations about 
how much of an award each project will get. It is difficult, unwise and 
unfair to most small firms and program officers to have to judge how 
much to request or award over such a vast range of dollars. Determining 
the award size will become a time consuming negotiation, complicated by 
questions of fairness to other participants. Those other applicants 
often will be equally qualified, and their projects will always be in 
need of more money. Ultimately, the size of many awards will end up 
being decided by salesmanship and personal connections, not by science. 
This will be a very corrosive influence on SBIR.
    Just as important, larger awards reduce the number of ideas that 
can be funded. An $8 million Phase II award, if cut back to $1 million, 
could free up funding for seven other $1 million Phase II awards. Or, 
that $7 million difference could fund 35 ``proofs of concept'' ideas at 
$200,000 each. Similarly, a $1 million Phase I ``proof of concept'' 
award eliminates the possibility of four others at $200,000 each. We 
need to remember that research on innovative ideas at the idea stage is 
often primarily a one person job.

Avoid bypassing Phase I.
    The foundation of the SBIR program is competition and openness. 
Take away the need to prove an innovation against other worthy 
innovations, in an above-board competition, and SBIR will degenerate 
into salesmanship and influence-peddling. Its genuine scientific 
accomplishments will diminish, year by year. If companies are allowed 
to apply directly for Phase II funding, SBIR will become little more 
than a traditional procurement program, not an innovation program. 
Phase I must not be by-passed; it is the seed bed of the entire SBIR 
Program.

Avoid using SBIR funds for commercialization.
    If an SBIR firm cannot obtain a commercialization commitment from 
private sources, or from federal agencies (using non-SBIR funds), that 
at least equals the SBIR investment in an innovation, then SBIR's 
involvement in that innovation should end. The far more pressing public 
need is to fund additional recommended early-stage innovations, not to 
keep projects afloat that cannot attract financial support from the 
government or the private sector.
    If SBIR award levels rise moderately to keep pace with inflation, 
an approach that the NAS/NAS study recommended, and that I agree with, 
then the SBIR investment in an early-stage technology idea should not 
exceed $1.2 million ($200,000 for Phase I and $1 million for Phase II). 
An innovation that cannot match or exceed that $1.2 million in the 
commercialization phase (Phase III) of SBIR, using non-SBIR funding, 
should not be rewarded with more SBIR funding.
    In other words, no SBIR funds should be spent for Phase III. SBIR 
dollars are urgently needed to support additional promising ideas and 
to keep the high-risk SBIR portfolio diversified. If an agency feels 
that an innovation deserves financial support beyond a single Phase II 
award, then it can provide this further investment with non-SBIR 
funding. An agency that lacks that much faith in an innovation 
developed under its own guidance should not expect the taxpayers, via 
the SBIR program, to supply that faith.

Avoid steps that would diminish the small business character of the 
        program.
    Large companies view innovation much differently than small 
companies. A large company wants to protect its product lines and its 
customer bases. It looks for incremental innovations that make those 
existing products a little better and a little cheaper to produce. It 
looks for new products that are familiar and comfortable. For large 
companies, ``re-defining'' types of innovations are frightening. They 
upset settled ways of doing business. the Nation needs both incremental 
innovations and quantum-leap innovations, but right now and for the 
foreseeable economic future, it needs those out-sized innovations the 
most. SBIR can deliver sweeping innovations, but to do so it must avoid 
taking on the coloration and biases of large companies.
    Even if there were only a modest national need for ``out-of-the-
box'' innovations, there would still be a powerful need for SBIR, 
because nothing else in the country, and certainly nothing else in the 
Federal Government, supports early-stage innovation by small companies. 
Despite having more scientists and engineers than large business, 
universities, nonprofit organizations, or the Federal Government 
itself, small business gets only 4.3 percent of federal R&D dollars. 
And SBIR accounts for over half of that. Those other institutions draw 
more than 90 percent of federal R&D dollars. And here's the rub: there 
aren't any other sources of that early-stage innovation funding for 
small business. Capital for small business innovation research is so 
short in the United States that SBIR rapidly became, and remains, the 
largest source of it.
    I come from a long and deep background in venture capital and I am 
a great believer in it. SBIR won't be nearly as successful unless VCs 
can participate in it. But VCs that directly or indirectly report back 
to large companies shouldn't be in Phase I or Phase II of the SBIR 
program. Nor should VCs that are big companies themselves.
    VCs that are large firms in fact or spirit will inevitably focus on 
companies more than innovations. That's fine in Phase III, but not 
earlier. If big VCs get into Phase I and Phase II, they will push for 
bigger bets on fewer companies. They will want to shift SBIR funding 
away from high-risk Phase I ideas and toward Phase II development, 
which is closer to market and therefore less risky for them. Sooner or 
later, they will back SBIR funding for Phase III, which will also 
offset some of their risk. And the kind of innovations they ultimately 
favor will be those that big companies favor--safer and more familiar 
ones, incremental rather than quantum leap. SBIR can do much more than 
this. SBIR's current restrictions on big VCs are therefore wise. By 
contrast, H.R. 5819's approach to this issue is dangerously unwise.

What to Do in the Future

We must meet the competitive challenge.
    We are currently the world leader in small high tech firms, in 
venture capital, and in basic research. These strengths are critical to 
our future economic growth. But others are catching up.
    China, Japan, and Western Europe are rapidly increasing their 
investment in all three areas.
    In a recent Harvard Business School Bulletin article, Jim Breyer, 
founder of Accel Partners and past chairman of NVCA, stated that there 
are now 6,000 venture-backed companies in Beijing alone! Accel has 
recently closed its second Chinese venture fund for $510 million. 
``Many of the very best [VC] firms in Europe and in Asia are affiliated 
with firms here in the United States,'' he notes.
    The UK has just announced a new innovation program. Dozens of 
countries, notably including those that came here to study the SBIR 
program, are now increasing their investment in innovations by small 
technology firms, venture capital development, business schools, and 
basic research.
    Seeking out technology breakthroughs should be a far more important 
objective of government R&D than ever before. The single most important 
initiative we could mount would be to increase the SBIR to five percent 
of extramural federal R&D in a series of steps.
    Such an initiative would be opposed by the current recipients of 
over 90 percent of federal R&D, like large companies, universities, 
non-profits, and the organizations representing them, but these were 
the same groups that opposed the creation of SBIR in the first place 
and have opposed every modest increase in the program ever since. The 
NAS/NAS report clearly shows that SBIR can successfully deploy 
additional funding.
    Think what the Internet and the telecommunications revolution have 
done for our economy. This was accomplished primarily by small, high-
tech firms with major VC support. Now the investment risk is even 
higher for initial funding. Seed-stage and early-stage VC support has 
plummeted. If there are only rare investments at the idea stage, there 
will be no storehouse of proven ideas ready for later development 
funding. As bad as our economic problems are today, with budget 
deficits, trade deficits, a shaky dollar, and so on, where would our 
tax revenues, our productivity, and our technology leadership be today 
if we had not had that technological revolution?

The SBIR program should be carefully strengthened.
    The following are my recommendations to Congress about some 
specific issues in the SBIR reauthorization:

1.  Small firms with 500 or fewer employees should remain eligible for 
SBIR awards as long as one or more large firms, including large venture 
capital firms, do not acquire a majority of ownership. Broad 
eligibility is necessary to identify and accelerate those innovations 
that can lead to technical and market success and superior economic 
growth. the Nation needs these potentially fast-growing firms far more 
than those that do not grow. Outside investors can, and often must, 
obtain more than 50 percent of the stock to protect their investment. 
That should be acceptable in SBIR as long as these investors are 
individuals and as long as the companies that they represent are small, 
as is required today. However, these investors must not be controlled, 
directly or indirectly, by large businesses. SBIR was created to 
provide small companies with innovation funding. The program remains 
too small to allow funds to be siphoned off by large companies, which 
already receive over half of federal R&D.

2.  There should be a set review period for Phase I results, as well as 
a set period for Phase II proposals, based upon Phase I results. Some 
firms are obtaining early reviews, before other firms. That is not fair 
to others and should not be allowed.

3.  Agencies should not allow companies to extend the break between 
Phase I and II except for illness or similar reasons. On the other 
hand, agencies themselves sometimes need to extend the breaks between 
Phase I and Phase II due to budgetary issues. This should be allowed 
when truly necessary, despite justifiable company concerns about cash 
flow. In the end, SBIR's purpose is to fund ideas, not to support a 
company's financial picture.

4.  SBA is still the proper organization to manage SBIR, not the 
Department of Commerce. Criticism of SBA over the years has been due in 
great part to significant under-staffing by SBA management that should 
not have been allowed. SBA's SBIR staff is less than half the level any 
evaluator would recommend. When SBIR was a much smaller program, SBA 
had eleven staff members assigned to it. Today, there are only four. 
This headquarters staffing crisis is responsible for many complaints. 
But some agencies, such as DOE, also grossly under-staff SBIR. This 
leads to reductions in the number of award topics, in order to reduce 
agency workloads, and to the temptation to use jumbo awards, far in 
excess of the program's legal guidelines. I suggest some kind of a 
brake on agency proposal cutbacks and stricter enforcement of the caps.

5.  Breakthroughs occur in new and emerging areas that cannot be 
predicted. I suggest that all agencies should allow innovation 
proposals in all areas that are relevant to their R&D programs. This 
openness to innovation proposals should be outlined in agency 
solicitations. Many agencies think in terms of relatively few topic 
areas. The original interagency innovation program essentially opened 
entire agency R&D programs for proposals. Solicitations now have become 
far more restrictive, which cuts against the national economic 
interest. Breakthrough ideas that are relevant to an aspect of an 
agency's R&D should be invited.

6.  The commercial results of SBIR need to be strengthened. Awards 
should not be made by agencies solely on the basis of technical merit 
and without any consideration being given to downstream commercial 
potential. Unfortunately, some SBIR firms favor agency approaches that 
minimize commercial potential, because the firms are really only 
interested in having their R&D ideas funded, not in commercializing the 
results. I suggest that proposers and agencies require a 
commercialization plan in both phases with a more detailed and specific 
plan in Phase II. Reviewers should consider both technical and 
commercial merit in their recommendations. This would include the 
proposer's plan for obtaining non-SBIR funding for Phase III. I would 
also support an SBIR funding cutoff for firms that win many Phase I 
awards without advancing any of them to Phase II, along the lines of 
what H.R. 5819 proposes. SBIR was specifically designed to force the 
small firm to focus on innovation, technology breakthroughs, and 
commercialization for their economic benefits to the Nation. Defense 
and NASA should also seek SBIR projects that have potential Phase III 
follow-on funding from non-SBIR sources. SBIR funds should not be used 
for mainstream procurement.

7.  Award sizes should be increased in size in this reauthorization, to 
keep pace with inflation since the last adjustment in 1992. I recommend 
increasing Phase I awards to a $200,000 cap and Phase II awards to a $1 
million cap. These are both substantial amounts of risk capital to 
explore technical feasibility. SBIR is not intended to build up the 
capabilities of a company, based on considerations like its other 
projects, but to explore the promise of the specific idea proposed. And 
SBIR's budget must fund as many ideas as possible.

8.  The SBIR set-aside should doubled as soon as possible. SBIR is a 
major national asset. It accelerates technological innovation and 
technology breakthroughs. It helps attract private sector investment to 
the most promising innovations. It increases economic growth. We need 
to reinvigorate the economy, and we need more technological innovation. 
Yet despite the history of small company innovations, notably relating 
to the Internet and to telecom, and despite the fact that there are six 
million scientists and engineers employed by small firms, over half of 
the government's external R&D, (50.3 percent) goes to large firms, 35.3 
percent to universities, and 10 percent goes to non-profit 
institutions. Small business firms received only that 4.3 percent. 
(2005 figures from NSF.) Even a modest increase in the award caps, such 
as I recommend, will diminish the number of SBIR awards and companies 
unless Congress takes the sensible step that it took last time award 
steps were increased--increasing the program size by a large enough 
amount to offset the larger awards. Shrinking SBIR would be exactly the 
wrong thing for Congress to do at this point in our economic history.

    Finally, I must say that as I review the SBIR recommendations made 
to Congress by the Biotechnology Industry Organization (BIO) and by my 
former VC colleagues in the National Venture Capital Association 
(NVCA), I am deeply troubled. It is mainly these two organizations that 
are calling for the far-reaching changes in the program. Many of the 
changes they are proposing would, in my judgment, significantly and 
perhaps irreparably harm the program. I can understand the desire of 
any organization to represent its members and prospective members, but 
this is a case when we must think of the broader national interest.
    Without open and competitive early R&D efforts, spread as widely as 
possible, innovations will never reach the level of maturity that can 
draw in venture capital or other follow-on funding. BIO and especially 
NVCA should understand this. The need is to explore as many ideas as 
possible and lower the risk as much as possible to attract follow-on 
Phase III investment. There will be no shortage of great new 
innovations to invest in if we allow SBIR to do its work in supporting 
truly innovative small companies by objectively assessing which ideas 
are wheat and which ones chaff.
    Congress supported the current SBIR objectives with the first SBIR 
legislation in 1982. The program is working well, but can be improved, 
as stated in the comprehensive NRC/NAS report. SBIR can stimulate 
thousands of high-risk, economically promising ideas like no other 
program. Given the opportunity to work as designed, and as proven, SBIR 
can make a major contribution to the national economic welfare.




















































                               Discussion

    Chair Wu. Thank you very much, Mr. Glover, and while I may 
not completely agree with all your substantive points, I sure 
do wish that I could talk like you. I have always wanted to 
have a southern accent. I have always wanted to be a western 
cowboy, but there are just some things that aren't going to 
happen in this life.
    I do want to mention that I believe our Ranking Member 
needs to step away at 3:15, and we have agreement that the 
hearing may continue in the absence of any Republican Members. 
And we look forward to Mr. Smith joining us, and I just want to 
reiterate that Ms. Edwards will be stepping in for me 
momentarily, and I aspire to return to continue some of the 
discussion.
    Now it is appropriate for us to open to questions, and the 
Chair recognizes himself for five minutes.
    Mr. Glover makes a point in both his oral and his written 
testimony for a five percent set-aside, and I am sympathetic to 
some set-aside increase, but I would like to get the views of 
Dr. Berdahl, even though you have stated your preference, and 
Mr. Greenwood and Dr. Rockey.
    First of all, Dr. Berdahl, when you said that you would 
like the program to stay the same, I assume you mean that you 
want the set-aside to stay the same and that you are not 
stating that you want every aspect of the program to stay the 
same.
    Dr. Berdahl. That is correct.
    Chair Wu. Microphone, please.
    Dr. Berdahl. We favor the current set-aside provision. We 
also favor greater flexibility in the agencies' ability to 
apply as many of my colleagues here at the table have also 
recommended, but we believe that the current set-aside is 
sufficient and that in many instances clearly adequate.
    Chair Wu. Thank you very much, Dr. Berdahl.
    Mr. Greenwood.
    Mr. Greenwood. Thank you, Mr. Chair. Obviously it would be 
in the interest of our company if we had a larger share of the 
NIH pool available to us, and I would like to see that day 
arrive.
    Having said that, I served in the Congress when we doubled 
the NIH budget. It was a good and noble thing that we did. I 
think many of us failed to understand why providing level 
funding, at best, after that was a mistake. We sort of took the 
attitude that, you know, doubling--nobody gets their budget 
doubled, so, you know, stop complaining about lack of growth.
    So as--but it was a mistake, and we really need--we need to 
continue to grow the NIH budget at a reasonable, at least 
inflationary factor annually. I would presume that an effort to 
get much beyond where we are now would meet resistance from my 
friend to my right and his colleagues and perhaps such----
    Chair Wu. And perhaps the friend on your left also.
    Mr. Greenwood. Perhaps. But so perhaps if and when the time 
comes that the Congress can see fit to significantly increase 
the size of the pie, that would probably be the best time to 
discuss changing the ratio of the slices.
    Chair Wu. May I take your answer to mean in an ideal world, 
yes.
    Mr. Greenwood. Yes.
    Chair Wu. Thank you, Mr. Greenwood.
    Dr. Rockey, please.
    Dr. Rockey. NIH would favor keeping the set-aside at the 
current 2.8 percent level.
    Chair Wu. Combined for both?
    Dr. Rockey. Combined for both. We would find it sufficient 
to meet our current mission. And as Mr. Greenwood had just 
mentioned, we have appreciated that as the NIH budget had grown 
and doubled essentially through--from 1998, to 2003, we were 
able to also sustain a doubling in the SBIR Program as well. So 
we feel that that level is appropriate just to meet the mission 
of NIH and to support innovation in the small business 
community.
    Chair Wu. Terrific. Thank you very much, Dr. Rockey, and I 
just want to say that I think everyone that I can think of in 
this institution is a fan of NIH and for good reason. It is 
because you all do really, really good work. I am also happy to 
hear that you do support a 2.5 percent set-aside for SBIR and a 
0.3 set-aside for STTR.
    So that leads to my next question. In the American Recovery 
Act, ARRA, better known as the stimulus bill, the additional 
billions that NIH is to receive were specifically exempted from 
the SBIR requirement.
    Do you know if anyone from NIH asked for that exemption?
    Dr. Rockey. Well, I can tell you that I had concerns. At 
the time that the ARRA or the American Recovery and 
Reinvestment Act was being discussed, I had concerns regarding 
the ability to have enough SBIR/STTR applications in the pool. 
Originally when we were discussing ARRA, the methodology that 
NIH was going to use to use the ARRA funds was to take existing 
applications, both in the SBIR Program and all of our programs, 
and to fund those to get those funds out the door immediately.
    Because of the decreasing numbers of SBIR applications and 
the increasing success rate, the applications that we would 
have had at hand were the 2008 applications, and we simply 
would not have had enough applications to meet the----
    Chair Wu. Well, let us return to the question. Did you or 
anyone else at NIH ask for that exemption?
    Dr. Rockey. I raised concerns. Yes.
    Chair Wu. You raised that concern with Congress?
    Dr. Rockey. No, I did not.
    Chair Wu. Did someone from NIH raise that concern with 
Congress?
    Dr. Rockey. I can't tell you exactly how the process was. 
The negotiation with----
    Chair Wu. Someone did.
    Dr. Rockey.--Congress. Congress has indicated that they 
asked questions of if there were any concerns with the entire--
--
    Chair Wu. Someone at NIH volunteered that?
    Dr. Rockey. Yes. I expressed my concerns. How the process--
I can get back to you for the record of how the process----
    Chair Wu. Yes. I would be very interested in hearing that 
for the record.
    Dr. Rockey. Sure.
    Chair Wu. I have a letter for the record from two Senators, 
Mary Landrieu and Olympia Snowe, and it is answered by a letter 
from Acting Director Kington?
    Dr. Rockey. Yes.
    [The information follow:]
    
    
    
    
    
    
    
    

    Chair Wu. And in it the Acting Director commits to leaving 
the 2.8 percent set-aside for SBIR and STTR, that NIH intends 
to adhere to that, and I take it that you agree with the 
Director's answer in that letter.
    Dr. Rockey. Yes. That letter he agreed to the 2.8 percent 
out of our appropriation. We are also--NIH is also using ARRA 
funds to support SBIR applications.
    Chair Wu. ARRA is an appropriation.
    Dr. Rockey. I understand that.
    Chair Wu. Yes.
    Dr. Rockey. So----
    Chair Wu. So we are in agreement on that.
    Dr. Rockey. Two point eight percent of our $30 billion 
appropriation. Yes.
    Chair Wu. But 2.8 percent of also the ARRA funds.
    Dr. Rockey. Those funds according to the legislation were 
not subject to the set-aside.
    Chair Wu. But take the letter as a voluntary commitment to 
maintain the 2.8 percent set-aside.
    Dr. Rockey. Again, I guess it is in the interpretation of 
the letter. I would not interpret the letter to say that. I 
believe what he is saying is that he was----
    Chair Wu. Then can we have a resolution of that----
    Dr. Rockey. Sure. Sure.
    Chair Wu.--disagreement perhaps with the NIH staff and with 
the Senate Small Business Committee and the House----
    Dr. Rockey. Sure.
    Chair Wu.--Small Business Committee?
    Dr. Rockey. Uh-huh.
    Chair Wu. Deeply appreciate that.
    Dr. Rockey. I appreciate that.
    Chair Wu. Thank you for going over a little bit with me.
    Dr. Rockey. Can I----
    Chair Wu. Mr. Greenwood, do you have a further point to 
make?
    Mr. Greenwood. If I may, Mr. Chair. I have spoken with both 
Senator Specter and his staff on this and we all know, Senator 
Specter was instrumental in this, and my understanding is that 
the language, while it may not require the NIH to set aside 2.8 
percent, nor does it prohibit them from setting aside up to----
    Chair Wu. That is----
    Mr. Greenwood.--that----
    Chair Wu.--my interpretation of the statutory language 
also. It is a pretty clearly crafted carve out. Things like 
that don't happen by accident, but it does seem quite 
permissive.
    With that I would like to recognize the Ranking Member for 
five minutes.
    Ms. Biggert. Thank you, Mr. Chair, and thank you to all the 
witnesses for your testimony.
    I have Argonne National Lab in my district, and I have a 
lot of spin-off companies. And what happens so many times is 
that they have a product that they are working on, and they get 
through the original, the first couple of steps until they get 
to, you know, they get through the demonstration project. And 
then they want to get to the commercialization, and so they 
might have gotten the loans and whatever, and then they come to 
me to see what we can do to help them with that further step. 
They can build the small demonstration project, but to go to 
that full step, and obviously this is something that either 
venture capital funding is necessary or they want an earmark, 
which obviously is a lot of money, which makes that kind of out 
of the question.
    But what--and you don't want to expand the program. What 
can we do for that ``Valley of Death'' that can bridge the gap 
there? Is there any--there was some talk about gap funding or 
whatever. Is there--Dr. Rockey.
    Dr. Rockey. Sure. Again, we have a number of programs or, 
excuse me, we fund a fast track program that allows Phase I and 
Phase II. We also give a renewal of the Phase II, which in part 
addresses this issue, although it only gets you a small way to 
funding the gap, and that is why I believe that the NRC's 
report which discusses the importance of venture capital, is 
significant in this case, particularly for biomedical research 
projects that may be very long term, very expansive, take a 
long time between the--for the clinical portion of it. And so 
we recognize that this is a serious issue and would like to 
look at ways to provide some flexibility for that more 
extensive research and development that needs to be going on.
    Ms. Biggert. Do you see also with this economic situation 
that we are in that the venture capitalists aren't as--don't 
have the ability to fund, too? Are there some projects that you 
see that are going, you know, that are not going to go through 
because they don't have that?
    Dr. Rockey. I think that is a possibility. I think what you 
may be seeing is venture capitalists are not taking on new 
ventures, and they are digging into the current investments 
that they have made, and thus, if we had a way also to allow 
them to also take on new venture as well, I think that would be 
very beneficial to the whole small business community.
    Ms. Biggert. Dr. Berdahl, why do you think that this was 
put in with the affiliation, if a venture capitalist company 
that have to include those members of the venture capital as 
well as any other business that they are involved in counting 
the number of employees?
    Dr. Berdahl. Why was it put in----
    Ms. Biggert. Yeah.
    Dr. Berdahl.--in the initial legislation do you mean?
    Ms. Biggert. Why, which really, I think, causes a lot of 
these companies not to be able to get the funding as well as 
venture capital.
    Dr. Berdahl. I think that obviously the availability of 
venture capital is harder to come by in the current climate. It 
is more difficult for young scientists or investigators who 
have developed something that has commercial value to be able 
to move to the proof of concept and scaling-up phase of this 
and the modeling that is required to assure a venture 
capitalist that it has commercial value and potential 
commercial success. And although the current SBIR Program 
partially recognizes this issue, it often falls short of being 
able to reach the level of development necessary to assure 
investors that a product has commercial viability. And so I 
think that we should be thinking very hard about how we can 
push these new technologies over this ``Valley of Death'' or 
across the gap, however anyone wants to describe it.
    And that certainly, I think, is in the interest of the 
Nation and in the interest of the scientists developing these 
products. We would welcome the opportunity to think with the 
Committee about and explore ways in which it might enable our 
universities, which also are pretty hard hit by this economy 
and don't have the resources in many cases to assist or the 
ability to assist in driving this--these developments over this 
gap.
    So there should be, I hope, some way in which we can extend 
the horizon for development of research advances and new 
technologies.
    Ms. Biggert. Do you think that--just to remove the counting 
of the people that are----
    Dr. Berdahl. I think that is a very important first step. 
Absolutely.
    Ms. Biggert. Is there--what would you do further then?
    Dr. Berdahl. Well, possibly an additional program of some 
sort. I don't favor increasing the set-aside as a means of 
doing that because I am not sure that we have an indication 
that there are----
    Ms. Biggert. Yeah.
    Dr. Berdahl.--enough----
    Ms. Biggert. Thank you.
    Dr. Berdahl.--able applicants.
    Ms. Biggert. Mr. Greenwood, what--would you think that that 
would solve the problem, just not to count the employees or the 
venture capitalists or their affiliates?
    Mr. Greenwood. I think that is part of the solution, and I 
think it would reflect the original intent of the Congress. I 
think that those affiliation rules really were interpretations 
made by the bureaucracy at SBA and doesn't reflect--it reflects 
neither the original Congressional intent nor I would think 
current Congressional intent.
    But certainly changing the rules with regard to the 
majority-backed VCs is critical. Companies who are doing 
important biomedical research that will have huge potential to 
release, relieve human suffering and premature death face the 
``Valley of Death'' whether they are or are not backed by a 50 
percent plus venture capital dollars.
    And keep in mind that what is important here is that these 
companies, if you are a drug discovery company, you cannot get 
very far down the road without VC funds, and what we are 
talking about there is very rare that one venture capital firm 
comes in and provides more than half of the funds for one of 
these companies. It is usually the case that several of them in 
the aggregate do. So maybe this one is providing ten percent 
and this one is providing ten percent and so forth.
    And none of that alters either the fact that these are 
still small companies and B, that they are making, as judged by 
the NIH reviewers, they are making important contributions to 
research that has great potential for humanity.
    Ms. Biggert. Thank you. Yield back.
    Ms. Edwards. [Presiding] Thank you, and thank you to the 
witnesses.
    I want to explore if we could for a bit the implementation 
of the SBIR Program, because it seems to me that obviously we 
have one agency in front of us, a big one to be sure, but there 
are wide variances in the implementation across the agencies of 
the program, and I understand your testimony with regard to 
flexibility and nimbleness across the agencies.
    But it makes it really tough to gage from one agency to the 
next whether there is consistency in terms of the 
implementation of the program and whether we are getting to the 
targeted need.
    And so I wonder if you would comment about the possibility 
or explore the possibility of some way that we can aggregate 
data, that we have some way across agencies of analyzing the 
effectiveness, the relative effectiveness. I mean, if NIH is 
doing it in the right way that it makes sense for that agency, 
what is the cross fertilization with other agencies?
    Dr. Rockey. So we have, of course, we have a number of ways 
as you mentioned, Congresswomen Edwards, regarding and 
analyzing our own data and also through the SBA we have some 
data available but at least will give you information on firms, 
and we can do some analysis.
    I think the issue about how the SBIR Program is implemented 
in each agency is an important one, and it becomes particularly 
important in your reauthorization, because I think it is good 
to look at best practices and what has worked well for each 
agency. I will say that the sectors that are being supported by 
each agency are quite different, and thus ultimately the 
flexibility that is allowed does help promote the particular 
type of program that is necessary to support that kind of 
sector. For example, the biomedical field that NIH would be 
working with as opposed to some of the more--in the physical 
sciences there are other small businesses that might be, for 
example, DOE [Department of Energy] or DOD [Department of 
Defense].
    So I think it is important not only to understand those 
flexibilities but understand best practices and their 
relationships to how the programs are managed for the 
particular sectors.
    Ms. Edwards. Mr. Glover.
    Mr. Glover. We have the National Academy of Sciences five-
year study that went into this at some length, and it did a 
very good job of analyzing what the agencies are doing. The 
conclusions were that the program is remarkable, that it is 
working very good. This is a data-driven, well-analyzed study. 
A lot of information is there.
    There is flexibility within the programs. A couple of basic 
things that are important to realize is it has the most 
remarkable rate of success of any of the federal R&D programs. 
Approximately half of the technologies make it to the 
marketplace in some shape or form or fashion, and that is quite 
successful. NIH just mentioned you are close to 50 percent. The 
Department of Defense is close to 50 percent. The other 
agencies are not quite that good but are still in there. So the 
program is quite good. That is why I say we have to be very 
careful on how we change it.
    Allowing large-size awards, much bigger awards, for 
example, NIH talks about the number of applicants have dropped. 
Well, quite frankly, the number of awards dropped, too. Which 
one came first? Chicken? Egg? I don't know, but they both went 
down together. So we have to be careful that we don't crowd out 
good innovations by giving a few large or super, jumbo awards 
or multiple awards that crowds out a lot of other technologies 
that may be coming along.
    The SBIR Program was designed to fill the earliest stage. 
One of the things I looked at for each of the states 
represented on this committee is whether seed and angel 
financings to your states were bigger than SBIR awards. That 
answer is they are not. That early stage, the really--the only 
source of money is SBIR, and that is why I think you have got 
to be careful about watching what you are doing. It is working 
remarkably well across all the agencies.
    Ms. Edwards. But let me just ask this because it gets to 
the question, I think that there was some suggestion that the 
changes that essentially screened out the venture capital based 
programs, backed programs contributed to the decline. I don't 
know what analytical data we have that suggests that is true, 
but if we do have it, I would be interested in seeing it.
    And what I wonder, the current economic environment that 
Ms. Biggert talked about, I think, you know, one could make an 
analysis that perhaps that has contributed as well to the 
decline in applications. And I come out of doing private 
sector, non-profit, grant making, and I always know that you 
always get many more applicants than you can ever fund. At the 
same time there is always a percentage of those that are just 
not worth funding at all no matter how much money you ever had.
    But my experience is then there is always, you know, a 
sector of them, maybe even it is above the 2.8 percent that you 
go, you know, if we just had some more, we actually might want 
to do that. And so I question, you know, what seems like a 
really, at least for most of you, a very sort of clear 
indication that there is no need to increase the set-aside, and 
then we have testimony from Mr. Glover that, you know, four or 
five percent set-aside, and I am not even sure why five percent 
and why not 2.9 percent or three percent, and so there must be, 
you know, some room in there both from the agency and small 
business standpoint but also, you know, looking at the percent 
of set-aside numbers, it says, well, maybe there is at least 
some room for movement on the set-aside.
    Mr. Greenwood or Dr. Rockey.
    Mr. Greenwood. The first thing I would say is that--and 
first reflecting on your comment that you get a certain number 
of applications and not all of them are the best, you know, 
almost by definition, but if you think about what we are trying 
to accomplish here in the big picture it is all about advancing 
the mission of the National Institutes, in terms of our 
industry, advancing the mission of the National Institutes of 
Health and making sure that the particular alacrity, the 
particular level of entrepreneurship and risk taking that small 
companies can take and be involved in because they don't have 
large overhead, they don't have large bureaucracies, that those 
skills are applied to the search for treatments for diseases.
    And the best way to make that happen, I think, and to get 
the greatest number of very qualified applications is to expand 
the application pool back to just what it was prior to 2004, 
and that is to re-allow these venture backed companies to 
participate. You will undoubtedly get a significant number of 
very qualified applications, making the process more 
competitive and making--and that competition I am sure will 
inspire excellence.
    Ms. Edwards. Thank you, and I will turn the chair back over 
to Chair Wu.
    Chair Wu. I thank all the Members and the witnesses for 
keeping a lively discussion going while I had to step away for 
another commitment just momentarily. If I rework any territory 
that has already been explored or thoroughly explored, please 
apprise me, and we will move on.
    I came back in during this discussion of the set-aside, and 
I very much understand and appreciate that this is a delicate 
balance, and it is a difficult balance. One can pick 1.0 
percent, 2.0 percent, 2.5 percent, 3.5 percent, five percent, 
and it is basically a value judgment about the appropriate role 
of tech transfer and tech development versus fundamental 
research. There is no getting away from that. But that is the 
line drawing that this institution engages in on a continual 
basis.
    Mr. Glover, I emphatically want to help small business in 
this endeavor, and it is an effort to help small business that 
we looked at increasing the set-aside so that although the 
total amount of funds is going up because of increased research 
funds, we wanted to grow the pie for everybody so that no one 
would be left out, as we try to get more people in, applicants 
in, and at the same time increase the size of grants.
    So I am very sensitive to your concerns. I just note that 
there is some significant resistance to changing set-asides, 
and I think I understand those concerns also.
    Dr. Rockey, there was, what, approximately a 40 percent 
drop in applications to NIH starting in 2004, and that is 
roughly correlated with the date of the ALJ [Administrative Law 
Judge] decision banning venture capital investment, which came 
down in 2003. Is that correct?
    Dr. Rockey. That is correct.
    Chair Wu. Now, we want to work out something that helps 
this program remain an innovation as well as a small business 
program, and it is in that spirit, Mr. Glover, that I am asking 
you to the extent that, you know, would you say that a 
substantial percentage, perhaps even a majority, of your paying 
membership, if you have paying membership, are in the defense 
industry or funded through DOD SBIR funds?
    Mr. Glover. They are not. Our current chairman has a 
significant number of NIH awards and is one of the top NIH 
award----
    Chair Wu. Right. But that is----
    Mr. Glover. Many of the other ones, many of the other 
companies are as well.
    Chair Wu. Well----
    Mr. Glover. We are across the whole spectrum.
    Chair Wu.--Mr. Glover, in looking at some of the data it 
seems to me that the organizations that you have brought in, 
when I have dug underneath, every single one of them was on the 
DOD SBIR.
    Mr. Glover. Mr. Chair, very few--we have only had one 
witness appear before this committee from the Small Business 
Technology Council.
    Chair Wu. Oh, I mean folks who came to my office.
    Mr. Glover. Oh. I am not sure who all has come to your 
office but----
    Chair Wu. Uh-huh.
    Mr. Glover.--they are certainly--half of the program is 
DOD, and so--and many companies that are in other areas are 
also in DOD.
    Chair Wu. Well, you know----
    Mr. Glover. So----
    Chair Wu.--Mr. Glover, I am asking this as a friendly 
question.
    Mr. Glover. I understand that.
    Chair Wu. And I am trying to find some basis which 
hopefully gets us away from capital structure as a proxy for 
either domestic ownership or as a proxy for the character of 
small business, because I think 500 employees is quite crisp on 
that front.
    It seems to me that a lot of Mr. Greenwood's issues have to 
do with biotechnology, and there are also software and hardware 
companies that burn a lot of cash. But if it is the case that 
DOD uses SBIR in a fundamentally different way as an adjunct to 
its research, as a spur to innovation by the large defense 
contractors, then perhaps what we can do if we can't get away 
with an intellectually pure solution of getting away from 
capital structure as a proxy for size, at least taking a 
substantive approach of perhaps exempting DOD from the new 
statute. And that is the avenue that I am trying to explore 
with you as an alternative, which may be even more palatable to 
your membership than the generous concessions which we made in 
negotiation of the last Congress to take into consideration the 
very real concerns that your membership has.
    Mr. Glover. It certainly solves the problem for 
approximately half of our members. Those members who are in the 
health sciences and the biotech, there are a lot of very good, 
important small biotech companies who are working very hard to 
survive. The only source of funding----
    Chair Wu. Do any of those small biotech companies not have 
venture capital investment?
    Mr. Glover. Absolutely. Many of them do not have venture 
capital, and they are successful.
    Chair Wu. And would you characterize those companies 
currently?
    Mr. Glover. Well, some are here today. The Maryland, State 
of Maryland has a wonderful program for angel investors that is 
making some of our biotech companies in Maryland grow very 
nicely. You got a 50 percent tax credit for investing in those 
companies. They have gone to that source. They have been able 
to raise angel capital to move their companies. There are many 
successful biotech companies that don't get----
    Chair Wu. Earlier, Mr. Glover, you said that the HHS SBIR 
budget would be insufficient to commercialize one 
pharmaceutical. Are you saying now that these small biotechs 
can make it on angel investment alone?
    Mr. Glover. Many have so far.
    Chair Wu. Then----
    Mr. Glover. But I am talking, but now when you talk about--
--
    Chair Wu. Are you taking back what you said about HHS and 
its SBIR Program?
    Mr. Glover. No, sir. There is a very clear distinction. Mr. 
Greenwood has said many times that it takes $800 million to 
take one drug through the FDA approval process. There are an 
awful lot of technologies that don't have to go through that 
$800 million process. But those that have to go through that 
process, you couldn't use the whole HHS budget to take one drug 
through that process.
    Chair Wu. Mr. Greenwood, I am going to give you an 
opportunity to respond to this conversation.
    Mr. Glover. Mr. Chair, I do want to respond to one thing 
you said earlier about believing the information and data that 
I provided. I did footnote virtually everything I said so that 
you can at a time take a chance to look at that. We are very 
careful about that.
    Chair Wu. I read your submissions to the Subcommittee with 
great interest and in detail.
    Mr. Glover. Thank you, sir, and I--but I did footnote as 
much as I could because quite frankly that kind of information 
is shocking to the innovation community.
    Chair Wu. Thank you very much, Mr. Glover. Mr. Greenwood, 
would you care to respond.
    Mr. Greenwood. I would. Thank you, Mr. Chair.
    This is a bit of a mystery to me because I think to some 
extent Mr. Glover's membership and mine are, they are not 
entirely mutually exclusive, but they seem to be fairly 
different. The companies in BIO, the companies that I am here 
to represent, are fundamentally drug discovery companies. They 
are companies that patented molecules. To some extent they are 
platform companies, but for the most part they are moving 
forward trying to get drugs into clinical trials and into the 
FDA approval process, and that, of course, is a challenge that 
takes hundreds of millions of dollars. And you cannot get very 
far down that path without having to rely on venture capital 
investment. In fact, without having to rely on a majority of 
your funds coming from venture capital.
    So companies that can do well year after year on SBIR 
grants are not companies that have as their core competency 
drug discovery and development. I am not frankly quite sure 
what these companies are doing. I am not suggesting that it is 
not valuable. Sometimes I wonder if the core competency is 
succeeding in getting SBIR grants, but they are certainly not 
companies that are moving down the path towards drug discovery, 
which is largely what the NIH is trying to accomplish.
    Chair Wu. Thank you, Mr. Greenwood.
    I just want to return for a moment to what are very 
legitimate concerns of the different parties to this 
discussion. Mr. Greenwood was addressing small biotechs which I 
think share some characteristics with software and hardware 
startups. Frequently they are VC funded. They are looking to 
hockey puck growth where hopefully if they succeed they will 
lock it up in size and employment and revenues and the VC 
investor fundamentally wants his or her money back times 60 if 
possible.
    What I was trying to encourage Mr. Glover to think about 
and this I only learned recently, that there has been an 
unfortunate bitterness between the different sides of this 
debate, and I am familiar with high-tech startups. I was 
unfamiliar until very recently with an entire industry, which 
is very, very important, which is primarily concentrated in 
defense, which does have repeat SBIR grants but for good policy 
reasons. Frequently there are only a few large defense 
contractors left in a given field, and not only, as Mr. Glover 
covered, the small entrepreneur companies have weight for 
weight more research going on. And the small companies not only 
innovate new products and in essence by getting contracts 
repeatedly from the DOD, are forming the backbone of some very 
important research for DOD, but by being small entrepreneur 
companies, they also spur the big companies because DOD is able 
to come to the big contractors and say, look. Those guys came 
up with better body amour. Why can't you?
    Now, that is a very legitimate use of repeat SBIR grants. I 
think I would like to carve something out so that we can all 
live with this, so that we don't have to live with what in my 
view is not only a very crude but an erroneous ALJ decision 
that was made by one person in Boston, ironically, but it has 
excluded the majority of VC-owned companies or companies that 
in the aggregate have many minority VC owners but in the 
aggregate have majority of VC ownership. And the aggregation 
rules also are a problem for these companies, and as Dr. Rockey 
points out, there is a problem with a drop off in applications 
to NIH, and we can't all count on positive outcomes or cures 
from these many companies, but I believe that they are very, 
very important, and we should have a crafted balance to bring 
that process back into harmony.
    Mr. Glover, I want to give you another opportunity to talk 
about the relative weights of your membership versus Mr. 
Greenwood's.
    Mr. Glover. Quite frankly, we do have members who are 
involved in both organizations. Some of our members cannot 
afford to be in Mr. Greenwood's organization. They simply can't 
afford the dues, but they share many of the common 
characteristics and traits.
    There is a lot of overlap between the two organizations. I 
think we feed to his organizations, that as our folks get 
bigger and grow, they probably do end up in his organization. 
There are many parts of NIH that are not related to drug 
development, and I think that you have to be a little careful 
in that. We are looking at an $800 billion solution to a 
problem that SBIR is not designed to fix. There is no way that 
this program is big enough to fund drug approval process 
through the FDA.
    But I think that there is probably some way to shape a 
compromise that goes along that way, but we have to keep a 
whole variety of biotech companies that have succeeded and been 
effective in the program, and we can't allow a few large giant 
companies with large awards or giant money, lots of money, not 
giant companies but with lots of backing, to crowd out all the 
other companies. And what we have seen is NIH--some large 
awards have, in effect, crowded out the number of awards that 
could be given.
    If you, for example, give a $10 million award, then you 
have foreclosed a lot of other companies that could have 
competed. So there is a balance here, and I have to tell you 
that my membership is far more concerned about competing with 
well-funded venture capital companies than I was when I first 
got involved in this process. They are genuinely concerned 
about the process.
    Remember, the company that started this at SBA [Small 
Business Administration], that decision was the Administrative 
Law Judge who looked at it and said, AIG's Swiss venture 
capital company and a Canadian venture capital company owned 
that company, we don't want money to go to that company. That 
is what it was. It was not local U.S. venture capital 
companies. It was AIG, a Swiss company, and a Canadian venture 
capital company, and he looked at it and said, this program is 
designed to help American businesses. No.
    Chair Wu. Well, Mr. Glover, I see that you have spent some 
time in this organization and on this Hill. But I recommend to 
you two things. The next time you want to engage in Canadian 
bashing, think first about their actions in saving our folks in 
the Toronto Embassy and the longest undefended border between 
any two countries the world has ever seen. Secondly, I think 
that a few organizations get away with no, no, never, never, we 
are not going to bend one inch. For whatever reason the NRA 
comes to mind, although I am a loyal firearm owner, but most 
organizations can't get away with that, and I am glad to hear, 
Mr. Glover, that your organization is willing to bend and reach 
reasonable compromises which take care of the legitimate 
interests of your membership and all the other folks out there 
as well as the technologic needs and employment needs of this 
country.
    We will return momentarily, but I thank Mr. Lujan, the 
gentleman from New Mexico, for his forbearance, but I might add 
that we have kept the discussion alive, so Mr. Lujan could be 
next in asking his questions. The gentleman from New Mexico is 
recognized for five minutes.
    Mr. Lujan. Mr. Chair, thank you very much, and I won't take 
long. I think that this is a great conversation, Mr. Chair, and 
both with what Ms. Edwards and yourself have been able to move 
forward, and I need to get some answers today as we get some 
more discussion on those items would be great.
    Dr. Rockey, why do you think the number of applicants has 
dropped?
    Dr. Rockey. It has been almost like the perfect storm. We 
really don't understand the entirety of why the applications 
have dropped. We have mentioned the question about eligibility 
with the venture capital companies as being perhaps a 
component. We also had mentioned about the complexity of 
determining eligibility and whether or not a company is 
eligible.
    There are a number of companies because of the linear 
fashion of this program which is a Phase I and Phase II, 
perhaps their model does not fit within the SBIR Phase I and 
Phase II approach.
    And in addition there are just some companies I think feel 
overwhelmed by the entire process of applying for SBIR grants. 
So there is a number of things that go on. I can't say that we 
understand it exactly. I think Chair Wu had pointed out or 
Congresswoman Edwards about the complexity of this issue, and 
really if we had any actual data that would support our 
understanding, we really don't. There are a number of things 
that have come together, and we really would have to tease out 
all of those different aspects to be able to understand it.
    Mr. Lujan. Anything specific with venture capital 
participation?
    Dr. Rockey. Well, as we said, the ruling at the same time 
we saw a drop in applications, whether or not there is a direct 
correlation we can't say, but we did see that drop.
    Mr. Lujan. Okay, and Mr. Glover, along the questioning I 
think that the Chair was pursuing, isn't it true that a small 
business can be disqualified where multiple venture firms each 
have a minority stake, but in the aggregate own a majority of 
the company share?
    Mr. Glover. That is the current situation.
    Mr. Lujan. And isn't it true that many small companies in 
this situation have been excluded from the SBIR Program since 
the reinterpretation, since '03?
    Mr. Glover. We looked at some years later--the NIH gave us 
an analysis, and they said that I think after the first two or 
three years they looked at it. Only 50 companies had been 
excluded. A number of those were foreign-owned companies, a 
number of those had grown beyond 500 employees, and that it 
turned out to be very few actually had been excluded based on 
the analysis NIH did at the time. Clearly there are companies 
that have been excluded. I am not saying they are not. I don't 
think there is a huge number of them, but I think there 
certainly have been companies excluded.
    Mr. Lujan. Okay, and Mr. Glover, you also stated that 
Congress should renew SBIR without major design changes. Are 
there any changes in your opinion that should be considered or 
that would increase the effectiveness of these programs?
    Mr. Glover. Certainly we have suggested that the award size 
needs to go up. It hasn't gone up. SBA has proposed raising it. 
It certainly should be raised for inflation, and we think that 
there are some additional suggestions.
    For example, there needs to be some additional 
commercialization, and I think everybody recognizes we need to 
find some way to move the technology readiness level from where 
it comes out of the SBIR Program closer to commercialization. 
The founder of the program, Roland Tibbetts--and his paper--
analysis is attached to my testimony, very specific. This 
program is not a commercialization program but moving it closer 
to commercialization, doing some testing and evaluation, some 
additional funding. There are good programs like the TIP 
Program [Technology Innovation Program], the old ATP Program 
[Advanced Technology Program] that is designed to move 
technology further down. There clearly needs to be something 
else done in that area, whether it is part--in addition to the 
SBIR Program or whether it is something freestanding. We really 
do have a problem. We are trying to get small business up to 
the ``Valley of Death'' to look in. Everybody else says we got 
to get it across. I am just saying we need to get more up to 
it, but we also need a bridge across that ``Valley of Death.''
    So there needs to be something extra. I am flexible on how 
that works, and I--but I think it clearly needs to be something 
that goes beyond SBIR, but I don't think we want to take away 
from the base program that we have now----
    Mr. Lujan. Thank you.
    Mr. Glover.--to do that.
    Mr. Lujan. And lastly, Mr. Greenwood, Dr. Rockey gave--
mentioned this in the first response to my question. You also 
brought this to our attention through your testimony with the 
application process. What can be done to increase the 
effectiveness or awareness, participation, competition within 
the program and to get your thoughts on that, Mr. Chair, then I 
would make sure that we would yield back any excess time that I 
have consumed today.
    Chair Wu. That would be fine.
    Mr. Greenwood. Thank you. I am going to sound like a one-
trick pony because I am on this subject, and it has to do--if 
you want to get more competition and more excellence in the 
program, you have to go back to the original Congressional 
intent and overrule statutorily this ill-found decision by the 
ALJ that excludes the majority backed venture capital 
companies.
    A couple of points--conjectures that need to be put to 
rest. This idea that somehow when--allowing these companies to 
participate crowds out the other applications. The National 
Research Council study found no evidence that participation of 
companies with multiple VC ownership was harmful to the program 
or that small businesses have ever been crowded out by the 
participation of small businesses that are majority owned by 
VCs. So that is not a concern at all.
    Another thing that is important here is that no one is 
suggesting that SBIR money is what gets companies through the 
process, that multiple hundred million dollar process of moving 
to FDA approval. What really happens is a biotech company will 
have a molecule that it thinks might cure brain cancer, and 
venture capitalists will look at that, look at the intellectual 
property and say, you know what? We think we are right, and we 
want to invest ten million or $15 million in that. And that 
program becomes, might become ineligible for an SBIR grant.
    Now, meanwhile, back in the laboratory the scientists are 
saying, you know, this molecule might also cure prostate 
cancer, breast cancer, have another application, and they want 
some seed money to get that process started, and the venture 
capitalists are saying, no, no, no, no. We put our money on the 
brain cancer application. So then it is--because it is 
perfectly appropriate for that company to come back with an 
application and say, this is a secondary project that holds 
great potential to cure human disease as well. And we think it 
makes perfect sense, even though that company has venture 
capital funding to come back to the NIH and say, what about 
this? Does this look like a good project that you might want to 
fund as well?
    So we think that, again, for all of those reasons that--and 
particularly going back to the original Congressional intent, 
and as the Chair said, it was never, never the intent of 
Congress and nor is it rational to make financial structure a 
proxy for smallness.
    Chair Wu. Mr. Greenwood, I would interrupt while you are 
quoting me with approval. I have a request from the minority to 
adhere more closely to the five-minute time limit, which is 
somewhat unusual, but I intend to abide by that request.
    So if you could draw your comments to a close and when Mr. 
Lujan is ready to yield back the balance----
    Mr. Greenwood. I have.
    Chair Wu. Thank you, Mr. Greenwood.
    Mr. Lujan. And Mr. Chair, I would just close with, you 
know, we had a phenomenal conversation with Secretary Chu with 
his visit to Las Alamos National Laboratories in New Mexico, 
talking about the importance of R&D science and technology 
innovation, looking to see what kind of projects we should be 
supporting, recognizing that eight of the ten may fail, but it 
is those two that succeed and the breakthroughs that we would 
yield from them with solving domestic problems and global 
problems. And that is why we need to be supporting projects 
like this so we can get these products to market.
    Thank you, Mr. Chair.
    Chair Wu. Mr. Lujan, you had Secretary Chu at a national 
lab, and you didn't invite me. And all this time I just always 
talk you up as a very valued contributing Member of the 
Subcommittee.
    Mr. Lujan. Mr. Chair, next time we will make sure we invite 
you, but, Mr. Chair, we had a 24-hour notice, and I am not sure 
we could have gotten many more people to the laboratories. 
Thank you, Mr. Chair.
    Chair Wu. I thank the gentleman, and now the----
    Mr. Glover. Mr. Chair, could I just mention one thing about 
national labs?
    Chair Wu. If Mr. Smith will permit that, I would be happy 
to.
    Mr. Smith of Nebraska. Briefly.
    Mr. Glover. The other thing about where innovations come 
from, the National labs has done remarkably well. That is the 
biggest increase in innovations, key innovations is the 
National labs. It is really quite a remarkable success story.
    Chair Wu. Thank you, Mr. Glover.
    The gentleman from Nebraska, five minutes. Thank you very 
much. Good to see you.
    Mr. Smith of Nebraska. Thank you. I apologize. This might 
be begging for a long answer, but if you could be as brief as 
possible.
    Could you comment on the National Academies of Sciences' 
review that--of SBIR that found the program is not sufficiently 
evidence based and in need of improved data collection on 
program outcomes and performance matrix to measure its impact? 
Could you respond to that?
    Dr. Berdahl. In my testimony I mentioned the fact that that 
is a recommendation of the National Academies and certainly one 
that we endorse. Indeed, perhaps much of the discussion that 
has been conducted here in this hearing today could have 
benefited from some more rigorous data that we might have 
acquired if we had really done the kind of analysis as between 
agencies and so forth that would yield some evidence that would 
help shape policy.
    Mr. Smith of Nebraska. Anyone else wishing to respond?
    Mr. Glover.
    Mr. Glover. I would just comment that there is a lot more 
information about the SBIR Program than virtually any other 
federal R&D program. It is quantified, it has been studied by 
GAO a number of times and the National Academy study is a five-
year, $5 million study. There is an awful lot of information 
about it. We can never get enough information when we are 
trying to evaluate and make decisions, but there is a lot more 
here than there is on most other programs.
    Mr. Smith of Nebraska. Okay.
    Dr. Rockey. I would also say that I would agree with Dr. 
Berdahl, and I had mentioned earlier that understanding our 
drop in applications would have been a lot easier had we had 
some evidence base. We have done a number of studies on the 
SBIR Program. As you know, the NRC just did theirs. We also 
have our own PODS [Performance Outcome Database System] 
database, which is really a way to look at commercialization, 
what happens.
    In addition, the SBA has a database called TechNet which 
also can help us with some evidence base, but we would agree 
that there should be and could be more evidence-based analysis 
of this program.
    Mr. Smith of Nebraska. Okay. Thank you. Mr. Greenwood, if 
you could give an example of the kind of companies that BIO 
believes should be made eligible for SBIR funding through a 
change in eligibility rules and how such a company might 
compare to others that are currently eligible in terms of 
employees, revenue, and other things.
    Mr. Greenwood. Uh-huh. Well, thank you, Mr. Smith. First 
off, we think it is important that companies who are small, and 
because they are small, are not burdened by the huge overhead 
and bureaucracy of, say, large pharmaceutical companies, they 
are much more willing to take risks and to go into areas that 
for which there are no cures right now, no treatments. They are 
into unknown territory, if you will. These are the kind of 
companies that we think can contribute the most to advancing 
the science around solving problems related to human disease.
    We think that companies that advance the science to the 
point where the venture capitalists, who are increasingly 
skeptical, in the beginning when the human genome was first 
sequenced in about 2000, any biotech company that emerged was 
pretty quick to get venture capital funds because it was 
assumed that there was going to be quick solutions. It has 
turned out that the problem of using the human genetics, 
understanding of genetics and DNA is more complicated than was 
first thought.
    So venture capitalists are being skeptical. So when the 
venture capitalists come in and say we are going to bet on this 
company, it is much more likely than it ever has been that this 
company is really going somewhere, that this is going to be a 
new breakthrough invention.
    And so the fact of venture capital investment should be--
and at times in the program's history, it was an indication 
that they should merit additional grants, not that they should 
be turned away. And so we have had a perversion of the original 
process in which a company that is good enough, the science is 
good enough, it is smart enough, and making important 
breakthroughs to the point where the venture capitalists are 
willing to risk their money, I think those should be the 
companies that minimally should be able to compete for SBIR 
funds because they obviously have demonstrated their ability to 
build the talent pool necessary to advance the science.
    Mr. Smith of Nebraska. Thank you, and what about the impact 
of the recession? Have you seen change in pattern of 
application for funds and otherwise?
    Mr. Greenwood. Well, I don't know that we have had enough 
time to see that, but we are in trouble. Small--most of our 
companies don't have any products on the market. They rely 
entirely on investor capital for their revenues, and they do 
for a very long period of time, and in this credit crunch right 
now we are in the position where there is just no money for 
those. And so we, as I said in my opening statement when you 
weren't able to be with us, fully a third of our companies are 
down to their last six months in capital and something like 40 
percent are down to their last--30 down to their last 12 months 
and 40 percent down to their last six months.
    So we are going--our companies whether they are majority 
VC-backed or not are going to be more in need of help in the 
next 12 months or so than they ever have before. And much will 
be lost if these companies dissolve.
    Mr. Smith of Nebraska. Thank you. Thank you, Mr. Chair.
    Chair Wu. Mr. Smith, you are prompt. I am going to have to 
mend my ways.
    The gentlelady from Maryland, Ms. Edwards, recognized for 
five minutes.
    Ms. Edwards. Thank you, Mr. Chair.
    I just have one real question, and it has to do with the 
moving the process towards commercialization, and Dr. Rockey 
and Mr. Greenwood, when I hear from small businesses, 
especially these that are nimble technology and research firms 
and minority-owned business and women-owned business, what they 
say is they do need that first push. That is why we have the 
program, but then, you know, a lot of them are not able to get 
that venture capital at the beginning, but they need something 
that helps them get there. And so I want to know actually 
within the context of the program, you know, what ability the 
program allows to even, you know, sort of see whether it is 
consultants or some assistance to get the business plan 
together to then, you know, move into that next phase and then 
out to real commercialization. Because I think if you are going 
to go ahead and make an investment in seeding the research and 
the technology and then you just kind of give it away at the 
time at which it needs to be spurred on, that is a particular 
dilemma for small, women, and minority-owned businesses.
    Dr. Rockey. And while we haven't invested greatly in this, 
we do have a number of programs at NIH called CAP 
[Commercialization Assistance Program] and TAP [Technical 
Assistance Program], which are commercialization assistance 
programs, and some of them are designed specifically for the 
smaller programs that really need help in just even 
understanding the process under which they can commercialize. 
So we have two programs, one of which supports training for 
those kinds of businesses to understand the process and one for 
more actual assistance in the commercialization process further 
down the road.
    But it is an issue. It is an enormous issue that I believe 
Mr. Greenwood would relate to many companies is getting onto 
that further step.
    Mr. Greenwood. If I may, as valuable as the SBIR Program 
is, and it has been essential to the development of 
biotechnology in this country, it is not the only source of 
revenue for early-stage companies, and one of the things that I 
do is travel from state to state talking to governors and State 
legislators about what they can do to help these companies as 
well.
    Every state in the union, in fact, virtually every country 
in the world right now wants to be a big biotech hub because 
they see both the opportunity to advance the health of their 
citizens, as well as to advance the economy, because this is a 
growth industry.
    So we encourage states to initiate their own programs. We 
have in my State of Pennsylvania we took tobacco settlement 
money and created a greenhouse, incubation centers for small 
biotechnology companies to get some of the help as you suggest 
with business plans and that sort of thing.
    There are--we have a whole catalog of programs that states, 
you know, can engage in in order to help all companies, include 
women-owned, minority companies, to get into this field. And 
frankly, BIO is taking a leading role in trying to bring 
minorities into this industry, young people, people of all ages 
to demonstrate that this a real growth field and an opportunity 
for diversity.
    Ms. Edwards. Thank you, and Dr. Rockey, you do feel that in 
the current structure of the program you have the flexibility 
to be able to assist with some of that as well, and I would say 
my own home State of Maryland, you know, does a tremendous job 
of seeding this because we view like other states, this is 
definitely a growth industry, at least on the biotech.
    Dr. Rockey. We have some, and we have, as I pointed out, 
considered technical assistance in this area for 
commercialization, very appropriate. I will point out that the 
SBA did have the Federal and State Partnership Program that 
ended in 2005. The FSPP Program, I think some of you might have 
been aware, was an outreach effort, and that was also helpful 
as was a rural outreach program, which were two programs 
specifically designed to help bring people in and understand 
what was happening at a State and federal level.
    So while those programs have gone by the wayside, there 
are--we also have extraordinary efforts in outreach. We attempt 
to outreach. I would mention that in--we are having our 11th 
annual SBIR conference in Nebraska this year in Omaha, and so 
we do think outreach as well as assistance is important in this 
whole program.
    Ms. Edwards. Thank you, Mr. Chair, and I will yield.
    Chair Wu. Thank you very much.
    Mr. Smith, do you have any further questions? Okay. I 
understand that Mr. Lujan has a further comment to make.
    Mr. Lujan. Mr. Chair, yes, and it is to extend an 
invitation to the Chair to New Mexico. We will make sure we 
have the appropriate hearing scheduled for that invitation Mr. 
Chair.
    Quickly, Mr. Chair----
    Chair Wu. I look forward to it.
    Mr. Lujan.--we reached out to a few businesses in New 
Mexico, and one of them by the name of Southwest Sciences in 
Santa Fe, New Mexico, is an example of how this program can 
work. And another example of a small business that is asking 
for support from the Congress to be able to support the 
reauthorization but making sure that the program is made 
available to their small businesses.
    Southwest Sciences has now been issued 28 United States 
patents, all of them on inventions made through the support of 
SBIR or STTR Programs. They license many of the patents to 
manufacturers who are actively making and selling products in 
the semi-conductor industry, natural gas pipeline industry, 
environmental monitoring, and atmospheric research 
applications.
    And so we just continue to see, Mr. Chair, not only with us 
reaching out to businesses but them reaching out, back to us 
that shows the jobs that can be created, progress that can be 
made, and the importance of making sure the capital is going to 
be made available to especially a lot of these small companies 
who need that little boost to be able to make great things 
happen.
    Thank you, Mr. Chair.
    Chair Wu. Mr. Lujan, would you like to enter any of those 
materials in the record?
    Mr. Lujan. Mr. Chair, we will request without any objection 
to submit a letter from Southwest Sciences into the record.
    Chair Wu. Without objection so ordered.
    [The information follows:]
    
    
    
    
    
    
    
    

    Chair Wu. As I said, the gentleman from New Mexico is a 
valued Member of the Committee and has now--works diligently 
and now has also invited me to New Mexico. I thank the 
gentleman.
    Well, the Chair recognizes himself. Ms. Edwards, I am about 
to get to your fine State of Maryland. We count on the NIH for 
innovation, and it has not gone unnoted that in the very 
thorough materials prepared by Mr. Glover that there is a 
tremendous concentration of SBIR companies and employees in the 
lovely State of Maryland, and we suspect that that may have 
something to do with NIH innovation. Another arena in which you 
all have been innovating is Phase II competition re-awards I 
would call it.
    Dr. Rockey, could you describe that program to us, because 
I think we share an interest in getting folks over the ``Valley 
of Death'' in promoting innovation, in protecting legitimate 
small business interests, and this may be an interesting tool 
for us to follow up on as a method of getting over the ``Valley 
of Death,'' although there are some downsides to it, too, 
perhaps.
    Dr. Rockey. So the competitive renewal of Phase II is 
really a phase 2.5, which allows us to support companies that 
have successfully completed their phase or are in the midst of 
their Phase II and come back in for competition to further 
their project towards the ultimate goal of commercialization.
    I would say that in the case of clinical research, we are 
still pre-clinical at that stage, but it is taking the projects 
further down the line. We do support these projects for three 
years at $1 million per year. So it is substantial support, and 
we do think it has been effective at getting closer to the 
``Valley of Death,'' although as I said, it is usually still 
pre-clinical. But we find this is a way to successfully try to 
navigate this next step, which they otherwise would not have 
funding for.
    But I do want to point out that it is competitive renewal. 
They are not guaranteed the renewal. They must come in and 
compete for it, and so they are judged against others who are 
competing for this as well.
    But we found it to be a very effective way of promoting the 
development further along.
    Chair Wu. Thank you very much, Dr. Rockey. We very much 
value NIH's innovation in Phase II competitive re-awards, its 
innovation with respect to flexibility and grant sizes. I would 
just like to underscore in a very friendly way that there are 
those of us who prefer NIH to innovate with a more clear 
statutory basis, and that is up for discussion.
    Mr. Glover, would you like to comment on the Phase II 
competitive re-award efforts that NIH has engaged in? Is that 
something that you view as a positive negative or a sideway 
slam?
    Mr. Glover. We think that is a positive. We think that 
because it is a gaited process where they have to compete again 
for the additional money, that is important. We also think that 
it can't be too big, because if you get too much money going 
into that phase, you are crowding out, you are eating your seed 
corn. You are not getting enough new ideas coming forward, but 
we think that so far that seems to be to be balanced at NIH, 
and it is a positive.
    And I think that as long as Congress puts a gaited process 
in and provides some additional funding for this kind of 
activity, it is a great idea.
    Chair Wu. Well, Mr. Glover, I just want to point out that 
you and your organization might feel that our $2.2 million 
Phase II award was way too high last go-round, but I think that 
in view of your support of a Phase II competitive re-award, 
there is flexibility on these numbers.
    Mr. Greenwood, would you care to comment on this Phase II 
re-competition?
    Mr. Greenwood. I would like to, but I can't. I don't know 
enough about it to give you good information.
    Chair Wu. Hopefully we will have the benefit of your 
organization's thoughts.
    Mr. Greenwood. We will submit it in writing if the Chair 
would like.
    Chair Wu. Thank you very much. I appreciate that.
    And with that I guess there are not going to be comments 
from any other Members of the Subcommittee. If our witnesses 
are not going to volunteer anything for the good of the order, 
then I want to thank you all for being here this afternoon and 
spending a decent chunk of time with us. It has been I think 
edifying for all Members, and I hope that it is part of a 
collaborative process as we go forward to have an SBIR Program 
that helps stimulate innovation, stimulate small business and 
employment and the production of new products, new services, 
and life-saving therapies and also helps keep our defense and 
other industries strong.
    The record will remain open for additional statements from 
Members and for answers to any follow-up questions that the 
Committee may ask of the witnesses.
    Again, I want to thank the witnesses and you are excused, 
and thanks profusely for your participation. The meeting is 
adjourned.
    [Whereupon, at 4:15 p.m., the Subcommittee was adjourned.]
                               Appendix:

                              ----------                              


                   Answers to Post-Hearing Questions




                   Answers to Post-Hearing Questions
Responses by Robert M. Berdahl, President, Association of American 
        Universities

Question submitted by Representative Adrian Smith

Program evaluation, performance measures.

Q1.  The recent National Research Council review of SBIR found that the 
program is ``not sufficiently evidence-based'' and is in need of 
improved data collection and tracking of program outcomes, as well as 
clear performance metrics for assessing the success or failure of a 
given initiative. Do you agree with this finding and recommendation?

A1. In response to your question about the need for ``improved data 
collection and tracking of program outcomes,'' I would commend to you 
the comments made in my written testimony, as well as the 
recommendations made by the National Research Council in its 2008 
report, ``An Assessment of the SBIR Program.'' As stated in my written 
and oral testimonies, it is difficult to truly assess the economic and 
innovative impact of the SBIR and STTR programs when there has not been 
systematic data-gathering by sponsoring federal agencies. To this 
point, the NRC report includes an example in which a sponsoring agency 
suggested the need to increase in the median Phase I and Phase II award 
sizes. However, due to the lack of data-collection, the sponsoring 
agency was unable to provide a systematic, data-driven justification 
for increasing the award sizes. Simply put, limited use of metrics, 
data-collection, and analysis hinders our ability to assess and improve 
these programs. In addition to providing for better assessment of these 
programs, it is also important that the specific missions and goals of 
each federal research agencies be taken into account when assessing 
these programs effectiveness. This was a point that was also 
highlighted in Chapter 4 of the NRC report.

Questions submitted by Representative Daniel Lipinski

Q1.  If the SBIR and STTR award amounts are increased and the set-
asides are not, thus resulting in fewer awards, what do you think the 
impact will be on the number of successful commercializations? Will we 
see more successes because we cull out more marginal companies and 
increase award sizes, or will it diminish the overall impact of the 
program because it eliminates research on promising ideas?

A1. If federal funding for research stays flat, then indeed increased 
award sizes in the absence of an increased set-aside will lead to fewer 
awards. On whether fewer awards lead to fewer commercializations, we 
can only echo the recommendations of the National Research Council in 
suggesting that accurate data collection about the performance of 
agency SBIR/STTR awards--and indeed the results of individual SBIR/STTR 
awards--is needed. The National Institutes of Health's experience seems 
to suggest that, where NIH has been able to be more flexible in the 
size of grants awarded, the agency has been able to attract and fund 
higher quality proposals. In addition to the recommendations made by 
the NRC and contained in my testimony, I would underscore the 
importance of sustained increases for federally funded research. Such 
increases will not only allow us to maintain our global scientific 
leadership, they will also assure that the SBIR/STTR programs grow in 
tandem with our nation's research enterprise.

Q2.  The STRR in particular program looks to promote cooperation 
between a small firm and a scientist in a University or National Lab. 
But starting a company from the ground up can be a full-time job for a 
scientist. Do you have any sense about the extent to which University 
or Lab scientists can actually participate in a startup? How flexible 
are Universities and Labs, respectively, with policies to allow their 
researchers this opportunity?

A2. Many universities have policies that will allow faculty leaves of 
absence or reduction in appointments to assist in the formation of a 
start-up, with appropriate conflict of interest oversight. They also 
have policies that permit faculty to devote a certain percentage of 
their time to consulting outside of the university. Having said that, 
many faculty members want to continue their research and don't want or 
don't have the time to start a new company. As a result, most 
university spin-offs are created by a faculty member in partnership 
with an entrepreneur outside of academia who actually guides the 
formation of the start-up. The faculty inventor serves as a consultant, 
the Chief Scientist or Chair of the Science Advisory Board to the start 
up, where their knowledge of the new technology is their primary 
contribution. It is precisely this partnership that STTRs seek to 
enhance--the transition from academic lab to a company lab. This less 
time-consuming role can be handled by most faculty within the time 
allotted by many institutions for consulting activities. The transition 
is often facilitated by a graduate student, post-doc or research 
associate leaving the university to help start-up the research and 
development effort at the new company.

Questions submitted by Representative Gary C. Peters

Q1.  When I talk with my constituents back home, they echo much of what 
has already been said here: that the SBIR/STTR programs are often the 
life blood for small firms, and that small firms are a crucial driver 
of innovation. However, they also mention the ``Valley of Death'' that 
occurs for technologies after the prototype has been developed. The 
companies do not have the dollars for marketing and commercialization 
of the product. To truly support economic development, we need for 
these small firms to have the support to make the jump from development 
to commercialization. How can SBIR/STTR support companies in making 
this leap and avoid the ``Valley of Death''? Wouldn't we see a greater 
return on our tax dollar investment if the SBIR/STTR program dollars 
helped companies through the commercialization phase?

A1. In response to your question about ``traversing the Valley of 
Death,'' I refer you to the comments made in my written testimony. As 
addressed in the NRC report, and as discussed during the hearing, some 
agencies are currently providing ``beyond Phase II'' support in order 
to improve the commercialization potential for SBIR-funded 
technologies. For example, National Institutes of Health has improvised 
a system to provide such funding with its ``competing renewal'' program 
for especially promising projects. Likewise, the Department of 
Defense's Navy Technology Assistance Program has developed a system for 
companies entering Phase III.
    The AAU agrees with the NRC's recommendation--``beyond Phase II'' 
funds are important and an essential step in helping companies traverse 
the ``Valley of Death.'' Embedded within this discussion of ``beyond 
Phase II'' is the notion of agency flexibility. Indeed agencies should 
be given the flexibility to develop their own, agency-specific ``beyond 
Phase II systems''; systems that lend themselves to the overall mission 
of the agency and the needs of the specific SBIR/STTR project.

Q2.  New companies in my district find the Fast Track program extremely 
valuable, and have even been launched based on a fast-track Phase II 
award. The National Academies have also found that experimentation by 
the agencies, such as the Fast Track program should be encouraged. Can 
you expand on how we can further promote the Fast Track program within 
SBIR/STTR?

A2. In response to your question concerning the Fast Track program, I 
would commend to you the recommendations made in the NRC SBIR report, 
as well as my own testimony before the Subcommittee in endorsing 
experimentation in the SBIR/STTR programs.
    Research agencies should have the flexibility to adapt SBIR/STTR 
awards to suit their programmatic objectives, address the needs of the 
companies competing, and ensure that additional commercialization 
arises from SBIR/STTR awards. To this point, the National Research 
Council's report, ``An Assessment of the Department of Defense Fast 
Track Initiative'' found that agency experimentation and flexibility at 
DOD increased the effectiveness of the SBIR program by encouraging the 
commercialization of new technologies.
    Similarly, the NRC's SBIR report notes that NIH's Fast Track 
program operates differently than DOD's and functions more as a 
complete Phase I and II award without matching funding. The NRC report 
further states that ``to date, there is little evidence about the 
impact of the program,'' but we are confident that, with the additional 
data collection and analyses, the relative merits of such expedited or 
flexible approaches should be revealed.

Q3.  Do you see a need to encourage larger companies to participate in 
the SBIR/STTR program at an earlier stage? Would extending R&D tax 
credits on a limited basis to larger commercial partners provide more 
of an incentive for large companies to partner with a small firm that 
may be operating at a zero net profit?

A3. A program that required pairing of small and large companies would 
be a great boon to emerging start-ups. The ``first customer'' barrier 
is a critical stage in the life of a start up and the large company 
partner could provide that entree to the market for a small business. 
Additionally, the networks, facilities, technical and business 
assistance that might be available from a larger company would be 
invaluable to a small company. Start-ups are often able to develop 
products and processes as a function of their agility and flexibility 
that larger companies are unable to incubate, so the partnerships may 
be productive to both, especially in these days when access to 
investment capital is so difficult to come by.
                   Answers to Post-Hearing Questions
Responses by James C. Greenwood, President and CEO, Biotechnology 
        Industry Organization (BIO)

Question submitted by Representative Adrian Smith

Program evaluation, performance measures.

Q1.  The recent National Council review of SBIR found that the program 
is ``not sufficiently evidence-based'' and is in need of improved data 
collection and tracking program outcomes, as well as clear performance 
metrics for assessing the success or failure of a given initiative. Do 
you agree with this finding and recommendation?

A1. BIO supports efforts to ensure that the SBIR program is able to 
track outcomes. We would recommend that metrics used to assess the 
success or failure of a given initiative are discussed with each 
individual agency, as the measures of success or failure will be unique 
to each agency's goals and missions. We would also recommend that the 
metrics focus on tracking the potential benefit to the public of 
projects being funded and whether those projects are commercialized 
over time. It is important to note that in some industries, such as 
biotechnology, it can take longer than a decade for a research project 
to reach commercialization. As such, any analysis of data collected 
must take this time horizon into consideration when evaluating success. 
Examining the potential for public benefit is equally important, as 
early stage research can often evolve into discoveries beyond the scope 
of the initial research project, based on scientific findings in the 
early stage research projects.

Questions submitted by Representative Daniel Lipinski

Q1.  If the SBIR and STTR award amounts are increased and the set-
asides are not, thus resulting in fewer awards, what do you think the 
impact will be on the number of successful commercializations? Will we 
see more successes because we cull out more marginal companies and 
increase award sizes, or will it diminish the overall impact of the 
program because it eliminates research on promising ideas?

A1. It is important that the award amounts are reflective of inflation 
and the increased costs associated with scientific research. The award 
amounts need to be meaningful in order for the funded research to be 
able to meet designated milestones in the funded project. This will 
increase the ability of these projects to move forward towards 
commercialization.
    As discussed in my testimony, it also important that agencies 
maintain flexibility in how they fund SBIR projects. This was supported 
by the National Research Council's 2007 report which stated ``. . . 
flexibility is a positive attribute in that it permits each agency to 
adapt its SBIR program to the agency's particular mission, scale and 
working culture.'' BIO believes that agencies are the best judge of how 
to use their SBIR funds to advance science and commercialization of new 
innovations.
    The number of awards each agency is able to give is also dependent 
on the research and development budget of that agency. BIO has 
consistently communicated to Congress the importance of having a 
properly funded NIH. More research and development funding at NIH 
equals more funding that will go to the SBIR program.
    Thus, the combination of a properly funded NIH, meaningful award 
amounts, and the ability of the agencies to have flexibility in 
exceeding those award amounts will help maximize the impact of the SBIR 
program.

Q2.  During the hearing Dr. Rockey discussed the NIH ``Phase 2.5'' 
competitive re-awards. The NSF has a similar ``Phase II supplement'' 
program. Is either of these programs, or are there similar efforts at 
other agencies, that are particularly effective at commercializing 
products toward the end of their Phase II grant?

A2. The competitive re-award programs at NIH are critical to ensuring 
research projects that have great scientific and commercialization 
potential are able to receive more funding, when warranted, to meet 
early-stage research milestones. This program is vital to small 
companies' ability to traverse the oft-discussed ``Valley of Death,'' 
where funding is difficult to find for early-stage high-risk but 
promising research projects.

Q2a.  Does the current approach to Phase III funding for 
commercializing products, which precludes using any SBIR or STTR funds, 
work for companies and products that are trying to move beyond their 
Phase II grant? Are there changes that you would recommend?

A2a. As mentioned previously, NIH's Phase 2.5 awards and ability to 
exceed award caps, when warranted, are key to maximizing 
commercialization of SBIR-funded research projects. BIO would also 
recommend that Congress look to the successes of NIH's 
Commercialization Assistance Program (CAP), which has been very 
successful in helping small businesses develop a sound strategy for 
commercialization, as an example of how to help small businesses move 
beyond their Phase II grants towards commercialization. The success of 
this program is dependent on the ability of the agency to have 
flexibility in awarding SBIR dollars. Caps on SBIR grants, if imposed, 
should not apply to the entire amount that the agency spends on a 
particular project. The NIH CAP program provides commercialization 
assistance to those companies who may need extra funding before they 
can attract private dollars to further develop early-stage research 
projects.
    BIO also supported provisions in H.R. 5819, the Small Business 
Innovation Research Program Reauthorization Act, as passed by the House 
in 2008, that would help small businesses develop a commercially-
available product. These included establishing the Partnerships, 
Resources, Investors, and Market Entry Research Program (PRIMER) [Sec. 
302]; increasing partnerships between SBIR awardees and Prime 
contractors, VC and larger businesses [Sec. 404]; and providing funds 
to all agencies to develop commercialization programs [Sec. 406].

Q3.  The STRR in particular program looks to promote cooperation 
between a small firm and a scientist in a University or National Lab. 
But starting a company from the ground up can be a full-time job for a 
scientist. Do you have any sense about the extent to which University 
or Lab scientist can actually participate in a startup? How flexible 
are Universities and Labs, respectively, with policies to allow their 
researchers this opportunity?

A3. I agree that founding a start-up company can be time-consuming and 
challenging, yet it is essential to the commercialization of new 
technologies in areas such as biotechnology. I would defer to my fellow 
witness, Dr. Berdahl of the Association of American Universities (AAU), 
to comment on the specific policies of Universities with respect to 
their researchers' involvement in start-up firms.

Q4.  Some of the nanotech businesses I've spoken with in Chicago have 
pointed to inconsistent paperwork as an obstacle encountered by people 
who are trying to turn their idea from a laboratory success into a 
small business. Can you comment on the consistency of SBIR and STTR 
program and application procedures across and within agencies? Is this 
something that discourages first-time SBIR applicants?

A4. BIO member companies have not indicated they are discouraged from 
applying to the SBIR program due to inconsistent application 
procedures. The two main obstacles hampering the ability of small 
biotechnology companies' to apply to the SBIR program are the SBA rules 
excluding small companies that are majority venture capital-backed and 
the overly-broad application of SBA's affiliation rules. In certain 
instances, if the SBA determines that a venture capital company is 
affiliated with the SBIR applicant, they will then make determinations 
that a venture capital company's other portfolio businesses are also 
affiliated to the SBIR applicant, even though the only thing they share 
in common is an investor. These complex and broadly-applied 
affiliations rules are an application barrier to many small 
biotechnology companies that rely on funding from multiple sources and 
investors to continue their capital-intensive research and development 
projects. The rules, as currently applied, create an enormous amount of 
uncertainty for many life sciences entrepreneurs as to whether or not 
their company is eligible for an SBIR grant award.

Questions submitted by Representative Gary C. Peters

Q1.  When I talk with my constituents back home, they echo much of what 
has already been said here: that the SBIR/STTR programs are often the 
life blood for small firms, and that small firms are a crucial driver 
of innovation. However, they also mention the ``Valley of Death'' that 
occurs for technologies after the prototype has been developed. The 
companies do not have the dollars for marketing and commercialization 
of the product. To truly support economic development, we need for 
these small firms to have the support to make the jump from development 
to commercialization. How can SBIR/STTR support companies in making 
this leap and avoid the ``Valley of Death''? Wouldn't we see a greater 
return on our tax dollar investment if the SBIR/STTR program dollars 
helped companies through the commercialization phase?

A1. The development of biotechnology treatments and therapies requires 
several avenues of funding working in a cohesive manner. As stated in 
my testimony, it takes between eight and twelve years to bring a 
biologic therapy to the market and costs between $800 million and $1.2 
billion. A small biotechnology company generally has between one and 
five research projects in development. Small biotechnology companies 
rely on grant funds, angel investors and venture capital companies to 
develop their biotechnology innovations into commercially available 
products. Since 2003, the majority of small biotechnology companies 
have been unable to access critical SBIR dollars because they are 
``majority owned'' by venture capital companies. This ruling has 
prevented small companies who generally have fewer than 75 employees 
and no product revenue from competing.
    It is important to understand that small biotechnology companies 
often exceed the majority owned restriction in the very early stages of 
the company because they usually have multiple venture capital 
companies who each have minority ownership stakes in the company for 
the company's lead product, that collectively trigger the 51 percent 
ownership restriction. As such, these small biotechnology companies are 
now unable to compete for SBIR dollars that can help fund their early-
stage projects and have a very difficult path to develop those projects 
to the point where it is attractive to private-sector investors.
    Allowing small businesses that happen to be majority venture-backed 
once again compete for SBIR funds is the best way for the SBIR/STTR 
programs to better support companies through the ``Valley of Death.'' 
Additionally, we support agency flexibility within SBIR so that 
commercialization programs, such as NIH's Commercialization Assistance 
Program, can continue to provide valuable funding for small companies 
that need further assistance in the commercialization process.

Q2.  New companies in my district find the Fast Track program extremely 
valuable, and have even been launched based on a fast-track Phase II 
award. The National Academies have also found that experimentation by 
the agencies, such as the Fast Track program should be encouraged. Can 
you expand on how we can further promote the Fast Track program within 
SBIR/STTR?

A2. I would agree that experimentation by the SBIR-participating 
agencies is an important component of an effective and successful SBIR 
program. Maintaining agency flexibility as part of the SBIR 
reauthorization process will enable each agency to pursue programs, 
such as Fast Track, that the agency determines is necessary to improve 
that agency's SBIR program. While it is Congress's job to set the broad 
parameters of the SBIR and STTR programs, we should not forget that it 
is the individual agencies that are in the best position to implement 
these programs effectively.

Q3.  Do you see a need to encourage larger companies to participate in 
the SBIR/STTR program at an earlier stage? Would extending R&D tax 
credits on a limited basis to larger commercial partners provide more 
of an incentive for larger companies to partner with a small firm that 
may be operating at a zero net profit?

A3. The SBIR program should be reserved for small businesses, so long 
as this determination is made using an objective and technology-neutral 
metric such as employee count. The current restriction on venture 
capital investment does not relate to the size of the company and it 
effectively discriminates against more capital-intensive sectors, such 
as biotechnology, relative to less capital-intensive technologies. This 
restriction does nothing to preserve the small business element of the 
SBIR program that could not be just as effectively preserved through 
the 500 employee count limitation. It does, however, serve to exclude 
many worthy small businesses from the SBIR program.
    With respect to the R&D tax credit, I agree that a major issue 
facing many small businesses is their inability to utilize many of the 
tax incentives that Congress has seen fit to enact over the years. 
These not-yet-profitable small companies are able to carry-forward 
their tax credits, but this carry-forward does nothing to inject 
investment capital into the small company at the point when it is most 
needed. I would be pleased to work with you and other Members of 
Congress to enact tax policies that more effectively support U.S. 
innovation and global competitiveness.
                   Answers to Post-Hearing Questions
Responses by Sally J. Rockey, Acting NIH Deputy Director, Extramural 
        Research, National Institutes of Health, U.S. Department of 
        Health and Human Services

Questions submitted by Chair David Wu

Q1.  In the American Recovery Act, the additional $8.2 billion that NIH 
is set to receive for extramural research was specifically exempted 
from the SBIR/STTR set aside requirement. Who at NIH asked for this set 
aside and what was the justification for the specific exemption from 
the SBIR/STTR statutory requirement?

A1. Due to the unique nature of the American Recovery and Reinvestment 
Act of 2009 (ARRA) funding requirements, NIH originally planned that 
most of the NIH's funding would be distributed by supplements to 
existing grants, or applications that had already been reviewed/scored 
and deemed to have scientific merit.
    NIH was concerned that because of the decreasing number of SBIR 
applications (we saw a near 40 percent decrease in fiscal years 2004 
through 2008), that a lack of flexibility on how to expend the funds 
would make it difficult to continue funding scientifically meritorious 
projects under the ARRA requirements. I have no specific details of how 
this exemption was put into ARRA.
    Although the NIH is not required by this law to provide a set 
amount of the funds toward the SBIR/STTR programs, it is important to 
note that small businesses are able to receive such funds. NIH is 
committed to the small business community and has been encouraging 
small businesses to apply for stimulus funds through the Challenge 
Grant and Grand Opportunity ``GO'' grant funding opportunities. 
Additionally, new funding mechanisms will be coming out soon under 
which NIH plans to set-aside some ARRA funds for small businesses.

Question submitted by Representative Adrian Smith

Program evaluation, performance measures.

Q1.  The recent National Research Council review of SBIR found that the 
program is ``not sufficiently evidence-based'' and is in need of 
improved data collection and tracking of program outcomes, as well as 
clear performance metrics for assessing the success or failure of a 
given initiative. Do you agree with this finding and recommendation?

A1. While the National Research Council (NRC) may highlight certain 
inherent challenges to measuring the program success and impact, the 
NIH has conducted two evaluations of its SBIR program and other groups, 
such as the General Accountability Office have also assessed the 
program. The NRC correctly observed that factors such as firms 
obtaining SBIR funds from several agencies, firms changing names and/or 
locations, key individuals moving on and taking their knowledge of the 
project with them pose real challenge to data collection. However, 
program decisions and management are evidence-based. Regular data 
collection and tracking of program outcomes helps to keep the SBIR 
program up to date on program performance and are useful in assessing 
the success or failure of a specific pilot program an agency may 
initiate.
    NIH has conducted two evaluations of its SBIR program and other 
groups, such as the National Research Council of the National Academies 
of Sciences and the General Accountability Office have also conducted 
studies. Regular data collection and tracking of program outcomes helps 
to keep the SBIR program up to date on program performance and can be 
useful in assessing the success or failure of a specific pilot program 
an agency may initiate. Therefore, the NIH developed an evaluation 
framework that includes performance measures and indices and conducts 
regular evaluations of its SBIR program. In addition, NIH established a 
dynamic monitoring system, called Performance Outcomes and Data System 
(PODS), which enables NIH to document the continued achievements of 
SBIR awardees over time. For example, through surveys and regular 
updates on SBIR awardees, NIH has found that about 50 percent of its 
SBIR awardees funded from 1992 to 2001 have achieved commercial sales.
    It is important to note that some products take much longer to 
reach the market than others. For example, the drug development process 
is a complex, long, and expensive one. The cost of bringing a drug to 
market is estimated to be over $1 billion with a timeframe of eight to 
twelve years before availability of the drug. Therefore, it is 
important when analyzing the success of the program to consider the 
trajectory a product takes to reach the market, and to consider other 
metrics equally valuable in demonstrating success of SBIR projects. 
These include published papers, patents, conduct of FDA-regulated 
trials, FDA approval/clearance of drugs and devices, Initial Public 
Offerings, the use of the technology in other research projects, and 
increasing the knowledge base in a scientific field. In addition to 
sales, these other metrics provide the much-needed evidence based data 
for tracking program outcomes.

Questions submitted by Representative Daniel Lipinski

Q1.  If the SBIR and STTR award amounts are increased and the set-
asides are not, thus resulting in fewer awards, what do you think the 
impact will be on the number of successful commercializations? Will we 
see more successes because we cull out more marginal companies and 
increase award sizes, or will it diminish the overall impact of the 
program because it eliminates research on promising ideas?

A1. The SBIR and STTR award amounts have remained at their current 
levels since 1992. Although agencies have the discretion and 
flexibility to exceed those award amounts where appropriate for a 
particular project, formally increasing the Phase I and Phase II award 
amounts to reflect economic adjustments and programmatic considerations 
may be viewed by small businesses as financial incentives for 
participating in the program, especially new start-ups who may not be 
aware of the program nuances. Larger award amounts may incentivize 
startups that have no other resources on which to draw, while being 
required to present feasible and exciting projects. Further, larger 
award sizes may enable small businesses to hire or retain strong talent 
that can help a project succeed. We believe that there could be a 
positive correlation between program incentives and successful 
outcomes. While we believe that the SBIR legislation should contain 
purposeful guidelines on award amounts and project periods, we believe 
that agencies should also have the flexibility to provide support for 
meritorious SBIR research projects at a funding level that is 
considered appropriate to achieve success in these projects. Our 
experience is that the conduct of some types of biomedical and 
behavioral research projects, such as clinically-related studies, 
vaccine development, drug discovery or certain technology development, 
does not routinely lend itself to prescribed maximum dollar levels.
    The commercialization success rate for NIH SBIR projects is now 
over 50 percent. While award amounts is likely not the only reason for 
success, we believe that the flexibility to make awards of sufficient 
size to accomplish the meritorious proposals, stimulates research on 
truly promising ideas with commercial potential. Further, what has made 
our program so appealing are the opportunities for firms to propose 
investigator-initiated, research projects in the fields that have the 
most biological promise, rather than to restrict their ideas to 
projects that can only be conducted under a prescribed amount of time 
and money. Such projects can be important steps in integrally involving 
small businesses in some of the most exciting, cutting-edge research 
with the potential to benefit health related outcomes.

Q2.  During the hearing, Dr. Rockey discussed the NIH ``Phase 2.5'' 
competitive re-awards. The NSF has a similar ``Phase II supplement'' 
program. Is either of these programs, or are there similar efforts at 
other agencies, that are particularly effective at commercializing 
products toward the end of their Phase II grant?

A2. Small businesses are playing an increasingly important role in drug 
discovery and development, typically, but not entirely, focusing their 
efforts on the earlier stages of this process rather than clinical 
trial evaluation. SBIR support has heretofore only allowed for a Phase 
I and single Phase II grant for such research. A recipient of an NIH 
SBIR Phase I and Phase II award normally receives no more than $1 
million and less than three years of support. Although Phase I and 
Phase II SBIR support is sufficient for initial discovery efforts, it 
is often not adequate to support either the kind of developmental work 
needed for compliance with the FDA's requirements for an 
investigational new drug (IND), or for clinical trials. If the intended 
commercialization product is a drug or biologic, the SBIR funds are 
often a small percentage of the funds necessary to complete the studies 
required for licensing by the Food and Drug Administration (FDA). 
Further, the process of moving promising new products from bench to 
bedside typically takes more than a decade.
    The NIH ``Phase 2.5'' competitive re-awards, which at the NIH are 
called Phase II Competing Renewal awards, provide up to three 
additional years of support to small businesses for promising drug 
research and development through the award of a Phase II Competing 
Renewal grant. It is recognized that even with a competing renewal 
grant, the entire development timeline will not be supported by the 
SBIR Program for any given drug. The competing renewal grant will, 
however, allow small businesses to carry further the fruits of their 
research to advance science and to attract interest and investment in 
their research programs by third parties.
    NIH started issuing Phase II Competing Renewal awards in 2005. 
Therefore, some of the earlier projects just finished last year and 
many of the projects are still ongoing. To date, 56 Competing Renewal 
awards have been awarded. We are tracking the companies closely and 
plan to evaluate the Phase II Competing Renewal award program to assess 
the extent to which it is effective at helping small businesses bridge 
the ``Valley of Death'' by contributing to the critical funding needed 
by companies to carry out R&D activities necessary to move a product or 
technology along the commercialization pathway.

Q2a.  Does the current approach to Phase III funding for 
commercializing products, which precludes using any SBIR or STTR funds, 
work for companies and products that are trying to move beyond their 
Phase II grant? Are there changes that you would recommend?

A2a. NIH does not provide Phase III funding. However, the current 
approach NIH uses to assist SBIR/STTR awardees in their transition to 
the marketplace does seem to work well. The NIH SBIR program 
commercialization success rate is now about 50 percent, the current 
approach to Phase III funding for commercializing products seems to 
work well. It is important to not lose sight of the fact that, given 
the ``I'' in the SBIR program, some projects will fail.
    Increasing the commercialization of products and services derived 
from Phase I and Phase II SBIR/STTR awards is one of the four 
Congressional goals of the Program and also a high priority of the 
agency. An interesting approach might be to consider revising the SBIR 
provisions of the Discretionary Technical Assistance to SBIR Awardees 
clause (and consider applying the clause to the STTR program) to permit 
a larger portion of the SBIR dollars to be used to provide small 
business concerns engaged in SBIR projects with technical assistance 
services. The $4,000 level has not been amended since 1992. The 
increase in Technical Assistance funds would be more aligned with the 
current market for such services. The increase will also allow federal 
agencies to establish more robust technical assistance programs that 
will permit more effective translational research.
    Currently, NIH's Technical Assistance Program (TAP), serves to 
enhance the current phased award structure, provides commercialization 
assistance, facilitates partnering opportunities, and helps small 
businesses cross what is so often called the ``Valley of Death,'' that 
gap between innovative promising research and development (R&D) and 
transitioning those innovations to the market. One program within the 
NIH TAP, called the ``Niche Assessment Program'' helps Phase I awardees 
assess the market opportunities as well as the needs and concerns of 
end-users and assists them in discovering potential new markets. This 
program has been helpful to researchers who often lack the 
entrepreneurial skills to assess whether there are other applications 
or niches for their SBIR-developed technology. Another TAP program, the 
NIH ``Commercialization Assistance Program'' (CAP) provides 
entrepreneurial training assistance and one-on-one business counseling 
to Phase II SBIR awardees in order to develop and implement an 
appropriate business strategy aimed at commercializing the products 
resulting from their SBIR research projects. CAP culminates with an 
investment event at which the participants present their business 
opportunities to a targeted group of potential investors and/or 
strategic partners. A recent enhancement to the CAP makes available 
publicly the abstracts and company presentations upon completion of the 
CAP to facilitate the identification of commercialization partners 
after the opportunity forum. NIH is tracking each participating 
company's commercialization progress for 18 months following completion 
of the program. Although investments and deals take time to mature, we 
believe the CAP is having positive impacts on SBIR companies seeking 
investments and partnerships. For example, one company is developing a 
technology to create a living blood vessel. This exciting medical 
advancement holds promise for coronary bypass candidates, lower limb 
amputation candidates, and hemodialysis patients. As a CAP participant, 
the company has raised more than $30 million in private equity 
financing to fund some of their clinical studies.
    Since the program's inception in 2004 through June of 2008, we have 
found that 91 NIH-CAP companies have been able to raise over $326.5M in 
funding. In addition, NIH-CAP participants have experienced over 3,900 
contacts with investors, over 2,800 meetings with investors and 
partners, 1,500 Confidentiality Disclosure Agreements signed, 800 
negotiations with investors and partners, 400 initial proposals and 
term sheets, and 235 deals.
    Finally, understanding that negotiations and deals take time, NIH 
has established the NIH Pipeline to Partnerships (P2P), a virtual space 
for NIH SBIR/STTR awardees and NIH licensees to showcase technology and 
product development for an audience of potential strategic partners, 
licensing partners and investors. P2P helps NIH in advancing its 
mission by furthering the development of its own licensed technologies 
or those for which it has provided SBIR/STTR funding. Currently, there 
are over 150 technologies in the searchable/indexed database.
    NIH is hopeful that this type of approach will help SBIR/STTR 
awardees attract funding and partners that will help to commercialize 
products and services supported by Phase I and Phase II.

Questions submitted by Representative Gary C. Peters

Q1.  When I talk with my constituents back home, they echo much of what 
has already been said here: that the SBIR/STTR programs are often the 
life blood for small firms, and that small firms are a crucial driver 
of innovation. However, they also mention the ``Valley of Death'' that 
occurs for technologies after the prototype has been developed. The 
companies do not have the dollars for marketing and commercialization 
of the product. To truly support economic development, we need for 
these small firms to have the support to make the jump from development 
to commercialization. How can SBIR/STTR support companies in making 
this leap and avoid the ``Valley of Death''? Wouldn't we see a greater 
return on our tax dollar investment if the SBIR/STTR program dollars 
helped companies through the commercialization phase?

A1. For the past five years, the NIH focused on ways that can assist 
SBIR awardees cross the ``Valley of Death.'' NIH has one of the highest 
success rates, and we attribute this to several factors. First, we 
recognize that the three-phase program progression is more a cyclical, 
rather than linear, uniform one. Thus, it may take multiple Phase I and 
Phase II projects to ultimately reach the Phase III stage. In addition, 
NIH offers gap-funding between Phase I and Phase II (e.g., Fast-Track 
awards, Phase I administrative and competitive supplement funding) and 
between Phase II and Phase III (e.g., Phase II Competing Renewal 
awards, Phase I administrative and competitive supplement funding; 
Commercialization Assistance Program; NIH Pipeline to Partnerships).
    The funding a company receives can serve as leverage for attracting 
additional resources that are critical in helping a company cross the 
``Valley of Death.'' SBIR and venture capital or strategic partner 
investments act in synergy with all three phases of the SBIR and in 
accord with two broad legislated goals of the SBIR program:

          ``To more effectively meet R&D needs brought on by 
        the utilization of small innovative firms (which have been 
        consistently shown to be the most prolific sources of new 
        technologies) and

          To attract private capital investment to 
        commercialize the results of federal research.''

    When the SBIR program was reauthorized in 2000, the authorizing 
legislation included a provision for the establishment of the Federal 
and State Technology Partnership (FAST) program, which was intended, in 
part, to strengthen the technological competitiveness of small business 
concerns in states. The types of services that States offered through 
the FAST program (e.g., technology deployment; establishing a mentoring 
network; commercialization assistance) are one approach that could help 
SBIR/STTR awardees ``make the leap'' to the marketplace.
    A primary goal of the SBIR program is the commercialization of the 
outcome(s) of the research, leading to job creation and the significant 
attendant economic benefits to the Nation attached thereto. Phase II is 
the in-depth continuation of the project that has met the requirements 
of Phase I for scientific and technical feasibility. Thus, Phase II 
provides the greatest opportunity for achieving Phase III 
commercialization. Another approach, particularly given non-SBIR/STTR 
funding opportunities for which small businesses are competing, is to 
consider is an alternative to the current phased structure of the 
program where small businesses would not be restricted to having 
received an SBIR- or STTR-funded Phase I in order to obtain Phase II 
SBIR or STTR support.

Q2.  New companies in my district find the Fast Track program extremely 
valuable, and have even been launched based on a fast-track Phase II 
award. The National Academies have also found that experimentation by 
the agencies, such as the Fast Track program should be encouraged. Can 
you expand on how we can further promote the Fast Track program within 
SBIR/STTR?

A2. NIH has heard repeatedly, and the case studies gathered by the NRC 
in its recent assessment of the SBIR program at the NIH underscored, 
that one of the most difficult issues faced by small businesses and 
entrepreneurs is the funding gap between Phase I and Phase II. As one 
company noted, ``The funding gap, which can be six months or more, 
creates an unstable employment environment. The funding gap can induce 
key scientific personnel to leave the firm and force the firm to 
abandon that line of research.''
    Current efforts to address this lull in funding include a Phase I/
Phase II Fast-Track review option in which applicants submit a Phase I 
and Phase II simultaneously for concurrent review. The Fast Track 
program is intended for companies that have some preliminary data as 
well as measurable and realistic milestones for transitioning to Phase 
II seamlessly, and who may be able to obtain letters of interest from 
investors or strategic partners for carrying the R&D further along the 
commercialization pathway. In NIH's experience, encouraging but not 
requiring third-party support is very important given how early-stage 
some of the projects may be in the eyes of an investor or strategic 
partner. NIH has exercised caution to not create unrealistic 
expectations or put a company in a position that might compromise 
future partnerships.
    We realize that the Fast-Track mechanism is not appropriate for all 
applicants or for all types of research, and in some cases, fully 
eliminating the funding gap is not possible. Therefore, NIH offers 
alternative gap-funding avenues such as no-cost award extensions, 
supplemental awards, and Phase II Competing Renewal awards.
    One approach to promote the Fast-Track program within SBIR/STTR is 
to consider longer Phase I project periods such that the Phase II could 
be submitted in the second year of Phase I.

Q3.  Do you see a need to encourage larger companies to participate in 
the SBIR/STTR program at an earlier stage? Would extending R&D tax 
credits on a limited basis to larger commercial partners provide more 
of an incentive for large companies to partner with a small firm that 
may be operating at a zero net profit?

A3. This is an interesting approach to consider and would add a new 
dimension to the SBIR and STTR programs. Extending R&D tax credits to 
larger commercial partners may provide more of an incentive to become 
involved with small companies at an earlier stage. Small companies may 
benefit from their involvement if the partners can bring resources that 
would supplement SBIR/STTR R&D activities and that would further the 
R&D toward commercialization.
                   Answers to Post-Hearing Questions
Responses by Jere N. Glover, Attorney and Executive Director, Small 
        Business Technology Council, Washington, DC

Question submitted by Representative Adrian Smith

Program evaluation, performance measures.

Q1.  The recent National Research Council review of SBIR found that the 
program is ``not sufficiently evidence-based'' and is in need of 
improved data collection and tracking of program outcomes, as well as 
clear performance metrics for assessing the success or failure of a 
given initiative. Do you agree with this finding and recommendation?

A1. The National Research Council/National Academy of Sciences study of 
the SBIR Program\1\ offered high praise for the Program, both in 
individual agencies and government-wide. Calling SBIR ``an effective 
program'' that ``is increasing innovation, encouraging participation by 
small companies in federal R&D, providing support for small firms owned 
by minorities and women, and resolving research questions for mission 
agencies'' (p. 88 of the summary of the final report), the report also 
recommended improved data collection and tracking of program outcomes, 
as well as an enhanced culture of evaluation (pp. 73-4). The NRC/NAS 
identified ``inadequate management funding'' (p. 74) as the underlying 
cause of these needs and stated that ``additional management resources 
are needed'' (p. 76). The report weighed various approaches to 
financing these recommended steps. It noted that diverting funds from 
existing program dollars would ``limit funds for awards to small 
companies, the program's core objective'' (fn 68, p. 76). But a new 
funding set-aside, dedicated to these data collection and evaluation 
initiatives, and structured within an overall increase in the SBIR 
Program set-aside, would ``perhaps be more easily achievable'' (fn 68, 
p. 76), the report observed. The report recommended a management 
funding increase of 0.03 percent to 0.05 percent, and noted that even 
the upper end of this range (0.05 percent) would still only bring the 
total SBIR set-aside ``to 2.55 percent, providing modest resources to 
assess and manage a program that is approaching an annual spend of some 
$2 billion'' (fn 68, pp. 76-7).
---------------------------------------------------------------------------
    \1\ National Research Council, Chuck Wessner, editor, An Assessment 
of the SBIR Program, National Academies Press, 2008.
---------------------------------------------------------------------------
    SBTC agrees with both the need and the solution identified by the 
NAS study. There is a need for better data collection and evaluation, 
and enhanced funding for program management would best address the 
need. We urge Congress to increase the management funding for SBIR as 
part of an overall increase in the SBIR set-aside, as described further 
in our testimony.

Questions submitted by Representative Daniel Lipinski

Q1.  If the SBIR and STTR award amounts are increased and the set-
asides are not, thus resulting in fewer awards, what do you think the 
impact will be on the number of successful commercializations? Will we 
see more successes because we cull out more marginal companies and 
increase award sizes, or will it diminish the overall impact of the 
program because it eliminates research on promising ideas?

A1. In assessing commercialization strategies, it must be remembered 
that the primary goal of the SBIR Program, and indeed most federal R&D, 
is to conduct research that the government needs. Thus the R&D topics 
chosen by the government for SBIR solicitations often do not lend 
themselves to private sector commercialization. Yet, as the NRC/NAS 
studies show, the SBIR Program still manages to move some 40-50 percent 
of its innovations close to the point that they are commercially 
feasible. This is an impressive feat, but it is due in large part to 
the current design of the SBIR Program. Crucially, SBIR and STTR sets 
relatively low award maximums for Phase II, and particularly for Phase 
I. This makes the Program dollars go further, because technological 
approaches that turn out to be unworkable or highly unpromising are cut 
off quickly, before much money has been spent on them.
    SBTC regards it as very unlikely that a major increase in the SBIR 
and STTR award maximums would lead to more commercialization. In the 
first place, the R&D that SBIR and STTR fund is very high-risk, meaning 
most Phase I innovations will not reach Phase II. In the second place, 
SBIR and STTR are intended to address Federal Government R&D 
priorities. Thus, quite a few Phase I's will lose out in competition 
with better technologies and never get to Phase II. Then, quite a few 
Phase II's will do just fine addressing the government's needs, but 
won't interest the private sector. The more robust the SBIR Program is, 
in terms of the number of science and technology ideas that it can 
choose from, the more likely the Program is to identify breakthrough 
innovations, for both the government and, subsequently, the private 
sector.
    Fewer and larger awards would not only reduce the options for later 
development and commercialization. They would also significantly 
increase the odds against a company winning an SBIR award, particularly 
a Phase II SBIR award. This would discourage many companies from making 
the effort to apply. As SBIR Founder Roland Tibbetts wrote, in a White 
Paper that SBTC included with its testimony:

         ``With the high risk involved in early-stage R&D, there is a 
        need to diversify the federal investment by betting on many, 
        rather than fewer, technologies and ideas . . .. Most of those 
        I worked with in developing SBIR agreed that the technologies 
        involved were such inherently high-risks that smaller bets 
        should be made on many projects before making a few larger bets 
        . . .. My own 20-year experience as an SBIR Program Manager 
        subsequently confirmed that the economic payoffs would be 
        higher this way. Many smaller awards mean that more ideas can 
        be evaluated for their potential. More and better choices for 
        further development become available . . .. If there are fewer 
        SBIR awards in the future, not only will fewer technologies get 
        evaluated and funded. Fewer companies will compete, because the 
        odds against winning will get even higher . . .. There will be 
        no shortage of great new innovations to invest in if we allow 
        SBIR to do its work in supporting truly innovative small 
        companies by objectively assessing which ideas are wheat and 
        which ones chaff.''

Q2.  During the hearing, Dr. Rockey discussed the NIH ``Phase 2.5'' 
competitive re-awards. The NSF has a similar ``Phase II supplement'' 
program. Is either of these programs, or are there similar efforts at 
other agencies, that are particularly effective at commercializing 
products toward the end of their Phase II grant?

        a.  Does the current approach to Phase III funding for 
        commercializing products, which precludes using any SBIR or 
        STTR funds, work for companies and products that are trying to 
        move beyond their Phase II grant? Are there changes that you 
        would recommend?

A2. The NIH ``Phase 2.5'' NSF Phase II supplement'' programs have 
helped many companies move their technology closer to ripeness for 
commercialization. SBTC believes that these programs have been largely 
successful. The structure and cost of these programs must be 
continually evaluated, however. They, and similar programs elsewhere in 
the government, must not drain away funding needed for the Phase I and 
Phase II core of the SBIR Program, the seed bed of its innovations.

Q3.  Some of the nanotech businesses I've spoken with in Chicago have 
pointed to inconsistent paperwork as an obstacle encountered by people 
who are trying to turn their idea from a laboratory success into a 
small business. Can you comment on the consistency of SBIR and STRR 
program and application procedures across and within agencies? Is this 
something that discourages first-time SBIR applicants?

A3. DOD, the agency with the largest SBIR budget, has consolidated and 
standardized its application process across the twelve diverse 
operational units that participate in its SBIR Program.\2\ That change 
is working well. The DOD example shows that more standardization is 
possible. So Representative Lipinski and his constituents have good 
point: agencies in the SBIR Program ought to do more to standardize. 
Generally the SBIR law requires the agencies to use the same awards 
process, but the agencies have evolved different application processes 
and to some extent different proposal evaluation processes. Much more 
standardization could be achieved. At the very least, SBIR applications 
could be divided into two parts, one of which is common to all agencies 
in the Program, and the other of which meets more specific agency 
needs. We would note, for example, that the ``Grants.gov'' process used 
by NIH is extremely hard for first-time applicants to master. By 
contrast, the NSF application procedure is far more user-friendly, 
especially for first time users.
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    \2\ These include the Departments of the Air Force, Army and Navy, 
Chemical and Biological Defenses Program, Defense Advanced Research 
Projects Agency, Defense Logistics Agency, Defense Media Activity, 
Defense Threat Reduction Agency, Missile Defense Agency, National 
Geospatial Intelligence Agency, Office of the Secretary of Defense, and 
United States Special Operations Command.
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    As the agency that administers SBIR, SBA should play a role in 
this, perhaps by bringing in a specialized management consulting firm 
to move the process forward.

Questions submitted by Representative Gary C. Peters

Q1.  When I talk with my constituents back home, they echo much of what 
has already been said here: that the SBIR/STTR programs are often the 
life blood for small firms, and that small firms are a crucial driver 
of innovation. However, they also mention the ``Valley of Death'' that 
occurs for technologies after the prototype has been developed. The 
companies do not have the dollars for marketing and commercialization 
of the product. To truly support economic development, we need for 
these small firms to have the support to make the jump from development 
to commercialization. How can SBIR/STTR support companies in making 
this leap and avoid the ``Valley of Death''? Wouldn't we see a greater 
return on our tax dollar investment if the SBIR/STTR program dollars 
helped companies through the commercialization phase?

A1. The ``Valley of Death'' problem exists for every new technology-
based business. And our country hasn't yet found a way to solve it. 
Consider venture capital investments. They succeed in roughly one case 
out of every eight. Thus even a large majority of those companies that 
attract VC investment never exit the ``Valley of Death.'' The SBIR 
success rate for moving early-stage R&D to a later stage of 
development--defined as sales or investments in excess of SBIR awards--
is in the 40-50 percent range. While this is a remarkable achievement, 
as the NRC/NAS report often emphasizes, it still falls short of the 
commercialization that's needed. Ironically, it has been the amazing 
success of SBIR as a nurturer of technology that has increased the 
calls to shift its limited funds to commercialization.
    In assessing SBIR, then, it is important to keep in mind that the 
Program was never designed to bridge the ``Valley of Death.'' Rather, 
it was designed as a competitive, science-based source of early-stage 
R&D investments. It is supposed to stimulate the creation of innovative 
technologies and then move these technologies on to later stage 
development.
    For more than twenty years, SBIR has been the Nation's largest 
source of early and seed-stage R&D funding. Today SBIR provides more 
than ten times as much early-stage and seed capital as venture capital 
investments, even though VC investments overall are orders of magnitude 
larger than the entire SBIR and STTR Programs. Diverting the scarce 
early-stage funding that SBIR currently provides, and shifting it to 
much later-stage commercialization funding, would be bad policy for 
several reasons. First, it would duplicate funding that is already 
available from many sources, including ``angel'' funding, bank lending, 
IPOs, and venture capital financing. Second, and much more 
destructively, it would dry up a vital stream of innovations before 
they can reach the potential for commercialization.
    Instead of consuming the SBIR seed-corn by diverting precious 
early-stage R&D funding to commercialization, we should find new ways 
to grow the plants.
    Programs such as the former Advanced Technology Program (ATP), now 
the Technology Innovation Program (TIP) at the National Institute of 
Standards and Technology have shown great promise in helping companies 
cross the ``Valley of Death.'' These programs should be expanded. Other 
new programs outside SBIR should be devised and tested.
    Within the SBIR program, the SBIR Commercialization Pilot Program 
at DOD has been successful in moving technology to a later stage of 
development where Phase III mainstream procurement funding may be 
available.\3\ (The program's title is something of a misnomer, though, 
since it does not actually commercialize technologies.).According to 
the Defense Department, the CPP has provided about 100 SBIR companies 
(50 in the Navy and 25 each in the Air Force and Army) with about $100 
million in development funding.\4\
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    \3\ See National Research Council, SBIR and the Phase III Challenge 
of Commercialization, National Academies Press, 2007.
    \4\ U.S. Department of Defense, Small Business Innovation Research 
Program, Commercialization Pilot Program (CPP), Report for Fiscal Year 
2008, April 2009.
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    While it is early to know with certainty, the CPP appears to be 
successful in advancing some defense technologies to a higher level of 
development. Programs such as CPP should be expanded to agencies such 
as DOE and NASA, where technological innovations can be similarly 
channeled toward consumption by the government itself, via the 
mainstream procurement system.
    The challenge remains, however, to balance early and later stages 
of development funding within SBIR's finite budget. Selection processes 
for later stage funding need to be rigorous, transparent, and 
competitive. And the tradeoffs between enhanced funding for later stage 
development and reduced funding for early stage development need to be 
explicitly acknowledged.

Q2.  New companies in my district find the Fast Track program extremely 
valuable, and have even been launched based on a fast-track Phase II 
award. The National Academies have also found that experimentation by 
the agencies, such as the Fast Track program should be encouraged. Can 
you expand on how we can further promote the Fast Track program within 
SBIR/STTR?

A2. SBTC agrees with the NRC/NAS finding that agency experimentation in 
pushing SBIR technologies forward should be encouraged. Fast Track, 
Phase IlB, and CPP have indeed proven helpful. But, as noted above, 
these and other such programs should not be expanded at the cost of 
significantly reducing the number of Phase I and Phase II SBIR awards 
that can be made.

Q3.  Do you see a need to encourage larger companies to participate in 
the SBIR/STTR program at an earlier stage? Would extending R&D tax 
credits on a limited basis to larger commercial partners provide more 
of an incentive for large companies to partner with a small firm that 
may be operating at a zero net profit?

A3. As shown in the NRC/NAS reports, the SBIR program has been 
remarkably successful in creating technologies that larger companies 
want to access. Nearly 1,300 SBIR companies have been acquired by 
larger firms. Partnerships between larger firms and SBIR companies now 
number in the thousands, and hundreds of licenses have been sold by 
SBIR companies to such larger firms. Indeed, the original design for 
the SBIR Program depends on larger companies coming in at Phase III--as 
buyers, investors and partners--in order for SBIR companies to 
successfully commercialize innovations. Likewise, the STTR Program 
partners small companies with universities, who may in turn seek to 
link up with large companies to foster commercialization at the Phase 
III stage of that Program.
    But neither SBIR nor STTR should invite large companies in at an 
earlier stage, in SBTC's view. There are several reasons for this.
    First, SBIR has been described to the public as a small business 
program for 25 years. Much of the Program's public support is rooted in 
that still quite accurate characterization. Devaluing the ``SB'' of 
``SBIR'' would not only endanger the empirical basis of the Program's 
success, as has been shown in the NAS studies. It would also gravely 
endanger public support for the Program.
    Second, large companies already have access to other sources of 
federal R&D funding--the 97.2 percent that isn't allocated to small 
business through the SBIR and STTR Programs. Small companies don't have 
that access. Even though small companies today employ six million 
scientists and engineers--significantly more scientists and engineers 
than either large companies or universities--and are producing more of 
the top innovations than either of them (see pp. 7-8 of our 
Subcommittee testimony), small companies still obtain only 4.3 percent 
of federal R&D dollars. And SBIR/STTR accounts for over half of that. 
If a group of SBIR applicants were to be backed by large companies, 
they would be able to generate far more polished-appearing 
applications, in far greater numbers, than smaller companies. This 
would soon swamp many smaller companies. Deserving technological ideas 
would lose out, as these deep-pocketed companies with large business 
backing took over more and more of the Program.
    Third, large companies have fundamentally different attitudes 
toward innovation than smaller companies. Large companies have product 
lines, sales channels, and customer bases to protect. Small companies 
are looking for the breakthroughs that will generate entirely new 
products and lines of business. Insert large companies into Phase I and 
II of the SBIR Program, and they will inevitably imbue their SBIR 
apprentices with far narrower and more guarded attitudes toward R&D. 
Here again SBIR Founder Roland Tibbetts is eloquent:

         ``(The large company looks for] incremental innovations that 
        make its existing products a little better and a little cheaper 
        to produce. It looks for new products that are familiar and 
        comfortable. For large companies, ``re-defining'' types of 
        innovations are frightening. They upset settled ways of doing 
        business. The Nation needs both incremental innovations and 
        quantum-leap innovations, but right now and for the foreseeable 
        economic future, it needs those out-sized innovations the most. 
        SBIR can deliver sweeping innovations, but to do so it must 
        avoid taking on the coloration and biases of large companies.''

    The question of R&D tax credits for larger companies requires a 
careful balancing of tax, innovation, and budget priorities. But in 
general SBTC would favor any reasonable incentive to promote the post-
Phase II commercialization of SBIR technologies that does not diminish 
SBIR funds.





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