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



 
                            SUBCOMMITTEE ON
                      CONTRACTING AND TECHNOLOGY
                   HEARING ON LEGISLATIVE INITIATIVES
                      TO STRENGTHEN AND MODERNIZE
                       THE SBIR AND STTR PROGRAMS

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

                                HEARING

                               before the


                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                              June 4, 2009

                               __________

                               [GRAPHIC] [TIFF OMITTED] TONGRESS.#13
                               

            Small Business Committee Document Number 111-027
Available via the GPO Website: http://www.access.gpo.gov/congress/house


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                   HOUSE COMMITTEE ON SMALL BUSINESS

                NYDIA M. VELAZQUEZ, New York, Chairwoman

                          DENNIS MOORE, Kansas

                      HEATH SHULER, North Carolina

                     KATHY DAHLKEMPER, Pennsylvania

                         KURT SCHRADER, Oregon

                        ANN KIRKPATRICK, Arizona

                          GLENN NYE, Virginia

                         MICHAEL MICHAUD, Maine

                         MELISSA BEAN, Illinois

                         DAN LIPINSKI, Illinois

                      JASON ALTMIRE, Pennsylvania

                        YVETTE CLARKE, New York

                        BRAD ELLSWORTH, Indiana

                        JOE SESTAK, Pennsylvania

                         BOBBY BRIGHT, Alabama

                        PARKER GRIFFITH, Alabama

                      DEBORAH HALVORSON, Illinois

                  SAM GRAVES, Missouri, Ranking Member

                      ROSCOE G. BARTLETT, Maryland

                         W. TODD AKIN, Missouri

                            STEVE KING, Iowa

                     LYNN A. WESTMORELAND, Georgia

                          LOUIE GOHMERT, Texas

                         MARY FALLIN, Oklahoma

                         VERN BUCHANAN, Florida

                      BLAINE LUETKEMEYER, Missouri

                         AARON SCHOCK, Illinois

                      GLENN THOMPSON, Pennsylvania

                         MIKE COFFMAN, Colorado

                  Michael Day, Majority Staff Director

                 Adam Minehardt, Deputy Staff Director

                      Tim Slattery, Chief Counsel

                  Karen Haas, Minority Staff Director

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

                                  (ii)

  
?

                         STANDING SUBCOMMITTEE

                                 ______

               Subcommittee on Contracting and Technology

                     GLENN NYE, Virginia, Chairman


YVETTE CLARKE, New York              AARON SCHOCK, Illinois, Ranking
BRAD ELLSWORTH, Indiana              ROSCOE BARTLETT, Maryland
KURT SCHRADER, Oregon                TODD AKIN, Missouri
DEBORAH HALVORSON, Illinois          MARY FALLIN, Oklahoma
MELISSA BEAN, Illinois               GLENN THOMPSON, Pennsylvania
JOE SESTAK, Pennsylvania
PARKER GRIFFITH, Alabama

                                 (iii)

  
?



                            C O N T E N T S

                               __________

                           OPENING STATEMENTS

                                                                   Page

Nye, Hon. Glenn..................................................     1
Schock, Hon. Aaron...............................................     2

                               WITNESSES

Leahey, Mr. Mark B., President & CEO, Medical Device 
  Manufacturers Association......................................     4
Biddle, Mr. Jack, Founding Partner, Novak Biddle Venture 
  Partners, Bethesda, MD, On behalf of the National Venture 
  Capital Association............................................     6
Hernandez, Mr. Joe, President & CEO, Innovative Biosensors, Inc., 
  On behalf of the Biotechnology Industry Organization...........     7
Blakey, Mr. Marion, President & CEO, Aerospace Industries 
  Association....................................................     8
Loper, Mr. Brett, Senior Vice President & Director of Government 
  Affairs, AdvaMed...............................................    10

                                APPENDIX


Prepared Statements:
Nye, Hon. Glenn..................................................    23
Schock, Hon. Aaron...............................................    25
Leahey, Mr. Mark B., President & CEO, Medical Device 
  Manufacturers Association......................................    27
Biddle, Mr. Jack, Founding Partner, Novak Biddle Venture 
  Partners, Bethesda, MD, On behalf of the National Venture 
  Capital Association............................................    32
Hernandez, Mr. Joe, President & CEO, Innovative Biosensors, Inc., 
  On behalf of the Biotechnology Industry Organization...........    39
Blakey, Mr. Marion, President & CEO, Aerospace Industries 
  Association....................................................    47
Loper, Mr. Brett, Senior Vice President & Director of Government 
  Affairs, AdvaMed...............................................    52

                                  (v)

  


                            SUBCOMMITTEE ON
                       CONTRACTING AND TECHNOLOGY
                 HEARING ON LEGISLATIVE INITIATIVES TO
                        STRENGTHEN AND MODERNIZE
                       THE SBIR AND STTR PROGRAMS

                              ----------                              


                         Thursday, June 4, 2009

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:10 a.m., in 
Room 2360, Rayburn House Office Building, Hon. Glenn Nye 
[chairman of the Subcommittee] presiding.
    Present: Representatives Nye, Ellsworth, Halvorson, and 
Schock.
    Chairman Nye. Thank you all for being here today. I am 
going to read an opening statement and then invite our ranking 
member, Mr. Schock, to give an opening statement and then we 
will ask for our witnesses, our panelists, to give their 
statements.
    Economist Peter F. Drucker once described innovation as the 
specific tool of entrepreneurs, and it is exactly that. Small 
firms produce 13 times more patents than big businesses, 
sparking breakthroughs in virtually every industry from health 
care to technology.
    To the casual observer, it may look effortless. We have all 
heard about Mark Zuckerberg running Facebook out of his dorm 
room, but the truth is developing a new product is no easy 
lift. Innovation is a risky, resource-intensive process. 
Without proper funding, even the most brilliant invention may 
never make it from the drawing board to the marketplace. For 
entrepreneurs with limited resources, this is a very real 
danger.
    In today's hearing, we are going to examine that challenge 
and look at legislation to address it. The proposals before us 
would improve and modernize the Small Business Innovative 
Research and Small Business Technology Transfer programs. This 
is key because an investment in innovation is an investment in 
our economy.
    SBIR and STTR are critical resources. Each year, these 
initiatives help 1,500 companies get off the ground. Those 
firms have triggered revolutionary achievements in everything 
from bioengineering to antivirus software. And yet for every 
groundbreaking new product, countless more don't make it past 
the laboratory doors.
    The proposals we are considering today will address the 
challenges of commercialization. As of now, the majority of 
SBIR and STTR projects, particularly those in the defense 
industry, never come to fruition.
    It is important that the SBIR program develop products that 
agencies need. We are addressing this issue by requiring 
communication between SBIR program managers and procurement 
personal. This ensures that when DOD, for instance, needs a 
product the SBIR program is focused on meeting that need.
    Understanding what makes a product marketable is also 
important. But unless you have the time and money to create 
that product, you can only go so far.
    By increasing award levels and permitting equity capital, 
this legislation would give small firms those resources. This 
is particularly important today. With capital increasingly 
difficult to come by, it just doesn't make sense to limit 
options for entrepreneurs.
    In the last year, the economic landscape has changed 
considerably. So has the face of entrepreneurship. While the 
word innovation often sparks images of Silicon Valley, the 
truth is that it comes from everywhere. That is why these 
proposals are so important. They encourage R&D in underserved 
communities and amongst historically underrepresented 
populations, including veterans. Because, if nothing else, 
innovation thrives on diversity of thought.
    Despite inherent value, neither SBIR or STTR have been 
updated in nearly a decade. Today, they are in sore need of 
modernization. In the last Congress, the House passed a bill to 
modernize and extend the programs, but the legislation died in 
the Senate. With these proposals, we can restart that process.
    As we work our way out of this recession, innovation will 
play an integral role. After all, downturns have a catalyzing 
affect on inventors. Take the recession of the mid-1990s, which 
ushered in the age of the Internet; or consider the Great 
Depression, which has been called the most technologically 
progressive area of the 20th century, bringing us such 
breakthroughs as synthetic rubber and a little-known fact here, 
canned beer. Who knew?
    Once again, our country is facing historic challenges, but 
with a fresh investment in homegrown ingenuity we can begin 
turning things around. These proposals mark a critical first 
step in making that happen.
    Now I would like to thank all of you for being here today; 
and I would like to yield to our ranking member, Mr. Schock, 
for any opening comments.
    Mr. Schock. Thank you, Mr. Chairman. Good morning.
    Thank you, Mr. Chairman, for holding this hearing to review 
legislative proposals to reauthorize and modernize the Small 
Business Innovation Research, or SBIR, program.
    I would like to extend a special thanks to each of our 
witnesses who are here today for taking the time to provide 
this Committee with their testimony.
    The SBIR program is one of those government programs that 
actually works. Specifically, the program encourages and 
supports risk and entrepreneurship within the small business 
community. The program is based on the correct theory that 
responsible government assistance at the right time can be 
critical in start-up and development stages of a small firm. 
Not only does it spur growth in individual companies, the 
program stresses the importance of expanding and diversifying 
research opportunities for the pool of companies the Federal 
Government uses to procure products and services. Thus, the 
SBIR program encourages both economic growth and innovation.
    Created in 1982, the SBIR program offers competition-based 
awards to stimulate technological innovation among small firms 
while providing government agencies new, cost-effective 
technical and scientific solutions to meet their diverse needs. 
The development of these programs not only are critical to the 
unique needs of each of the participating Federal agencies but 
also to our national economy.
    Small businesses invigorate the U.S. economy by introducing 
new products and cheaper ways of doing business, many times 
with substantial economic benefits. They play a key role in 
introducing technologies to the market, often responding 
quickly to new market opportunities. Some of greatest 
technological innovation come from small business owners 
experimenting in their workshops and labs, and the SBIR program 
provides these innovators with an opportunity to grow their 
ideas into practice, provide jobs, and improve our economy.
    The SBIR was last reauthorized in the year 2000; and I am 
sure, as everyone in this room would admit, undoubtedly a lot 
can change over that length of time. And to fully capitalize on 
the benefits of this program, this is a very opportune time to 
reauthorize and also modernize it.
    The proposals we have before us go a long way toward 
achieving the goals of modernizing the SBIR program with 
greater efficiency and accountability. For example, the 
legislation before us raises the award sizes for both Phase I 
and Phase II grants. This is essential because the award sizes 
have not been increased since the program's inception.
    Additionally, the National Academy of Sciences' report on 
the SBIR program made note of the difficulty of properly 
studying and measuring the performance of the program because 
of inadequate data collection. In response, these bills will 
improve the way small businesses and sponsoring agencies share 
information by creating online databases to improve information 
flow between agencies and the participants.
    The proposals before us today will also create an 
interagency policy among the participating agencies that 
require reports on specific findings to the relevant 
congressional Committees. The creation of these Committees and 
databases will allow for greater oversight and better 
management of the SBIR program.
    However, I along with members of this Committee have some 
concerns about some of the provisions of the drafts. And while 
these concerns in no way overshadow my support of the SBIR 
program and the good-faith effort that is being made here today 
to improve the program, I remain certain that, as this 
Committee has done in the past under the leadership of Chairman 
Nye and Chairwoman Velazquez, together we will work with those 
members on the Committee to rectify any philosophical 
difference that may come up as we continue through this 
process.
    I look forward to working with Chairman Nye and all of my 
colleagues on this Committee as we work on this important 
legislation. Again, I thank each one of the panelists for being 
here today. I look forward to your comments.
    And I yield back, Mr. Chairman.
    Chairman Nye. Thank you, Mr. Schock.
    What I would like to now is go ahead and invite our 
panelists--I will call on you one by one--to make any opening 
comments you would like to make.
    We are going to try to stick to the 5-minute rule. You have 
a device in front of you with some lights. It will start out 
green; and when it gets to yellow, it means you have 1 minute 
left to sort of wrap up your comments; and when it turns red, 
your 5 minutes are up.
    Chairman Nye. I would like to start by recognizing Mr. 
Leahey, President and CEO of Medical Device Manufacturers 
Association, for any opening comments you have.

                  STATEMENT OF MARK B. LEAHEY

    Mr. Leahey. Thank you, Mr. Chairman.
    Chairman Nye, Ranking Member Schock, members of the 
Subcommittee, on behalf of the hundreds of innovative companies 
that the Medical Device Manufacturers represent across the 
country, I would like to thank you for your efforts to 
strengthen and modernize the SBIR and STTR programs.
    MDMA's mission is to ensure that patients have timely 
access to safe and effective products, most of which are 
developed by small, innovative medical technology companies. 
After reviewing the Subcommittee's various legislative 
proposals, I am confident that, if enacted, these improvements 
ensure that small, innovative companies have access to 
necessary resources to develop life-sustaining and enhancing 
products.
    Given the advances in science, increasing regulatory 
requirements, and access to venture capital that are often 
needed to develop the technologies, it is critical that changes 
are made. Furthermore, with today's economic climate, 
government assistance for small companies has never been more 
important.
    One of the cornerstones of the government investment in 
small companies has been the SBIR and STTR programs. Resources 
from these programs, in addition to private investment, have 
greatly improved the quality of care over the past 20-plus 
years. However, as you are aware, the Small Business 
Administration's reinterpretation of the definition of 
"individual" has hindered the landscape of the public private-
partnership envisioned by the SBIR program.
    Since SBA's reinterpretation of ownership requirements 
under SBIR, the number of medical technology companies applying 
for grants has significantly declined. Applications for SBIR 
grants at the National Institutes of Health, the most prolific 
granter of SBIR grants to medical technology companies, have 
dropped nearly 12 percent in 2005, 14-1/2 percent in 2006, and 
21 percent in 2007. As a result, many promising technologies 
from smaller companies did not receive support from SBIR; and 
patients have suffered as a result.
    MDMA strongly believes that the SBIR program should support 
small companies with promising clinical technologies, 
regardless of whether venture capitalists have partnered with 
the company. Fortunately, this Subcommittee is taking the 
necessary steps to correct the actions of SBA and ensure that 
the SBIR and STTR programs are restored to their critical roles 
of providing promising entrepreneurial technology companies 
with the resources needed to develop the clinical solutions of 
tomorrow.
    I would now like to focus my remarks on a few key elements 
of the Subcommittee's legislative proposals that are welcome 
improvements to the current programs.
    First, as stated above, the reauthorization should include 
language to restore the participation of venture-backed 
companies, especially the redefinition of the ownership 
requirements for business concerns. This will serve to provide 
SBIR grants to the most promising technologies, which are 
likely to provide the greatest public benefit and patient 
benefit.
    Second, MDMA believed that increasing the dollar amount of 
the Phase I and Phase II grants to $250,000 and $2 million 
respectively is critical to address increasing developmental 
concerns. In addition, it will help provide the necessary 
incentive to encourage more companies to apply for grants. 
Given that the award levels have not been modified since 1992, 
this change is long overdue.
    Third, MDMA supports allocating additional resources to 
conduct outreach efforts to increase participation and provide 
application support and entrepreneurial skills to perspective 
participants. These initiatives should serve as an important 
tool for small companies to achieve the ultimate goal of 
successfully commercializing technologies that will benefit 
patients and caregivers.
    Fourth, MDMA supports efforts to evaluate recipients of 
multiple Phase I awards but who are unsuccessful in receiving 
Phase II awards. This is an absolutely critical element to 
ensure that the program funds are allocated to those with the 
greatest likelihood of commercialization success.
    Finally, it would be beneficial to remove the requirement 
that a company must have applied for a Phase I grant in order 
to apply for a Phase II grant. If this rule changed, MDMA 
believes that small business participation in the SBIR program 
would increase.
    Adopting these challenges outlined above and included in 
the Subcommittee's legislative proposals are consistent with 
the SBIR and STTR programs to ensure that the Nation's small, 
high-tech, innovative businesses are a significant part of the 
Federal Government's research and development efforts. They are 
also consistent with the SBA's mission to strengthen the 
Nation's economy by enabling the establishment and validity of 
small businesses.
    Thank you again for your efforts and leadership to improve 
and modernize these important programs, and I look forward to 
answering any questions that you may have. Thank you. 
    Chairman Nye. Thank you, Mr. Leahey. We appreciate your 
comments. And I again thank everybody for making the trip in 
today.
    [The statement of Mr. Leahey is included in the appendix.]
    Chairman Nye. I would like to introduce our second 
panelist, Mr. Jack Biddle, who is the founding partner of Novak 
Biddle Venture Partners, Bethesda; and he is also speaking on 
behalf of the National Venture Capital Association.
    Mr. Biddle.

                    STATEMENT OF JACK BIDDLE

    Mr. Biddle. Thank you, Chairman Nye and Ranking Member 
Schock and members of the Committee.
    I am a founding partner of Novak Biddle Venture Partners. I 
ask that my written testimony be added to the record.
    Chairman Nye. So ordered.
    Mr. Biddle. I have a few additional comments and would be 
pleased to take some questions. I hope I get asked questions 
about four real examples of where we have failed badly.
    Because of our proximity to Washington, D.C., and the 
Federal Government, Novak Biddle is in a position to appreciate 
the power of collaboration between government and 
entrepreneurs. As someone who comes from a military family and 
has volunteered a great deal of time working with our military 
establishment in the last 5 years, I have donated about a 
million dollars worth of my time working with the Department of 
Defense trying to bridge the gap between the entrepreneurial 
community and the needs of the government. I have seen how the 
collaboration between many brilliant engineers and scientists 
has broken down. In my view, this isn't the best outcome for 
our government's U.S. military or our national security.
    In past years, the best and brightest scientists worked in 
the government; and the most promising innovation emerged from 
the work done by the Federal Government. In the 1960s, the best 
and the brightest worked for NASA. The Naval Research Labs won 
six or eight Nobel prizes. In the 1970s, the best and brightest 
worked for Bell Labs and IBM making computers for the National 
Security Agency. Today, there are entrepreneurs all over the 
country, and they don't go to government conferences, they do 
not read Broad Area Announcements, they do not interact with 
the government, and we are missing them.
    The SBIR program is much more important than just money. It 
provides a legal authority for scientists in the commercial 
world to collaborate with government scientists. That is a big 
deal. I had to become a dollar a year employee of the 
government to be able to give the government advice. So that 
authority is key.
    The SBIR allows small business procurement if you are 
successful. A 14-person company we have financed has no more 
chance against Lockheed than an unventure-funded 14-person 
company. So the procurement rules are a critical part of 
success.
    And the SBIR allows current year unallocated money to be 
used opportunistically. There are 57 programs in the Department 
of Defense all around $1 million that are designed to go 
discover technology. If they collaborate and put this money 
together, it turns into an F-22 in the middle of the night. The 
SBIR dollars can't be turned into an F-22. They have to go to 
small businesses.
    So if we can set aside some money to manage this program 
better and they can be more proactive on the discovery side, we 
can benefit the government and back the most promising 
companies.
    Thank you.
    Chairman Nye. Thank you, Mr. Biddle.
    [The statement of Mr. Biddle is included in the appendix.]
    Chairman Nye. I would like to introduce now Mr. Joe 
Hernandez, President and CEO of Innovative Biosensors, 
Incorporated, in Rockville, Maryland, also speaking on behalf 
of the Biotechnology Industry Organization.

                   STATEMENT OF JOE HERNANDEZ

    Mr. Hernandez. Good morning, Chairman Nye.
    I appreciate the opportunity to share a little bit about my 
story--I am an entrepreneur, so I have to figure this thing 
out. I appreciate the opportunity to share a little bit about 
our story and my personal story with relation to early stage 
companies, especially in the biotech industry.
    I currently serve as the President and CEO of a local 
company by the name of Innovative Biosensors. I will tell you a 
little bit about the company in a second, but my history, this 
is really my third involvement in early stage biotech 
companies.
    I was involved early on with a company by the name of 
AlphaMetrics in the Silicon Valley area. We developed a 
revolutionary technology to really put a human genome on a 
computer chip, and that technology has been used to really 
explore the nuances and the complexity of the human genome. So 
we really started that company and funded it through some early 
government funds.
    The second company I was involved in was also in Maryland, 
by the name of Digene, and that company developed the first 
FDA-approved cervical cancer diagnostics for human papilloma 
virus, a very important tool in the health care arena and I 
would argue one of the most important diagnostics in the last 
10 years or so.
    So this is my third company. This particular company is 
involved in the area of rapid infectious detection. We are a 4-
year-old company. We were originally funded by DARPA, by the 
Massachusetts Institutes of Technology, published in the 
Journal of Science. This is a real vetted technology from a 
technology perspective.
    Our technology--we are very proud of the fact that our 
technology is a truly deployed technology. We are deploying our 
technology in a very critical infrastructure within the 
national capital region for bioweapons protection. I can't go 
into further details on that technology application, obviously, 
but it is a technology that has its genesis really in the early 
government programs.
    We are 20-person company. We have about raised about $20 
million in venture capital in several rounds of financing. And 
our personal story is that we received the Phase I back in 2005 
for the development of a rapid prion test for Mad Cow Disease, 
if you guys are familiar with that disease. Unfortunately, we 
could not move to a Phase II program because the venture 
requirements that currently exist prohibited us from really 
moving forward in that development; and, unfortunately, we did 
not move forward on that project.
    You know, the SBIR program plays a very important role, as 
Mr. Biddle alluded to. First of all, it is a validation for 
private capital. It really removes some of the technical 
diligence that some of the firms have to do to validate the 
technology is real. So it does play that important role. It 
funds projects that are too risky for private capital; and I 
think had it not been for the Phase I SBIR we probably would 
not have done the first project.
    So it really allows us to take on the high-risk projects. 
It really is a great tool for innovation. It allows us to 
really be able to push the envelope with capital, that I think 
ultimately, as these technologies move, it benefits society as 
a whole.
    So a couple of recommendations here as we are suffering 
through what I call the Grand Canyon of Death--the Valley of 
Death no longer exists. It has gotten bigger. We have a couple 
of recommendations.
    The first thing is that we need to increase the size of 
these awards. As a company, time is money, and there is a time 
value of money, so we really need to make sure that these funds 
are worthwhile in terms of size.
    We need to reinstate the eligibility of a majority of VC-
backed companies. I think that is really important. We are a 
capital-intensive business. We depend on friends like Mr. 
Biddle here to support our endeavors, and we shouldn't be 
prohibited from really targeting those types of application. I 
would argue that if you had that aspect reinstated, you would 
have more competitiveness; and I think you would have better 
quality SBIR programs by definition.
    I think the clarity around affiliation rules is really 
important. Just because we are invested, we are part of a 
portfolio of 10 companies does not mean we have relationships 
with any of those companies. It is truly a unique and different 
investment.
    We need to maintain agent flexibility. These agencies know 
what they are doing with regards to what is important in their 
respective fields. So we need to allow them to do that, and 
then we need to speed the response.
    In our business, as I said, time is money. We are capital 
intensive. We burn lots of money on a monthly basis. And every 
month that goes by we don't hear from the SBIR grants it costs 
us a lot of money. So we really want to expedite the process.
    So, with that, I thank you for the opportunity. I would be 
happy to answer any additional questions. Again, thanks for the 
opportunity.
    Chairman Nye. All right, thank you very much, Mr. 
Hernandez.
    [The statement of Mr. Hernandez is included in the 
appendix.]
    Chairman Nye. I would like to now introduce Ms. Marion 
Blakeley--Blakey, President and CEO of Aerospace Industries 
Association, for any opening comments.

                 STATEMENT OF MARION C. BLAKEY

    Ms. Blakey. Thank you, Chairman Nye, Ranking Member Schock, 
Congressman Ellsworth. We are delighted to be here and 
testifying before you.
    I do represent the Aerospace Industries Association and our 
almost 300 member companies. I think in this economy it is 
important to point out that our industry is responsible for 
almost 2 million well-paying jobs. We had $95 billion in 
exports last year and that contributed to a positive foreign 
trade balance of $57 billion. That is the largest for any 
manufacturing sector.
    Aerospace Industries has a very keen interest in the Small 
Business Innovative Research and Small Business Technology 
Transfer programs. In fact, the major part of AIA's membership 
of 175 small companies make up our Supplier Management Council. 
Our large members also rely on these companies because they 
make machine component parts, electronic subsystems, the kind 
of system software that become integral to the aerospace 
equipment that the U.S. Government depends on.
    And our large companies understand that SBIR is often what 
gives their smaller partners the ability to be innovative and 
to bring the best work into the large projects. For example, it 
was a successful SBIR project, sponsored by NASA, that led to 
the development of a robotic device that allows an astronaut to 
position a joystick with a sense of feel that is very real 
world and actually contributes to the manipulability. This has 
led to multiple applications beyond the device's original plan, 
and in fact it is on the International Space Station. But we 
also find it is operating in satellite docking research and now 
in military unmanned ground vehicles, just an example.
    As you can see, small business is an important part of 
driving technology innovation for the aerospace industry. So we 
do have specific recommendations on the program going forward, 
four of them, in fact.
    First, we think it is critical to the integrity of the SBIR 
program not to be weakened by allowing large companies access 
to these funds. While modifying the program to allow venture 
capital participation we think is a sign of the changing times, 
we believe that the fundamental principle to be preserved here 
is venture capital firms who don't meet the size standard 
definition of small business should not be allowed access to 
SBIR funds.
    Our second concern, particularly for small businesses who 
are working on Defense technology research and development 
projects, is that there is currently a technology readiness 
gap. SBIR currently funds the so-called Technology Readiness 
Level 4. Military contractors generally won't consider a new 
technology into the acquisition process until you hit 
Technology Readiness Level 6. This gap is crucial. It stands 
between pure research and development and the rubber-hits-the-
road activity of testing, evaluation, and manufacturing that 
represents the real maturation of technologies that go from 
prototypes to actual production.
    Closing the gap between TRL-4 and TRL-6 with new funding--
and we are thinking in terms of Phase II for technology and 
manufacturing--is important and would allow the SBIR program to 
a more effective tool.
    Thirdly, I think everyone on the Subcommittee is well aware 
of the technological advances that program has spurred, but it 
is only allocated 2.5 percent of the Federal R&D budget. We 
recommend that figure be increased to 5 percent of the total 
eligible R&D funds.
    In addition, to take into account 15 years of inflation, we 
recommend that the award levels be increased to $250,000 for 
Phase I and $2 billion for Phase II awards.
    My final recommendation this morning deals with extending 
the authorization period for the program. We believe the 
authorization period should be extended to September, 2022. It 
seems a long way away, doesn't it? But we do believe that is 
important. Based on SBIR's history of 7-to-10-year 
reauthorization, we believe this is a reasonable extension that 
will allow an opportunity for the changes to be implemented and 
the effectiveness evaluated.
    So, in closing, let me just say small business innovation 
is a hallmark of this country's leadership and competitiveness 
and this is a real stimulus program. These programs are often 
the only game in town for small business when it comes to 
government funding; and we believe a strong reauthorization 
bill focused on the current realities will help this program 
keep pace with economic and technological innovation change and 
yield untold results.
    Thank you very much.
    Chairman Nye. Thank you very much.
    Can you tell me if I got your name wrong? Is it Blakeley or 
Blakey?
    Ms. Blakey. I like very much that you corrected it. It is 
Blakey, and I think I am the only one in the phone book, but 
there are a lot of Blakeleys.
    Chairman Nye. Blakey, okay. I am trying to be detail 
oriented here and get those right. Thank you very much.
    [The statement of Ms. Blakey is included in the appendix.]
    Chairman Nye. Finally, I would like to invite Mr. Loper to 
make a comment. Mr. Brett Loper, the Senior Executive Vice 
President and Director of Government Affairs at AdvaMed. So 
thank you for joining us.

                    STATEMENT OF BRETT LOPER

    Mr. Loper. Thank you.
    Chairman Nye, Ranking Member Schock, and members of the 
Subcommittee, thank you for holding this hearing today and for 
continuing your efforts to reauthorize and improve the Small 
Business Innovation Research grant program. My name is Brett 
Loper. I am Senior Executive Vice President of Government 
Affairs at AdvaMed, the Advanced Medical Technology 
Association.
    AdvaMed's recommendations for SBIR reauthorization are 
straightforward: Eliminate the arbitrary venture capital 
ownership rule, expand the total pool of funding available for 
SBIR grants, and increase the capital in individual grant 
awards.
    Rather than repeating my written statement, I would like to 
illustrate through a few examples what advances in medical 
technology mean for the public health and how the innovation 
ecosystem makes them possible.
    Advances in medical technology have no less a wow factor 
than those of the personal computer or the iPod. A generation 
ago, treating cataracts required patients to undergo invasive 
surgery and stay in the hospital for up to a week. Today, with 
better outcomes for vision and fewer complications, patients 
are treated through minimally invasive surgery that allows them 
to return home the same day. There are literally thousands of 
examples of similar advancements, common procedures and 
complex, from the last 30 years.
    Because of the nature of the industry, many of the advances 
along the way, both incremental and breakthrough, came from 
small, pre-revenue, risk-taking entrepreneurs. In fact, 80 
percent of medical device and diagnostics companies have fewer 
than 100 employees.
    In the medical technology sector, small business 
entrepreneurs are the norm; and they are fueled largely by 
venture capital. Biotech and medical devices were 31 percent of 
venture investment in 2007, and $3.9 billion of that went to 
medical devices.
    But even with that significant investment there are still 
what many patient advocacy organizations refer to as the Valley 
of Death between basic research primarily funded by National 
Institutes of Health and clinical development and 
commercialization of new patient treatment.
    Consider for a moment chronic pain. Great progress has been 
made in the past several years with a medical device that 
focuses on spinal cord stimulation. It works by sending 
electrical impulses from an implantable device to the spinal 
cord.
    One company, Advanced Neuromodulation Systems, was founded 
by an electrical engineer who wanted to advance 
neurostimulation technology in order to help his sister who 
suffered from Multiple Sclerosis. ANS was eventually acquired 
by St. Jude Medical, and the technology is treating more than 
45,000 people with chronic pain in 35 countries. This 
technology is now being innovated to help people suffering from 
depression, Parkinson's disease, chronic migraine, and other 
neurological disorders. It holds a great deal of promise.
    Venture funding alone will not fund the innovations like 
these that are on the horizon or eliminate the Valley of Death. 
But expanded SBIR grants can be an important part of addressing 
the Valley of Death.
    The small companies that drive the innovation ecosystem 
rarely have revenues from existing sales to fund their 
research, don't benefit from the R&D tax credit, couldn't raise 
a dime from an IPO, and cannot access bond markets for 
financing. Many rely on personal savings, loans from friends, 
borrowing from credit cards, or even the equity in their house. 
An SBIR grant not only gives them the time and capital 
resources necessary to reach a tollgate in a product 
development cycle, it has the added benefit of incentivizing 
venture investment.
    At the same time, venture seed money during the early 
stages of product development may come in several small pieces 
and an SBIR grant which augments that can be the difference 
between success and failure. Arbitrary limits on award grants 
sizes and limitations on the source of capital financing only 
pivot advances in technology.
    In summary, the unique nature of the medical technology 
innovation ecosystem necessitates an SBIR program which helps 
emerging companies to not only get off the ground but also 
leverage private resources.
    AdvaMed looks forward to working with the Committee to 
achieve reauthorization of this important program. Thank you 
for the opportunity to testify, and I look forward to any 
questions you may have.
    Chairman Nye. Thank you.
    [The statement of Mr. Loper is included in the appendix.]
    Chairman Nye. I heard some positive comments about the 
program, and I am glad to hear them. Clearly, what we are 
trying to do today is to try to determine how we can strengthen 
and improve the program and make it work better in practice; 
and that is what you are all here to help us figure out.
    I have a couple of questions. I want to focus first on this 
Valley of Death--or Mr. Hernandez said the Grand Canyon of 
Death--issue in terms of the third phase. I want to start with 
Mr. Loper because you suggested that has been a problem, and 
then I will ask Mr. Hernandez to answer the same question.
    But I would just like to get your thoughts on whether or 
not our proposed changes in the legislation will be helpful in 
solving that problem, if we are on the right track, if there is 
something else we ought to be thinking about.
    Mr. Loper. Certainly I think the draft legislation would 
make significant improvements in moving to stem that problem.
    Chairman Nye. Mr. Hernandez?
    Mr. Hernandez. I believe one of the critical things that 
needs to be looked at is really how one leverages these Federal 
dollars to bring in the private sector dollars. While the 
venture community is quiet for the time being, there is still 
plenty of capital around that will be probably deployed in 
coming years. So I think using these dollars to leverage the 
dollars into the system is really the best strategy to provide 
these sort of public/private interests.
    My opinion, the best way to do that is to make those 
amounts be larger. I think it is really critically important. 
$100,000, takes a lot of time to put these together. I had the 
pleasure of being involved in a couple of them, and sometimes 
you really do not pursue these grants simply because the 
dollars are not worth it. So increasing it would really, in my 
opinion, make it a little bit more competitive.
    Also, allowing these venture-backed companies to play in 
proposed higher-risk projects they typically wouldn't do I 
think is the other way to really stimulate and play an 
important role in getting this thing moving.
    Chairman Nye. Thank you.
    I have a question I would like to put to Ms. Blakey. You 
mentioned that venture capital participation is useful in the 
program but with appropriate size standard limitations. Can you 
just elaborate on how you think the best approach is towards 
the venture capital angle in this program and how it will be 
determined what the right kind of limitation would be?
    Ms. Blakey. Well, I think we see that venture capital 
certainly has an appropriate role to play, and flexibility to 
do that makes sense. But we think the size limitation of 500 
employees for organizations that the venture capital is 
controlling is an appropriate size limit.
    When you get to very large venture capital organizations, 
the dynamics begin to change and there is a question as to 
whether or not these funds are critical when you are talking 
about what essentially a larger business is. The larger venture 
capital and the experience we have, at least in our domain 
area, is often involved with a real press for profitability and 
shorter term turnaround than is sometime possible and 
appropriate in the kind of R&D that we do. So those are 
considerations there.
    I think I would put one final question before you, and that 
is one also should take a look at the source of funding. When 
you are dealing with the aerospace and military arena, foreign 
capital is something you have to look at as an area where you 
may need additional safeguards.
    Chairman Nye. A question for Mr. Leahey. I just want to 
make sure I understand the value in allowing companies to apply 
for Phase II without being involved in the Phase I. Can you 
give us your thoughts on where the benefit is there?
    Mr. Leahey. Certainly. I think, actually, the draft 
legislation--we are not suggesting that without the proper data 
and meeting the requirements of Phase II that without the 
underlying feasibility studies done that they should be 
permitted to jump in.
    I think what we are seeing right now is, particularly in 
this economic environment, you may have a situation where a 
company through family, friends was able to raise some initial 
funding and conduct feasibility studies on their own and 
perhaps never envisioning to go to the SBIR route. But now with 
alternative revenue streams or investment streams drying up, I 
think if companies have those feasibility studies and that 
would satisfy kind of the Phase I requirements of SBIR, to have 
them actually repeat that process and duplicate it in Phase I 
before they can get to Phase II, I don't think is a useful 
source of the resources.
    So, again, I think the legislation here and allowing that 
to happen as long as the company has a feasibility study is 
certainly a welcome improvement.
    Chairman Nye. I have one more question, and then I will 
yield to Mr. Schock.
    But, Mr. Biddle, you suggested that there had been some 
areas where there have been some failures evident and were 
hoping you would get asked about that, so I am going to ask 
would you mind commenting on where you think things have not 
gone well just so we have the lessons that we can apply?
    Mr. Biddle. Yeah, let me describe what a venture capital 
business is. We are a 14-person small business in Bethesda, and 
we live to discover and fund small start-up companies. And we 
have been successful. We have created over 10,000 jobs in the 
Washington area in the last 10 years. For our last fund, we 
were offered $2 billion. We took $200 million so we could 
continue to do small investments.
    I have got a company in Washington, two 24-year-old kids we 
backed in 1997. They have a thousand employees today. Does that 
mean my 4-person startup--and I do not control that company, 
but under the SBA rules I do. We are affiliated? My partner is 
lead director. So my entire portfolio can't work with the 
government. And these are some of the smartest people on the 
planet, and they can't work with the government. It makes no 
sense.
    So I will tell you some real-world stories.
    A meeting yesterday. There is a company that we have, an 
ex-government scientist we backed about 3 years ago. There are 
two investors. We own 52 percent of this company between us. We 
put in $11 million. He has a breakthrough in the national 
security area that is incredible. There is a multi-agency task 
force who wants to procure millions of dollars of this stuff. 
This is a 14-person company who can't make payroll in 30 days, 
by the way. We will have to put in more money. And the small 
business procurement rules are what allow a 14-person company 
to be able to work with the government, whether he is venture 
backed or not.
    We got a call yesterday from a procurement officer at the 
Special Operations Command. They say they are a large business. 
They are ineligible. They have to do large business 
procurement. This is critical technology.
    Another one which we didn't get to finance, a Taiwanese 
immigrant, naturalized U.S. Citizen, bootstrapped a company. 
His expertise was in wireless security, and the Department of 
Defense wanted us to use more commercial technology, but it is 
not secure enough. He had bootstrapped his business with 
friends and family, Taiwanese friends and family, and they 
owned about 20 percent of the company. Through multiple phases, 
he won a Phase III $100 million award from the U.S. Navy. He 
then needed to raise capital.
    We put together a term sheet. I brought together a 
syndicate of Intel who would take this technology commercial 
once we proved it in the military and Carlyle and ourselves. We 
each would have owned I think 13 percent of the company. When 
you added it all up, it would be 52 percent.
    The attorneys we hired to look at this said, "this is gray; 
you could be ineligible. If you represent you are a small 
business, you could be charged with a crime." And Intel and 
Carlyle said, "we can't do stuff that is gray." They withdrew 
their term sheet, and he couldn't raise the money to meet the 
contract, and he sold out to a big contractor.
    So there are other stories like that, and we are really 
doing ourselves a disservice.
    I think the misunderstanding here is talent is a pyramid. 
And we don't get them all, but the venture capital industry 
gets about half of the companies that become great companies 
with a tiny percentage of the capital. The guys at the top of 
the pyramid are not there because they are venture backed. They 
are venture backed because they are at the top of the pyramid. 
So we are the best in the world at going under every rock in 
this country and finding talent and getting money behind them 
and helping them built big enterprises. That is what we are 
after. We start with these small companies.
    Thanks.
    Chairman Nye. Thank you. I appreciate your frank comments.
    Again, I want to thank all the panelists for giving us the 
real-world perspective to help shape the program going forward. 
Noting there are some other members here, I would like to go 
ahead and yield to Mr. Schock for as much time as he would like 
to consume.
    Mr. Schock. Thank you, Mr. Chairman.
    Thank you to the panelists here today for your very 
insightful comments and perspectives.
    I had questions about the venture capital portion, but you 
have, Mr. Biddle, done a very good job of explaining the rule 
that organizations like yourself play in not only the grant 
participants in the SBIR program but in the entrepreneurial 
community in our country; and I would say that that is an 
important role, given all of the talk around this campus about 
stimulating the economy.
    Since 60 percent of the American citizens get their 
paycheck from a small business, it seems this Committee and our 
work and the folks we look out for are important always but 
especially now as we try and stimulate the economy. So I think 
programs like SBIR are always justified, but I think especially 
so. That is why I want to make sure that the reauthorization, 
the language in here is exactly what needs to happen.
    There was some discussion about needing to increase the 
grants. I believe in that. It is a portion of the language that 
I brought forward, and in the draft form that we have now the 
Phase I grants would include an increase from $100,000 to a 
quarter million and then the Phase II grants would go up to $2 
million.
    I just want to give each one of you the opportunity that 
wish to comment on that and whether or not you think those are 
sufficient levels or you think another figure or a different 
level--obviously, the sky is the limit, but, realistically, 
what do you think are appropriate amounts? Given there has been 
quite a lapse in updating these figures since 2000, obviously, 
the time value of money has some effect on what $100,000 will 
get you in terms of research and development.
    Mr. Biddle.
    Mr. Biddle. I don't think the size of the program needs to 
be increased. I think the program can be made more effective. I 
think that increasing the grant size is important to make the 
grants worth the effort. Because what you are trying to do here 
is discover things, but you are also trying to co-opt people to 
think about government applications, things that could be 
useful.
    I think the most important change besides the grant size is 
taking a percentage of this money to manage the programs within 
the Department. You won't want to hear this, but in a lot of 
agencies this is viewed as a congressional tax. They pay the 
tax and go back to work. So a lot of this money is not well 
spent, and it is not managed by the real customers.
    The gold standard in the military is the submarine program. 
The Program Executive, the guy who builds submarines, owns the 
SBIR program; and he uses it as a discovery tool and a tool to 
go find talent to solve his problems. But most of the 
government has it down in a basement. They publish Broad Area 
Announcements to the usual suspects, and it doesn't get acted 
on. So I think that taking 2 or 3 percent to put talent around 
this money and bring it closer to the internal customers is as 
important as increasing the fund size.
    Mr. Schock. Very good.
    Mr. Hernandez.
    Mr. Hernandez. To comment on the size, my father used to 
have this old saying that too much money makes people lazy. So 
I am not an advocate for too much money in these programs.
    That being said, we are a very capital-intensive industry; 
at least the biotechnology industry is. We don't believe the 
$100,000 is the right size. Again, it takes so much time to 
write these things; and I would rather have my scientists focus 
on other things besides a $100,000 effort. So I think the 250 
feels right. The 2 million on Phase II is definitely I think 
the right number.
    I would argue that there are other mechanisms that allow 
one to, for example, fast track these programs to really 
combine them so that there is no gap in funding between Phase I 
and Phase II. I think that would be an important element to 
look at.
    Again, you have to remember these grants, these fundings 
can be used to leverage additional capital, additional private 
capital. So it really allows us to be able to do that by 
validating the technology and approach in some regard. So the 
number sounds right. I would ask for more, but, again, think I 
think we want to make sure we manage it and get the private 
sector involved as well.
    Mr. Schock. Okay.
    Ms. Blakey. We like the size that you all have designated. 
Two hundred and fifty and two million seems appropriate for us.
    We do believe, though, that the overall monies aggregated 
here should be larger. As I said, I suggested 5 percent of R&D. 
We think it is appropriate for these smaller companies. We like 
that 90-day turnaround, also. I agree with you. And I think we 
want to see better data collection as the program goes forward 
so we are all clear about the steps toward utilization in State 
commercialization, and some of that undoubtedly would mean 
better administration of the agencies programs.
    Mr. Loper. I think the burden of the application and time 
it takes to secure the grant award, which often entails hiring 
an outside advisor or consultant to assist with the 
application, diminishes the value of the grant; and I think 
that in part has led to the drop of the applications, 
particularly in the medical technology industry that Mr. Leahey 
referred to.
    Mr. Leahey. If I could follow up on two comments. I think 2 
to 3 percent set aside again to help with the administration 
and really implementation, I think that would help achieve the 
objective of commercialization.
    And then also addressing this issue of timing, we actually 
had our annual meeting here in D.C. Over the past few days. 
About 150 CEOs of small medical device companies came in. I 
chatted with one of them, and they talked about the Valley of 
Death even within the SBIR program because of the gaps between 
Phase I and Phase II. And although there are goals out there 
which they are supposed to achieve, to respond in time, 
sometime there is a significant lag.
    So I think some of the time lines in the bill are certainly 
helpful, but if there is any additional oversight mechanisms 
that are in place to help ensure that companies aren't sitting 
on the sidelines waiting for Phase II grants, it certainly 
would be a welcomed improvement.
    Mr. Schock. I agree.
    The bill that we are putting forward or the language that 
we are submitting actually allows for fast-track authority 
within each of the agencies that would basically allow 
simultaneously for them to issue a Phase I and a Phase II grant 
to the same company or to the same venture. So I would 
encourage you to take a look at it and get back to me or the 
Committee if you think there needs to be further improvements, 
but I think it speaks to all the concerns that you have raised.
    Follow-up on that, I am curious with the venture capital 
funds, Mr. Hernandez, when your company or similar 
entrepreneurs are awarded an SBIR grant, to what degree does 
that help you raise the eyebrow and get the attention of a 
potential VC fund, or does it not?
    Mr. Hernandez. Well, there are a couple of things that I 
would argue in my experience in raising venture capital. I 
raised venture money from five major investment houses, so I 
have kind of figured out the business a little bit.
    One of the risks that is assessed beyond the most critical 
one, which is the management risk, is the technical risk. 
Oftentimes, these venture capitalists are quite savvy and hire 
the right people to give them perspectives on the validity of 
that technology or that company. But I would argue that when 
you have a panel of highly sophisticated scientists that have 
no dog in the fight, if you would, to vet or give a perspective 
on a technology of an SBIR funding mechanism, I think that adds 
immense credibility to the effort. The danger is to ensure that 
the programs that are pursued are ones that are high risk but 
still have a market opportunity, and I think that that has been 
another challenge that needs to be looked at.
    So I would argue that the technical validation is probably 
the most important role that these funds play in addition to 
the plain offering of capital to get the company and the 
venture going.
    Mr. Schock. Very good.
    Mr. Biddle, do you want to comment on that? Do folks who 
come forward with an idea and they do or don't have--I mean, do 
you often refer folks, to say, hey, you have a great idea. 
There is this government program out there that might be able--
I mean, obviously, 250 grand I am sure does not compare to the 
type of investment your organization typically funds, but to 
what degree does this program interface with what you do?
    Mr. Biddle. Well, it does more than the money. As I said 
before, you can sole-source procure from a Phase III winner, 
and that is a big deal. I will not back a company that thinks 
it can compete against Lockheed, period, for a government-type 
business, because they can't. So the ability to sole-source 
procure a Phase III winner is a big deal. And then the ability 
to collaborate with the scientists, with the legal authority to 
collaborate--otherwise, you can't talk to each other--is a big 
deal.
    My fund is different because the world-class science that 
is in Washington tends to be science that comes out of the 
intelligence community and DARPA and the DOD. So half my 
companies are government Ph.D.s who are building commercial 
companies and the government doesn't want these guys to go 
completely native. They know how the system works so they will 
participate in SBIR.
    But my brethren in Boston and Chicago and Silicon Valley, 
they just don't deal with government anymore. So our government 
scientists don't see them, and they don't see the gaps. So it 
is broken on the information technology side.
    The vetting is important. Being close to a customer is 
important. The way that gap is bridged is with a customer. And 
the government--some of the SBIR money belongs to customers 
like the PEO of the submarine program. Some of it belongs to 
academics. There is no customer there. They are not working 
with a program of record. That is where the real money is that 
can build big companies are programs of record.
    So the SBIR money needs to be closer to the customer; and 
it needs to have dedicated management focused on discovery, not 
just publishing broad area announcements.
    The SBIR program should be more similar to what I do. I 
don't have on my Web site, "are you a battery company? Check 
box. Submit plan." I go out. I go to universities. I go to 
conferences. I will be at the Navy's SBIR program on Monday. I 
am looking for stuff. I scour the country looking for stuff 
that solves problems that I am aware of, whether they are 
government or commercial. And that is what this program should 
be doing. Then you have the highest value.
    So you don't want to just fund companies for the sake of 
funding companies. You want to create wealth and create value. 
You want to create big companies. And they come from small 
companies. They are the most innovative. And that is where a 
disproportionate share of our talent works today. The culture 
has changed. Working for small companies is now cooler than 
working for NASA. We should exploit that.
    Mr. Schock. Great. Well, in the interest of time and the 
other members who are here who wish to ask questions, I 
appreciate all of you for being here and the work that you do 
and Mr. Chairman for hosting this Committee.
    I yield back.
    Chairman Nye. Thank you.
    I would like to recognize Mr. Ellsworth for any questions.
    Mr. Ellsworth. Thank you, Mr. Chairman and Mr. Schock, for 
holding this meeting.
    I was notified--did they call votes or just notify us about 
votes.
    Chairman Nye. I think we have until about 11:15 or so for 
votes.
    Mr. Ellsworth. Mine won't take that long. Thank you both 
and thank you all for this very informative meeting.
    The benefit of going third--or the detriment--is that most 
of the questions you are interested in asking get asked before 
you get down here, so it has been very informative.
    I guess one of the things I would talk about when we talk 
about increasing this was one of the things I wanted to ask was 
if it was enough money. And in a time when--a couple weeks ago, 
we had tea parties and everyone is talking about less 
government spending, us included, that we hope your 
organization, when you are putting out the newsletters and the 
e-mails, that you will back up that we know that we are going 
to invest in these programs that are going to solve problems 
and fix people, that you will be our cheerleaders, not just us 
going back to the town halls but you will go out to your 
organizations and your members and tell the same thing: We are 
investing in good products and good organizations.
    One of you--and I cannot remember which one--was talking 
about the technology readiness gap. I don't know if that was 
Mr. Loper or Ms. Blakey?
    Ms. Blakey. Yes.
    Mr. Ellsworth. Would you elaborate on that point, please, 
and clear that up for me, if you can, and how you might suggest 
that we close that gap between 4 and 6? Help me understand, if 
you don't mind.
    Ms. Blakey. I think it really does come down to the fact 
that at that point you are looking at the stages where you have 
gone from the concepts, you have done a certain amount of the 
work, but getting through from a prototype to the point that 
you really have manufactureability and you are at that low-rate 
production level, that is very critical. And the military is 
very exacting about that, and there are very specific 
requirements, as there are for NASA, et cetera. So that area 
right there is where you often find that things bog down, and 
at that point you may find that the program simply stops. This 
is where we would like very much to see Phase II have a 
component, if you will, that looks at that very specifically 
and looks to solve the gap problem.
    Mr. Ellsworth. Thank you very much.
    One of the things I always like to do is give somebody a 
chance to dispute something they heard from the other 
panelists. Not that I want to cause a fight, but if anyone 
heard something from another panelist--Mr. Biddle, I know you 
raised your eyebrows a couple of times with some of the other 
ideas. If anybody would like to dispute something they heard 
from somebody else, I would love to give you that opportunity.
    Mr. Biddle. I love these press releases that talk about 
these billionaires who own these small companies who are trying 
to hide behind the SBIR program. My venture fund is owned by 
the Virginia's Police Pension, the Teachers Pension Plan, the 
University of Virginia's Endowment, Howard Hughes Medical 
Institute, Episcopal ministers. I mean, it is American money. 
It belongs to American individuals. The success here pays for 
scholarships at Georgetown, Carnegie Mellon, and Notre Dame. So 
there are no billionaires with these companies.
    And the fact that we have done a good job and I have 
created 10,000 jobs shouldn't mean that my four guys in a 
garage can't collaborate with the government on a piece of 
science that could make a big difference.
    So the aggregation is just silly. I mean, the last thing I 
want to do is run a company. I am on 10 boards. I can't run 
these companies. What I tell my entrepreneurs is, "is this 
ownership thing is a myth. If I own 5 percent of your company 
and you can't make payroll, it is my company. If I own 60 
percent of your company and you are doing great, it is your 
company." So we provide coaching and finance, but each company 
is separate. Each of our funds is a limited purpose entity. It 
lasts for 10 years, and it goes away. Our limited partners give 
us cash. They expect to get cash back. And that there is 
collaboration or collusion between these companies is just 
ridiculous.
    So, typically, most great companies take capital because 
the entrepreneur wants capital because he wants 10 percent of a 
billion instead of 100 percent of a million. So each of us will 
typically own 10, 15, 20 percent of a company. But it is so 
easy to get to 51 percent. These are consenting adult 
transactions. These guys want our money, and they want to 
exchange stock for the potential to be the next Google or 
Cisco.
    So being venture backed is a badge of honor. It shouldn't 
disqualify you from being able to work on national security 
issues.
    So I am here for the NVCA, but I am really here for the 
Department of Defense. The military needs to engage our 
inventors. If I was designing a program from scratch to allow 
that to happen, I would want current year unallocated spending 
authority. I would want small business procurement rules. I 
would want a legal authority for my scientists to collaborate 
with government scientists.
    I go on the road. The Navy did this with me and eight other 
VCs, got us clearances, told what the problems were, asked us 
to keep our eyes open and look for people who have stuff that, 
with a twist or a little money, could solve big problems. That 
is what we should be doing.
    Mr. Hernandez. If I could just echo that sentiment as it 
relates to affiliation rules. While we are backed by five major 
investors, venture capitalists, the reality is they are small 
players in the company with regards to the equity that they 
individually have. These funds are pretty large funds. They 
invest in numerous companies. Each fund has typically an 
average of 10 to 15, probably 20 investments, in some cases. So 
they manage or invest in a large number of companies. They do 
not run my company. I run my company, and the buck stops with 
me.
    That being said, they play an important and integral role 
in our ability to commercialize these technologies. Without the 
capital, we couldn't do it.
    I think it is ridiculous that the affiliation notion 
exists. Half the time I don't even know the investments these 
other funds make, nor do we have affiliations with them. So I 
think we need to make sure that there are clarification rules 
around that.
    We are a unique entity. Yes, we are backed by five 
different funds that have probably an aggregate of over 100 
investments. We don't interact with those companies. So I think 
we need to really make sure we pay attention to that.
    So getting rid of the eligibility of VC-backed companies, I 
think we really, really have to do that. That is prohibiting 
competition within these programs. And I would argue devaluing 
these dollars that get deployed, and this is the criticism that 
you often get with government dollars being poorly deployed, 
and I think we need to add more competition to the system.
    Mr. Ellsworth. Mr. Chairman, I know my time has expired. If 
I could close by saying I think we definitely need to spell out 
the difference in what you are saying between--with all the 
reputation and things going on the last 5 months on Wall Street 
and the separation between venture capitalists and the 
companies on Wall Street, the bailouts, I think it is a very 
important point to bring up and that people understand the 
venture capitalists aren't part of these closures.
    Thank you. I yield back.
    Chairman Nye. I want to again thank all the panelists. We 
expect to be called for votes here relatively shortly, but I do 
want to offer an opportunity if anybody feels like there is a 
thought that came up during the testimony and they want to add 
it at the end here and didn't feel that they had a chance to 
say it. If anyone has any final comment, I want to offer that 
chance.
    Mr. Loper. I don't want to jump on the bandwagon here, 
but--
    Chairman Nye. Please do.
    Mr. Loper. I think what we are talking about, boiling it 
down to a more simple discussion, I guess, the forms of 
financing here that we are discussing, venture versus other, 
there are different industries, and there are different 
business models, but I think it is important to consider if you 
have a choice between going to get a loan from a commercial 
bank that has tens of thousands of employees and tens of 
thousands potentially of shareholders, someone ultimately owns 
that financing. There is a difference certainly between that 
mechanism of financing, one, because it is harder to get in the 
case of a company that owns very little and the venture. It is 
a risk equation.
    The commercial bank in our setting is not going to offer 
financing to a start-up company like the ones we are 
discussing. They have nothing essentially to repossess except 
ideas. So the venture funding is critical to the medical 
technology industry in order to get that product from idea to 
bedside. It is a question of risk. And the venture firms exist 
on the financing spectrum for a reason, because they are 
willing to take certain risks that others are not. I think 
that, in short, is the critical issue for us as the program is 
reauthorized.
    Ms. Blakey. Well, one thing I would say, and I think there 
is a commonality up here. But in all the talk about venture 
capital, I don't want us to lose sight of the fact that one of 
the critical things here is a longer reauthorization period, so 
you have program stability. You can build awareness. You can 
build competition. And then adding into that the larger award 
amounts as well as a larger pool of money, again, will bring 
the best and the brightest and will make it a much stronger 
program.
    So those three elements, please don't lose sight of how 
critical they are in this. Thank you.
    Mr. Biddle. I don't think the size of the program needs to 
be increased. I think it just needs to be better managed. I 
have also heard discussions about quotas and stuff for venture 
capital. I think a legitimate venture fund is easy to define: 
multiple limited partners, domestic money, no more than X 
companies in the portfolio, limited life. We should be defined 
as persons for ownership purposes for all of the small business 
programs, if they are in fact small businesses. It is the 
management piece here that I think you can get much more bang 
than increasing the program size and throwing the venture 
community a bone. You know, report it, collect it.
    The venture-backed companies are 20 percent of the GDP, 10 
percent of the employment. Pound for pound, these are the most 
promising companies in the country. And we don't get them all; 
we get about half of them. About half of them are venture-
backed. And to exclude those from solving critical national 
problems is just foolish.
    Chairman Nye. All right.
    Well, again, let me thank you all for being here. And I 
want to thank you for not only sharing your experience with us 
today, but also for everything that you all do to drive the 
economy forward. I see it as our role here in Congress to work 
together to try to maintain an enabling environment for you and 
your members to do what you do to create the innovations, to 
come up with new technologies, to create the new jobs, and to 
really drive our economy forward. So we appreciate all of what 
you are doing every day to make that work.
    In conclusion, I would like to ask unanimous consent that 
members have 5 days to submit statements and supporting 
materials for the record.
    Without objection, so ordered.
    And in bringing this hearing to a close, the hearing is now 
adjourned. Thank you again.
    [Whereupon, at 11:15 a.m., the subcommittee was adjourned.]

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