[Senate Hearing 111-1091]
[From the U.S. Government Publishing Office]

                                                       S. Hrg. 111-1091




                               BEFORE THE

                          UNITED STATES SENATE


                             FIRST SESSION


                              JUNE 4, 2009


    Printed for the Committee on Small Business and Entrepreneurship

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                   MARY L. LANDRIEU, Louisiana, Chair
                OLYMPIA J. SNOWE, Maine, Ranking Member
JOHN F. KERRY, Massachusetts         CHRISTOPHER S. BOND, Missouri
CARL LEVIN, Michigan                 DAVID VITTER, Louisiana
TOM HARKIN, Iowa                     JOHN THUNE, South Dakota
JOSEPH I. LIEBERMAN, Connecticut     MICHAEL B. ENZI, Wyoming
MARIA CANTWELL, Washington           JOHNNY ISAKSON, Georgia
EVAN BAYH, Indiana                   ROGER WICKER, Mississippi
MARK L. PRYOR, Arkansas              JAMES E. RISCH, Idaho
KAY HAGAN, North Carolina
           Donald R. Cravins, Jr., Democratic Staff Director
              Wallace K. Hsueh, Republican Staff Director

                            C O N T E N T S


                           Opening Statements


Landrieu, Hon. Mary L., Chairman, a United States Senator from 
  Louisiana......................................................     1
Shaheen, Hon. Jeanne, a United States Senator from New Hampshire.     4


Wheeler, Kevin, Director, Committee on Small Business and 
  Entrepreneurship...............................................     5
Barry, Jim, Creare, Incorporated, Hanover, NH....................     5
Crandell, Keith, ARCH Venture Partners...........................     5
Eyester, Laura, SBA, Office of General Counsel...................     5
Iyer, Subash, SBA, Office of the Administrator...................     6
Glover, Jere, Small Business Technology Council..................     6
McGarrity, Gary, VIRxSYS, Gaithersburg, MD.......................     6
Mehra, Kunal, Scientific Systems, Woburn, MA.....................     6
Oliver, Linda, Acting Director, Small Business Programs, 
  Department of Defense..........................................     6
Fedorkova, Lenka, Representative from the NIH SBIR program.......     6
Wessner, Charles, National Academy's Program on Innovation.......     6
Williams, Cheryl, Government Accountability Office...............     6
Wyatt, Kathy, Louisiana Tech University..........................     6
Necciai, Erik, Staffer, Office of Senator Olympia J. Snowe.......    10



                         THURSDAY, JUNE 4, 2009

                      United States Senate,
                        Committee on Small Business
                                      and Entrepreneurship,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:39 a.m., in 
Room 428-A, Russell Senate Office Building, Hon. Mary L. 
Landrieu (chairman of the committee) presiding.
    Present: Senators Landrieu and Shaheen.


    Chairman Landrieu. Let me begin by calling this roundtable 
to order and thank all of you all for coming this morning. I am 
really very grateful that you have given your time to join us 
for this roundtable. I am hoping that Senator Snowe, who like 
me has many other hearings today--unfortunately, we are usually 
double-scheduled--but hopefully, she will be able to stop by 
sometime during the roundtable, and we are expecting some of 
our other members to come in, as well.
    I am going to be spending some time with you all this 
morning and then turn it over to my staff that will be 
conducting the bulk of the roundtable. But these roundtables 
are very, very important opportunities as Congress attempts, 
particularly this committee, to reshape and reauthorize two 
very important programs in the SBA administration, which I am 
sure you are all familiar with and have strong opinions and are 
expert in and we are looking forward to hearing your views 
    As I said, the purpose of this roundtable is to discuss the 
reauthorization of the Small Business Innovation Research, 
SBIR, program and the Small Business Technology Transfer, STTR, 
programs, two of the most important and tech-focused programs 
in the SBA. We have several reauthorizations for SBA programs 
on the horizon, but these two continue to be our committee's 
top priority. In the coming weeks, we will also be discussing 
the reauthorization of the SBA's entrepreneurial development 
    As you all know, these two programs--one was authorized in 
1982 and the STTR program in 1992--among other things, it helps 
to meet the government's research and development needs through 
small business. The last comprehensive reauthorization of the 
SBIR program occurred in 2000. The program was reauthorized for 
eight years. It was scheduled to sunset September 30, 2008. 
This program has received two temporary extensions. We must do 
a, in my view, a final reauthorization, hopefully for another 
eight-year extension, and that is my goal. I have made it a 
priority of this committee to get the comprehensive 
reauthorization bill to the President's desk before July 31.
    So let me just briefly explain for those of you who have 
participated in roundtables before. When you would like to 
speak, just stand your card up like that and you will be 
recognized. Kevin Wheeler, who is the Director of this effort, 
Don Cravins, my Staff Director, and Thad Inge will be leading 
this discussion. They will be reporting back to me, as I said, 
and to Senator Snowe, and together, we will try to take the 
best of your ideas and submit them with our reauthorization.
    We have a good foundation for this year's bill based on the 
committee work of the last two Congresses, but if anyone has an 
idea about changing a direction or adding, this would be your 
day to make specific comments about how you think our base 
reauthorization effort should be changed.
    Unfortunately, sometimes with these programs particularly, 
we have had some difficulty actually keeping people focused on 
the facts and on specifics and not just spectacular statements 
about their points of view, so the staff has been instructed by 
me to keep everybody very focused on facts and statistics as we 
seek to reauthorize these two very important programs.
    We have many policy goals and interests to balance. 
Obviously, we want these programs to stay focused as a bridge, 
help, and support for true small business, Main Street 
business, hometown businesses in America. That is what the SBA 
is focused on, entrepreneurship, growing small businesses to 
large business. It is not a hand-holder for larger businesses 
that have other options because of their size and ability to 
    We want to encourage the exploration of high-risk, high-
reward, cutting-edge research. That is what these programs are 
designed to do. We want a fair playing field so that Main 
Street and hometown businesses can compete for this very small 
percentage of the overall Federal R&D budget. We want 
commercialization, but not at the expense of turning programs 
into an acquisition program. We realize there are different 
ways to get to these goals. States with low SBIR activity and 
high SBIR activity, differences among small business, research 
universities, agencies, differences within States with little 
venture capital and those with more, but this committee wants 
to balance those interests.
    As all of you know, these two programs have been enormously 
successful over the years since their inception. Both programs 
have played an unprecedented goal in stimulating technological 
innovation and allowing small business to meet Federal research 
and development needs and providing seed capital for small 
business to develop ideas until they are able to attract 
outside investment.
    The SBIR program has awarded more than $24 billion to 
100,000 projects since it started. Recipients have produced 
more than 85,000 patents, generated millions of well-paying 
jobs across all 50 States. Both programs have garnered high 
praise from well-respected sources, and governments around the 
world are increasingly adopting SBIR-type programs to encourage 
innovation in their own countries.
    Small businesses continue to receive only about four 
percent of research and development dollars, despite the fact 
that they employ nearly 40 percent of American scientists and 
engineers and produced 14 times more patents than large 
businesses and universities and produced patents that are of 
higher quality and are more than twice as likely to be cited. 
The SBIR and STTR programs are two of the very few Federal 
programs that tap into the scientific and technical communities 
found in America's small business. These programs foster 
government-industry partnerships by making competitive awards 
to firms with the best scientific proposals, regardless of 
size, and apply them to the research needs of our agencies, by 
helping to move technologies from the lab, from our 
universities to the marketplaces, or from the lab to insertion 
in government programs or systems.
    I am just going to mention two success programs that we 
wanted to highlight. One of the technologies pioneered by an 
SBIR-funded small business is a machine that uses lasers and 
computer cameras to sort and inspect bullets at a much finer 
level than the human eye can manage. The technology created the 
invisible condensation trail of the B-2 bomber, a therapeutic 
drug to create chronic inflammatory disease, and a nerve gas 
protection system. We think that was a very good investment for 
the money that we spent.
    With regard to the bullet-sorting technology developed by 
Cybernet Systems, a small woman-owned business located in Ann 
Arbor, Michigan, and currently in use in Iraq and Afghanistan, 
the SBIR technology is estimated to have saved taxpayers more 
than $300 million. These are real cost savings and tangible 
technological improvement.
    I am very familiar with one of our own Louisiana companies 
that has had great success in recent years, Network Foundation 
Technologies, known as NiFTy. I visited the company in Ruston, 
Louisiana, a relatively rural part of our State, but is home to 
one of our great universities, Louisiana Tech University, and 
right down the road, another well-known university, Grambling 
State University. NiFTy has worked closely with our guest, 
Kathy Wyatt from Louisiana Tech. Kathy, welcome. They used an 
SBIR grant from the National Science Foundation to develop 
technology that permits live streaming video over the Internet 
without the use of large amounts of bandwidth. They have been 
particularly successful in bringing sporting events live over 
the Internet.
    NiFTy has grown to more than 40 employees, many drawn from 
the ranks of our own scientists there at Louisiana Tech. These 
are high-paying new jobs, high-paying jobs in Louisiana. Kathy 
will testify today that when they started this process, they 
were told that they could not build this business in Louisiana. 
It just didn't have the gravidas or the atmosphere or the 
possibilities because it was in a State that was not known for 
technology. But I beg to differ, as the Senator from Louisiana. 
We have some very exciting high-tech corridors being developed 
outside of the well-known Silicon Valley and Triangle of North 
Carolina and places here in Northern Virginia.
    There are pockets of extraordinary and exciting 
technologies and entrepreneurships from east to west, from 
north to south, in small places that people can hardly find on 
the maps, and it is the intention of this Chairman to make sure 
that these programs reach those small communities, particularly 
in rural areas outside of the well-known areas, to bring the 
great brains and talent of American citizens wherever they 
might choose to live for any number of reasons to give benefit 
to the taxpayer and to build the jobs in the next century.
    So again, I encourage you all to make very constructive 
discussion. I know many of you flew in from parts of the 
country and the weather isn't terrific, so I thank you for your 
    I would especially like to, of course, recognize Kathy 
Wyatt, who I mentioned earlier. Kathy serves as Director of 
Louisiana Tech Technology Business Development Center, has long 
been active in small business. I thank Kathy for being here.
    Dr. Kevin Kelly from Meso Technologies in Baton Rouge was 
also going to be invited, but unfortunately because of the 
weather had to be rerouted.
    So I am pleased to have both of these great spokespersons 
from my own State and I look forward to being introduced to the 
rest of you all and look forward to your testimony today. Thank 
you very much.
    We have been joined by one of my great leaders on this 
committee and a fierce advocate for small business, a woman who 
has done a lot of it in her career as Governor before she got 
here as a Senator, so Senator Shaheen, we are very grateful for 
you attending this morning, and please.


    Senator Shaheen. Thank you, Madam Chair, and thank you for 
your leadership of this committee before putting together this 
innovative discussion this morning to talk about reauthorizing 
    I also want to thank all of the panelists for coming today. 
As Senator Landrieu said, we especially appreciate your 
challenges getting here given the weather. For those of you who 
made it yesterday and got to be here through that awful 
rainstorm, we especially appreciate that effort.
    I am sorry that, unfortunately, I am not going to be able 
to stay for the entire discussion this morning. We have a mark-
up in the Energy Committee, another very important issue for 
all of us, so I will miss much of your discussion but will have 
the transcript that we can all review, and, of course, the 
staff will report the discussion this morning to all of us.
    As a Senator from New Hampshire, I take particular pride in 
the SBIR program. As you will hear from Jim Barry, who is from 
New Hampshire, it was New Hampshire Senator Warren Rudman who 
in 1982 sponsored the Small Business Innovation Development 
Act, which established the SBIR program. I think Jim will tell 
you that Creare, which he represents, was very instrumental in 
helping to develop the original Act. Many New Hampshire small 
businesses have successfully competed for SBIR funding over 
these past 27 years, including Creare. Thank you, Jim, for 
coming to share your experiences with the committee.
    All across New Hampshire, from Applied Geo Solutions in 
Durham to Mikros Manufacturing in Claremont, small businesses 
that otherwise would not be able to compete for Federal 
research and development funding have won competitive SBIR 
grants that advance technology and science and create good 
jobs. Over 794 Phase One awards and over 385 Phase Two awards 
have been won by New Hampshire small businesses. And as 
Chairman Landrieu has noted already, small businesses employ 
about one-third of America's scientists and engineers and 
produce more patents than large businesses and universities, 
and yet small business receives only about four percent of 
Federal research and development dollars.
    I believe that our future economic prosperity depends on 
whether this country continues to be a leader in science and 
innovation, and that means, in my opinion, that we need to 
reauthorize and strengthen SBIR. So I am going to take what 
little time I have this morning to sit back and listen as you 
all begin this discussion about how we can reauthorize this 
legislation and hopefully create something that is going to be 
better for the future. Thank you.
    Chairman Landrieu. Thank you, Senator Shaheen.
    I am going to now turn over the program to Kevin Wheeler, 
our Director. She is going to lead us in an open discussion, as 
you all have been briefed, with some specific questions. And 
again, when you want to speak, just stand your name card up and 
we will call on you and try to have as much interaction as 
possible. Again, we want you to be, of course, very 
forthcoming. That is what the purpose of this roundtable is. 
But please try to keep your answers to the point and present as 
many facts or supportive documentation as you can.
    Of course, the record of our committee will stay open for 
one week, so anything that you can't get in today but you feel 
like you want to back up a point, of course, we would love to 
receive your material.
    So I am going to turn it over to Ms. Wheeler.
    Ms. Wheeler. Good morning. Thank you. Before we get 
started, did you want to just go around the table and say your 
name and tell us your company or who you are representing so 
that the Senators have a sense of who you are? Do you want to 
start, Jim?
    Mr. Barry. Jim Barry, Creare, Incorporated in Hanover, New 
    Chairman Landrieu. If you all could pull the microphones a 
little bit closer. You have to really get them close to you, 
and, of course, because this is being recorded, it is 
important. Some of you are going to have to share them, but 
just pull them as close as possible. So Jim, could you restate 
    Mr. Barry. Jim Barry, Creare, Incorporated, Hanover, New 
    Mr. Crandell. Keith Crandell, ARCH Venture Partners, which 
is a seed and early stage venture capital company in Chicago.
    Ms. Eyester. Laura Eyester. I am with SBA's Office of 
General Counsel.
    Mr. Iyer. I am Subash Iyer with the SBA, Office of the 
    Mr. Glover. Jere Glover, Small Business Technology Council. 
Good to see you.
    Dr. McGarrity. I am Gary McGarrity from VIRxSYS in 
Gaithersburg, Maryland, and I am also representing the 
Biotechnology Industry Organization.
    Mr. Mehra. I am Kunal Mehra with Scientific Systems in 
Woburn, Massachusetts. We are a small minority-owned business, 
very active in both the NASA and Department of Defense SBIR 
    Ms. Oliver. I am Linda Oliver. I am the Acting Director of 
Small Business Programs for the Department of Defense.
    Dr. Fedorkova. Good morning. I am Lenka Fedorkova, 
representing the NIH SBIR program.
    Chairman Landrieu. I have to stop you all. I can see people 
in the back of the room cannot hear you at all, so I am going 
to ask you again, when you speak, you have to speak like this, 
okay, close to the microphone so that people can hear you. 
These microphones are sensitive only if you are close. Try it 
    Dr. Fedorkova. This is Lenka Fedorkova representing the NIH 
SBIR/STTR program. Good morning.
    Chairman Landrieu. Was that better in the back? Okay. 
Somebody back there be in charge, up or down.
    Dr. Wessner. My name is Charles Wessner. I am with the 
National Academy's Program on Innovation.
    Chairman Landrieu. Thank you, Charles.
    Ms. Williams. I am Cheryl Williams. I am with the 
Government Accountability Office.
    Ms. Wyatt. Kathy Wyatt with Louisiana Tech University.
    Chairman Landrieu. Okay. Kevin.
    Ms. Wheeler. Thank you. And then, also, I would just like 
to recognize Erik Necciai, who works for Senator Snowe, and he 
will represent their side.
    So the first topic of discussion is length of 
reauthorization. As some of you may know, the last two 
reauthorizations for the SBIR program were eight years. The 
last reauthorization period for the STTR program was also eight 
years. In the 109th Congress, this committee voted to make the 
programs permanent. Then in the last Congress, we voted to 
reauthorize them for 14 years as a balance between the eight 
and the permanent.
    Right now, we are operating under--the SBIR program, at 
least, is operating under a temporary extension and they have 
been six and eight months. We would like to establish on the 
record today from the small businesses, the agencies, how do 
the shorter or longer periods affect you so that it would guide 
us in going for the longer or shorter periods.
    I would like to start with the businesses, if we could go 
around the table, and tell us, are shorter or longer periods 
better for your business?
    Mr. Barry. A longer period is preferred for us. It allows 
us to plan better, have some consistency as we go forward.
    Ms. Wheeler. And are you worried at all about these 
temporary extensions?
    Mr. Barry. They are a little unsettling because one never 
knows whether the program is going to halt unexpectedly or be 
put on hiatus for a while, which would be very disruptive for 
the small companies that are involved.
    Ms. Wheeler. Okay. Mr. Crandell.
    Mr. Crandell. We are supportive of longer periods. I think 
the time line that the National Venture Capital Association 
also is supportive of is five years, and that way to allow the 
Phase One, Phase Two, Phase Three process to complete a full 
cycle and then be able to collect data and sort of understand 
the implications of actions and policies that have been taken.
    Ms. Wheeler. So NVCA is in favor of a shorter period?
    Mr. Crandell. Of five years, which is certainly longer than 
what we have--
    Ms. Wheeler. But shorter than all the precedents of eight 
    Mr. Crandell. Five is shorter than eight, yes.
    Ms. Wheeler. We will just go ahead and go through the 
agencies. Do you want to represent SBA, Subash?
    Mr. Iyer. Sure.
    Senator Shaheen. Can I just ask a question, Kevin? Would 
you be opposed to an eight-year? It wasn't clear to me from 
what you were saying. Eight or ten years? Is there a reason why 
you think five is better?
    Mr. Crandell. Well, I mean, the last couple of years, there 
has been--I have only been on the NVCA or involved in it for 
about three years as a board member. I have been involved in 
the SBIR issue for that entire period of time. It seems like 
there are some questions that are open to getting data to 
resolve. The National Academy has done a great job of starting, 
but they didn't have all the data available to be able to track 
some of the critical parameters. It seems like you would want 
to choose a period of time where you could get a full cycle of 
people applying, of awards being made, of programs being 
completed, and then results being developed so that you could 
then look at that result and know whether you had indeed 
achieved the ends that you were interested in.
    Senator Shaheen. I understand that, and certainly what I 
have heard from businesses, and Jim can attest to this, is that 
a longer period is important so that people can plan. But what 
I am trying to figure out is are you saying that you think 
eight or ten years is too long and that five years is a 
preferred time period, or--
    Mr. Crandell. Well, it to some degree depends on what is 
actually in the bills. From the venture capital-backed company 
standpoint, there are still issues about whether they can 
participate and how. Obviously, if they are excluded and it is 
an infinite authorization, that is something that disadvantages 
what we think are important participants who are prospective 
participants, who would like to participate but would be 
    Senator Shaheen. Thank you.
    Ms. Wheeler. Just to clarify for the record, the committee 
was aware of concerns of regular reviews of the program, 
allowing you to go back in, and we did not see them as 
inconsistent with long periods of permanency or 14 years.
    And for that reason, the foundation of the bill has the 
National Academies or National Research Council go back and at 
regular intervals, every four years, to update the 
comprehensive studies that they had done so we didn't lose that 
base of research. And then also your concern that firms would 
be excluded and therefore you would want to not have a longer 
window, one, VC firms are not excluded even today, and two, the 
foundation for the bill had a compromise to allow firms that 
are majority-owned and controlled by multiple VCs. So they 
wouldn't have been excluded in either scenario, not today and 
not even if last year's bill had passed, to address your 
    Mr. Crandell. I appreciate that, and I appreciate you 
pointing out all those points. I think from our perspective, a 
majority of important firms that are venture capital-backed 
actually would have been excluded under what we have now, or at 
least their participation capped. Second, many firms have been 
excluded since 2003, and even though there are these review 
mechanisms that you have identified, and I am certainly a fan 
of review, in point of fact, it hasn't--the program was 
materially changed in 2003 from our perspective and the review 
process, even though there is, I think, significant relevant 
arguments to go back to the system that existed prior to 2003, 
it, in point of fact, hasn't. So I don't share the same level 
of confidence that you do in the program review.
    Ms. Wheeler. Well, we will go into the VC issues further.
    For SBA, what is the administration's position on, say, a 
14-year authorization?
    Mr. Iyer. Well, the SBA believes firmly that this 
reauthorization needs to be a long-term reauthorization and 
there are two reasons for that. The first is that at a program 
and agency level, it is important for program managers for 
planning purposes as well as broader considerations of how they 
develop their program and outreach, have a definitive long-term 
time frame for the program. In terms of the small business 
side, perhaps more importantly, small businesses need to also 
know that this program is there to exist for a long time.
    As for the specific length of reauthorization, there is no 
firm position on that and I think that there needs to be a 
dialogue like the one that we are having right now to get all 
of the views on the matter before we can definitively suggest a 
length. But we do believe firmly in a long-term 
    Ms. Wheeler. Thank you.
    Jere, your members from the Small Business Technology 
    Mr. Glover. The stopping and starting uncertainty creates 
real problems in terms of recruiting and retaining the best 
scientists in the world to work for these companies. A long-
term reauthorization, certainly the 14 years, the longer the 
better, and I think our folks really do think that the short-
term doesn't serve any real purposes.
    There is flexibility within the Small Business 
Administration. Hopefully, they are going to take a strong 
position and have a strong Office of Innovation, as the bill 
provides some strength. To the extent it needs to be tuned and 
tweaked, there are provisions within the policy directives that 
allow SBA to do that. So a short-term reauthorization doesn't 
make sense, even for those who would like to change it from 
time to time.
    Ms. Wheeler. Thank you.
    Dr. McGarrity for BIO.
    Dr. McGarrity. As a member of a small emerging 
biotechnology company, I think we could live with a 14-year 
reauthorization plan as long as, as previous speakers and you 
have mentioned, there is constancy there, because I think the 
big problem and the big hurdle is the changing rules going on. 
I would also emphasize what Mr. Crandell said in response to 
the eligibility requirements, and I think my approval or 
support for a 14-year reauthorization plan would be contingent 
on the proper eligibility requirements. I think you are partway 
there, but it is not fully where I think the biotechnology 
industry would like to see the playing field.
    Ms. Wheeler. Thank you.
    Mr. Mehra. Yes. I strongly favor a lengthy reauthorization 
and for three very practical reasons. The first is I think we 
have seen in the past that whenever you get within four to six 
months of sunset, the process really pauses within the 
agencies. The agencies have to stop making decisions around 
awards. Contracts get stopped. As a consequence, it causes an 
incredible amount of stress and planning challenges for small 
businesses. We don't know whether we should recruit. We don't 
know whether we can actually rely on this revenue coming in. 
And I think as everybody would agree, planning is critical for 
all businesses, particularly for small businesses. So that is 
the first reason.
    The second reason is when the bill finally does get 
reauthorized, there is an incredible backlog of awards of 
contracts, again, that the agencies have to grapple with, and 
that creates a lot of stress both for the agencies and for the 
small business concerns. So when you add up the impact, both on 
the stop of decision making and then the backlog of contracts, 
it is almost a year that you lose as a consequence of these 
short reauthorization cycles.
    What do I do for a year? I have got the staff. I know that 
the award is potentially coming in and I could put some 
probability against it, but now I have to find other projects 
to put them onto. It impacts my ability to make hiring 
decisions. So from a planning perspective, it is very, very 
    The third reason is, in terms of customers, we are, as a 
company, extremely focused on transitioning our programs to 
acquisition programs. So we will go out two to three years in 
advance and start engaging with customers and develop a 
transition plan. I mean, we are really doing what I think the 
SBIR program was intended to do. When we lay out that 
transition plan for them, we talk about various funding sources 
from Phase Two SBIRs, Phase Two enhancements, but I think as 
everybody knows, acquisition program managers are extremely 
risk averse and they look at that funding cycle and say, well, 
if SBIR is coming up for reauthorization, we can't rely on that 
funding. That introduces an incredible amount of risk. That 
therefore makes it even more difficult, compounding the problem 
for a small business to overcome that risk-averse culture and 
be successful with the transition of a technology.
    Ms. Wheeler. Thank you. Very good.
    Mr. Necciai. Kevin, if you don't mind, I wanted to see if 
we could touch on something you mentioned. I think a key issue 
is job creation, and before the Department of Defense has an 
opportunity to discuss that, if there is ever an issue where 
discussing job creation as it relates to SBIR, I would like you 
to emphasize that, if you could. You mentioned forecasting 
through reauthorization, how that may have an effect on, my 
decision to hire more people, or I had to lay off people 
because I wasn't able to obtain new contracts or new grants and 
such things. Were there any specific examples that your company 
had in having to reduce staff or where you couldn't hire?
    Mr. Mehra. Yes. I am glad you asked for clarification. My 
company, we are very fortunate. We have been on a growth 
trajectory. We actually grew about 40 percent in the last year. 
However, there have certainly been times where we have looked 
at our business forecast and we have said, okay, if 
reauthorization happens, we have space to hire another five or 
six people. In the worst case, if reauthorization doesn't 
happen, we are overstaffed by five people. And therefore, we 
say, all right, we are going to have to take a risk-adjusted 
view of this and probably not hire for at least six or seven 
months until there is clarity on whether these awards are going 
to come in.
    That is a very disruptive process. It means that if the 
awards come in, we end up having to request no cost extensions, 
because we are understaffed. We have less investment capital to 
put into growth, going after new business. So it has this very 
deleterious effect that kind of tends to roll over for a long 
time and I think is not in the program's interest, it is not in 
our customers' interest, and it is certainly not in our own 
business interest or in the State's in terms of a hiring--
    Mr. Necciai. What type of time frame would provide your 
company and companies like yours with the security of knowing 
that the program will be there and that there isn't this job 
fluctuation? Say you don't have to make those decisions every 
two years, every three years, every five years?
    Mr. Mehra. Well, I would say ten years would be great. 
Eight years would be a minimum. Ten years would be great. 
Upwards of 12, 14 years would be wonderful. But equally as 
important, I think, is to make sure that when reauthorization 
does come up, that that actually happens a year in advance of 
the sunset of the bill, and I know that that is a very 
difficult thing to have happen, but no matter how long the 
reauthorization is, at some point, the bill will sunset, and if 
we could clarify that, get the reauthorization done within a 
year of that sunset as opposed to waiting until the last 
minute, again, from a planning perspective, it makes it much 
easier and I think this is in the interest of overall economic 
    Ms. Wheeler. Ms. Oliver.
    Ms. Oliver. That was such a nice, clear explanation that I 
have little to add except to say that from the Department of 
Defense standpoint, what we have to do in anticipation of 
possibly shutting down a program is labor intensive and 
wasteful, so we don't see--and we don't really see any benefit 
from it. We just see a lot of wasted resources.
    Mr. Necciai. Ms. Oliver, as you know, the SBIR Program was 
supposed to terminate at last September, at the end of the last 
fiscal year last year. We reauthorized it until March. We 
reauthorized it again until July. Could you please estimate 
what type of costs is this incurring to your agency or similar 
agencies on having to do that type of fluctuation?
    Ms. Oliver. We have to--if I had to, I probably could 
translate it to dollars, but the sorts of wastefulness are we 
have to go out to vast numbers of people to explain to them 
what may happen. The communication process--in some ways, it is 
like jamming up the airwaves. It would be better if we didn't 
have to go through that drill at all because we need to be able 
to use their attention for things more useful than in a sort of 
a drill about we may not go on, and if we are not going to go 
on, here is what we are going to do. So even the communication 
part of not being sure whether something will be reauthorized 
is burdensome to--wasteful to an organization.
    Mr. Necciai. So the Department of Defense would be more 
comfortable having a longer reauthorization?
    Ms. Oliver. Yes. Yes, we surely would.
    Ms. Wheeler. Thank you.
    Dr. Fedorkova. From the NIH perspective, I think key points 
were touched on. The timeliness of the authorization is 
definitely something that would also allow us not to have to 
spend sufficient time and effort to allay nervousness and 
anxiety in the community who is asking us how not reauthorized 
programs would affect the funding flow, even if we have the 
appropriations and the agency de facto is functioning normally. 
We feel, in general, too short of a reauthorization would be 
difficult for planning purposes, as was already alluded to. Too 
long of a reauthorization might pose other challenges where we 
would have fewer opportunities to do necessary checking in as 
to how the programs are doing and opportunity to perhaps adjust 
things as necessary.
    So I think, in general, the eight-year interval has worked 
well. Again, as I think Mr. Mehra has mentioned, the key is 
when the authorization happens so that those involved don't 
have to spend that time managing the risks involved. So that 
would be our perspective on that.
    Ms. Wheeler. Thank you.
    Dr. Wessner.
    Dr. Wessner. Well, thank you. Our research on the SBIR 
program but also on other innovation programs, both in this 
country and around the world, would strongly argue that the 
advantages of this program are its scale, its stability, the 
continuity that allows for ongoing planning. So we would very 
strongly favor a long reauthorization.
    I would like to stress the point that I think was touched 
on by both my colleagues from the agencies. If you want to have 
this small business and this program integrated into the 
procurement process, you do not want even three years out to be 
wondering whether or not this program is going to be 
reauthorized. I can think of nothing more disruptive to the 
credibility of the program than these tiny extensions that we 
have had in this period.
    So without picking a particular time, the longest times 
that you have mentioned here would be fully justified with a 
very important condition, and that is that evaluation is 
ongoing, both internally and externally. If the evaluation is 
there, then I think you have the opportunity to revisit. I 
don't think a program that is extended over a long period of 
time, say 15 years, need not be looked at periodically, and I 
think it can be.
    And I would like, with respect, to take very strong issue 
with my colleague, Mr. Crandell. The idea of holding the 
program hostage because we are not happy with one particular 
provision, I think understates the contributions that small 
companies are making to national defense and to energy. We need 
this program. We need their involvement. We are not 
unsympathetic to the point of view that Mr. Crandell might 
represent, but we very strongly think that it is putting--that 
it is having the tip of the tail wag the dog and we would like 
that not to happen. So with evaluation, we would argue for the 
longest possible extension.
    I would also just like to venture, it is not here that----
    Ms. Wheeler. Chuck, could you just pull your microphone a 
little bit closer?
    Dr. Wessner. I beg your pardon.
    Ms. Wheeler. You are such a good speaker. I would hate for 
people in the back not to hear you.
    Dr. Wessner. You are very kind. You are very kind, and if I 
weren't so dumb, I couldn't use the mike and it would be 
    Dr. Wessner. Anyhow, I will stop there. Scale, stability, 
continuity, integration, as long as possible, with evaluation. 
And I think we also need to look at a broader question about 
the need for obligation. The fundamental premise of the program 
is that we have to oblige the agencies to use the primary 
source of innovation in the economy, and that is small 
business. There is something fundamentally wrong about that. 
Thank you.
    Ms. Wheeler. Thank you.
    Cheryl, would you like to add? Does GAO have--
    Ms. Williams. GAO's work has generally found the program to 
be very successful, but we have no position on the length of 
time for reauthorization.
    Ms. Wheeler. Thank you.
    Kathy, is there any perspective for the businesses that you 
    Ms. Wyatt. Well, basically, I agree with the fact that it 
is very helpful to planning for small businesses. I can 
recognize where it would be very important for the agencies to 
have continuity. But what I would also like to point out is 
that in the small businesses that I deal with, I think there is 
a lot of wasted energy every time reauthorization emerges as a 
question because these businesses stop doing their research and 
focusing on the things that they are doing to bring innovation 
to the marketplace and they begin focusing on communicating the 
value and importance of the program to those who have the power 
or authority to keep it in operation. So I think there is a 
tremendous amount of wasted energy there.
    And then I just think that it is extremely important for 
the Federal Government to do this in a manner that demonstrates 
their continuing commitment to innovation and small business 
throughout the country.
    Ms. Wheeler. And I think that is why we did--the committee 
voted for permanency in 2006, to address that issue, to take 
that away. But the compromise is now at 14 years.
    Is there anything that anyone else would like to add before 
we move on to the next topic?
    [No response.]
    Ms. Wheeler. The next topic that we have on the agenda is 
the discussion of increasing the size of awards, and if you 
want to touch upon it, increases in the allocations of 2.5 and 
0.3 percent. As you may know, the committee voted in the last 
two Congresses to raise the Phase One awards from $100,000 to 
$150,000, and the Phase Two awards from $750,000 to $1 million. 
There was also a 50 percent cap put on increases above those 
guidelines, which for Phase One would be about $225,000 and 
Phase Two would be $1.5 million, to address complaints, 
particularly from rural States, about jumbo awards.
    So I would just like to--would anyone like to weigh in on 
those award sizes? Are they sufficient, et cetera?
    Ms. Oliver. It makes sense to raise the award--the sort of 
recommended award value is really what it is--because there 
hasn't been any adjustment for a long time. The Department of 
Defense really does not favor caps, however. I think there are 
all sorts of mechanisms that help remind agencies that they 
need to be conscious of not using too much money in one place, 
but there are differences. There are times when you do need to 
go over the cap, or the suggested amount as it is right now, 
and SBA has consistently been reasonable about that.
    Now, if there were, under the present system, if one of the 
agencies was acting a little crazy, I think SBA would step in 
and say, knock that off. But the system with no cap I think has 
worked well. I don't know of any actual excesses. I can make 
out the scenario in which there could be one, but I don't know 
of any actual excesses.
    Ms. Wheeler. Two questions. Would the ability to go 50 
percent above the guidelines be a problem for DOD, because 
GAO's report found that you were not--DOD did not have a 
particular problem with the guidelines. There were other 
agencies that had problems with this, but DOD complied with 
reporting, with justifications, and this is kind of getting at 
some of those other problems. So would $225,000 and $1.5 
million not be enough, particularly since you also have the 
CPP, which goes up to $5 million? I mean, to get at those other 
companies who you said at times need more money?
    Ms. Oliver. The--let me see. It is hard to understand why 
we should put a--we should have less flexibility when there 
isn't really a need for less flexibility. If there had been 
excesses, that would make sense.
    In answer to your question, I don't think it is very likely 
that the Department of Defense will suddenly need to go--maybe 
ever need to go above the suggested guidelines. It is that one 
case that I worry about. It is that one case or two cases where 
if we had the flexibility, it would make a big difference. So 
it is the flexibility I am in favor of, I guess is the way to 
explain what I am trying to say.
    Ms. Wheeler. And what if there were the ability to apply to 
SBA for the exception when you needed to go above the 50 
percent cap of $225,000 or $1.5 million? Would that address 
your concerns? Because we don't really see this problem at DOD. 
We didn't see this as being a problem. There were other 
agencies that had this problem, and to answer your question, 
what the small businesses came to us and said was, and the 
balance we were trying to get at is, if you make a Phase One 
award for $2 million, you have eaten 20 Phase Ones. And so in 
some States where you have one or two awards, there is a 
possibility that those awards could go away.
    And so for about eight years, we have been hearing concerns 
from Wyoming and, you know, Louisiana and other smaller States 
that have low participation that there is only so much money. 
And so we were trying to strike a balance. Yes, the agencies 
get flexibility, but there would be a limit for the abuses that 
had been identified. So would that exception get to what you 
are concerned about?
    Ms. Oliver. Not completely, probably. But, of course, it is 
surely a step in the right direction. I think the only thing--
it seems to me that the weight between having SBA be able to 
step in when SBA needs to or having to go to SBA to ask if we 
can is--it seems like an unnecessary set of paperwork systems 
that would need to be set up, certainly from the Department of 
Defense standpoint, with no particular benefit. I mean, if we 
have a question----
    Ms. Wheeler. If agencies are reporting, as DOD is, it was 
not a problem. Our problem was that some agencies were not 
reporting as required when they exceeded the guidelines and 
that is why the oversight wasn't there.
    Ms. Oliver. I see. I understand. I did not understand what 
you were saying.
    Ms. Wheeler. That is why we had to work backwards to 
address that problem, to force the compliance with the 
reporting. But we will take that----
    Mr. Necciai. I guess, Linda, what I am hearing from you is 
flexibility is very, very important----
    Ms. Oliver. Yes.
    Mr. Necciai [continuing]. And I think that was something 
that was echoed in the National Academy of Sciences report. 
Though this may not have occurred in the past, you are saying 
there is one chance that it may, and having the ability to do 
that for a unique situation provides you with greater 
flexibility. Kevin was highlighting--and I appreciate Lenka 
bringing it up, that might be a direction that we would like to 
go with you as far as it seems like NIH was the agency that 
had, on occasion, gone over the limit. What would a cap for 
your agency do?
    Dr. Fedorkova. Thank you. Yes. Our agency also feels like 
the DOD, and I think many others, that the flexibility is very 
much needed to ensure that we have the right kinds of 
incentives to encourage companies with high-risk, high-reward 
projects, depending on what field of biomedical research they 
are proposing these projects in, that they can submit realistic 
projects and budgets.
    We do feel that some of our gap funding programs which we 
have instituted might be affected by some of the caps, but 
that, I think, would depend specifically on how things are 
phrased. I think the idea there is--and I know that you have a 
great appreciation for the diversity of the agencies and their 
missions within the program--as we are moving into some of the 
new fields, like nanotechnology and the well-understood costs 
that come with clinical trials. So I am referring to some of 
our programs like the continuing renewal programs, which are 
for our Phase Two applicants to do specific additional clinical 
work and prototype development which really incrementally rises 
in cost might be affected by the caps.
    We do appreciate the recognition that the award levels need 
to be adjusted, as they haven't been for a long time, and in 
cases where projects do come to us with a higher proposal, they 
are automatically, so to speak, I guess, if you will, flagged 
and brought to the attention of the program officers at the 
Institutes. In those cases, those budgets have to be defended 
and justified. They have to really match what the company is 
proposing to do in their business plan. And at the same time, 
of course, we have companies who receive less than what the 
guidelines are now. So it really is judged on individual cases 
and that is, I think, especially why flexibility has been 
    Mr. Necciai. How often do you think that occurs?
    Dr. Fedorkova. Which case?
    Mr. Necciai. In which they are flagged and they go over?
    Dr. Fedorkova. I don't have the numbers in terms of the 
frequency. I am sure that varies greatly from year to year 
depending on emerging technologies and new research areas. You 
know, we do sometimes see clusters of applications coming in in 
the hot topic areas, so that is hard to say. But I would be 
happy to look into that and provide anything for the record.
    Mr. Necciai. Do you think it is unreasonable, to hear what 
Kevin was saying, in order to not reduce the amount of awards 
that would be issued if there are those type of ``jumbo'' type 
of awards, to have a review process through SBA or a review 
process through NIH?
    Dr. Fedorkova. Well, and I think that that does happen to 
some extent already, really. If there are any extraneous 
circumstances, we do go to the SBA and that is where the 
process, I think, is already in place to address those kinds of 
scenarios already. So again, I think it would have to be 
carefully considered, what additional checkpoints we need to 
reduce flexibility or where the need arises to reduce 
    Ms. Wheeler. Before we go on to Dr. Wessner, Cheryl, your 
GAO study looked at DOD and NIH for awards that exceed the 
    Ms. Williams. Yes.
    Ms. Wheeler. And so I don't know if I am on the right page 
33. Do you want to tell us how often NIH exceeds the 
    Ms. Williams. I don't have the specific numbers in front of 
me as you do, but we did find that awards exceeding the 
guidelines were more frequent at NIH and they accounted for a 
larger proportion of the SBIR dollars than was the case at DOD.
    Ms. Wheeler. If I am looking at this top thing, it says in 
2004, they exceeded it 19 percent of the time----
    Ms. Williams. That sounds right.
    Ms. Wheeler. And then at DOD, if I look at this, it was two 
and one percent, basically. So there was a difference.
    Ms. Williams. Yes.
    Ms. Wheeler. Okay. Thank you.
    Dr. Wessner.
    Dr. Wessner. Well, thank you. I think there are several 
issues here that are worth looking at. Just on your last point, 
my understanding is that NIH exceeds the awards almost all the 
time, and that is because they have adjusted the awards for 
inflation. Their average awards, I think, are 150K in the Phase 
One, and that is good. It should be. So we would strongly 
endorse, as we do on the record, in raising the ceiling. We 
recommend $150,000 and the $1 million caps.
    I think if I could suggest, Ms. Wheeler, an alternative, I 
think the awards--the legislation should call for the awards to 
be readjusted with inflation. The SBA has the power to do this 
and has been derelict in not readjusting the awards. So the 
problem is not to blame the agencies for adjusting to the 
realities of the marketplace but to insist that the SBA do this 
and we not do this on an eight-year or a ten-year cycle. I 
mean, that makes no sense at all if you want to fund current 
    So first, we strongly endorse raising the ceiling and we 
strongly endorse having this as a regular nearly automatic 
process, at least a regular report accounting for inflation, 
and it might be even more important, because in medical 
science, inflation has far outstripped the inflation across the 
    The second point that we would like to stress is the 
flexibility. One of the key findings of the National Academy 
study was that the virtue--and I would like to respectfully 
point out that the two largest agencies in the program are 
asking that that flexibility be retained. We are on record as 
arguing that if the scientists at NIH feel that there is an 
award that would help address cervical cancer, that they should 
be allowed to put the money in that that they need to do so. 
The current process calls for SBA approval of those larger 
awards. They have to get permission, and that should be given 
more meaning with perhaps a more robust SBA looking at it.
    The Academy report also called for these large awards. We 
did not condemn the awards. We welcome them. But they should be 
defined and defended and evaluated. What are you trying to do? 
Why do you need to make more money available? And have some 
metrics for what you are seeking to achieve. So letting them do 
what they think they need to do is the hallmark of--and this 
gets back also to integrating the program in the acquisition 
process or taking advantage of scientific opportunity.
    With respect to the disadvantaged regions--forgive me, but 
these are separate issues--the GAO report in 1999, which I have 
always found is both accurate and funny, is that the best ways 
to achieve success in a basketball game is to shoot and the 
best way of getting accepted in the SBIR program is to apply, 
and that the regions that are not applying don't get many 
awards. There is some logic there, I would respectfully say.
    Ms. Wheeler. Which we--we address that correlation that GAO 
    Ms. Williams. And lastly, to close, if we are looking for 
more money in areas that are not having a high success rate, 
then I think the outreach programs, the possibility of State 
levels and perhaps matching Federal funds to facilitate 
applications makes more sense than trying to freeze the top of 
the quantity of any particular award.
    Ms. Wheeler. Okay. And just so everyone is clear, that 
right now, SBA has the authority to adjust the awards for 
inflation every five years. The foundation for our bill moves 
that from five years to three years, which is what the 
committee voted for last year. So I think--would that address 
what you are talking about, to keep up with the pace and the 
cost and the size of awards? You were saying, let them 
regularly update it, and we have now made it more often.
    Dr. Wessner. Well, that is a very positive step. The key 
thing, I think, is to get some data on the costs of research, 
and that is available. That doesn't require a major study. And 
then evaluate that on a regular basis.
    I think this type of flexibility and regular updating is 
particularly important if you accept our first intervention, 
which is that the program should be extended for a long period 
of time. So if you are going to extend, then you have got to 
build in lots of flexibility and regular updating.
    Ms. Wheeler. Okay. Cheryl, did you want to add to that?
    Ms. Williams. No. I just--we did hear from the agencies 
that there needed to be some increases to keep pace with 
inflation. But also, as you pointed out, for the awards in 
excess of the guidelines, at NIH, they consume 70 percent of 
the SBIR dollars compared to 23 percent for Department of 
Defense. Those do need to be evaluated individually.
    Ms. Wheeler. And where were they concentrated? Weren't they 
concentrated in certain States?
    Ms. Williams. We found that ten States accounted for the 
bulk of the awards made by both agencies, although there were 
slightly different States for each of the agencies. We found 
that the ten States accounted for about 75 percent of NIH 
awards that went to firms that had received venture capital 
investment and about 70 percent of the DOD awards that went to 
firms that had received venture capital. And California and 
Massachusetts together accounted for about a third of all of 
the applications, as well as all of the awards.
    Ms. Wheeler. Okay. Thank you.
    Kathy, did you want to make a comment on the size of the 
    Ms. Wyatt. The main thing I was going to ask about is that 
when we are talking about the size of the award, I do think it 
is very valuable to be making this adjustment that is--or an 
indication of the need to increase award amounts because of 
inflation, but then the total set-aside to me is something that 
is very important in this question, also, because I know from 
our perspective, we would like to see that the number of 
opportunities remain large and that many people have the 
opportunity to submit applications and compete in this highly 
competitive program.
    So from a small rural State's perspective that is 
developing this sort of opportunity, we would like to see the 
amount of award increased, but we would like to see a 
corresponding increase in the set-asides so that the number of 
opportunities is not diminished when the size of those awards 
go up.
    Ms. Wheeler. Thank you. I am glad you mentioned that. For 
those who want to be reminded, the committee voted last year to 
increase the allocation for SBIR from 2.5 percent to five 
percent incrementally over ten years and to double STTR from 
0.3 to 0.6 incrementally over years. And at DOD and Department 
of Energy, those were dedicated to only furthering tech 
transition, not for Phase One and Phase Two, and the exception 
was that NIH would not get any increase. So we appreciate your 
saying that that is important to your State.
    Dr. McGarrity, did you want to make a statement?
    Dr. McGarrity. Yes. I spent a significant part of my career 
in academic research. In fact, I had to generate my salary and 
my laboratory's operation through NIH grants. I also 
participated in a number of committees at NIH, including study 
sections which actually evaluate grant applications that are 
coming in, both from academic scientists and SBIRs, and first, 
I would say, that is an outstanding system of peer review. In 
fact, it may be unmatched, or I would challenge anyone to match 
it around the world.
    So these people who are reviewing the grants, these are, 
for the most part, academic scientists from across the country. 
They are top-tier scientists. And NIH, I would assume, has 
literally hundreds of these scientists doing the peer review. I 
think they do an outstanding job, and if you look at their 
qualifications, these are scientists who conduct research as a 
major part of their livelihood. They know the cost of doing 
research. They know what it costs to buy a machine or employ a 
young Ph.D. or M.D.
    So when I look at the possibilities of saying, well, should 
we put that authorization in the hands of NIH or do it from a 
much higher level, I would say I think NIH does an outstanding 
job of administering competitive grants and competitive grant 
reviews, and I would think that it is much better to empower an 
agency like NIH to look at these on a case-by-case basis by 
scientists who do everyday research and say, all right, this is 
justified that we are going over two percent, five percent, ten 
percent. And I would feel much more comfortable, and I think 
the system is better served by having an empowerment of the 
agency rather than saying, we are going to dictate this to you 
from Capitol Hill or the Small Business authorization. Let the 
people who do this on a full-time basis empower them to do 
their job and I think the public will be rewarded and I think 
the SBIR dollars will be wisely spent.
    Ms. Wheeler. Thank you.
    Kunal, did you want to add to that?
    Mr. Mehra. Yes. I just want to--first of all, I strongly 
agree with both Ms. Oliver and Dr. Wessner. I think that the 
award size should be increased to the proposed 150K and $1 
million limit for Phase Twos. Just to provide some data, in the 
last five years alone, my company has seen about a 30 percent 
increase in salaries, pretty much across the board, for 
existing employees when you look at the cost of hiring a fresh 
Ph.D. out of MIT or some of the other universities where we 
recruit heavily. I have actually had one or two very passionate 
employees come and offer to take salary cuts so that they could 
finish the work underneath the size of a small Phase One. So I 
hope we could avoid that.
    But the second point that I really do want to touch upon is 
I believe that it is integral to increase the size of the set-
    Ms. Wheeler. Which we call the allocation. We think set-
aside is a dirty word in the small business community.
    Mr. Mehra. I agree. Increase----
    Ms. Wheeler. We think that is a cultural issue at the 
agencies who refer to this as a tax, a set-aside. So we say 
allocation. These are competed things. They are not handouts.
    Mr. Mehra. I will put soap in my mouth for using a dirty 
word. I do apologize.
    I strongly support increasing the allocation of the 
program, both as a taxpayer and as a small business owner, and 
let me describe why. I mean, right now, the program is 
tremendous at fostering innovation, and there are many 
successes of transitions of technology out of the SBIR program 
into the acquisition cycle. But it is fundamentally 
undercapitalized. When you look at the pharmaceutical industry, 
which I think is probably the most successful in terms of 
fostering innovation all the way from true experimentation 
through to product development, when you look at the way they 
manage their pipeline, there is a continuous steady increase in 
funding as products reach more maturity.
    I can speak to the Department of Defense, where I have the 
most experience. It is very well recognized that there exists 
this valley of death. So as a taxpayer, I look at it and say we 
are investing an incredible amount of money in the SBIR 
program. We are fostering a lot of innovation. But then we are 
failing to put the investment after the Phase Two to actually 
really develop the technology, turn it into a prototype that 
can then transition over to the acquisition system.
    The commercialization pilot programs that have been 
enacted, I think are probably one of the best pieces of 
legislation to happen to the SBIR program in the last ten 
years. My company is participating in both the Air Force and 
the Navy programs and I think that they have both been 
tremendous in terms of helping us increase our chances for 
success to actually turn our research business into a viable 
business selling product to the government and truly creating 
value for the taxpayer and for the military.
    Ms. Wheeler. Wonderful. Thank you for that.
    Any other comments before we move on to the next? Erik, did 
you have any? Oh, I am sorry. Go ahead, Jim.
    Mr. Barry. I just wanted to share that we are also very 
supportive of increasing the recommended award amounts to the 
levels that have been mentioned, 150 and one million, and the 
allocation adjustment, as well. I think the program is very, 
very important and deserves more funding, and our experience 
with the CPP program has also been very valuable in helping us 
to transition several different technologies towards 
    Ms. Wheeler. Wonderful. Thank you for that feedback.
    I am sorry, Subash? Oh, okay. We are running over time. 
Subash, do you want to make one more comment? No, no, go ahead 
and then we will go to Jere. Go ahead.
    Mr. Iyer. Great. I think there are three issues in this 
that we wanted to just quickly weigh in on. The first is around 
the size of the allocation. In the National Academy study, it 
was very clear, and they made it clear, that the SBIR program 
could handle more funding and still do it effectively. Whether 
that is through an increase in overall Federal R&D budgets or 
through other means, we believe that it is an important program 
that has had a long history of success that should have 
increased funding associated with it.
    The second point is around the actual award size, and that 
is something that the SBA is actually actively looking into, as 
well, to figure out what the best option is on the award size.
    The third issue was the issue around the caps, and I think 
that here, there are two principles that we need to make sure 
that we are balancing. One is the flexibility afforded to the 
program agencies. This has been a hallmark of the SBIR program 
and it is something that we would like to see continued in 
    The second principle is that any SBIR program or agency 
needs to have adequate oversight, and that is something that 
the SBA is committed to and the administration is committed to. 
So I just wanted to weigh in on those three areas.
    Ms. Wheeler. Thank you. Just FYI on that oversight, part of 
the reason we put that in the bill is because they weren't 
reporting to the SBA, which is why we found a data 
insufficiency on these awards. There was nothing to say what 
the increases had gone for. They weren't reporting them. And so 
we agree with you. But it was to help SBA that that provision 
was in there.
    Mr. Iyer. We believe in oversight, and I think it is a 
priority for the new Administrator as well as the SBA across 
the board, so that is something that we are looking into, as 
    Ms. Wheeler. Thank you.
    Mr. Glover. Yes. Large awards, and NIH has made some in the 
$8 million range, a million a year for seven or eight years, 
those do crowd out significantly other technologies. There has 
not been an evaluation as to whether these large awards 
actually result in more commercialization, more success, better 
science. That clearly needs to be monitored. There needs to be 
a gated process for larger awards in excess of the amount so 
that somebody outside the immediate chain reviews that. I think 
SBA has done a good job of that when asked to do so. My 
understanding is they have never turned one down. But the 
process of preparing the application, looking at it and 
justifying it, is a very important process.
    Crowding out is a real concern. This program was always 
designed to fund the earliest stage research. It has been 
remarkably successful. Allowing agencies discretion to change 
that to where a few companies get a lot of money and lots of 
States don't get any money is a real problem. I like SBA's 
involvement and I think SBTC is in support of that.
    Ms. Wheeler. Thank you.
    Okay, now we will move on to the next topic, which is 
maintaining the flexibility, which has been mentioned many 
times, of the program and preserving the basic program 
structure. This was a recommendation of the National Academies, 
National Research Council. There have been requests to change 
the basic structure and bypass Phase One.
    NRC, I think, has recommended against this, and so I would 
like to first ask the NRC why they concluded that Congress 
should not allow agencies to bypass Phase One. And if you want 
to have a little time to think about it, since you have moved 
on to studies----
    Dr. Wessner. Oh, no. Trust me, I have had to think about 
    Ms. Wheeler [continuing]. We can ask the next question and 
come back. Okay.
    Ms. Williams. The study has occupied us, as you know, for a 
number of years. The great virtue of this program, as the 
celebrated venture capitalist Burt McMurtry, who helped fund a 
start-up called Microsoft--some of you may know the company--
argues that the great virtue of the program is it is letting 
100 flowers bloom. So we think that the Phase One gate where 
you offer the prospect of proof of principle, as Jere Glover 
was just arguing, to a large number of companies is a great 
    The fact that it is also highly competitive, however, that 
this is not an automatic process and that 15 to 20 percent of 
the companies are those that succeed in Phase One is equally 
    We also felt--the committee felt that the fact that there 
was flexibility for NIH, that if you want to make a larger 
Phase One award, you can do so--one of the arguments for 
dropping Phase One is, well, if you know how to do this, you 
should be able to just proceed quickly. Well, if they have that 
flexibility, then they can make a larger Phase One and push 
that research process on fast. We very much associate ourselves 
with this requirement that this be justified and defended to 
the SBA. And we also in our report pushed, again to repeat, NIH 
should be able to document what they are trying to achieve and 
what appropriate metrics should be there.
    So we see no--we have a 25-year history now of a program 
with remarkable success based on a double-gated innovation 
awards system and we see no reason to drop that, particularly 
if there is flexibility when they want to move quickly to pull 
something across, something forward faster. There is no 
compelling reason to make--you know, there is an irony. Some of 
the things that we have heard talked about, which involve one-
time, very large awards to single companies, we support that 
type of program. We used to call it the ATP program and we 
think it is an excellent program. It is just not the SBIR 
    Ms. Wheeler. Would anybody else like to weigh in on 
bypassing the Phase One? Kunal.
    Mr. Mehra. Yes. I just want to say I also think that 
bypassing Phase One is not a good idea. I think the hallmark of 
the program is competition. That is what gives it so much 
credibility. That, I think, is also crucial to providing the 
sole source authority for Phase Three and beyond, because it 
has already been competed twice. So I see going straight to a 
Phase Two as being detrimental to the integrity of the program.
    However, I do think we should make attempts to accelerate 
the process of going from Phase One to Phase Two, and I think 
in order to enable that, the agencies need more administrative 
support from the program, and I would certainly favor that as 
a--if it is linked to increasing the size of the allocation 
funding for the program. I think that is also critical.
    Ms. Wheeler. Thank you.
    Mr. Necciai. So in theory, by skipping Phase One, 
government would be funding potentially poorer science because 
it hasn't had that extra hurdle of peer review?
    Mr. Mehra. That is exactly right. That is exactly right. 
That is exactly the way I view it.
    Mr. Necciai. Thank you.
    Ms. Wheeler. Lenka.
    Dr. Fedorkova. Yes, just wanted to comment on the fact that 
there are certainly circumstances where we have heard from 
companies who are first time applying to the SBIR, at either 
agency, but in our case, companies that feel they have 
generated certain preliminary data, which is not necessarily 
required for Phase One applicants. But let us assume they do 
have that kind of data. Right now, under the mechanism, they 
can't jump into Phase Two.
    While that is not happening and we don't have the ability 
to do that, I think our agency has in a creative way responded 
by creating the Fast Track program, which is a one-time 
application for a company that can demonstrate. Their data will 
be judged and scored. So if they are going to submit any data, 
it has to hold water. If they do that, they can then just apply 
an application and proceed through Phase One and directly into 
Phase Two once they meet certain milestones, and that has 
proved to be valuable for those who need to move in an 
expedited time line.
    The fact that they don't have to reapply for Phase Two--
again, there is no guarantee they will be able to move there. 
But if they meet the milestones and can, they don't have to 
wait or waste six to nine months applying, waiting for review, 
and hearing back from the agency. So saving six to nine months 
can sometimes mean a difference between sustaining a project or 
keeping staff on board or not.
    So that has been one way that we have dealt with that. But 
I think certainly--I am not familiar with all the discussion 
surrounding skipping Phase One, but I think we are not in 
support of that and that will certainly be in a minority of 
cases, and in those cases, we suggest to companies, maybe you 
should think about the fast track.
    Ms. Wheeler. But again, it is not automatic that they get a 
Phase Two.
    Dr. Fedorkova. No.
    Ms. Wheeler. It is just that they have the potential.
    Dr. Fedorkova. The only elimination is of the second 
application to a Phase Two, which otherwise happened for 
someone just applying for Phase Two. It is just a one-time 
application for the entire program. The Phase One and Phase Two 
are subject to the same criteria, same requirements, same award 
levels, and everything else applies. It is just a shortened 
review period.
    Mr. Necciai. Is there just one review, or is it still two?
    Dr. Fedorkova. No. There is one review. There is one 
review. A final report at the completion of Phase One has to be 
compiled and specific milestones have to be met. So again, it 
is reviewed by the council which has on its review board 
members from the small business community or from the for-
profit sector, and then they get a go or no go decision.
    Ms. Wheeler. Thank you.
    Do you want to go ahead, Jim?
    Mr. Barry. I don't want to repeat what everyone else has 
said, but Creare is certainly in favor of maintaining the Phase 
One competition going forward. I think the program as 
constituted works very well.
    Ms. Wheeler. Thank you. Anyone else?
    [No response.]
    Ms. Wheeler. So the next--there is a subset of that topic 
and that is the idea of preferences. In last year's bill, there 
was a section that encouraged applications for nanotechnology-
related projects, and in the NRC's comprehensive report--Dr. 
Wessner, I hope I have this right--it directed agencies to give 
high priority to firms that do energy efficiency and renewal 
energy. And so there has been a lot of concern whether there 
should be preferences at all, and so my first question would 
be, are preferences consistent with the NRC's recommendations 
to preserve the flexibility of the programs for agencies 
instead of dictating priorities? Chuck, do you want to weigh in 
on that?
    Dr. Wessner. Yes, thank you. No, they are not. The risk 
that we describe in the report that is just coming out on the 
venture issue is the--and I think this is a serious risk to the 
program--is the Balkanization. You can--if you set up a program 
that--we encourage work with women and minorities, but if you 
start to set up a quota system, either implicit or direct, for 
minorities, for veterans, for disadvantaged regions, you can 
count the ways you can divide the program up and cripple it. It 
is successful because it is a highly competitive program based 
on scientific and technological and commercial merit and we 
need to maintain that open, competitive system.
    I would just add, we do need to facilitate applications to 
the program. We do need to encourage States who are not active 
in the program to become more active. But this would be the 
wrong way to go.
    Ms. Wheeler. In preferences. And so do the agencies--I know 
sometimes the agencies are opposed to these preferences. So for 
the agencies here, are there ways for you to focus on something 
that is a priority for the nation without having to do it 
legislatively? I mean, would you----
    Dr. Fedorkova. The short answer is yes.
    Ms. Wheeler. Would you come to us and say that you could 
not give a preference or a priority to a topic such as energy 
efficiency or renewable energy or nanotechnology or orphan 
diseases because it would be preferential? Is there a way for 
you to focus on that?
    Dr. Fedorkova. No, and I guess it may be a choice of words. 
We speak in terms of research priority areas, and I think that 
those involved on review boards and those who are really 
involved with the research community and know what the emerging 
trends are and emerging areas are are very much aware, and we 
do have the flexibility in issuing requests for applications. 
We have many different kinds of mechanisms. So there are 
specific ways where we can issue more tailored, topically 
focused requests for applications to the research community, 
although the traditional way of funding at NIH is such that the 
community responds and submits ideas to us. So they are not 
looking for a match, which is different to some of the other 
agency missions. I think the core difference is that we are not 
a procurement-focused agency but are research-based, and so the 
way of science being so nimble and unpredictable.
    But yes, we have mechanisms where if we feel we need to 
invest in a particular area, we can prioritize that, and 
depending on the institute, or broadly speaking across the NIH, 
if it is an interdisciplinary research area, multiple 
institutes can support a particular funding program. So I think 
at the moment energy, nanotechnology, those areas, we already 
do fund and everyone is really very excited about those areas. 
It is kind of the hot topic of the day, of the year. And we do 
correspond when we respond to the research community.
    Chairman Landrieu. Okay. Thank you. Jere.
    Mr. Glover. I think it is difficult for the Congress to 
predict what is going to be needed down the road. This is a 
multi-year process. Hot select topics, like energy efficiency 
now, that is great, nanotechnology. I think it is certainly 
nice to give guidance and suggestions.
    What I remember doing when I was at SBA is we brought the 
Office of Science and Technology Policy in to meet with the 
Tibbetts Award winners and the program managers and tell us 
what they saw ten years out, 15 years out, and I remember them 
bringing up nanotechnology, which is something nobody knew 
anything about and nobody talked about, and now it is a huge 
topic. But they basically said, these are some areas we think 
are good. The agencies then took them back and worked on them. 
I don't think that picking those ideas today will be the right 
ones in four or five, eight years.
    But the flexibility of--I think SBA should provide that 
role of bringing in the best scientists and then sharing that 
with the agencies and looking out, because if the program ever 
looks--and does what science and technology is today, they are 
missing the bet. The hot issue is going to be something that we 
don't think about in five years. So we need that flexibility to 
go down the road, but we certainly--locking the program into an 
area that may become less important in four or five years is 
the wrong thing for Congress to do.
    Ms. Wheeler. So even if it were not in perpetuity and it 
were, say, three years or five years as a preference or a high 
priority or encouraging applications, SBTC would take the 
position that it is better not to legislate special topics?
    Mr. Glover. I think that is correct.
    Ms. Wheeler. Okay. Chuck, did you want to weigh in on that?
    Dr. Wessner. If I may, in two ways. One is we perhaps could 
get together on a sidebar conversation, but to the best of my 
knowledge and belief, in a very substantial number of volumes, 
we did not--we talked about the way the program can do these 
things. We did not recommend--unless I am mistaken, and I may 
be--that it be a specific----
    Ms. Wheeler. I am probably wrong, so----
    Dr. Wessner. Well, no, not wrong. There are many things 
there and I just would like to----
    Ms. Wheeler. I have this page 95, but we will talk about it 
    Dr. Wessner. On which report?
    Ms. Wheeler. Good point.
    Dr. Wessner. But more broadly, and that is why I took the 
mike and I appreciate the opportunity to reintervene, very 
quickly, in order to do things like in renewable energy, which 
we do think are important--I fully associate myself, by the 
way, with the flexibility and ability of agencies to identify 
these things.
    Funding more research involving the National Laboratories 
and with the program, we have ARPA-E, which involves a 
substantial sum. If we want to do more work on renewable, then 
let us make sure that where we are putting new research funds, 
that this program is included.
    It is also possible to think about--at least I hope it is 
possible to think about agencies increasing the funding of the 
program on a voluntary basis when you are trying to bring 
things forward quickly. I think the case of NIAID at the 
National Institutes after the 2001 attacks where they had a 
very open-ended question on bioterrorism and very positive 
response, very large numbers of responses from companies, is 
illustrative of how it can quickly adapt to a pressing national 
need without legislating.
    Ms. Wheeler. Thank you.
    Let us take a quick break. Let us take a five-minute break 
and then let us come back and we will just finish the rest of 
the agenda. Does that sound good?
    Ms. Wheeler. Hi. Could we get everyone to sit down and we 
will continue with the roundtable. Thank you.
    Mr. Inge. I have been asked by some people in the back to 
remind everyone to speak into the microphones.
    Ms. Wheeler. Okay. So our next topic is outreach and 
technical and commercialization assistance. Part of the 
discussion today is the GAO report that was referenced earlier 
in the late 1980s or early 1990s that looked at geographic 
distribution of SBIR projects around the country and found that 
there was a correlation between awards to applications. In 
States where there were more applications, they had higher 
awards. And so to increase participation in low-activity 
States, Senator Bond in 1990 created the Federal and State 
Technology Program to give matching grants to States to raise 
awareness of the programs and increase those that apply and 
improve the quality of their applications to win awards.
    Part of the foundation for this year's bill will be to 
reauthorize the Fast and Rural Outreach programs and to 
increase the authorization amounts that go to those programs, 
and I wanted to ask if participants could speak to these 
programs and how they help their States or their businesses 
better compete. Kathy, did you want to go ahead and speak to 
    Ms. Wyatt. Yes, I will be glad to do that. First of all, I 
would like to say that I really appreciate the fact that this 
legislation is recognizing the difficulties that those small 
and emerging firms in more rural and isolated or underserved 
areas have in trying to compete in this program. For people who 
come from metropolitan areas and very resource-rich 
environments, they may not realize how limited the types of 
management expertise and even access to capital, or things that 
you take for granted like having a patent attorney within your 
community that you can work with in order to advance these 
types of technology discoveries and businesses that we are 
working with.
    So it is very critically important that we have this 
program to help people overcome those types of obstacles and I 
can give some examples of the ways that we have used these 
programs effectively in doing training events and even bringing 
in outside resources to help our businesses develop their 
capacity. And just by virtue of having this event, sometimes 
the networking that takes place and the communication and 
connections that are made can be very helpful.
    For instance, we hosted a forum to provide--help increase 
awareness and provide information about the SBIR and STTR 
programs and one of our researchers actually met up with a 
business interest that was there to learn more about the 
program and found that they shared a common interest and a 
license agreement actually occurred as a result of that 
particular event taking place.
    When you look at the fact that we have used these programs 
to the best of our ability, although we have had limited 
funding through this program to offer events around the entire 
State, we have seen tremendous growth. Within a five-year 
period, we have gone from having no SBIR participation to 
currently having 19--or having received 19 awards in the last 
five years and eight different entities participating in the 
program. And of those achievements, we do have one company that 
is a viable start-up that you spoke about, which is NiFTy 
Television that has grown in the last few years to employ 40 
individuals, and not only do they employ a good number of 
people, they are employing them in higher wage-earning jobs 
than what we would typically see in our community and we are 
seeing them also grow in the number of customers that they have 
and strengthen as a business.
    We also are seeing that we are not only increasing the 
number of awards, but these kinds of initiatives partnered with 
some of the State programs that are coming forward, and just 
the very solid research capabilities that are available at our 
university, are helping us to attract companies from outside 
locations, not so much that they are coming and relocating in 
our community, but they are looking at and actually opening 
satellite offices in a small community that has a population of 
only 20,000 people, and without this kind of incentive or the 
opportunity to attract them to this area, they would never have 
even considered us as an option for a business location.
    So I just cannot--I mean, I could go on forever about the 
things that I consider to be valuable about this program and I 
consider it to be a very important component of the SBIR-STTR 
program and an extremely important component of this currently 
proposed legislation.
    Ms. Wheeler. Part of what the legislation does is reduce 
the matching requirement for States that are rural and States 
that are in the lowest 18 or 19--of the 18 or 19 lowest-
participation States. Has the matching requirement ever been a 
problem? Should there be a matching requirement? I just don't 
know what Louisiana--if they have had a hard time making their 
    Ms. Wyatt. It would be very--I think it would be extremely 
difficult for us to make a one-to-one match. I think it is very 
helpful that there is a reduced matching requirement. I do 
think that the State is committed to innovation and that they 
are willing to put forward some money to try and help advance 
these types of programs, but it would be very hard for us to be 
able to provide that one-to-one match. So the reduced 
opportunity of a 35 to 50 percent match is extremely important 
for us to be able to take full advantage of this program.
    Ms. Wheeler. Great. Thank you.
    Jere, did you want to weigh in on that?
    Mr. Glover. I think one of the most disturbing trends is 
the number of new firms applying for SBIR first the time is 
going down, and that happens concurrently with the lost of Fast 
and Rural Outreach funds and the diminished importance and role 
of the national conferences that have been held. In the old 
days, meaning two or three years ago, the Department of Defense 
and NSF funded the national conferences. They have gotten out 
of that program.
    But Rural Outreach, and I think you may need to waive any 
match the first year to get them back in place very quickly 
because there is a funding cycle in the States. Often, the 
legislatures don't often meet a year or two. If you require 
matching, you may not have people coming in quickly, and those 
programs seem to do so well and be so good in the States that 
you may need to do something very quickly for one year or two 
years until you get into the State funding cycle.
    But I would encourage that some administrative expenses be 
allocated. I think the National Academy study recommended that 
the percentage be increased by 0.3 percent or something like 
that. So if it is 2.5, make it 2.53. If it is 3.5, make it 
3.53. That is the best way to do that. But some of that money 
clearly should go to not only administer the program within the 
agencies, but also for outreach, and the agencies should be 
required to use some of that money to help get the message out 
and get new companies and keep new companies applying.
    Ms. Wheeler. And I think you are referencing what Kunal did 
earlier and saying that right now, agencies are not allowed to 
use any portion of their allocation for administering the 
program, such as you said, outreach, training, et cetera. That 
is not true outreach. And so they should be able to use a 
portion of it, but only if it is tied to an increase in the----
    Mr. Glover. No, I think it is so important that I would 
prefer it be tied to an increase. But if it can't be, this 
program is successful because it covers all 50 States and we 
have winners everywhere. But without the reach and without Fast 
and Rural Outreach and our partners in the various States, we 
are not going to continue that good success. It was a good idea 
when it was put in. Maybe you can come up with a better way to 
do it, but I would clearly at any cost make sure that we do 
Fast and Rural Outreach and we do provide some additional funds 
for that, obviously monitoring it and making sure that the 
agencies don't just simply replace work they are doing already 
and do new things is important.
    But I would encourage the committee to go forward and I 
think our membership certainly supports that. We didn't at 
first, but after we thought about it and talked to the agency 
people, we are comfortable that that should happen. But we also 
think it needs to be focused to getting new companies into the 
    Ms. Wheeler. So if there was not an increase in the 
allocation but the agencies were allowed to use three percent 
of their funds, at DOD, your annual SBIR budget is about $600 
million, is that right?
    Mr. Glover. No----
    Ms. Wheeler. I am sorry.
    Ms. Oliver. One-point-six.
    Ms. Wheeler. One-point-six. Sorry.
    Ms. Oliver. That is correct, 1.6.
    Ms. Wheeler. Okay. So you would advocate using three 
percent of those dollars, even without an increase?
    Mr. Glover. I think somewhere between one and three 
percent. If it is an increase, then I think the three percent 
number works. If it is no increase, then maybe something less 
than that. But it is too important to have the agency programs 
administered properly and for there to be outreach. We really 
do have to change that, and the committee authorizing it but it 
not being appropriated funds for Rural Outreach and the Fast 
programs would be a mistake. We can't not get new companies all 
over the whole country educated about the program and 
participating in the program. The beauty of it is 25, 30 
percent of companies applying for these awards every year are 
brand new to the program and we have got to keep generating the 
next generation of new technology companies.
    Ms. Wheeler. Well, the Fast appropriation would be separate 
than taking it--it wouldn't come out of the allocation. I guess 
the concern would be taking so much money away from awards 
without an increase in the allocation.
    Mr. Glover. I think we did support that in the CPP program, 
and as long as it is used wisely and it is monitored by SBA and 
the Congress, I think we have to be able to realize this 
program has grown from--grown significantly, fourfold over the 
last ten or 15 years. SBA has virtually no personnel assigned 
to this task. While the program has quadrupled, the personnel 
have gone down by two-thirds. There needs to be more 
administration. The same thing goes for the agencies. I think 
you are going to have to administer the program and have enough 
people in it and add enough people to make it work well.
    Ms. Wheeler. Okay. Thank you.
    I am sorry, go ahead.
    Mr. Necciai. I just wanted just to clarify real quickly, 
and just a yes or no answer from DOD and NIH. I am presuming 
that administrative fees for you would be favorable, correct?
    Ms. Oliver. Yes.
    Dr. Fedorkova. Yes.
    Mr. Necciai. Okay. I think--and Jere was mentioning--what 
we are trying to clarify is out of the 2.5 percent, if it came 
out of the 2.5 percent without increasing that, is there anyone 
here that would be in favor of keeping it, as Jere had 
mentioned, keeping it within the 2.5 percent, which has the 
potential to decrease the opportunities or the awards that are 
going out otherwise? In other words, you are taking a chunk out 
of the 2.5 percent versus increasing it, which is something 
that we were advocating in the past. If you increase 2.5 
percent to a higher percentage and then take it out of that 
percent, because you are increasing the pie, which, as we were 
talking about before, increasing the pie total, there would be 
less of an effect. Is there anyone here that would be in favor 
of that?
    Ms. Oliver. The Department of Defense would be.
    Mr. Necciai. Okay.
    Ms. Oliver. Let me make sure I am clear about this. The 
Department of Defense believes that the program could be so 
much improved if we had--if we weren't an afterthought for most 
of the work that is done in connection with the SBIR program. 
If when we had reviews, when we find scientists and persuade 
them to look at the submissions, if it weren't an ``other duty 
as assigned,'' if we were able to be moved up in their 
priority, which that is just what money does, we think the 
program could be--the quality of the program could be improved 
so much with--outreach is a good example.
    You know, the Department of Defense quit doing those 
outreach programs, not because we didn't think they were a good 
idea, but we have to have the program run or there is no point 
at all in doing outreach. So yes, the Department of Defense 
would be in favor of using up to three percent of the current 
allocation--if the allocation doesn't change at all, we would 
still be in favor. We think it, for the long run, would benefit 
the program.
    Ms. Wheeler. Why would DOD oppose increasing the allocation 
by an equivalent amount to give you the funds that you are 
saying would be so helpful?
    Ms. Oliver. Now you understand that----
    Ms. Wheeler. You can't say it.
    Ms. Oliver. What I think--well, no. What I--the Department 
of Defense has to work out its positions and come to one answer 
instead of this piece of the Department of Defense thinks this 
and the other one thinks something else. We are surely not 
there. In fact, it has not been a question asked. In this 
administration, that question has not been asked. That hasn't 
gone through any of that clearance process. The last time that 
question went through the clearance process, although it was a 
prior administration, Department of Defense as a whole did not 
favor increasing the allocation.
    Basically, the--I mean, one way to look at it, at least, is 
the program managers felt that what they were intending to do 
with those program funds moved their projects forward more 
fully than using--than adding that money to the existing SBIR 
program. And this goes right back to the difficult 
communication problem.
    Ms. Wheeler. Well, I guess that I will just send this out 
there, and I know it has been said many times, but we will put 
it on the record again. The problem is, as was mentioned at the 
roundtable in 2007--Mike Skolanti [ph.] brought this up--we 
have all these ideas to increase the grant sizes, to possibly 
let other businesses in, but we are not increasing the 
allocation. The agencies want administrative funds. And so at 
some point, there has to be a compromise to say, how are we 
doing all of this without undermining the whole mission of this 
program, which is to promote innovation? And so it seems it 
would be a very small task for the administration to increase 
the allocation by an amount to give the agencies what they 
think would be so powerful to get these innovations.
    So I know you can't comment and I appreciate that you said 
as much as you did, but I guess that would be the message, and 
for Subash, too, who I know is involved in these, and Lenka.
    Okay, Kunal, you go ahead, and then we will turn to Lenka.
    Mr. Mehra. Well, actually, I think you very eloquently 
stated the point that I was going to make, which is just I 
think all these points are extremely valid and it just 
underscores the importance of increasing the size of the 
allocation. I support increasing the award sizes. I support 
using part of the budget for administrative fees. I support 
CBP. I support the commercialization assistance programs. But 
when you add all these things up, the net effect, just when you 
do the math, is you are going to decrease the volume of awards 
by 40 or 50 percent at a time where the country is in the worst 
recession since the 1920s.
    It is a well-documented fact--I am sure Dr. Wessner could 
speak to this more eloquently than I can--that small business 
is always the growth of innovation that helps the country 
recover from these types of crises. It would just seem 
counterintuitive to me to not increase the allocation, and I 
just think we are at a turning point here. We have the 
opportunity with a small increase in the size of the allocation 
to have a disproportionate effect on the value of the program 
and the effectiveness of the program because we understand so 
well where the weak points are.
    Ms. Wheeler. Thank you.
    Lenka, did you want to follow on?
    Dr. Fedorkova. Yes. I just wanted to--back to the question 
of the Fast. We also feel it is a very valuable program where 
you would have the States come to the SBA and be able to 
support, you know, whether it is an application where it can 
cost $5,000, $10,000 for a company, they may not have those 
kinds of administrative funds available. So I think that is a 
very good effort, to try to revive that program. We would 
definitely like to see that happen again and I think it has 
affected some start-ups that haven't been able to receive that 
kind of support.
    On the size of the allocations, I would similarly, like 
DOD, say that that has to be carefully revisited. I know you 
are already familiar with some of the reasons from the previous 
administration from the NIH's perspective related to the 
agency's flat budget as part of the concerns about some of the 
proposals to increase. We do, however, feel that some of the 
National Academy's recommendation to, I think, 0.3 percent 
allocation from the allocation would be of great help.
    We are very committed as an agency to doing outreach, 
really, since I joined the office. Just a few months ago, I 
have myself been on the road really every few weeks and we 
have--at least 50 percent of those have been to minority, 
women-owned business types of conferences in New Jersey, or we 
will have some local events. We will try to partner also with 
States' Business Development Departments, see how we can reach 
out to the local communities, make sure we can do some local 
things where travel costs are not entailed. That seems to be a 
big barrier for companies to come out to some of our events.
    I wanted to also mention that we are going to be holding in 
Omaha, Nebraska, at the end of this month the NIH Annual SBIR-
STTR Conference, so we are going out to the middle land and we 
will try to reach out to the area small businesses.
    But also to the point of not having certainty from year to 
year about what kinds of funds we have available from our 
agency to do the outreach, whether it is generating materials 
to support the outreach and communicate necessary information 
to the community, it has been really uncertain from year to 
year and I think we need to address that accordingly. So the 
Academy's recommendation, I think, is welcomed.
    Ms. Wheeler. Okay. Thank you.
    Dr. Wessner, did you want to comment?
    Dr. Wessner. Yes. I would like to associate myself with Mr. 
Glover's remarks about the importance of the outreach 
activities. We did not, I would like to stress, in this 
particular capacity with respect to the Fast program, we did 
not examine that, but our view is--our unofficial view is that 
it is a positive program that needs--I am just concerned, 
though, that we not go back to the size that it was. Federal 
programs of $2 million strike me as inherently----
    Ms. Wheeler. I think we take it up to five.
    Dr. Wessner. Could I hear ten?
    Ms. Wheeler. I am sure you could get support for that.
    Dr. Wessner. We have----
    Ms. Wheeler. It may be ten, actually. It may be ten.
    Dr. Wessner. Remember ``Charlie Wilson's War''?
    Dr. Wessner. But there is an important point there. The 
critical mass in these programs matters, and if we are actually 
going to do outreach, we don't want it to be an appearance of 
outreach but actually something that can fund an ongoing effort 
and draw on the ingenuity of our nation's entrepreneurs in 
these disadvantaged States.
    A second point which is equally important, and this is 
within the program, I would almost plead with you, we really 
need to find some way--you find the way of getting management 
funds. At $300 million, it may not have mattered, or 1.2, but 
at 2.5 going towards three billion, not providing funds--if you 
can, working with the Armed Services Committee, convince them 
to instruct the departments to make available funding on the 
level of the Navy--I mean, it is almost mind boggling. We have 
an example of best practice, but without quoting any particular 
service, when we say that the Navy does it well, the reaction 
seems to be, what is your point? It works well if you provide 
these additional funds and the effective management that is 
characterized in that program. So how can we emulate that? And 
I would count on your ingenuity to find some way of doing that.
    We came up with the 0.3 simply because we didn't think it 
should come from the program or would come from the program, 
and we have been waiting 25 years for the agencies to step 
forward and be helpful, so that was the compromise we came 
with. But the best way would be for the agencies to make the 
money available to run an important program effectively. Thank 
    Ms. Wheeler. Thank you. Any other comments on that one? No?
    [No response.]
    Ms. Wheeler. Okay. Now we will turn to the next topic, 
which is the venture capital issue. As some of you may know, in 
last year's bill, there was a compromise to allow up to 18 
percent of the SBIR dollars to go to firms that are majority 
owned and controlled by multiple venture capital firms, and at 
the other agencies, eight percent of the SBIR dollars could go 
to these entities. To give us some data to go on to come up 
with compromise, we relied on the GAO. They had a study that 
looked at the two years before a clarification and the two 
years after, and I know that some people don't use the word 
``clarification.'' Some use the word ``change.''
    So what we will do is we will turn to GAO to lay out what 
we see--the facts of the ownership eligibility and then to talk 
about what the mission was of their study and their 
conclusions. I know you couldn't really make recommendations, 
but you had findings. And then we will do that for the National 
Research Council, too. Do you want to go ahead, Cheryl?
    Ms. Williams. Certainly. We were asked by this committee to 
look at the extent to which SBIR awards at DOD and NIH were 
going to firms that had received venture capital funding, and 
more to the extent of what changes, if any, had occurred before 
and after the 2002 clarification by the Small Business 
Administration. We talked to agency officials and we reviewed 
documentation from the agencies--NIH, DOD, and SBA--regarding 
the eligibility criterion of ownership.
    In our view, we believe that it was not a change but it was 
a clarification. Part of the documentation that we reviewed was 
also decisions from the SBA's Office of Hearings and Appeals. 
Typically, when SBA has made a change, it is subjected to the 
rulemaking process in which there is public comment and 
notification. So we believe that it was a clarification, not a 
    In terms of what we found, we found that since 2002 when 
SBA made the clarification, that a larger number of awards went 
to firms that had received venture capital funding, that the 
awards were larger at NIH, and that in the aggregate, firms 
that had received venture capital funding received a larger 
share of the SBIR dollars at both agencies.
    We found that over the time period--and we selected for our 
study the time period that was evenly divided by that 
clarification because we felt that awards made in fiscal years 
2003 and 2004 could reflect changes from awards made in fiscal 
year 2001 and 2002 that could be related to the clarification 
and to the agency's efforts to inform potential applicants 
about that clarification.
    And we found that since--over the four years that we looked 
at, that an increasing share of the SBIR dollars at each agency 
was devoted to firms that had received venture capital funding. 
More specifically, at NIH, in fiscal year 2001 and 2002, firms 
that had received venture capital funding accounted for 14 
percent of the SBIR dollars. That increased to 20 percent in 
fiscal year 2003 and 22 percent in fiscal year 2004.
    We found the same trend at the Department of Defense, but 
to a lesser extent. There were five awards to firms that had 
received venture capital, accounting for five percent of the 
funds that DOD awarded in fiscal year 2001 and increased to 
seven percent for fiscal years 2002, 2003, and 2004.
    Ms. Wheeler. And we had asked GAO to also look at the 
geography of these, the distribution. Were they concentrated in 
certain places?
    Ms. Williams. Yes, they were concentrated and ten States 
accounted for the bulk of the awards made to firms with venture 
capital funding. Specifically, California and Massachusetts 
were responsible for overall about a third of both the funds 
and the--the applications and the awards. Most all of the other 
States accounted for a very small percent. I think 
approximately maybe only four States for NIH awards had more 
than five percent and maybe six States at DOD had more than 
five percent.
    Ms. Wheeler. And why did GAO conclude that it was a change 
versus--I mean, why did they conclude it was a clarification 
versus a change?
    Ms. Williams. Well, largely, this is what the agency 
officials told us. I mean, for example, at NIH, as the process 
unfolds and as NIH is making decisions regarding awarding, 
making awards, they attempt to verify the information that 
applicants provide to them, and as part of that process, they 
were focusing prior to 2002 on the number of employees as an 
ownership criterion, or as an eligibility criterion. After the 
SBA clarification, they focused more on ownership. So the 
agencies were telling us there hadn't been a change. We looked 
at the Office of Hearing and Appeals Records. Their conclusion 
was that there hasn't been a change. And the SBA officials told 
us there hadn't been a change.
    About this same time, there was a change in eligibility 
criterion related to whether or not you could be owned by 
another company and that was subjected to the rulemaking 
process and they did receive comments on that before making a 
decision, and we felt that that would have been--had there been 
a change, they would have subjected that change to the similar 
    Ms. Wheeler. That was the subsidiary rule?
    Ms. Williams. Subsidiary, precisely.
    Ms. Wheeler. Okay.
    Mr. Necciai. Ms. Williams, is it GAO's opinion that 
majority-owned venture capital firms were not permitted in 
prior to the ruling as well as obviously after the ruling?
    Ms. Williams. Based on the SBA criterion, that is exactly 
our position, that they should not have been participating in 
the program before and they should not have been afterwards.
    Mr. Necciai. Hence the term clarification, not change?
    Ms. Williams. Precisely.
    Ms. Wheeler. And again, that came from interviews also with 
the NIH officials----
    Ms. Williams. NIH, DOD, and SBA.
    Ms. Wheeler. Okay.
    Mr. Inge. Is there a chance some firms were participating 
before 2002 or 2003?
    Ms. Williams. Certainly.
    Mr. Inge. And why would that be the case?
    Ms. Williams. Either information did not appear to--was not 
made available to the agency officials. Perhaps firms 
misinterpreted the information about eligibility criteria. It 
could be for any reason. We didn't conduct any interviews with 
people. And at the time that we did our review, the agencies 
weren't collecting centralized data on applicants that they had 
found to be ineligible for any reason so that we didn't have 
any pool of people that we could have gone to for more 
    Mr. Necciai. Two questions. You mentioned the study and you 
mentioned the 14 percent and then the 20 percent. So that is 
obviously an increase. Is it correct, 14, 14, 20, 22?
    Ms. Williams. Yes.
    Mr. Necciai. So the investment did not change and, in fact, 
increased following 2003?
    Ms. Williams. Based on the information we had.
    Mr. Necciai. You had mentioned that National Institutes of 
Health had in its own evaluation requested if it is an 
individual or citizen. So you are saying that the Institutes 
themselves had been fully aware that it is a requirement that 
they were not allowed to have majority-owned venture capital?
    Ms. Williams. That was our understanding based on the 
interviews we conducted.
    Mr. Necciai. Thank you.
    Ms. Wheeler. Chuck, did you want to turn to the NRC study 
to tell us what you were charged with reviewing and what your 
findings were?
    Dr. Wessner. Well, yes. We were asked to look at the impact 
of the change in the eligibility rules that occurred as a 
result of the ruling, and I think to take a step back here, a 
key issue of difference is that we did not find the same levels 
of participation that our friends at GAO seem to have found 
with venture-backed firms.
    But there is a broader issue. Our study, as you all know, 
found that this is a highly effective program that has been 
performing well for 20 years, and during that 20-year period 
and during our study of that period, at no time was this issue 
raised as a problem. When we--the committee could not find ill 
effects on the program from the participation of venture-backed 
firms or majority venture-backed firms.
    Our specific findings, and I am happy to go over those, but 
our--one of the key things that we found is that the impact of 
the SBIR--first, there wasn't a problem. We have with that 
inimitable American way managed to now identify a problem which 
we are now seeking to address.
    I think it is important to keep in mind the limitations of 
the data in all these areas. Ownership is a very complex 
process. What constitutes control is not always self-evident. 
Our research showed that the impact of the SBA ruling was quite 
limited in the number of affected firms. Again, keep the data 
caveats in mind. But our estimate was that it is between four 
and--roughly between four and 12 percent. However, the 
committee and our own research suggested that the impact on 
program commercialization--can you hear me in the back?
    The impact on commercialization is nonetheless significant. 
That is because some of the most promising firms now appear to 
be excluded from participation in the SBIR program. This was a 
point that Dr. Zerhouni identified early on. The evidence 
suggests that the impact of the ruling falls most heavily on 
the limited number of firms--limited number of firms--that have 
been selected both by the NIH for their promising technologies 
and commercial potential and by venture investors for their 
commercial potential.
    I would simply stress that venture capitalists, although I 
am sure they are nice people, don't invest in companies because 
they think they can advance the science. They do that because 
they think they can make very substantial gains.
    One of the things that we found is that non-venture-backed 
firms actually reached the market more frequently in the period 
we studied than do venture-backed firms. We don't think that 
that makes one more virtuous than the other. We think that is 
good for the program.
    The firms that do reach the market that are venture-funded, 
however, are more likely to generate more significant sales. 
The figures are about 55 percent of the non-venture reach the 
market. About 38 percent of the majority venture-owned firms 
reach the market. But the smaller number of venture companies--
think about this, it is actually logical--when they do reach 
the market, they have substantially larger sales.
    So given that restricting access of SBIR funding to firms 
that benefit from venture investments, we believe would risk--
not certainly--we believe it would risk, disproportionately 
affecting some of the most promising small, innovative firms. 
And to that extent, the SBA ruling has the potential--the 
potential, not the certainty--to diminish the positive impact 
of the nation's investments and research and development and 
particularly in the biomedical area.
    Do you want me to go on to the recommendations?
    Ms. Wheeler. If you would like to, sure.
    Mr. Necciai. I think that is important.
    Dr. Wessner. All right. Well, the key--we suggested that 
the consideration should be given either to restoring the de 
facto status quo eligibility requirements, and by de facto 
status quo what we meant was what was going on for 20 years, 
where there were companies with majority-backed ventures that 
participated with no harm apparent.
    Failing that, we recommend making some other adjustment 
that will permit the limited number of majority venture-funded 
firms with significant commercial potential to compete for SBIR 
    We also add that SBA should maintain the commendable 
program flexibility that it has exercised in the past. We 
suggest--we assert that the SBA and the agencies should 
maintain the open competition that is based on scientific 
quality and commercial potential, and note that we do not talk 
about financial structure.
    And we assert further that they should continue to rely on 
agency managers' judgment, experience, and understanding of 
mission needs to effectively administer the program. Our belief 
is that if there is a problem, that the agency managers will be 
the very first ones to detect that problem and be able to 
address it in an expeditious manner. We are fearful of 
legislative efforts to manage a program. Thank you.
    Ms. Wheeler. Thank you.
    Question: You said, Chuck, that there was a difference 
between NRC and GAO on the levels of VC participation, but I 
thought you were both around 14 or 15 percent overall, not 
majority owned but VC participation overall.
    Dr. Wessner. We are under that. I would have to take a 
closer look at the GAO report. But what I would like to stress 
here is the uncertainty on some of these numbers. These are 
self-reported. There are various forms of investment. Everybody 
who doesn't know about small companies and doesn't know about 
venture investments has greater clarity on this than the 
companies that actually participate in the venture communities. 
Venture funding is by no means a homogeneous entity. We had 
vigorous debates in our committee about what kind of control 
are you talking about. What do you mean by control? And, of 
course, debates on why does it matter?
    So we think the numbers are--I think, if I may use the 
analogy rather than the specific numbers, we think what we are 
talking about here is a very small number, but it is a little 
bit like the top five percent of the West Point class. That is 
where the stars are most likely to fall. So we don't think the 
overall numbers are large, but we think the potential for 
commercialization from those companies are large.
    Keep in mind, if we thought----
    Ms. Wheeler. Based on money, not based on proportion, but 
just on dollars that they bring back in. I think that is what--
    Dr. Wessner. Yes, and the potential that both the NIH has 
made in its judgment and the venture capitalists have then 
validated. As I mentioned before, they are not in this to be 
nice. They are in this because they think there is a 
substantial market. Remember, they are shooting for very large 
returns and this often would involve things like important 
drugs or other medical devices that would potentially--and why 
do they have that return? It is because they have very 
significant social and medical benefits. That is why people 
will pay for them. That is the hope. So that is where we are on 
    But I have talked with our Chairman--well, not since 
yesterday--and one of the things that he mentioned was the 
really important thing about the venture issue is to 
reauthorize the program. Please, just reauthorize the program. 
He asked me to say that.
    Ms. Wheeler. We agree with that.
    I want to go back to the point on venture capital firms 
validating. VC in a firm indicates that they are the most 
promising, but it doesn't mean that they are the most likely to 
commercialize the SBIR project----
    Dr. Wessner. Reach the market.
    Ms. Wheeler [continuing]. Because as even your study found, 
of all the firms identified as being majority-owned and 
controlled, only six received their venture capital investment 
after their SBIR award. And so we tried to be very careful in 
creating a war between these two sides to say one side's 
research isn't as promising because they haven't attracted any 
venture capital. Oftentimes, they have attracted venture 
capital for another lead project, which I suppose Mr. Crandell 
could speak to more clearly.
    Mr. Necciai. Actually, before we move to Mr. Crandell, I 
just wanted to ask one quick question. How long did it take to 
do the study?
    Dr. Wessner. Uh, it depends--I don't want to--it depends 
what you mean by do the study. Do you mean----
    Mr. Necciai. Not the term of the study. How long did it 
take to do----
    Dr. Wessner. Well, we worked on it about----
    Mr. Necciai [continuing]. It from the beginning----
    Dr. Wessner. Yes, but we worked on it--I am not quibbling 
to be facetious. We worked on it for about two years.
    Mr. Necciai. Okay.
    Dr. Wessner. We had an extremely rigorous review process. 
Our study from our perspective was completed last September. We 
spent six months in review and we had a doubling of the number 
of reviewers assigned to it and there were great discussions. 
And I appreciate the question. So calendar, roughly about two 
years, but how many hours----
    Mr. Necciai. What was the return----
    Dr. Wessner. Keep in mind, we were producing a substantial 
number of other reports during the same----
    Mr. Necciai. Absolutely. What was the return rate on the 
questionnaires that you had out?
    Ms. Wheeler. Response rate?
    Dr. Wessner. I would have to get back to you on that, Erik. 
I don't recall that number.
    Mr. Necciai. Was it roughly 20 percent, if that was----
    Dr. Wessner. It was, yes, roughly--actually, I think it was 
18 percent, 18 and change.
    Mr. Necciai. And for GAO, how long did it take to--
roughly--do your study?
    Ms. Williams. Typically, our studies take between nine and 
12 months. I don't remember for this one specifically.
    Mr. Necciai. And what was the return rate for yours?
    Ms. Williams. Well, in this case, we didn't do a survey, 
but generally speaking, we shoot for 75 percent response rate. 
But we will report results out, depending on the circumstances, 
with a response rate of more than 60 percent.
    Mr. Necciai. Thank you.
    Dr. Wessner. Could I just add, Erik, that you can have 
higher standards if you don't do the surveys.
    Mr. Necciai. Okay. Thank you.
    Mr. Crandell. Thank you very much. I think the question 
was, what are the parameters that venture capital firms are 
typically looking to see in an effort in order to invest 
capital and how might that compare with opportunities that 
present perfectly good science but may not meet those criteria, 
and correct me if I am--I mean, I am repeating your question, 
Kevin, so----
    Ms. Wheeler. Well, I just wanted to give you a chance to 
respond. When I said that the VC dollars that were already in 
the firm--were often already in the firm before they ever 
applied to the SBIR program, so there was not necessarily a 
correlation between VCs existing and their promise to 
commercialize, so----
    Mr. Crandell. Okay. Well, I am probably best speaking from 
my own personal experience, which my partners and I started as 
graduate students at the University of Chicago in the mid-1980s 
following the Bayh-Dole Act. We were chartered with spinning 
out new companies from the University of Chicago and Argonne 
National Labs. There were no previous spin-outs or commercial 
activity at those institutions before we started our effort.
    We raised a small venture capital fund at that time, which 
was about $9 million. It took us about 15 months and we 
presented to about 100 institutional investors to raise that 
capital. And we set about starting companies and running them 
ourselves. We did 12 companies during that period of time and 
looked at probably several hundred different invention 
disclosures that were turned in by the University or by Argonne 
National Laboratory researchers.
    Of those 12 companies, some of the ones that we chose was 
an elementary school math curriculum that is called Everyday 
Mathematics. Those of you that have children and help them with 
their homework will probably have suffered through some of 
that, but that is now the largest market share math curriculum 
in the U.S. with 18 percent market share and it has generated 
hundreds of millions of dollars in revenue and I think employs 
a lot of people----
    Ms. Wheeler. And that was an SBIR project?
    Mr. Crandell. That was not an SBIR project, but it did have 
the attributes of a potentially larger market and we were able 
to invest our capital toward productization of some raw 
research and did the work.
    The second project that we--or another one that is worth 
mentioning is the company that became Averon. This is the 
company that did the cold-adapted flu vaccine. It is the 
FluMist that kids spray in their noses so they don't get 
injectable vaccines. That was a 13-year project. It took 
ultimately hundreds of millions of dollars to commercialize. 
But again, the vision was that if the technology worked and we 
could get additional funding, and it came from a lot of 
different sources over that time, ultimately, there would be a 
    We also worked on what the Economist has called the very 
first nanotechnology company, which was spun out of Argonne in 
the late 1980s, and worked on a host of others in the 
chemicals, materials, instrumentation space.
    So in the intervening 22 years, our company has done about 
122 of these companies. We are now focused nationally on the 
leading academic institutions and national labs. So in large 
part, our firm has grown over time. We now have about 15 
professionals that do this work. We have offices in Seattle, in 
Austin, one on the West Coast, and our headquarters and 
administrative functions in Chicago. We have funded companies 
in the fly-over States because the science in many cases is 
extremely good, but it is much more difficult to gain financing 
in those locations and it is much more difficult to attract 
managers that have experience because you have got a bit of a 
chicken-and-egg issue there.
    So part of our process, and I think most of the groups that 
do what we do, and there aren't a huge number of them--if there 
were more, we probably wouldn't be having this discussion, in a 
way, because there would be much more capital available to fill 
that gap--is we bear more technology risk--it is in a sense we 
have a concept that we hope would have large commercial 
potential, but we have to do the investigation to validate that 
there is a commercial opportunity and we also have to establish 
that the invention is consistent with the laws or physics or at 
least the best judgments that are available.
    So part of our process of determining how to get there is 
to develop plans along those lines to get the answers to those 
questions, and this gets back to where the SBIR program fits 
in, and I apologize for the long intro there but the context is 
sometimes helpful. And that is we set a strategy to try and 
find a way to build the things that we think are commercially 
important and we then look to overlay those with the results 
and the interests of these major funding agencies and we scan 
the literature and the proposals to see if there are things 
that match. And often there are because the things, as Dr. 
Wessner pointed out, the things that create the most value are 
usually socially important, and they certainly are in the life 
sciences and the physical sciences.
    So our process is to evaluate the commercial viability, and 
we need large markets. People will not give you capital to 
invest if you cannot generate a return because they can put 
their money in Treasury bills or whatever denominated security 
that is much safer.
    Also, our process is imperfect. Even though we feel like we 
have armed ourselves with every possible advantage and we have 
people that have experience, which is extremely important to 
making the right business decisions, we still crater or fail in 
about a third of our efforts.
    I think as we--one of the hallmarks----
    Ms. Wheeler. I am sorry. Are any of your investments 
ineligible for SBIR right now?
    Mr. Crandell. Yes, under what I will call the change, they 
are not eligible, and I think----
    Ms. Wheeler. And they were before? Your companies were 
    Mr. Crandell. Well, we view ourselves as small businesses. 
As I said, we have 15 professionals on our support staff. Our 
companies typically have a dozen or two dozen people in them. 
They are small, focused, entrepreneurial groups that are at 
risk that are going after big challenges. And right now, there 
is a cooling both because of the notion of potential caps, 
because if you are not sure that you are going to--if you have 
the potential of being the one that gets cut, you have to make 
a second judgment beyond just the SBIR program as to whether or 
not you are going to be able to make it into the program, even 
if everything else lines up perfectly. So there is an issue 
    And then second, most technologies that are what I will 
call core technologies based on the physical and life sciences 
are extremely capital-intensive projects. You know, the notion 
of people developing a new drug in their garage is just not 
happening. I haven't seen it. Maybe it could be done.
    But the point is that these funding sources basically 
interweave and are complimentary and I think the exclusion, the 
damage that is done in a situation where there is essentially 
an arbitrary cap that is set or discrimination against a 
certain group is that it limits the options of the 
entrepreneurs that are running the business because it makes it 
less attractive for them to take capital. It makes it less 
interesting for the venture capital people to participate in 
those start-ups and fund them because they know that their 
companies are not going to be able to garner additional capital 
which is necessary for them to succeed.
    And then finally, from the standpoint of a venture 
capitalist who has operated for 22 years in a fly-over State, 
we are fighting every way we possibly can to get our companies 
the capital so they can have the planning horizon and be able 
to make the plans and execute on them to succeed, and that is--
you know, I have a receipt for my five-year comment earlier and 
I would like to say that I support longer planning horizons for 
all the reasons that people had outlined. But it is basically 
the same issue that we suffer from here.
    Ms. Wheeler. May I just ask a question? What was it before 
2002 that made your firm think that your companies were 
eligible? With the terms majority-owned by individuals, 51 
percent owned by individuals or U.S. citizens, by what standard 
would your companies have felt that they were eligible?
    Mr. Crandell. Well, let me say that we started in 1986, and 
I think it was the SBIR program predates our involvement. I 
think that we viewed ourselves as small businesses and we 
applied for those, or our companies did, answering the 
questions that were asked of them, and there were other peer 
groups that had it. You know, all this differentiation about 51 
percent ownership is not something that was discussed or 
control. I mean, I think we have heard earlier that this whole 
notion of control at the operating level of the company or at 
the board of directors is something that is not super clear-cut 
and I think there wasn't a lot of attention spent, frankly.
    Ms. Wheeler. But the self-certification form from NIH has a 
box which they must check which says 51 percent by U.S. 
citizens, right?
    Dr. Fedorkova. Correct.
    Ms. Wheeler. So I am just so curious, because I know you 
all are just really upset about this and feel that before, you 
could self-certify that such firms were eligible. So I am 
curious just how a company looks at that and says, I am just 
going to take the example, there are three venture capital 
firms that together make up the majority of the ownership and 
control of this SBIR applicant. So when they checked it, what 
in it was making them--by what standard did they think that 
they could check that box?
    Mr. Crandell. Well, maybe two important points there. One 
is I don't think there is a visceral reaction, and if I have in 
any way----
    Ms. Wheeler. No, I mean that you are----
    Mr. Crandell [continuing]. Conveyed that--I am passionate 
about it----
    Ms. Wheeler. You feel--yes--I am sorry----
    Mr. Crandell [continuing]. Because I live it every day.
    Ms. Wheeler. I mean that you feel strongly about it.
    Mr. Crandell. Right.
    Ms. Wheeler. I didn't mean that as negative at all.
    Mr. Crandell. Yes.
    Ms. Wheeler. I am just trying to understand how somebody 
checks that box, and NIH's self-certification form has that.
    Mr. Crandell. I think--first off, you would have to ask 
them, okay, and I am sure there are as many different answers 
for that question as there are people that are out there doing 
    I will say that in your description, I believe there is a 
misunderstanding of language that is possibly at the root of 
all this----
    Ms. Wheeler. Okay.
    Mr. Crandell [continuing]. And one is the notion that if 
you have a syndicate of venture capital funds--each of those, 
by the way, is an independent manager that has capital from 
different sources that is focused in different areas that may 
never co-invest with the other investors at all--so the notion 
that three--in your example, I think it was three venture 
capital groups exert control over it. In each round of 
financing, those venture capital funds may decide not to 
continue to invest. They may sell their position if they want 
to to some other group. It is not a tightly aligned group of 
anything, and I have served on enough venture capital-backed 
boards to know that if you get three or four people in a room 
from different venture capital funds, the only thing you know 
for certain is they are all going to have different 
perspectives on it.
    So I guess if, in your example, there were three groups 
that had control, it was clear-cut control, and if they all 
were colluding in some fashion, then I imagine they would have 
a hard time checking the box. If, on the other hand, they are 
small businesses themselves, they operate independently, their 
capital structures are absolutely independent, then the whole 
notion that there is some double-secret handshake that makes 
these folks collude against or organize themselves, I just 
haven't--I haven't seen that. So I think that is probably the 
point where the cognitive dissonance sets in is that there is a 
preconceived notion perhaps that these--that venture 
capitalists organize themselves the way large corporations do 
and I don't--I haven't found that in my experience.
    I also would say that we are better off as a country here 
if we get more money focused on commercializing the things that 
are going to have impact and make a difference, and----
    Ms. Wheeler. But that would be an argument for not making a 
change because the NRC identified that the majority of the 
applicants who commercialize, 55 percent are non--don't have 
    Mr. Crandell. Well, I mean, again, this is----
    Ms. Wheeler. But you know what? Aside from that, there is a 
compromise that is out there of 18 and eight percent. Those 
would get your companies in.
    Mr. Crandell. Well, I mean, again, I don't want to 
monopolize the time here, so you have got to use this type of 
    Ms. Wheeler. Well, we will let everybody comment on it. So 
18 and eight percent, that addresses the issue that you are 
concerned about, that now some of your investment firms would 
not be eligible. Now, they would be.
    Mr. Crandell. And Kevin, I----
    Ms. Wheeler. Is that sufficient?
    Mr. Crandell [continuing]. I appreciate that fact, and if 
you are in Washington and you are making a gesture or putting 
this type of thing together, it is splitting the baby. I am 
sure that happens here all the time. I only come once in a 
while so I am a little more sensitive to it.
    So I think there are two things that to me I think are 
problematic there. One is, from a policy level, the country 
faces huge challenges in clean tech, in energy independence, in 
the biological area with things like pandemics, and if you are 
arbitrarily capping this, what you are basically doing is 
telling those groups you don't want their ideas, okay. So do we 
want to be the group that tells the agencies that they 
shouldn't get the very best ideas in, especially if one or two 
of those may make all the difference, and I think we are 
hearing from Dr. Wessner that these are some very high-powered 
    I am absolutely a fan of competition in these things. Let 
them be peer reviewed. I think that is a great process for our 
groups and for the agencies and I think they do a great job.
    But from a policy standpoint, what you are essentially 
doing by putting a cap in, that you are saying, don't send in 
your ideas because we are going to add one more level of 
uncertainty, so that even if you do everything right and even 
if it takes the nine months, even if you file all the forms, 
you still may not get it because you are somehow the last one 
through the door, and that is----
    Ms. Wheeler. Well, actually, right now, they can't 
participate at all. So actually, we would be saying the door is 
open for you to come. And furthermore, the 18 percent is far 
above what the GAO found was the participation for all firms 
with VC before the clarification. And, in fact, if it were 
enacted, based on the data we have from 2006--let me see, you 
would be getting proportionately and dollar-wise more than they 
were getting before SBA qualified. So before the clarification 
in 2001, GAO found that the firms with venture capital received 
14 percent, or $57 million, of all SBIR dollars at NIH. And in 
2002, they received 14 percent, or $72 million.
    If we were to put in this 18 percent and they were to use 
it all--would they get to that? Some have argued that they 
wouldn't because these amounts are smaller than that. It would 
be an increase of 84 percent over the amount of funds firms 
with venture capital were sharing--sharing. Now, this would be 
all for this class of firms that you are advocating for, and a 
possible increase of 45 percent over what they were sharing in 
    And at DOD, it would be an increase of 47 percent over the 
funds they were sharing in 2002 and 65 percent of what they 
were sharing over 2001.
    So they weren't arbitrary. We understand what you are 
saying. But we don't see that this is in any way limiting. 
Right now, these firms you are talking about don't have access. 
And based on the information we have here and these self-
certification forms, they were never--I mean, they might have 
been in there, but they weren't supposed to. And so now they 
would actually really explicitly have access.
    Mr. Crandell. Well, I mean, again, I have been working this 
project, I guess you could say, on the SBIR side because it 
affects the commercialization gap and the interplay between 
venture capital entrepreneurs and technologists and I view it 
as an important one. So I appreciate your assurances that 
things will be good, and in this room, it sounds reasonable.
    But I think in point of fact, from a ground-level person, 
what it is going to do is add in uncertainty about whether or 
not they are going to be the last--whether their good ideas are 
going to be the last ones through the door, and that is going 
to chill the effect of people applying, number one.
    And number two, from a policy standpoint, we need the best 
ideas coming in to the country and to the research agencies, 
and that is what they want, and it is a contest of ideas in 
meritocracy. The agencies choose the topics. They peer review 
them separately. And I don't think that it makes sense, both 
from the National Venture Capital Association, from me as a 
taxpaying person, too, to arbitrarily discriminate against a 
high-performance group of idea people when the country is in 
the throes of some serious challenges and forcing them to have 
to think through the idea that they are making it more 
    So if you are saying the caps are generous, I have a 
receipt for that point. I would say there were no caps before 
2002 or 2003. In hindsight, you are saying these folks perhaps 
shouldn't have been participating, or not all of them. Nobody 
is quite sure who would have been in, who wouldn't have been 
in. I think we are looking to take this back where it worked 
for 20-some years, where we know it worked, and just make that 
modification, and I don't--if the caps are--if the numbers are 
so good and we should feel so strong about them, I kind of 
wonder, why are people so interested in putting them in and 
doing this sort of set-aside-like discrimination. Again, from 
my narrow perspective, I don't get it. It is the top scientists 
with peer-reviewed ideas. It is what America is about, is 
competing for meritocracy on that and let them be where they 
    Ms. Wheeler. Because it is a small business program and we 
have to define small business. Right now, these firms are not 
considered a small business----
    Mr. Crandell. Right now.
    Ms. Wheeler [continuing]. And so----
    Mr. Inge. Let us--do you want to open it up for comment, 
just because we have got to be out of here at one. The court 
reporter has another appointment. It would be good to get--I 
know Dr. McGarrity will probably want to say some stuff, and 
then some of the small businesses.
    Ms. Wheeler. Kathy, did you want to make a comment?
    Ms. Wyatt. Yes. I would just make a brief comment. One 
thing I would like to say is that I particularly appreciate 
your comment that this is not intended to be something that 
pits VCs against small businesses, because I think the truth of 
the matter is that we are both playing a vitally important role 
in sustaining and improving our quality.
    I just would like to throw in from the small business more 
than anything that I think a small business perspective is to 
want some assurances that those diamonds in the rough that are 
out there that this program will help us to identify by the way 
that it has been operating in the past continue to have access 
to this program in a way that will be effective for them and it 
will help us grow some of those potential rising stars of 
tomorrow that will be good candidates for venture funding.
    And the other thing that I do think is important is to 
remember that it is a small business program, and I think that 
there is importance in having the definition of small business 
be consistent across programs that the Small Business 
Administration is actually in charge of overseeing and 
    Ms. Wheeler. Thank you, Kathy.
    Mr. Mehra. Thanks. I guess I want to share a few 
observations, just taking a step back for a second, and then 
raise just what I think are a couple practical issues in terms 
of how you would even implement a policy like this.
    So just by way of background, I think I have a little bit 
of a unique perspective on this because I spent quite a bit of 
time as a manager consultant advising venture capital firms. I 
was in on the management team of a VC-backed company that was 
acquired by IBM for four years and now I am part of a privately 
held company competing with firms that have VC capital. So I 
have sort of looked at it from three different sides.
    So let us just take a step back for a second and make some 
general observations. When you look at the SBIR program, I 
think two major motivations and two major goals of the program 
have remained consistent for the last 25 years and I think are 
never really in dispute. The first is a recognition that small 
businesses, by and large, are the hotbeds of innovation in 
America and in the world and that the Federal Government 
historically has had a very hard time tapping that innovation 
for whatever reason. So one of the major objectives of SBIR was 
to provide a mechanism for the Federal Government to benefit 
from that innovative mindset and creativity in small 
    The second major recognition was that small businesses, 
particularly minority-owned small businesses or small 
businesses in rural areas like Louisiana or other States, are 
inherently disadvantaged. They lack the same access to capital 
that large businesses have. They lack the access to advisors 
and other forms of distribution to actually get into the 
Federal Government and be able to support such an incredible 
sales process.
    And I think when you hold up companies that have 
significant venture capital investment, and whether it is 
majority-controlled or not, I don't see how they pass those two 
tests. How can a company that has raised $10, $15, $20 million 
be considered disadvantaged? It just doesn't make any sense.
    And I am not worried about the entrepreneur that has got a 
really successful technology that could raise $10 million. I am 
worried about the entrepreneur in Louisiana or some other State 
that has no access to capital and has to compete with that 
person. Suddenly, this program that was very egalitarian where 
the best ideas won becomes much more competitive and starts to 
lock out those two people.
    And on the first test, again, the focus of the program is 
on spurring innovation. There is a great place for venture 
capital in the SBIR program. That comes in what we call Phase 
Three, the commercialization process. And Mr. Crandell's 
comments, all of which I think were fantastic, one of the 
things he talked about was the first thing that they do when 
they come in is to evaluate the commercial potential of the 
technology that has been developed, not evaluate the merit of a 
crazy idea that a scientist has to create a revolutionary 
technology. That is what SBIR Phase One and Phase Two is for. 
So I think on those two tests, it fails.
    And then let me now just talk about some really practical 
issues in terms of--even if there was an allocation for 
venture-backed companies or majority controlled venture-backed 
companies, I think there are some really practical questions 
you have to ask.
    The first is, how are you going to determine if a company 
is majority-controlled or majority-owned by a venture capital 
firm? It is not as simple as just looking at who owns the 
shares of the company because in most instances that I have 
seen or that I have been involved in, when an outside investor 
comes in investing capital, they will take preferred equity 
shares or they will invest with debt instruments that are 
convertible to equity over time. So they might not look as if 
they own two-thirds or 75 percent of the equity of the company, 
but in effect, they control that amount, or they can have a 
disproportionate number of board seats.
    So I think just answering that simple question to figure 
out what category they fit in and whether they fall under that 
eight percent cap or that 18 percent cap or not is incredibly 
    The second point I would raise is, again, right now to 
participate in SBIR, the firm has to be majority-controlled by 
an individual who is a U.S. citizen. How do you apply that test 
to a company when it has got a substantial number of private 
investors? Do you look at the citizenship of the sponsors in 
the venture capital firm? Do you then go back to the investors 
in the VC firm and look at their citizenship? I mean, I think 
that--and then does that create a double standard? If you are 
going to penalize an entrepreneur for not being a U.S. citizen 
but you don't penalize a company that has got VC-backed 
investment from foreign investors and other folks, it seems to 
me like that is a double standard.
    And I think that is even further compounded when you look 
at DOD, where there are some real national security concerns. I 
mean, in my company, the vast majority of projects that we work 
on are ITAR restricted. We can't have non-U.S. citizens even be 
in the same room when somebody is working on a project like 
    So again, how do you deal with that issue when you have got 
an institutional investor that may or may not have foreign 
ties? And I am not ruling one way or the other. I am just 
saying it is a very vague thing and I think it becomes 
extremely difficult to legislate for.
    So those are two, I think, important considerations. The 
other observation I would make is I think there are also some 
fairly big differences between the NIH program and the DOD 
program. In DOD, the marketplace for the eventual technology is 
the Department of Defense itself. So a lot of the 
commercialization that needs to occur happens through the 
natural mechanisms in the DOD to acquire technology, and again, 
I think we have talked about--I certainly feel like that could 
be improved.
    In the NIH, the situation is different. In the NIH, there 
is no--the marketplace for technology developed by the NIH is 
the commercial sector. And so I wonder if it makes more sense 
to think about VC participation more in the NIH sector than it 
does in the DOD sector.
    And then finally, just to provide one thought process for 
how I think everybody can sort of have their cake and eat it, 
too, there are companies that recognize the importance of 
getting VC funding to commercialize their technologies. PSI, 
Physical Sciences, Inc., in Andover is a fantastic example. So 
what they do is they take that technology, they spin it out 
into a separate entity, and then they invite venture 
capitalists to invest in that entity. That entity is focused on 
commercializing the technology and therefore that is what the 
VC dollars are directed at. Meanwhile, PSI, the parent company, 
can continue to be majority controlled by individuals and can 
continue to compete for SBIR funding. And I think that that is 
a very fair compromise that exists within that kind of 
    Mr. Necciai. Have you found in your experience that this is 
a successful process and one which many firms use in order to 
both get the advantage of VC and SBIR?
    Mr. Mehra. I think, one, it is a very successful model. And 
secondly, given all the points I just tried to raise, the 
practical points, I don't even know how the SBA would 
legislate, would be able to manage the process. We would have 
to have forensic accountants going in and assessing the capital 
structure and doing all these other things to figure out, is it 
majority-controlled? Is it not majority-controlled? Is there a 
national security risk or is there not?
    This mechanism that I just described, I think if we were to 
publicize it and just make more people aware of it, is just a 
really simple practical solution to, I think, a very clear set 
of issues.
    Ms. Wheeler. Thank you, Kunal.
    Dr. McGarrity.
    Dr. McGarrity. Thank you. What I would like to do is add my 
personal experience and tell you about two companies that I 
have been involved with, VIRxSYS, where I am presently, and 
another company called Intron, where I was CEO.
    Intron started in 1996 when a very young innovative 
physician who had just completed his training at NIH was 
looking for a job and he invented some technology literally in 
his living room and actually using his children's crayon and 
construction paper to sketch out the scope of the invention. He 
was able to get some seed funding from the Cystic Fibrosis 
Foundation because they had an application for a possible 
treatment, and then later, Intron received a Phase One SBIR 
grant from the NIH. In fact, in a rarity, and as I said to you, 
I have been a reviewer for hundreds of applications, grant 
applications, at NIH, including SBIRs, the grant review 
committee actually doubled the budget of the requested budget 
and I have never heard of that happening before.
    We completed that Phase One study. We applied for a Phase 
Two study. A separate group of experts, 18 to 20 of them, said 
this is one of the most innovative, thoughtful, and exciting 
applications they ever read, and we got fully funded.
    On the basis of that, we went out and we acquired VC 
funding, small, modest amounts, and so our lead program was 
Cystic Fibrosis. The VCs, I mean, to what Keith has said, said, 
well, it is the same amount of work, it is the same amount of 
time, the same amount of money to develop a product for a major 
market like cardiovascular than it is for cystic fibrosis, so 
let us focus on cardiovascular disease and then we will 
continue to get grants to support the cystic fibrosis program.
    We went out and we did that. We got another Phase Two from 
Cystic Fibrosis at the NIH which would have taken us into 
clinical trials. Now, that is when the change in rules occurred 
and NIH came to us and said, we question your eligibility 
requirements for this. Let us go through the paces.
    Because of the VC funding, that grant was actually 
rescinded and we actually had to terminate people that were 
working on that program. Also, our collaborator at the Cystic 
Fibrosis Center at the University of Iowa had to stop funding 
two graduate students who were working on the project.
    So that is fairly typical, and I think the experiences we 
have are representative of a large number of small and emerging 
biotech companies.
    Eventually, Intron was acquired by VIRxSYS, my present 
company. VIRxSYS was founded in 1998, so we are 11 years old. 
We still have no revenues. We are in clinical trials for HIV/
AIDS, and those trials are going well. We are also developing 
an HIV vaccine, and the technology at VIRxSYS came out of Johns 
    Now, VIRxSYS is unusual, if not unique, in that we have no 
major VC funding. We have literally several hundred private 
investors that put in their money and have supported us over 
the past ten years. So actually, I am sitting here representing 
VIRxSYS, a company who is eligible for SBIR grants. So you 
might say, well, if you are eligible for NIH grants, what is 
your position on this? It is in my best interest to say, keep 
those VC-funded companies out of the mix. It is better for me. 
I have a better chance of competing for the limited amount of 
research dollars.
    And, in fact, that is not my position. I don't think the 
purpose of the SBIR program is best served by excluding young, 
innovative technologies, and I think what Keith said is 
absolutely true. The purpose of the SBIR program is, as its 
title has said, it is looking for innovative research. And I 
sit here and say I have absolutely no hesitation in competing 
for research grants with every other biotechnology company in 
the country. If I go and I get my grant funded, that is good 
for me. If I fail to get a grant award, I have to go back and 
work harder and retool and get that.
    We are going to put in an SBIR application this September 
for some work that developed out of our clinical trials with 
AIDS. It is some new findings we have got and it is basic 
science which we think would have commercial application. But 
it is a long-term process. And I can't justify going to my 
investors, who have been funding the company for 11 years, and 
say, also give me money to fund this new avenue of research. So 
as we are eligible, we will apply to NIH for an SBIR grant.
    I also think if the rules go back to the way they were, and 
I support what the National Academy report said, that worked 
very, very well. And also, I refer to Table 5.2 in your program 
where it said, what are the major reasons why these various 
companies are not presently applying for SBIR funds, and among 
the reasons given, there was the likelihood of getting an award 
is too small. That was 13.6 percent of the respondents. There 
was another one that there are significant delays in the 
funding. If I put an application in for an SBIR grant right now 
at NIH, it is going to be nine months before I get word back. 
And then also the size of the award is too small. So those 
three groups represent 30 percent of the respondents. Thirty 
percent of the respondents said, I am not going to apply.
    So you are not going to have a run on SBIR grants if you 
change this rule. I think you will get a small number of 
applications like you had before for early stage projects, for 
highly innovative projects, and also, as our experience showed, 
it is also an application that are in orphan diseases where the 
common marketplace doesn't address those needs. And I know just 
last year, I think there were 50 patient advocacy groups came 
and said, we are getting shut out of this kind of a market.
    We have had--when I was at Intron, we had requests from 
several organizations and from several scientists for, for 
example, wanted us to work on a disease called spinal muscular 
atrophy, a terrible disease, very, very small number of 
patients, very small market, and we said we can't do it with 
the basic capital markets. At that time, we were not eligible 
for SBIR. So those people are being shut out of eligibility for 
many of these kinds of--yes?
    Ms. Wheeler. Dr. McGarrity, I wanted to ask you a question. 
On your first company, what was it that made you all self-
certify that you were 51 percent owned by U.S. citizens?
    Dr. McGarrity. Well, I think it was the--first of all, we 
didn't have any legal department to say, go check this out. And 
also, I think it was the common experience in the community 
that it didn't make a difference whether you had venture 
capital or not. Now, that doesn't excuse that, and in fact, 
that was rescinded at a very early stage. But also, at the same 
    Ms. Wheeler. But just logically.
    Dr. McGarrity. Yes.
    Ms. Wheeler. I am just trying to get why the companies are 
going about it, because they are so upset that they are now 
excluded and I am just curious, if they had this self-
certification form----
    Dr. McGarrity. As I said----
    Ms. Wheeler. Explain to me what you say that you look at 
and you say, so I own--I don't know how much you owned, but I 
am just going to say you owned--did you own 52 percent of the 
company so you said, I checked that box?
    Dr. McGarrity. Well, first of all, I think there is an SBIR 
program at NIH, and I no longer have the slides, but every 
year, they would have a communication and a show, a meeting, to 
say here is what the SBIR program at the NIH is all about. Now, 
I went through those slides and I kept them for a couple of 
years. But if I went back to the 2003 show and went through 
every slide there, there was no check-box on if you have VC 
funding, you are no longer eligible. It was the size--it was 
judged by the size and the percent American ownership, and they 
were the two big headlines that companies like myself would 
look at and say, all right, we are a U.S. organization. We have 
far fewer and we have--you know, here we are. We have 20 
    Ms. Wheeler. Plus affiliates, 500 including affiliates.
    Dr. McGarrity. Well, that--yes, but in the organizations 
that we had, that was with the VC----
    Ms. Wheeler. That is true. Okay. So you could check that 
    Dr. McGarrity. Yes.
    Ms. Wheeler. Okay.
    Dr. McGarrity. And so, as I say, I think it--and I am not 
necessarily excusing it, but I am saying that was the common 
experience in my neighborhood or my community of small and 
emerging biotech companies, and you saw the companies that were 
getting it. We didn't hear otherwise from NIH. So we applied in 
good faith, thinking it was the same old eligibility 
requirements that we had in the first couple of awards that we 
    Ms. Wheeler. I see. Okay.
    And I just want to clarify for everybody the facts. Firms 
with venture capital are not excluded. They are not. They never 
have been and they aren't excluded now. It is the ones that are 
majority-owned and controlled by, as the Cognetics case points 
out, non-individuals, right? So they found pension funds, 
corporate entities, and venture capital funds. I think it is 
very important that we stick to the facts.
    Under this compromise, your firm would be eligible to 
    Dr. McGarrity. My firm is eligible right now.
    Ms. Wheeler. I know, but the first one that you
    Dr. McGarrity. Yes. Yes.
    Ms. Wheeler [continuing]. That you decided to focus on 
    Dr. McGarrity. Yes.
    Ms. Wheeler [continuing]. And then you wanted to pursue 
government grants for the cystic fibrosis. So you would now be 
eligible to compete.
    Dr. McGarrity. Mm-hmm.
    Ms. Wheeler. Are you in support of this compromise?
    Dr. McGarrity. Well, I would--first, I am a scientist, so I 
have to start asking--and don't take it personally. I mean, we 
    Ms. Wheeler. We just want to get this program reauthorized. 
So we are trying to get to compromise, so----
    Dr. McGarrity. Yes, but my question back to you, if you 
were saying that at NIH, you had 14 percent were going to firms 
with VC funding, and then you are saying, let us put 18 percent 
on the table, I would say, well, then that sounds to me very 
artificial. Why do you need 18 percent if we are coming in at 
14 percent or all of the VC-backed firms would be eligible and 
the number is under that percentage?
    Ms. Wheeler. Well, first of all, if you want it to be 14, I 
am sure there is a lot of support to match the number.
    Dr. McGarrity. No, no, but I wasn't trying to be a smart 
    Ms. Wheeler. No, I know you weren't, but I am just saying, 
you understand that we based it on data that we had, and again, 
I want to be very careful with terminology. The 18 percent in 
the compromise is not only for firms with VC. It is for firms 
that are majority-owned and controlled by multiple VC firms. So 
they would now not be sharing this pot of money. They would be 
able to get up to that entirely for themselves. That is why 
they are doing better dollar-wise and percent-wise than what 
they were doing before.
    So we went above 18 percent because there were people on 
the committee that felt very strongly that--above 14 percent 
because they felt very strongly that NIH was the one place 
where this was really needed and that it was focused on 
biomedical. So the compromise was that we would go up beyond 
the data that we had. So it wasn't arbitrary. It was based on 
    So if you have data that tells us that you need more than 
18 percent and there is a justification for it, you know, we 
are going to mark up this bill very soon, so as Senator 
Landrieu said, today is the day to make the case that the 
compromise that this committee voted on is not sufficient.
    Dr. McGarrity. Yes. Well, I would say, looking at the 
alternatives, where we are zero right now and you are saying 18 
percent, 18 percent is obviously better than zero.
    Ms. Wheeler. Right.
    Dr. McGarrity. But I still think--I have trouble 
understanding the rationale of saying why we want to go to 18 
percent, which theoretically would accommodate all of you 
people or all of the companies that have VC backing. When we 
were talking earlier about the length of reauthorization, we 
said we wanted to keep it simple. We wanted to keep it constant 
over time so it is predictable.
    And so if that percentage were to increase--let us say it 
is highly successful and it is highly successful, but let us 
say the percentage of NIH in, if you are talking about a long-
term authorization program, let us say in seven or eight years, 
you hit the ceiling of 18 percent. Then what do you do? Do you 
have to then start saying, well, I am sorry. We are going to 
have to have quotas here to say that some of these companies 
are going to get turned down because we are over the 18 
    Ms. Wheeler. If you have 501 employees, are you turned 
down? I think the point that Senator Kennedy's staff made on 
Health and Human Services was we have to draw the line. We have 
to define a small business. And unfortunately, there might be 
that firm that has 501 employees or that comes in at that 18 
percent. Right now, we have no data that says that there is a 
    And just from a policy perspective, it is the totality. It 
is not just the fact that you are saying they can't compete. We 
have heard data here that of the awards that go to firms with 
VC, they account for, was it 70 percent of the awards in SBIR? 
So let us look at this in totality.
    So we are saying that up to 18 percent of awards, SBIR 
dollars at NIH, can go for firms that are majority-owned and 
controlled by multiple VC firms. Then we look at the GAO study 
and we look at extra data we have that says that any firm--I 
mean, firms that have VC, but we are assuming they are not 
majority-owned because it was in 2004, after the clarification, 
it is very clear they can't apply anymore--we assume they 
aren't. That is 22 percent. So we add 22 percent to 18 percent 
and we are now moving the program of getting to--we are moving 
towards half of the program going to firms with venture 
    Then we take the data that we have from the NRC study which 
says that a larger per share--the majority of commercialization 
comes from firms that don't have VC, 55 percent versus 38 
percent. Then we add on top of it that where is the 
concentration of the awards that go to firms with VCs? They go 
to mostly California and Massachusetts and then somewhat in ten 
States, that they get the larger awards. So we have it 
geographically imbalanced and one of the goals of the program 
is to do economic development.
    So we look at the totality of circumstances and we say, 
what is the balance we can get here for innovation of this 
country? And then on top of it, we look at this and we say, 
what are the types of research that VCs go after versus those 
that are non-VC, and it is our experience, and Keith can weigh 
in and you can weigh in, they are different. They look 
different. And we want this program to still go after those 
projects that are really high-risk. We want them to not turn 
this into an acquisition program.
    And so we look at the totality and we say, we see the case 
that you are making. We see the case that you are making and 
here is the compromise. And you know what? We are going to base 
this compromise on actual data that we have. That seems pretty 
    Dr. McGarrity. Right.
    Ms. Wheeler. So what is not fair about 18 and eight percent 
and what data does BIO have to give us that there is a 
different compromise?
    Dr. McGarrity. Well, I think----
    Ms. Wheeler. And we are willing to listen to it, but today 
is the day to make the case.
    Dr. McGarrity. Okay.
    Ms. Wheeler. I mean, we want this program reauthorized. 
This has gone on for years. And so, please, if you have a 
better idea, let us know, because we struggled with nine months 
over this.
    Mr. Necciai. And before you respond, I am sorry, we are 
coming down shortly here----
    Ms. Wheeler. Yes. Sorry.
    Mr. Necciai [continuing]. If you could make your response 
quickly, we want to get to a share of the people and we want to 
head to affiliation rule before we wrap up.
    Dr. McGarrity. Okay. Well, I think one is that--I would say 
that biotech companies are different than some of the companies 
that you are talking to and about at the Department of Defense. 
When you are saying that the non-VC-backed companies are 
getting to market and generating revenues quicker, that is 
absolutely true, because I think in Department of Defense or if 
you are in IT, you are going to generate revenues very quickly. 
As I said, we have been around 11 years and we still do not 
have a penny of revenue. So that is a hallmark of biotechnology 
companies. I mean, to the response----
    Ms. Wheeler. And the compromise recognizes that.
    Dr. McGarrity. I appreciate that. I appreciate that. So 
what I said to you is saying that from looking at zero percent 
now and 18 percent, obviously, I picked the 18 percent, but I 
still question as to the wisdom and the rationale, why there 
has to be a limit, because you are saying, all right, you are 
eligible but you are only eligible up to a certain point and 
you are putting a ceiling and what I see as an artificial 
boundary around the kind of percentage that you have.
    Ms. Wheeler. It goes back to partly--and I will finish 
this--what Kunal referenced. If you go back and you read all 
these thick legislative records on the creation of the program, 
it was to get seed capital to firms that had not yet attracted 
outside funding, private sector funding, and the government had 
recognized that small businesses were the biggest innovators. 
They did it faster, it was more cost effective, and they were 
saying, for the best use of our Federal R&D dollars, we should 
be trying to incorporate small businesses more to meet our 
research needs.
    And therefore, because we want a level playing field, the 
majority of these dollars are going to huge corporations and 
universities, we are going to create this allocation to make 
sure that there is a level playing field and this is part of 
it. And so typically, one would say these firms have attracted 
the outside capital and they have graduated. At some point, you 
would say they have graduated. Eighty million dollars. We have 
had witnesses who have come here and participants who have $80 
million in VC, $140 million in VC. Kunal mentioned levels of $5 
and $10 million, smaller, but still they have proven. They have 
attracted the outside funding.
    So this is a compromise. So I guess what I am saying, 
instead of just saying no or you don't--what is the compromise? 
Are you saying that it is 100 percent?
    Dr. McGarrity. I would prefer to have VC-backed firms be 
equal partners and being able to apply. I mean, I heard Mr. 
Glover say there is a crisis because the number of SBIR 
applications are going down. I have heard the former Director 
of NIH say the quality----
    Ms. Wheeler. I think he said first-time applicants, because 
that is a measure that we look at for growing economic 
    Dr. McGarrity. Okay. Then my notes----
    Ms. Wheeler. Sorry.
    Dr. McGarrity [continuing]. My notes are wrong. But the 
number was going down. I heard from NIH that the quality is 
going down. And when I look at the overall objectives of this 
program, it is for innovation to provide job opportunities and 
generate revenues, and I think, well, if everyone can fit under 
the 18 percent cap, why have the 18 percent cap? I don't mean 
to be antagonistic and I am saying 18 percent is much better 
than zero percent, but I think let the system, and for biotech, 
let NIH--empower them to bring this forward with no artificial 
caps or just artificial boundaries.
    Ms. Wheeler. Okay. Jere, do you want to----
    Mr. Inge. Dr. Wessner, I think, had it up first.
    Ms. Wheeler. Oh, sorry.
    Mr. Inge. Do you want to go quickly, and then Jere?
    Dr. Wessner. Just very briefly, I think there are two key 
points. One is that the program, to the best of our knowledge 
and understanding, is not trying to help disadvantaged 
companies. The program is trying to draw on the ingenuity of 
the very best small companies wherever they may be located. And 
those States that have had trouble getting in the program are 
also States who have levels of education which are not as high 
as the successful States. They have underfunded universities. 
They often have unfriendly business environments. And they 
don't have the infrastructure that is required, putting the 
onus for a whole systematic set of failures on the outcomes of 
the SBIR program. They also don't apply to the program. So I 
really think that the shining quality of this program is that 
it is open to competition from all concerned.
    I have a simple point here. I would hope that whatever 
compromise you reach, that you would require some monitoring of 
this by the agencies. As we state in our report, we found--you 
know, we don't have a dog in the fight. We found no evidence 
that these companies were being excluded. We found no damage to 
the program from their previous inclusion. We believe that the 
program managers could surely correct, if there is a tilt in 
the program where there are inappropriate companies--as they 
do, by the way, for some of the contract research companies who 
feel so strongly about not having them in who are relatively 
large, well-functioning, well-funded companies. They correct 
for them when they think that they are overwhelming the program 
with applications. That goes back to the flexibility. It goes 
back to the judgment of the people on the ground.
    So I would hope you would have some monitoring in there----
    Ms. Wheeler. We do put in--we have tried, and, of course, 
you can weigh in on that. We did put in the foundation has much 
more detailed data collection so if you went back in, if GAO 
went back in, that you would have an easier time of identifying 
these firms and giving us the characteristics that we need, not 
relying on proxies, et cetera, so that we could revisit it and 
see whether the amounts are appropriate, whether it works or 
    Dr. Wessner. And let me refer you just to one. There is on 
page 28 of our report, box two, we honestly believe--we stated 
lower figures than GAO, but our best survey people argue that 
we are underestimating the impact of the program, the impact of 
the--that the numbers of venture-backed firms in biotech have 
risen very substantially and we are not able to capture that 
    Ms. Wheeler. Well, you only went through 2002----
    Dr. Wessner. Right.
    Ms. Wheeler [continuing]. And GAO went through 2004, and--
    Dr. Wessner. Well, there is, as biotech----
    Ms. Wheeler [continuing]. I guess NIH wants you to look 
beyond that.
    Dr. Wessner [continuing]. Industry is maturing--yes, we 
would. Keep in mind, in addition to the monitoring, we do ask 
for a second snapshot. We don't know--I mean, ironically here, 
and I say this very constructively, we are talking about having 
all this hard data and we know how thin the data is and we 
would very much like to get a second snapshot of where we were 
in 2002, where we were in, say, 2008.
    Ms. Wheeler. I understand, but this is where we are and 
this is the information we have.
    Dr. Wessner. Right.
    Mr. Necciai. Chuck, I appreciate your comments on that and 
I think we agree and emphasize the importance for reporting and 
oversight and making sure that the numbers are right and, in 
fact, what the numbers are. And I know that you encouraged the 
reporting of minorities and women and such in past reports and 
that is something that we are pushing for in our current 
    Would you say that the 18 percent and eight percent 
provides a large enough--as Dr. McGarrity eloquently said, zero 
to 18 is certainly better than zero to zero, but would 18 
percent provide a large enough umbrella or window for those 
participating before and after to continue to participate?
    Dr. Wessner. Well, based on two years of study and very 
careful examination of the data, I can tell you that we don't 
    So it is, therefore, important for you to keep in mind that 
perhaps--I am not arguing about the percentages, but 18 percent 
implies we know that this is--so do 20 percent or something and 
then have a reassessment. Have a reporting requirement, some--
    Ms. Wheeler. That makes no sense. I mean, we based it on 14 
percent, so that is the best data we have, we know. And yours 
says, what, 61 firms were excluded over ten years, or 4.9 
percent, although I realize that is not share of dollars, that 
is 4.9 percent of companies. But we feel like there is the room 
there to take that into consideration.
    Dr. Wessner. Well, I read--I am not disputing the two 
percent with you. I am simply suggesting that 18 suggests that 
we are hitting a target on the head and I just am cautioning 
you, as I have been asked by the Academies, that the data is 
quite uncertain, that I think we need to rely on management, 
and that you should set up something that can be reassessed as 
you go. I am addressing your concerns that we reassess this as 
we go forward and have them report.
    And I would point out that both the advocates from BIO 
have, in our view, in the Academy's view, overstated the 
damage, and the opponents of participation of venture-backed 
firms, in our view, have overstated the problem altogether and 
that we have basically a good program.
    Ms. Wheeler. Thank you.
    Mr. Necciai. Do you want to go, Jere?
    Mr. Glover. Yes. First, I believe Intron, the folks in 
cystic fibrosis left the company, went out and did the same 
research and got funded elsewhere and completed it, isn't that 
correct? They actually----
    Dr. McGarrity. Absolutely not. Absolutely not.
    Mr. Glover. They didn't leave the company? They didn't fund 
    Dr. McGarrity. No.
    Mr. Glover. It never got done?
    Dr. McGarrity. No, never got done.
    Mr. Glover. Okay. You know, 25 percent of the key 
innovations in America come from this program. Thirty to 50 
percent are commercialized. This program is working very well. 
If you are going to remove any restrictions, if you allow VCs 
in, don't restrict them. Change the name of the program. Make 
it the Venture Capital Innovation Research Program, because if 
over half of them who are going to participate are going to be 
VCs, change the name of the program.
    A couple of things that are pretty clear to me. When I look 
at this, 80 percent of the firms in Dr. Wessner's study lost 
money. Of VC-funded, controlled firms, 80 percent lost money. 
Three-hundred million dollars, they lost. The nine that made 
money only made $52 million. I am not sure the VC-controlled 
firms have such a sterling record they can brag about. And the 
fact that the majority of companies in the NIH program that 
were not VC-funded were able to get in the marketplace for 
commercial sales.
    If somebody can find another R&D program in the world that 
does a better job of getting the commercial technology, getting 
to the marketplace than this program, say so right now because 
I don't think there is one anywhere and I have never heard of 
one. So it is a great program. Congress has a wonderful chance 
to screw it up, and they may well do it. But for 27 years, it 
has worked very, very well, and minor tweaks, that is 
acceptable. But somebody finds out in five years we have 
screwed up the best innovation program the United States ever 
had, we are going to be back crying and wondering what 
    But if you are not going to restrict the amount of VC 
participation, change the name of the program. It is no longer 
a small business program.
    Ms. Wheeler. And even though you have arguments against 
changing the eligibility rules, could your organization's 
members live with a compromise of 18 and eight?
    Mr. Glover. We did when this bill was brought up before the 
Senate. We recognized that. We agreed with BIO and NVCA at the 
time. That was acceptable. We obviously recognize reality. But 
clearly, there needs to be a number of things in this to make 
sure that there are controls and balances on that. We need to 
make sure that, monitoring it, we control it, we know what is 
there, we know it is U.S.-owned venture capital companies, not 
foreign venture capital companies. We need some clear 
safeguards and protection within that 18 percent. The Senate 
bill went towards that goal, but I think more protections and 
certainly more monitoring so we don't find out we have done 
something we didn't mean to do.
    Ms. Wheeler. Thank you.
    We are about to lose our court reporter. Jim, did you want 
to comment?
    Mr. Barry. I won't repeat many of the things. One of the 
things that was most troubling to us, particularly in not the 
legislation produced here but the House, was the combination of 
changing the eligibility, increasing the award sizes, and 
allowing companies to skip Phase One. And I think that 
combination is particularly terrifying to a lot of the 
companies that have been involved in the program. So I think 
that your bill certainly addresses that and we are supportive 
on that basis.
    Ms. Wheeler. And for Creare, would it be acceptable for 
there to be a compromise of 18 and eight, or do you want zero, 
or is it acceptable?
    Mr. Barry. Well, I guess I would prefer zero, but the 
compromise, we supported that last fall and we continue to 
support that.
    Ms. Wheeler. Okay. Lenka.
    Dr. Fedorkova. Yes. I just want to say we really appreciate 
you trying to reach a compromise. It is a very difficult issue 
and I think we need to look forward into how to maintain the 
quality of the program.
    I am not going to comment about what percentage is 
appropriate. I think that is always a very difficult situation 
to enter into that discussion. But I would just say that from 
an NIH SBIR survey which was OMB-approved, we know that about 
65 percent of our Phase Two awardees will require FDA approval. 
Federal dollars are not able to go that far. The Federal 
requirements, the FDA requirements for clinical studies and 
milestones are extremely expensive, so I think the question 
should be who will support that kind of a gap funding?
    We talk about the valley of death and there is only so far 
the government can support small businesses, and to help them 
get close or across the valley of death, our competing renewal 
programs are not going to be sufficient, either. I think there 
is a logical synergy that exists and has always existed between 
small businesses and other types of investors. The VC firms are 
also a very diverse group of investors, very small, very large 
to very high-risk averse. That is where the government steps in 
to support the start-up companies.
    I don't believe that companies that have in the past 
participated and had VC funding claimed to be disadvantaged. I 
think we are talking about something very else. We are talking 
about the geographically disadvantaged groups, minority, women-
owned, and those who don't have access to capital. As we all 
know, that is very much concentrated on the coasts, as the data 
supports that. You obviously will have a lot of California and 
East Coast-based companies that successfully compete for very 
good reasons, that they have access to those resources.
    So I think the number is an arbitrary number in terms of 
not allowing sufficient room for instances where companies feel 
they can come back into the program----
    Ms. Wheeler. Based on what?
    Dr. Fedorkova. Based on the need of what the biomedical 
enterprise requires in terms of costs and what the Federal 
    Ms. Wheeler. What data do you have that says that 18 
percent would not be sufficient and why do you use the word 
``arbitrary'' when we have said it is based on the GAO report 
data? And if you all didn't think that data was so good, why 
did you pay $300,000 or $400,000 for a study that looked ten 
years back instead of going forward?
    Dr. Fedorkova. I don't have an answer to that, but I would 
    Ms. Wheeler. Right, so----
    Dr. Fedorkova [continuing]. I also question--I haven't seen 
    Ms. Wheeler. They used proxies. They identified----
    Dr. Fedorkova. I wanted to actually ask a question of the 
GAO to clarify the 70 percent of awards from all NIH awardees 
being VC-backed.
    Ms. Williams. I was just getting ready to correct that. The 
70 percent was awards above the guidelines, and of the--70 
percent of all awards, NIH awards above the guideline. I am 
sorry. Seventy percent of NIH's dollars went to awards above 
the guidelines, which supports the notion that biomedical does 
take a lot of money, and NIH operated under a blanket waiver so 
they were not reporting to SBA, at least at the time of our 
report, each individual instance. And it was of those awards 
above the guidelines, 18 percent of those went to firms that 
had VC investment. I think both the NRC study and our study 
showed that the majority of awards went to firms that did not 
have VC investment.
    Dr. Fedorkova. Thank you. I really was concerned that maybe 
the perception was going to be there that 70 percent of our 
companies had VC backing, which really did not sound correct.
    Ms. Williams. Right. No. It was----
    Dr. Fedorkova. We have so many Phase One companies that are 
nowhere near being ready for that kind of investment.
    Ms. Wheeler. If NIH has data to show us that this amount is 
not sufficient, please give it to us. As we said, today is the 
day to make the case, okay?
    Dr. Fedorkova. That is, unfortunately, challenging. OMB 
doesn't allow us to survey and ask particular questions. That, 
in fact, may be helpful to maybe consider how companies, I 
mean, agencies could be empowered to ask some questions. That 
is the large unknown we are not able to, unfortunately, really 
get a handle on.
    Mr. Necciai. Okay. Any data that anyone is able to provide, 
I think Kevin might have mentioned it or Chair Landrieu might 
have mentioned it before, but the record will be open for one 
week starting today until next Thursday, the 11th, COB.
    Ms. Wheeler. Kunal.
    Mr. Mehra. Thanks. Just a very quick, two points or 
observations. One is all of the arguments that have been 
presented in the last hour about whether to allow VC 
participation in the program or not have all been based on 
examples from the biomedical space. So my question is, since 
that is where all the examples are coming from, since that is 
really where the interest is coming from to allow 
participation, why don't we be a little careful here, to Jere's 
point, not to risk killing something that is working so well 
and instead pilot this in the NIH and wait longer and then 
reassess whether it makes sense for the DOD, because I am 
really not hearing anybody from the DOD side, industry, the 
agencies themselves, or any lobbies stating that this is 
integral for DOD. So that is the first point I would like to 
    The second thing is, again, black or whites don't apply 
here. I think there are shades of gray. What makes a 
disadvantage? What doesn't make a disadvantage? But I think 
there needs to be a cap on how much venture capital investment 
is allowable or not. Clearly, a company that has raised $100 
million is not disadvantaged. Now, I know there is no data to 
support this, so is the number $5 million, $10 million, $12.5 
million, $12.6 million? I don't know. I would suggest maybe 
seven or eight or ten as the max, as a cap. But I think that 
there has to be that kind of cap in the legislation.
    And I also think that individual agencies should have 
discretion to disqualify certain companies if when they look at 
them they just don't think that they are a small business. It 
would be very difficult to do that right now.
    Ms. Wheeler. Thank you. Thank you, Kunal, for those 
    Keith, did you want to go quickly?
    Mr. Necciai. I am sorry. Just to be fair, there is very, 
very small, but there is some existing--they might not be 
sitting at the table today, but we have had in the past 
representation for VC majority-owned firms at the Department of 
Defense and at other agencies. But you are right. They are very 
    Mr. Crandell. I guess I would say that, no question, the 
focus of this is sort of geared toward the NIH and the life 
science-related programs. I do believe, however, there is a 
major investment that the Federal Government is making in labs 
and universities for new technology that isn't physical 
science-based and it is called things like nanotechnology. It 
is called clean tech. It is called energy tech. So the notion 
that there aren't groups, and from the NVCA's standpoint, we 
believe those should be equal. In fact, we don't understand why 
they would be different unless there is some notion that 
somehow we are trying to stop innovation or not fund it as well 
in those particular areas. So I would like to just make that 
    And then just one little other one is just that, again, for 
the purposes of sitting in a room like this, it is much cleaner 
and easier to say, well, there is a Phase One, then there is a 
Phase Two, then there is a Phase Three, then there is venture 
capital, then there is private equity, then there is public 
markets. The world is much more complicated than that and I 
think actually we are all better for that, because if we had 
more experienced people that were doing investing at the early 
stages, there would be more choice and advantage for the 
entrepreneurs that were starting companies in that space. So 
while it might seem attractive here to exclude people, in point 
of fact, I think we really want to be inclusive and try to 
bring capital to that gap. And the people that have that 
capital are venture capital people or wealthy private 
individuals in many cases.
    So I don't want to burn much more of your time. Thank you.
    Mr. Necciai. I know. We are really, really coming down to 
the last minute here and I really wanted to at least see if we 
can get, just for a moment, if SBA wouldn't mind, briefly 
describing the affiliation rule, as this is kind of a dove tail 
to the VC issue, and then perhaps open it very, very briefly to 
any comments.
    Ms. Eyester. Sure. In SBA's regulations in Part 121, we set 
forth the two eligibility criteria for businesses to receive an 
SBIR Phase One or Phase Two award, and there are size 
eligibility criteria. There are other criteria or requirements 
in our policy directive, but these are for size.
    The first one everyone knows is the 51 percent owned and 
controlled requirement.
    The second part is that they have to meet the 500-employee 
size standard. When SBA looks at size, okay, in 121 we have 
size standards for all of our programs, not just SBIR, we have 
either revenues or employee-based size standards. This one is 
employee-based. We always look at the business concern and its 
affiliates. So this is a concept that has been in SBA's 
regulations since, I believe, the first time we ever issued 
regulations on size.
    Affiliation has been around for a very long time. There are 
some exceptions to affiliation. Most of them are done 
legislatively. There are some that are done by regulation. Our 
size regulations are done on notice and comment rulemaking, so 
everyone has had a chance to comment on this or see what SBA 
has proposed.
    The basic--I guess the way I can sum up affiliation is we 
are looking at control. So we are looking at if a business 
concern is applying to the program, we are trying to see who 
controls that business concern, and it may be that they are 51 
percent owned by another company or it may be that the stock is 
so widely held that you would have to look at the board or 
directors or the president to determine who controls the 
concern. But that is what we would look at, and then we would 
see who controls the concern, and if it is a person or a 
business, we would look to see who that person--what other 
businesses they control, and then we affiliate them for size 
    I am not sure if anyone has questions on it or----
    Mr. Necciai. I guess one of the main concerns is that 
majority-owned venture capital firms have been excluded. Have 
there been, or in what instance would you say as far as number-
wise--I don't know if you report this, but have come to you 
that don't know? I think there is a lot of confusion whether 
firms just don't know if they qualify or not.
    Ms. Eyester. Sure. We get--I mean, SBA gets calls every 
day. I know I get calls at least once a week from businesses 
trying to either--even when they are trying to set up, they are 
trying to figure out how would they be eligible for a certain 
program, not just SBIR, but all of our small business programs. 
We have our district offices that get calls all the time and 
our size offices and we talk them through our affiliation 
regulations and the ownership and control requirements, and 
every business is different. There are different nuances.
    But yes, if you are 51 percent owned and controlled by a 
business and that business owns several other businesses that 
they control, not just own, but they control them, again, we 
would call them affiliates and we would count all the employees 
from those other businesses if it is an employee-based size 
standard and count them towards the employees of that business 
applying for, for example, the SBIR program for Phase One and 
Phase Two awards, not Phase Three.
    Ms. Wheeler. And would SBA be in favor of exempting the 
employees of portfolio companies of VCs that have majority 
ownership and control of an SBIR applicant?
    Ms. Eyester. I am going to----
    Mr. Iyer. That is an issue that we would be interested in 
hearing different people's perspectives on. I think it is a 
complicated issue. But at the moment, the SBA does not have a 
position on that particular rule, but we can get back to you.
    Ms. Wheeler. And just for clarification, does SBA consider 
that it changed its eligibility standards in 2002 or does it 
consider it a clarification?
    Ms. Eyester. What I did was I looked back through the 
regulations, and our regulations--I will start with the OHA 
decisions. The OHA is an administrative tribunal and they are 
composed of the administrative judges and administrative law 
judges, and what they did in both of their decisions, the CBRL 
and the Cognetics, is they looked at their regulations and the 
wording in the regulations, and the regulations at the time 
specifically talked about 51 percent owned and controlled by 
individuals who are U.S. citizens or permanent resident aliens.
    I went back to the first time we ever used it in the 
regulations, those exact terms, the individuals owned by U.S. 
citizens. It was 1989, and that was put into our 13 CFR 121, 
and according to the preamble in that regulation, we were 
mimicking what was in the policy directive which had been 
issued way back then. So I don't see that there was any change 
in the plain language of our regulation starting from at least 
1989 until we issued the change to basically broaden the 
eligibility requirements of the program.
    Ms. Wheeler. And was there a change in interpretation?
    Ms. Eyester. Again, I can tell you that the plain language 
of the regulation did not change and that is what OHA looked 
    Ms. Wheeler. Does NIH believe there was a change? Just yes 
or no. I mean, sorry, we are running out of time.
    Dr. Fedorkova. No.
    Ms. Wheeler. Does DOD believe there is a change?
    Ms. Oliver. I don't know.
    Ms. Wheeler. Okay, fair enough. Okay.
    Thank you. If anybody has changes to the base legislation, 
as we said, would you please get it to us. You have one week. 
And thank you very much, and particularly those who came 
through this very bad weather.
    Mr. Necciai. Yes. Thank you.
    [Whereupon, at 1:13 p.m., the committee was adjourned.]