[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
                  CREATING AND GROWING NEW BUSINESSES:
                       FOSTERING U.S. INNOVATION

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

                                HEARING

                               BEFORE THE

               SUBCOMMITTEE ON TECHNOLOGY AND INNOVATION

              COMMITTEE ON SCIENCE, SPACE, AND TECHNOLOGY
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                      WEDNESDAY, NOVEMBER 2, 2011

                               __________

                           Serial No. 112-48

                               __________

 Printed for the use of the Committee on Science, Space, and Technology


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



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              COMMITTEE ON SCIENCE, SPACE, AND TECHNOLOGY

                    HON. RALPH M. HALL, Texas, Chair
F. JAMES SENSENBRENNER, JR.,         EDDIE BERNICE JOHNSON, Texas
    Wisconsin                        JERRY F. COSTELLO, Illinois
LAMAR S. SMITH, Texas                LYNN C. WOOLSEY, California
DANA ROHRABACHER, California         ZOE LOFGREN, California
ROSCOE G. BARTLETT, Maryland         BRAD MILLER, North Carolina
FRANK D. LUCAS, Oklahoma             DANIEL LIPINSKI, Illinois
JUDY BIGGERT, Illinois               GABRIELLE GIFFORDS, Arizona
W. TODD AKIN, Missouri               DONNA F. EDWARDS, Maryland
RANDY NEUGEBAUER, Texas              MARCIA L. FUDGE, Ohio
MICHAEL T. McCAUL, Texas             BEN R. LUJAN, New Mexico
PAUL C. BROUN, Georgia               PAUL D. TONKO, New York
SANDY ADAMS, Florida                 JERRY McNERNEY, California
BENJAMIN QUAYLE, Arizona             JOHN P. SARBANES, Maryland
CHARLES J. ``CHUCK'' FLEISCHMANN,    TERRI A. SEWELL, Alabama
    Tennessee                        FREDERICA S. WILSON, Florida
E. SCOTT RIGELL, Virginia            HANSEN CLARKE, Michigan
STEVEN M. PALAZZO, Mississippi
MO BROOKS, Alabama
ANDY HARRIS, Maryland
RANDY HULTGREN, Illinois
CHIP CRAVAACK, Minnesota
LARRY BUCSHON, Indiana
DAN BENISHEK, Michigan
VACANCY
                                 ------                                

               Subcommittee on Technology and Innovation

                  HON. BENJAMIN QUAYLE, Arizona, Chair
LAMAR S. SMITH, Texas
JUDY BIGGERT, Illinois               DONNA F. EDWARDS, Maryland
RANDY NEUGEBAUER, Texas              JOHN P. SARBANES, Maryland
MICHAEL T. McCAUL, Texas             FREDERICA S. WILSON, Florida
CHARLES J. ``CHUCK'' FLEISCHMANN,    DANIEL LIPINSKI, Illinois
    Tennessee                        GABRIELLE GIFFORDS, Arizona
E. SCOTT RIGELL, Virginia            BEN R. LUJAN, New Mexico
RANDY HULTGREN, Illinois                 
CHIP CRAVAACK, Minnesota                 
RALPH M. HALL, Texas                     
                                     EDDIE BERNICE JOHNSON, Texas


                            C O N T E N T S

                      Wednesday, November 2, 2011

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

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

                           Opening Statements

Statement by Representative Benjamin Quayle, Chairman, 
  Subcommittee on Technology and Innovation, Committee on 
  Science, Space, and Technology, U.S. House of Representatives..     5
    Written Statement............................................     6

Statement by Representative Donna Edwards, Ranking Minority 
  Member, Subcommittee on Technology and Innovation, Committee on 
  Science, Space, and Technology, U.S. House of Representatives..     7
    Written Statement............................................     9

                               Witnesses:

Brink Lindsey, Senior Scholar in Research and Policy, Ewing 
  Marion Kauffman Foundation
    Oral Statement...............................................    11
    Written Statement............................................    12

Julian Mann, Co-Founder and Vice President, Product Development 
  and Research, Skybox Imaging
    Oral Statement...............................................    16
    Written Statement............................................    18

Ray Rothrock, Partner, Venrock
    Oral Statement...............................................    20
    Written Statement............................................    23

Steve Dubin, Former CEO, Martek Biosciences, and Senior Advisor 
  to DSM Nutritional Products
    Oral Statement...............................................    28
    Written Statement............................................    30

Discussion
  ...............................................................    33

             Appendix 1: Answers to Post-Hearing Questions

Brink Lindsey, Senior Scholar in Research and Policy, Ewing 
  Marion Kauffman Foundation.....................................    50

Julian Mann, Co-Founder and Vice President, Product Development 
  and Research, Skybox Imaging...................................    54

Ray Rothrock, Partner, Venrock...................................    59

Steve Dubin, Former CEO, Martek Biosciences, and Senior Advisor 
  to DSM Nutritional Products....................................    65

             Appendix 2: Additional Material for the Record

Rebuilding the IPO On-Ramp: Putting Emerging Companies and the 
  Job Market Back on the Road to Growth..........................    70


                  CREATING AND GROWING NEW BUSINESSES:
                       FOSTERING U.S. INNOVATION

                              ----------                              


                      WEDNESDAY, NOVEMBER 2, 2011

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

    The Subcommittee met, pursuant to call, at 10:06 a.m., in 
Room 2318 of the Rayburn House Office Building, Hon. Benjamin 
Quayle [Chairman of the Subcommittee] presiding.




                            HEARING CHARTER

              COMMITTEE ON SCIENCE, SPACE, AND TECHNOLOGY

               SUBCOMMITTEE ON TECHNOLOGY AND INNOVATION

                     U.S. HOUSE OF REPRESENTATIVES

                  Creating and Growing New Businesses:

                       Fostering U.S. Innovation

                      wednesday, november 2, 2011
                         10:00 a.m.--12:00 p.m.
                   2318 rayburn house office building

Purpose

    On Wednesday, November 2, 2011, the Subcommittee on Technology and 
Innovation will convene a hearing to examine the current state of 
small, innovative startup companies, which are engines of both 
transformative innovations and job creation. The Subcommittee will seek 
testimony on obstacles limiting those with the ideas and desire to 
either start a new company, or take a fledgling company to a place of 
rapid growth.

Witnesses

      Mr. Brink Lindsey, Senior Scholar in Research and Policy, 
Ewing Marion Kauffman Foundation.

      Mr. Julian Mann, Co-Founder and Vice President, Product 
Development and Research, Skybox Imaging.

      Mr. Ray Rothrock, Partner, Venrock.

      Mr. Steve Dubin, Former CEO, Martek Biosciences; Senior 
Advisor to DSM Nutritional Products.

                               Background

    New businesses have historically played a major role in advancing 
both job creation and innovation in the U.S. economy. According to 
research conducted by the Kauffman Foundation and the U.S. Census 
Bureau's Business Dynamics Statistics, startup companies (those in 
their first year of existence) added an average of three million jobs 
per year between 1977 and 2005, whereas existing companies (those aged 
one year and older) experienced net job losses over the same period. 
\1\ By their very nature, new businesses advance innovation because 
entrepreneurs identify market opportunities that current businesses are 
not addressing and create companies to satisfy these market 
opportunities. Through the last decade, many business efforts that 
started with an individual or small group have grown and transformed 
the way we live our lives. For example, social media startups such as 
Facebook and Twitter have introduced new ways to communicate both 
personally and professionally.
---------------------------------------------------------------------------
    \1\  T. Kane, ``The Importance of Startups in Job Creation and Job 
Destruction,'' Ewing Marion Kauffman Foundation, July 2010; http://
www.ces.census.gov/index.php/bds/bds-home.

---------------------------------------------------------------------------
Innovation and High-Growth Industry Startups

    The Organization for Economic Co-operation and Development (OECD) 
defines innovation as the introduction of a new or significantly 
improved product (good or service), process, or method. \2\
---------------------------------------------------------------------------
    \2\  ``The OECD Innovation Strategy: Getting a Head Start on 
Tomorrow,'' OECD 2010.
---------------------------------------------------------------------------
    Examples of innovation include the development of new products 
which have the capacity to fundamentally change the market, such as the 
personal computer or the semiconductor. Alternatively, innovation can 
lead to improvements of existing products and services, such as 
improving the speed of microprocessors, or the functionality of 
software. An example of process innovation is the implementation of 
lean manufacturing.
    Innovative companies have played a central role in the growth of 
the U.S. economy by providing mid-term and long-term employment and 
income growth. \3\ Indeed, innovation has been responsible for 
approximately 80 percent of the growth in the U.S. economy since World 
War II \4\ and new businesses in high-growth sectors have contributed 
significantly to the country's innovative capacity.
---------------------------------------------------------------------------
    \3\  R. Atkinson, D. Castro, S. Andes, S. Ezell, D. Hackler, and R. 
Bennett, ``Innovation Policy on a Budget: Driving Innovation in a Time 
of Fiscal Constraint,'' Information Technology and Innovation 
Foundation, September 2010.
    \4\  Information Technology Industry Council, www.itic.org.
---------------------------------------------------------------------------
    Over the past decade, the high-growth sectors of the U.S. economy 
have centered on information technology, health care, energy, defense, 
and advanced manufacturing. These sectors are dependent on the output 
of scientific and engineering-related research and development, and 
many small companies are also started based on intellectual property 
derived from basic research conducted at universities and other 
research organizations.

Job Creation

    According to the Kauffman Foundation, job creation from startup 
companies remained relatively consistent between 1977 and 2005, even 
during periods of recession. 1A\5\ However, in recent years, startup 
companies have witnessed a significant decline in job creation. 1A\6\ 
While companies are still being created, they are starting up with 
smaller numbers of employees, and not adding employees at a rate that 
has been historically characteristic of small business growth. 1A\7\ 
This trend is troubling for the long-term outlook of job growth from 
small businesses. While the current economic environment may have 
exacerbated the situation, this data suggests the pattern predates the 
recent recession, leading to questions about whether a systemic change 
in the relationship between new company formation and job creation may 
be occurring. \8\
---------------------------------------------------------------------------
    \5\  T. Kane, ``The Importance of Startups in Job Creation and Job 
Destruction,'' Ewing Marion Kauffman Foundation, July 2010; http://
www.ces.census.gov/index.php/bds/bds-home.
    \6\  J. Haltiwanger, R. Jarmin, and J. Miranda, ``Business Dynamics 
Statistics Briefing: Historically Large Decline in Job Creation from 
Startup and Existing Firms in the 2008-2009 Recession,'' Ewing Marion 
Kauffman Foundation, March 2011.
    \7\  E.J. Reedy and Robert E. Litan, ``Firm Foundation and Economic 
Growth, Starting Smaller, Staying Smaller: America's Slow Leak in Job 
Creation,'' Kauffman Foundation Research Series, July 2011, http://
www.kauffman.org/uploadedFiles/
job-leaks-starting-smaller-s
tudy.pdf.
    \8\  Ibid.

---------------------------------------------------------------------------
Issues for Examination

    Many factors influence those with innovative ideas who want to 
start companies. The Committee is interested in understanding how 
local, State, regional, and federal policies influence the environment 
for new company creation or growth. Issues for examination within this 
hearing include:

New Business Formation, Job Growth, and Innovation

      What is the historical relationship between new business 
formation and job creation in the country?

      What is the role of new businesses in driving the 
nation's innovative capacity and competitiveness?

      Do existing policies adequately address recent trends in 
job growth affiliated with new businesses?

      What challenges are unique to entrepreneurs in the 
technology and innovation sector?

Policy Obstacles and Opportunities

      Local, State and federal stakeholders are all interested 
in both making targeted investments and removing barriers to companies 
starting and growing. What are the most significant policy levers?

      How do federal policies influence potential research 
partnerships between startups and research institutions, or larger 
companies?

      Should federal policies have a greater focus on new 
business formation, or on promoting business growth?

      Are there any federal policies that discourage potential 
entrepreneurs who are considering starting or expanding a company?

Access to Capital

      How important is access to capital in today's 
environment? How have investment trends changed the types of 
innovations in the pipeline, and potential for companies to go public?

      What opportunities exist for raising capital for startup 
companies that are located in areas without great concentrations of 
venture capital companies? What steps do venture capital companies take 
to identify investment opportunities outside their immediate 
geographical area?

    Chairman Quayle. The Subcommittee on Technology and 
Innovation will come to order. Good morning. Welcome to today's 
hearing entitled ``Creating and Growing New Businesses: 
Fostering U.S. Innovation.'' In front of you are packets 
containing the written testimony, biographies, and truth-in-
testimony disclosures for today's witnesses. I will now 
recognize myself for five minutes for an opening statement.
    Before we get started, even though Ms. Edwards is not here, 
I would like to welcome her when she gets here because she is 
the new Ranking Member of this Subcommittee, and I am very 
eager to be working with her in the next coming year and a 
half. So we are very excited to have her as the new Ranking 
Member.
    But the goal of today's hearing is to learn more about U.S. 
startup companies, which are engines of both transformative 
innovations and job creation. We will be hearing testimony on 
the obstacles impeding entrepreneurs from starting a new 
company from scratch or from expanding a fledgling company to a 
place of rapid growth. As this Subcommittee sits at the 
intersection of technology and innovation, we are uniquely 
positioned to address topics affecting competitiveness of 
emerging high-growth industries. Today's discussion is the 
second in a series focused on advanced U.S. innovation in a 
constrained budget environment.
    Earlier this fall, we held a hearing on the opportunities 
and challenges of cloud computing. In the coming months, it is 
my intention to address a range of topics including the role of 
standards in international trade, the importance of 
collaborative research partnerships in the innovation 
ecosystem, and new developments in wireless communications. In 
these difficult times, it is important that we continue to 
empower our Nation's innovators to maintain our economic 
competitiveness.
    Entrepreneurs and new businesses have played a vital role 
in advancing both job creation and innovation in our country. 
Over the last three decades, new businesses have created nearly 
40 million jobs and have been responsible for nearly all net 
new job creation. New businesses also facilitate the spread and 
adoption of innovation because they are more likely to seize 
new developments in order to create market niches for 
themselves.
    From our founding, the United States has always cultivated 
the entrepreneurial spirit of its citizens, recognizing the 
vitality new businesses bring to commerce. Economist Robert 
Solow was awarded the Nobel Prize for his work demonstrating 
how economic innovation was the most powerful factor driving 
our country's growth and productivity in the 20th century. The 
public and private sectors have worked to support 
entrepreneurship by facilitating new business formation, access 
to capital, and financial rewards for success. In turn, these 
new businesses have added significantly to the growth and 
dynamism of our economy.
    Unfortunately, recent studies have found that the 
environment for new businesses has grown increasingly 
unfavorable. In the past three years, the number of new 
businesses launched has fallen 23 percent. Recently, the World 
Bank's ``Doing Business'' report showed that the United States 
has dropped in the ease of starting a business category from 
third to 13th since 2007. Capital investment in startup 
companies has decreased, and far fewer small companies are 
holding initial public offerings.
    But, as some of our witnesses may testify today, a number 
of these challenges predate the economic downturn of the last 
few years. The continued decline in new business formation and 
growth puts our Nation's job creation and innovative capacity 
at risk. Recognizing this link between startup businesses, 
innovation, and job creation, the Subcommittee is interested in 
hearing from today's witnesses about the environment for new 
business formation, and obstacles preventing entrepreneurs from 
forming new companies and accelerating their growth. This is a 
difficult question to answer given our current budgetary 
challenges, so I especially hope to hear from our witnesses 
examples of what the Federal Government can do to eliminate 
barriers to entrepreneurship, in addition to any other creative 
ideas they may have.
    I would like to extend my appreciation to each of our 
witnesses for taking the time and effort to appear with us 
today and we look forward to your testimony.
    I now recognize the gentlelady from Maryland, the new 
Ranking Member of this Subcommittee, Ms. Edwards, for her 
opening statement and welcome to the Subcommittee as the 
Ranking Member.
    [The prepared statement of Mr. Quayle follows:]

               Prepared Statement of Chairman Ben Quayle,
               Subcommittee on Technology and Innovation,
      Committee on Science, Space, and Technology, U.S. House of 
                            Representatives

    Good morning. Before we get started, I would like to take a moment 
to welcome Congresswoman Donna Edwards of Maryland to her new role as 
Ranking Member of this Subcommittee. I look forward to working with you 
and your staff in the 112th Congress.
    The goal of today's hearing is to learn more about U.S. startup 
companies, which are engines of both transformative innovations and job 
creation. We will be hearing testimony on the obstacles impeding 
entrepreneurs from starting a new company from scratch or from 
expanding a fledgling company to a place of rapid growth.
    As this Subcommittee sits at the intersection of technology and 
innovation, we are uniquely positioned to address topics affecting 
competitiveness of emerging high-growth industries. Today's discussion 
is the second in a series focused on advancing U.S. innovation in a 
constrained budget environment. Earlier this fall, we held a hearing on 
the opportunities and challenges of cloud computing. In the coming 
months, it is my intention to address a range of topics including the 
role of standards in international trade, the importance of 
collaborative research partnerships in the innovation ecosystem, and 
new developments in wireless communications. In these difficult times, 
it is important that we continue to empower our Nation's innovators to 
maintain our economic competitiveness.
    Entrepreneurs and new businesses have played a vital role in 
advancing both job creation and innovation in our country. Over the 
last three decades, new businesses have created nearly 40 million jobs 
and have been responsible for nearly all net new job creation. New 
businesses also facilitate the spread and adoption of innovation 
because they are more likely to seize new developments in order to 
create market niches for themselves.
    From our founding, the United States has always cultivated the 
entrepreneurial spirit of its citizens, recognizing the vitality new 
businesses bring to commerce. Economist Robert Solow was awarded the 
Nobel Prize for his work demonstrating how economic innovation was the 
most powerful factor driving our country's growth and productivity in 
the 20th century. The public and private sectors have worked to support 
entrepreneurship by facilitating new business formation, access to 
capital, and financial rewards for success. In turn, these new 
businesses have added significantly to the growth and dynamism of our 
economy.
    Unfortunately, recent studies have found that the environment for 
new businesses has grown increasingly unfavorable. In the past three 
years, the number of new businesses launched has fallen 23 percent. 
Recently, the World Bank's ``Doing Business'' report showed that the 
U.S. has dropped in the ease of starting a business category from third 
to 13th since 2007. Capital investment in startup companies has 
decreased, and far fewer small companies are holding initial public 
offerings. But, as some of our witnesses may testify today, a number of 
these challenges predate the economic downturn of the last few years.
    The continued decline in new business formation and growth puts our 
Nation's job creation and innovative capacity at risk.
    Recognizing this link between startup businesses, innovation, and 
job creation, the Subcommittee is interested in hearing from today's 
witnesses about the environment for new business formation, and 
obstacles preventing entrepreneurs from forming new companies and 
accelerating their growth. This is a difficult question to answer, 
given our current budgetary challenges, so I especially hope to hear 
from our witnesses examples of what the Federal Government can do to 
eliminate barriers to entrepreneurship, in addition to any other 
creative ideas they may have.
    I'd like to extend my appreciation to each of our witnesses for 
taking the time and effort to appear before us today. We look forward 
to your testimony.

    Ms. Edwards. Thank you, Mr. Chairman, and I apologize if I 
am late. Usually, my military dad would have reminded me that I 
should be on time, which I usually am, and so I apologize. And 
thanks for welcoming me to the Committee and for calling this 
hearing on small business creation and the way to spur 
innovation. I want to thank our witnesses for joining us here 
today to discuss the obstacles and the challenges that face 
small businesses and what this Subcommittee can do to help.
    Mr. Chairman, I am also honored to join you on this 
Subcommittee as Ranking Member, and I look forward to working 
with you on the many issues that come under our jurisdiction 
and ways in which we can actually work together in a 
collaborative and bipartisan way.
    I am certain there isn't a person in this hearing room 
today that doesn't recognize how important small businesses are 
to our economy. We say it all the time, particularly new small 
businesses that spur innovation and create jobs. According to 
the Small Business Administration, small businesses generated 
65 percent of net new jobs over the past 17 years. And as we 
continue our efforts to put our economy back on track, we 
should be committed to fostering the creation of small 
businesses and give them the support and resources they need to 
succeed.
    And I am also certain that many of us here today would also 
agree that there is much that can be done to reduce the 
regulatory burden on emerging small businesses by reviewing 
duplicative or outdated regulations, as well as reducing 
bureaucracies that slow progress and add cost to business. I 
expect that many of us will also be united in our desire to 
create an environment for small business creation, and we can 
support policies that provide additional tax incentives to 
foster growth. I have long championed providing incentives to 
companies that co-locate research and development activities 
with domestic manufacturing. I think this is good public 
policy; it is good tax policy, and these federal policies can 
incentivize good behavior and spur homegrown innovation, 
progress, and manufacturing--21st century manufacturing.
    We should also ensure that our communities have the proper 
infrastructure and support to help businesses thrive. For that 
reason, I appreciate the shout-out from Mr. Rothrock to the I-
270 Corridor in your prepared remarks. The critical investments 
that our State in Maryland has made to support and grow 
businesses has been recognized by Bloomberg News in its naming 
of the region as one of the top 10 places for startups. And 
that is not by accident; it is by policy.
    There are additional ways to support small business 
creation, including amending our intellectual property laws to 
spur greater innovation and updating our immigration laws so 
that small businesses will have access to the most skilled 
workforce possible and enable entrepreneurs from throughout the 
world to set up shop here in the United States.
    And while there may be a shared interest in tackling these 
sort of matters, they unfortunately do not fall within this 
Subcommittee's jurisdiction and are not the items on which we 
have the authority to legislate. So we should do what we can. 
We have to do a better job of transferring new ideas and 
technologies out of federal or university labs and into the 
hands of startup companies in this country. I believe there are 
many opportunities for us to strengthen and improve federal 
technology transfer, build on the lab-to-market efforts that 
are already underway within the Administration. And Mr. 
Chairman, I hope that this is an issue that we can explore 
together in the months to come.
    I think that we have to recognize that there is a role for 
the Federal Government as well. There are countless 
technologies that we use every day that can trace their origin 
back to federal research and development investments. I hope 
that our witnesses will testify about that today. The 
indisputable truth is that without new discoveries, we won't 
have new game-changing technologies or the small businesses to 
make and sell them. The reality, though, is that those early 
risks are sometimes things that government needs to do and can 
do and then allow the commercial sector to take over.
    If we want a vibrant small business community that spurs 
innovation and creates new jobs, we have to provide sufficient 
funding to our federal research agencies. They are key. And if 
we turn our back on federal research and development, the 
medium- and long-term impacts on small business creation will 
be devastating.
    Finally, we should be building on the foundation this 
Committee laid last year in the America COMPETES 
Reauthorization Act to enhance and expand federal support for 
the commercialization of new technologies by small businesses. 
Over the last year, the Administration has made significant 
strides through its Startup America Initiative to ensure that 
the Federal Government does not turn its back on struggling 
small businesses. These efforts are helping to provide small 
businesses with the tools and resources they need to innovate 
and transform promising technologies into marketable products.
    This Subcommittee ought to be doing what it can to build 
upon the Administration's efforts, and we should be taking our 
cue from international competitors who are developing and 
investing in groundbreaking programs that help small businesses 
innovate and commercialize new products.
    For example, this year, Germany is investing $545 million 
in cooperative research and development projects conducted 
collaboratively by a number of small manufacturers or by small 
manufacturers in collaboration with public research 
institutions.
    Again, Mr. Chairman, I want to thank you for holding this 
important hearing, and I look forward to hearing from our 
witnesses today on this topic.
    [The prepared statement of Ms. Edwards follows:]

          Prepared Statement of Ranking Member Donna Edwards,
               Subcommittee on Technology and Innovation,
      Committee on Science, Space, and Technology, U.S. House of 
                            Representatives

    Mr. Chairman, thank you for calling this hearing on small business 
creation and ways to spur innovation. And thank you to our witnesses 
for joining us here today to discuss the obstacles and challenges 
facing small businesses and what this Subcommittee can do to help.
    Mr. Chairman, I am also honored to join you on this Subcommittee as 
Ranking Member. I am certainly looking forward to working with you on 
the important issues that come before this Subcommittee. I believe that 
there is a lot of common ground on these matters, and I fully expect 
that we will be able to work together in a collaborative and bipartisan 
way to address them.
    I am certain that there isn't a person in this hearing room today 
that does not recognize how important small businesses are to our 
economy. Small businesses, particularly new small businesses, spur 
innovation and create new jobs. According to the Small Business 
Administration, small businesses generated 65 percent of net new jobs 
over the past 17 years. As we continue our efforts to put our economy 
back on track, we should be committed to fostering the creation of 
small businesses and give them the support and resources they need to 
succeed.
    I am also certain that many of us here today would agree that there 
is much that can be done to reduce the regulatory burden on emerging 
small businesses by reviewing duplicative or outdated regulations, as 
well as, reducing bureaucracies that slow progress and add costs to 
businesses.
    I expect that many of us will also be united in our desire to 
create an environment for small business creation. We can support 
policies that provide additional tax incentives to foster growth. I 
have long championed providing incentives to companies that co-locate 
research and development with domestic manufacturing. These federal 
policies incentivize good behavior and spur home-grown innovation and 
progress.
    We must also ensure that our communities have the proper 
infrastructure and support to help businesses thrive. For that reason, 
I appreciate the shout-out from Mr. Rothrock to the I-270 corridor in 
his prepared remarks. The efforts and the critical investments the 
State has made to support and grow businesses have been recognized by 
Bloomberg News in its naming of the region as one of the top 10 places 
for startups.
    There are additional ways to support small business creation, 
including amending our intellectual property laws to spur greater 
innovation and updating our immigration laws so that small businesses 
will have access to the most skilled workforce possible and enable 
entrepreneurs from throughout the world to set up shop here in the 
United States. While there may well be a shared interest in tackling 
these sorts of matters, they unfortunately do not fall within this 
Subcommittee's jurisdiction and are not items upon which we have the 
authority to legislate.
    Fortunately, there is a lot within this Subcommittee's jurisdiction 
that can be done to support and foster the creation of new small 
businesses, and it is my hope that we will be able to focus today's 
discussion on these issues.
    There are countless technologies that we use every day that can 
trace their origin back to federal research and development 
investments. The indisputable truth is that without new discoveries, we 
won't have new game-changing technologies or the small businesses to 
make and sell them. If we want a vibrant small business community that 
spurs innovation and creates new jobs, we simply must provide 
sufficient funding to our federal research agencies. If we turn our 
back on federal research and development, the medium- and long-term 
impacts on small business creation will be devastating.
    We must also do a better job of transferring new ideas and 
technologies out of federal or university labs and into the hands of 
startup companies in this country. I believe there are many 
opportunities for us to strengthen and improve federal technology 
transfer and build upon the lab-to-market efforts that are already 
underway within the Administration. Mr. Chairman, I hope that this is 
an issue that we can explore together in the months to come.
    Finally, we should be building upon the foundation this Committee 
laid last year in the America COMPETES Reauthorization Act to enhance 
and expand federal support for the commercialization of new 
technologies by small businesses. Over the last year, the 
Administration has made significant strides through its Startup America 
initiative to ensure that the Federal Government does not turn its back 
on struggling small businesses. These efforts are helping to provide 
small businesses with the tools and resources they need to innovate and 
transform promising technologies into marketable products.
    This Subcommittee ought to be doing what it can to build upon the 
Administration's efforts. We should be taking our cue from our 
international competitors who are developing and investing in ground-
breaking programs that help small businesses innovate and commercialize 
new products. For example, this year, Germany is investing $545 million 
in cooperative research and development projects conducted 
collaboratively by a number of small manufacturers or by small 
manufacturers in collaboration with public research institutions.
    The truth is that when our Federal Government has stepped up to the 
plate and taken an active role in private sector innovation--whether 
through the widely popular Small Business Innovation Research program 
or the Advanced Technology Program at NIST--we've witnessed great 
success. I am hopeful that we can begin to move past historical debates 
about industrial policy and picking winners and losers, and acknowledge 
that this is instead about ensuring that our country and our small 
businesses win in the global market.
    Mr. Chairman, thank you again for holding this important hearing. I 
look forward to hearing from our witnesses today on this important 
topic.

    Chairman Quayle. Thank you, Ms. Edwards.
    If there are Members who wish to submit additional opening 
statements, your statements will be added to the record at this 
point.
    At this time, I would like to introduce our witnesses, and 
then we will proceed to hear from each of them in order.
    Our first witness is Mr. Brink Lindsey, Senior Scholar in 
Research and Policy at the Ewing Marion Kauffman Foundation. 
Mr. Lindsey has conducted research and has written on the 
structural reforms needed to revive entrepreneurial innovation 
from formation and job creation.
    Next, we will hear from Mr. Julian Mann, Cofounder and Vice 
President of Product Development and Research at Skybox 
Imaging. Mr. Mann is an aerospace engineer who balances near-
term product development and long-term technology strategy for 
his company.
    Our third witness is Mr. Ray Rothrock, a Partner at the 
venture capital firm Venrock. Mr. Rothrock is a nuclear 
engineer who has spent much of his career growing companies.
    Our final witness is Mr. Steve Dubin, former CEO of Martek 
Biosciences and Senior Advisor to DSM Nutritional Products. 
Early this year, Martek was inducted into the Small Business 
Innovation Research Hall of Fame in recognition of its success 
in research, innovation, and commercialization within the SBIR 
program.
    Thanks again to our witnesses for being here this morning. 
As our witnesses should know, spoken testimony is limited to 
five minutes each. After all witnesses have spoken, members of 
the Committee will have five minutes each to ask questions.
    I now recognize our first witness, Mr. Brink Lindsey, for 
five minutes.

                STATEMENT OF MR. BRINK LINDSEY,

             SENIOR SCHOLAR IN RESEARCH AND POLICY,

                EWING MARION KAUFFMAN FOUNDATION

    Mr. Lindsey. Chairman Quayle, Members of the Committee, 
thank you very much for the opportunity to appear here today.
    Today's hearing is premised on a connection between 
encouraging new businesses and fostering innovation, and that 
premise is very well supported by the evidence. It turns out 
that a significant fraction of U.S. productivity growth comes 
from the entry and exit of firms, what the economist Joseph 
Schumpeter called ``creative destruction.'' Generally speaking, 
exiting firms are less productive than existing firms, which in 
turn are less productive than surviving new firms. According to 
a recent paper by the economist John Haltiwanger at the 
University of Maryland and research supported by the Kauffman 
Foundation, net entry of firms has contributed about 30 percent 
of recent total productivity growth in the manufacturing sector 
and virtually all productivity growth in the retail sector. New 
firms are thus the lifeblood of rising productivity, and, 
consequently, rising living standards.
    And when it comes to promoting prosperity through job 
creation, the role of new enterprises can hardly be overstated. 
According again to research from the Kauffman Foundation, there 
were only seven years between 1977 to 2005 in which existing 
firms created more jobs than they destroyed. So the bottom line 
is simple--without startups there would be no net job creation 
in the United States.
    Unfortunately for both the short-term prospects for a 
rebound in employment and the long-term prospects for 
productivity and growth, the creation of new businesses in 
America is in a slump, and that slump predates the Great 
Recession that began in 2008. According to that paper by John 
Haltiwanger I just mentioned, average annual gross job creation 
by startups has fallen from 3.5 percent of total employment in 
the 1980s to three percent in the 1990s to 2.6 percent since 
2000, a 25 percent cumulative drop. With this slump has come a 
drop in overall gross and net job creation for the U.S. 
economy.
    The timing of this deterioration suggests that the problem 
is structural, not merely cyclical. That is, it is not merely 
linked to the current downturn. And structural problems call 
for structural solutions. Specifically, the ultimate answer to 
restoring both innovation and vigorous job growth lies in 
policy reforms that create a more favorable environment for the 
creation and growth of new businesses. Barriers to 
entrepreneurship need to be identified and systematically 
dismantled.
    This conclusion is further supported by my own research 
into the growth challenges confronting not only the United 
States but all advanced countries operating at the 
technological frontier. My findings can be summarized as 
follows: The available sources of growth--and the policy 
requirements of growth--change over time with a country's 
advancing economic development. In particular, as countries get 
richer, they become ever more heavily dependent on homegrown 
innovation, as opposed to simply expanding existing activities 
or borrowing good ideas from abroad in order to keep the growth 
machine humming. And since new firms play an absolutely vital 
role in the innovation process, that means that removing 
barriers to entrepreneurship becomes increasingly important to 
maintaining economic dynamism and prosperity.
    In an effort to identify the kinds of policy reforms needed 
to reduce the structural barriers to entrepreneurship, 
innovation, and job creation, the Kauffman Foundation unveiled 
in July of this year a series of legislative proposals called 
the Startup Act of 2011. Let me review now the major elements 
of this plan: an entrepreneur visa along the lines of the 
revised Kerry-Lugar Startup Visa Act; green cards for foreign 
students when they receive so-called STEM degrees from U.S. 
universities; exemption from capital gains taxation for 
investments in startups held for at least five years; a 100 
percent exclusion from corporate income tax for qualified small 
businesses on their first year of taxable profit followed by a 
50 percent exclusion in the subsequent two years; allowing 
shareholders of companies with market valuations under $1 
billion to opt out of Sarbanes-Oxley requirements; higher fees 
for better, faster service at the Patent and Trademark Office 
to clear the backlog there--happily, I can say that this 
proposal was included in the recently enacted patent reform 
legislation; mandating that all federal research grants to 
universities be conditioned on universities affording their 
faculty members the ability to choose their own licensing 
agents rather than having to rely, as they do at present, on 
the monopoly of their own university's technology licensing 
office; instituting a requirement that all major regulatory 
rules sunset automatically after 10 years; subjecting all 
proposed and existing major regulatory rules to a uniformed 
cost-benefit analysis; and finally, instituting monitoring of 
business climate in states and localities along the lines of 
what the World Bank's ``Doing Business'' report does for 
different countries.
    The proposals contained in the Startup Act represent a kind 
of greatest hits collection produced--picked from a far broader 
set of promising reform ideas. Some of these other ideas can be 
found in a book published this year by the Kaufmann Foundation 
entitled ``Rules for Growth.''
    A great deal of additional work needs to be done on 
fleshing out what we can do to change the legal and regulatory 
environment, but in the current crisis, first steps are 
urgently needed. We believe that the proposals put forward in 
the Startup Act would make excellent first steps towards a 
better climate for firm formation, innovation, and prosperity.
    Thank you very much.
    [The prepared statement of Mr. Lindsey follows:]

                Prepared Statement of Mr. Brink Lindsey,
                 Senior Scholar in Research and Policy,
                    Ewing Marion Kauffman Foundation

    Chairman Quayle, Ranking Member Edwards and distinguished Members 
of the Subcommittee, my name is Brink Lindsey, and I am a senior 
scholar in research and policy at the Ewing Marion Kauffman Foundation. 
I thank you for the invitation to appear at today's hearing and share 
some perspectives on the crucial challenge of reviving new firm 
formation and restoring dynamism and prosperity to the U.S. economy.
    Today's hearing is premised on a connection between encouraging new 
businesses and fostering innovation, and that premise is well supported 
by the evidence. Existing firms contribute much to innovation as well, 
but such innovation tends to be incremental: improvements in existing 
products or production processes or introduction of new products 
through pursuit of well-established R&D agendas. But when it comes to 
so-called discontinuous or disruptive innovation--the kinds of 
breakthroughs that topple the status quo and give rise to whole new 
industries--the agents of change tend to be new firms. Think FedEx, 
WalMart, Microsoft, Google, all of which were upstarts without any 
stake in the existing way of doing things. In this regard, the 
remarkable career of Steve Jobs at Apple is the exception that proves 
the rule. The reason he was so exceptional was precisely that he 
launched multiple business revolutions from the same company. That is a 
rarity.
    Economic research bears out the importance of new firms to 
America's economic dynamism. It turns out that a significant fraction 
of U.S. productivity growth comes from the entry and exit of firms--
what Joseph Schumpeter called creative destruction. Generally speaking, 
exiting firms are less productive than existing firms, which in turn 
are less productive than surviving new firms. According to a recent 
paper written by economist John Haltiwanger and supported by the 
Kauffman Foundation, net entry of firms has contributed about 30 
percent of total productivity growth in the manufacturing sector and 
virtually all productivity growth in the retail sector. \1\ New firms 
are thus the lifeblood of rising productivity, and, consequently, 
rising living standards.
---------------------------------------------------------------------------
    \1\  John Haltiwanger, ``Job Creation and Firm Dynamics in the 
U.S.,'' National Bureau of Economic Research, May 2011, http://
www.nber.org/chapters/c12451.pdf.
---------------------------------------------------------------------------
    And when it comes to promoting prosperity through job creation, the 
role of new enterprises can hardly be overstated. According to research 
from the Kauffman Foundation, there were only seven years from 1977 to 
2005 in which existing firms created more jobs than they destroyed. The 
bottom line is simple: Without startups, there would be no net job 
creation in the United States. \2\
---------------------------------------------------------------------------
    \2\  See Tim Kane, ``The Importance of Startups in Job Creation and 
Job Destruction,'' Kauffman Foundation Research Series: Firm Formation 
and Economic Growth, July 2010, http://www.kauffman.org/uploadedFiles/
firm-formation-importance-of-
startups.pdf.
---------------------------------------------------------------------------
    Unfortunately for both the short-term prospects for a rebound in 
employment and the long-term prospects for productivity and growth, the 
creation of new businesses in America is in a deep slump. And what is 
more, additional research from the Kauffman Foundation reveals that 
slump predates the Great Recession that began in 2008. Census data show 
that the number of new employer businesses created annually began 
falling after 2006, dropping 27 percent by 2009. Meanwhile, the average 
number of employees per new firm has been trending gradually downward 
since 1998. And the pace of job growth at new firms during their first 
five years has been slowing since 1994. \3\
---------------------------------------------------------------------------
    \3\  E.J. Reedy and Robert E. Litan, ``Starting Smaller, Staying 
Smaller: America's Slow Leak in Job Creation,'' Kauffman Foundation 
Research Series: Firm Formation and Economic Growth, July 2011, http://
www.kauffman.org/uploadedFiles/
job-leaks-starting-smaller-study.pdf.
---------------------------------------------------------------------------
    A picture of even longer-term decline is revealed by the recent 
paper from John Haltiwanger mentioned above. Average annual gross job 
creation by startups has fallen from 3.5 percent of total employment in 
the 1980s to three percent in the 1990s to 2.6 percent since 2000--25 
percent cumulative drop. With this slump has come a drop in overall 
gross and net job creation for the U.S. economy.
    The timing of this deterioration suggests that the problem is 
structural, not merely cyclical. And structural problems call for 
structural solutions. Specifically, the ultimate answer to restoring 
both innovation and vigorous job growth lies in policy reforms that 
create a more favorable environment for the creation and growth of new 
businesses. Barriers to entrepreneurship need to be identified and 
systematically dismantled.
    This conclusion is further supported by my own research into the 
growth challenges confronting not only the United States but all 
advanced economies operating at the technological frontier. My findings 
can be summarized as follows: The available sources of growth, and the 
policy requirements of growth, change over time with a country's 
advancing economic development. In particular, as countries get richer, 
they become ever more heavily dependent on home-grown innovation--as 
opposed to simply expanding existing activities or borrowing good ideas 
from abroad--to keep the growth machine humming. And since new firms 
play an absolutely vital role in the innovation process, that means 
that removing barriers to entrepreneurship becomes increasingly 
important to maintaining economic dynamism and prosperity. \4\
---------------------------------------------------------------------------
    \4\  Brink Lindsey, ``Frontier Economics: Why Entrepreneurial 
Capitalism Is Needed Now More Than Ever,'' Kauffman Foundation Research 
Series on Dynamics of Economic Growth, April 2011, http://
www.kauffman.org/uploadedFiles/
frontier-economics-4-06.pdf.
---------------------------------------------------------------------------
    To get more specific, our long-term growth prospects are dimmed 
today by shifting demographics. Over the course of the 20th century, 
U.S. growth rates got a steady and considerable boost from the ongoing 
rise of women in the workforce. As a result, the American labor force 
climbed from 56 percent of the adult population in 1900 to 67 percent 
in 2000. This is a classic form of non-innovative growth: boosting 
inputs into the production process, as opposed to figuring out how to 
get more output from a given quantity of inputs. But now this source of 
growth is all but exhausted. The female labor force participation rate 
peaked in the 1990s and then began dipping well before the Great 
Recession. Meanwhile, male participation has been falling gradually for 
decades because of later entry into the workforce, longer retirements, 
and the aging of the population. Consequently, according to a study by 
the McKinsey Global Institute, growth in the workforce will add only 
0.5 percentage points to the overall growth rate between 2010 and 
2020--as compared to 2.0 percentage points in the 1970s. Because of 
these unfavorable demographics, McKinsey estimates that productivity 
growth will have to increase by almost 25 percent to keep real per 
capita growth going at its long-term historic rate of 1.7 percent a 
year. \5\
---------------------------------------------------------------------------
    \5\  McKinsey Global Institute, ``Growth and Renewal in the United 
States: Retooling America's Economic Engine,'' February 2011. http://
www.mckinsey.com/mgi/publications/
growth-and-renewal-in-the-
us/pdfs/. 
MGI-growth-and-renewal-in-
the-us-full-report.pdf.
---------------------------------------------------------------------------
    In an effort to identify the kinds of policy reforms needed to 
reduce structural barriers to entrepreneurship, innovation and job 
creation, the Kauffman Foundation unveiled in July of this year a 
series of legislative proposals called the Startup Act of 2011. \6\ Let 
me review now the major elements of this plan:
---------------------------------------------------------------------------
    \6\  Kauffman Foundation, ``The Startup Act: A proposal for new 
legislation aimed at jump-starting the U.S. economy through successful 
startups,'' http://www.kauffman.org/uploadedFiles/
startup-act.pdf.

      Welcoming job creators to the United States. First, we 
propose an entrepreneur visa along the lines of the revised Kerry-Lugar 
Start-Up Visa Act. Initially, entrants would be screened for temporary 
visas based on either the outside capital they had attracted or 
revenues from U.S. sales they already had recorded. Permanent work 
visas (green cards) would be granted once these entrepreneurs had hired 
a minimum number of U.S. workers. Although the Kerry-Lugar bill imposes 
a limit on the number of visas granted, we believe a strong case can be 
made for a visa without any caps. A second, mutually reinforcing idea 
would grant green cards to foreign students when they receive their so-
called STEM degrees--degrees in science, technology, engineering and 
mathematics--from U.S. universities. Admittedly, most STEM graduates 
who are given visas will compete with U.S. workers for jobs. In the 
long run, however, given the greater propensity of immigrants to found 
businesses, it is likely many of the STEM graduates permitted entry now 
eventually will go on to form scale businesses that hire American 
---------------------------------------------------------------------------
workers.

      Facilitating early-stage financing for new firms. The 
first proposal here is for a capital gains tax exemption for long-held 
investments in startups. The Small Business Jobs Act of 2010 currently 
provides such an exemption for investments in ``qualified small 
businesses'' (those with less than a $50 million valuation at the time 
of investment) held for at least five years. The exemption is currently 
due to expire at the beginning of 2012, but the National Advisory 
Council on Innovation and Entrepreneurship (NACIE), created by the 
Department of Commerce, has recommended a permanent exemption for these 
critical initial investments in startups. It is appropriate for this 
idea to be included in any comprehensive startup legislation. NACIE 
also has suggested a 100 percent exclusion on corporate taxable income 
earned by qualified small businesses (again, using the same test as for 
the proposed capital tax exemption) on the first year of taxable 
profit, followed by a 50 percent exclusion in the subsequent two years. 
We believe additional incentives along these lines are worthy of 
support.

      Facilitating access to public capital markets. The 
provisions of the Sarbanes-Oxley Act, especially the verification of 
internal controls embodied in Section 404 of the Act, impose a 
disproportionate burden on new, small companies and thus act as a 
barrier to going public. In 2010, Congress implicitly recognized this 
problem when granting a permanent exemption from the Section 404 audit 
requirements for public companies with market capitalizations of less 
than $75 million. Any comprehensive startup legislation should go 
further, for a very simple reason: The best judges of whether the 
benefits of the SOX requirements outweigh their costs are the 
shareholders of the companies for whose benefit the law was enacted in 
the first place. Accordingly, rather than simply raising the market cap 
threshold for exempting smaller public companies from SOX's 
requirements, the most logical SOX reform is to allow shareholders of 
public companies with market valuations below $1 billion to opt in to 
at least Section 404 compliance, if not to all of the SOX requirements. 
Companies whose shareholders do not elect to comply with SOX should 
have special designations in their exchange listings to denote this 
fact so that all shareholders, current and potential, are put on 
notice.

      Accelerating the formation and commercialization of new 
ideas. Recently enacted patent reform legislation contains various 
provisions whose likely impacts on innovation and startups are not 
clear. We believe that at least one provision of the legislation--
namely, higher fees for faster or better service--is very likely to be 
positive in its effects. To obtain patent protection for new ideas, 
inventors first must receive a patent from the U.S. Patent and 
Trademark Office (USPTO). In recent years, however, USPTO examiners 
have been unable to keep up with the pace of new applications, to the 
point where there is now a backlog of more than 700,000 patent 
applications at the office. There is an old saying that ``justice 
delayed is justice denied,'' and the same certainly applies to a patent 
regime that is too slow to process incoming patents.

        More than 30 years ago, Congress enacted the Bayh-Dole Act, 
        granting recipients of federal research monies intellectual 
        property rights in innovations discovered with the use of those 
        funds. Since Bayh-Dole was enacted, faculty members typically 
        have been required under their university contracts to use the 
        university's own technology licensing office (TLO) as the 
        exclusive agent for licensing the rights to faculty-developed 
        innovations either to the inventors themselves or third 
        parties. In effect, university TLOs have become monopoly 
        licensing agents and gatekeepers, preventing innovative faculty 
        from using their own attorneys or other third parties, or even 
        other university TLOs, to license and commercialize their 
        innovations. The Federal Government can and should remedy this 
        odd situation. One simple way to do so is to mandate that all 
        federal research grants to universities be conditioned on 
        universities' affording their faculty members the ability to 
        choose their own licensing agents. A university's own TLO could 
        compete in this new environment or, at minimum, provide 
        informational services and mentoring to university faculty 
        members. Licensing freedom for faculty inventors and true 
        competition in innovation licensing would speed up the 
        commercialization of faculty innovations, benefiting the 
        innovators, their universities and our society.

      Removing regulatory barriers to entrepreneurship. Because 
of their size, small and new businesses bear an especially heavy burden 
when complying with the multitude of local, State and federal rules 
that govern business behavior. To help alleviate this burden, the 
Startup Act contains two proposals for systemic reform of the federal 
regulatory process. The first is a simple requirement that all major 
rules (those with estimated costs of at least $100 million) sunset 
automatically after 10 years. Rules then would be allowed to lapse 
unless and until re-proposed and implemented (under new standards 
outlined next). This would regularly cleanse the books of inefficient 
and costly rules and, thus, barriers to business formation and growth 
for all businesses, including startups. The second proposal is for all 
major rules to be subject to a uniform regulatory review process. Under 
this screening procedure, no major rules would be implemented or 
maintained (after a sunset review) unless agencies can determine that 
the rules' benefits outweigh their costs. Furthermore, the form of 
these rules should be such that the option chosen is the most cost-
effective of the alternatives available.

    In addition, the Startup Act offers a new mechanism for monitoring 
and thereby potentially curbing regulatory abuses and excessive costs 
at the State and local levels. Although the Federal Government should 
not step on the toes of local and State governments, it can facilitate 
healthy competition among these jurisdictions for favorable startup 
environments. Just as the World Bank has assessed the favorability of 
the legal environment toward business in different countries through 
its annual Doing Business reports, there should be some recognized 
entity that does the same (with a special emphasis on policies and 
practices affecting the formation and growth of new businesses) for 
each of the 50 States and all cities above a certain size. The Doing 
Business rankings have proven to be an important spur to regulatory 
reform around the world. A similar Doing Business project for 
jurisdictions inside the United States could have the same result. Both 
the government and private sector have roles in this effort. Because 
the underlying data are likely to be costly and difficult to gather, it 
could be useful and important to charge and fund one government agency 
with collecting the raw data that could be made available to the 
public, which would permit either nonprofit or for-profit rating 
systems to develop.
    The proposals contained in the Startup Act represent a kind of 
``greatest hits'' collection picked from a far broader set of promising 
reform ideas. Some of these other ideas can be found in a book 
published this year by the Kauffman Foundation entitled Rules for 
Growth: Promoting Innovation and Growth through Legal Reform. That book 
was the product of an ongoing Kauffman Foundation initiative--the 
Project on Law, Innovation and Growth--that we hope will make further 
major contributions to our understanding of how to improve our legal 
and regulatory system to make it more conducive to entrepreneurial 
dynamism.
    Much work remains to be done, but in the current crisis, first 
steps are urgently needed. We believe the proposals put forward in the 
Startup Act would make excellent first steps toward reviving firm 
formation, innovation and prosperity.
    Thank you.

    Chairman Quayle. Thank you, Mr. Lindsey.
    I now recognize Mr. Julian Mann to present his testimony.

                 STATEMENT OF MR. JULIAN MANN,

       CO-FOUNDER AND VICE PRESIDENT, PRODUCT DEVELOPMENT

                  AND RESEARCH, SKYBOX IMAGING

    Mr. Mann. Mr. Chairman and Committee, thank you very much 
for the opportunity to be here this morning.
    In 2007, I was working as a student intern with NASA and 
realized that the billions of dollars we were spending building 
satellites as a Nation was largely driven by the antiquated set 
of technologies on which these satellites were based. But I had 
an epiphany. The technology that we were using to build 
academic satellites in our Stanford University research lab 
could have real impact on the way in which our Nation conducts 
business in space if only we could bring the necessary 
investment from the private sector to accelerate the 
development and commercialization of the technology. This idea 
became Skybox.
    I co-founded Skybox Imaging in January 2009 to 
revolutionize the use of satellite imagery in characterizing 
daily activity across the surface of our planet. At Skybox, we 
combine our own low-cost microsatellite design with the Silicon 
Valley approach to storing, processing, and disseminating 
massive quantities of imagery and derived data. We have raised 
$21 million in venture capital to date, have quadrupled in size 
over the last nine months and now directly and indirectly 
employ over 75 engineers across the United States.
    People talk about the decline in American competitiveness, 
but there is a real opportunity to make up that lost ground. We 
need more companies like Skybox, and I have three ways in which 
we can facilitate that growth: improve the transfer of 
commercially viable IP out of research institutions and into 
the private sector, create mechanisms that assist startup 
companies in alleviating governmental regulations that are 
restricting innovation, and reforming acquisition practices to 
make the government a better customer to emerging ventures.
    As we started seriously investigating making Skybox a 
reality, Stanford provided a number of resources that were 
essential to our commercial growth. We were also encouraged to 
take the idea outside the university if we were serious about 
such commercialization. There was sound reason for this. 
Graduate students conducting steadily progressing, multiyear 
projects produce the majority of university research. The pace 
within new ventures is much faster. New ventures are successful 
due to their ability to rapidly change course in order to 
ensure convergence between product and market opportunity. This 
inherent lack of synchronicity between the two groups makes 
productive collaboration restrictively difficult to pursue. 
Instead, by transitioning the work from academia to industry 
when the focus shifts from fundamental research to 
commercialization, Stanford ensures alignment between the 
current stage of development and the environment in which said 
development is taking place.
    Stanford is particularly effective in providing programs 
that assist in facilitating this transition from courses 
designed to help entrepreneurial-minded researchers understand 
the business plan creation and venture capital financing 
processes to investor and advisor introductions provided 
through the extended Stanford network; a distinct pipeline 
exists to help educate and foster entrepreneurship within the 
university.
    There are numerous examples of this technology transition 
approach working extremely effectively--Google, Cisco, Hewlett 
Packard, Yahoo, Sun Microsystems, and VMware were all founded 
in this way. Skybox follows a long tradition in progressing 
from research to commercialization by leaving academia.
    Navigating burdensome federal regulations while 
simultaneously trying to build and grow a business can kill a 
new venture. As a commercial satellite imaging company, Skybox 
has felt this pain since the day of our founding. One set of 
regulations has been particularly restrictive: the 
International Traffic in Arms Regulations (ITAR). Beyond 
driving up our engineering costs by up to a factor of 10, of 
greater concern is how ITAR has reduced American 
competitiveness. Because the majority of the global market for 
small satellite technology is international, domestic suppliers 
restricted by the ITAR have fallen behind their foreign 
competitors.
    When we have approached these foreign suppliers with the 
idea of a deeper collaboration or co-development, they have 
largely declined. They are concerned that they will not be able 
to provide the resultant technology to their existing customer 
base if they partner with American companies. This is a real 
problem. Rather than having the government attempt to create 
what amounts to public venture capital, the government needs to 
consider how it can be a better customer to innovative and 
growing companies.
    Ultimately, the private sector is very efficient at 
identifying technologies that have real commercial viability 
and providing the capital necessary to grow these technologies. 
Existing government acquisition models have not kept up with 
the pace of technological innovation and failed to express the 
market need in a way that is addressable by commercial product 
companies. Consequently, many innovative technology companies 
do not even consider doing business with the Federal Government 
because it is simply too costly to do so. Entrepreneurs are 
successful in the private sector because they find ways of 
delivering capabilities that do more with less. This is the 
same challenge that we face as a Nation today.
    Working with new ventures is dissimilar from working with 
other types of organizations. It requires alternate 
communication and outreach strategies, new acquisition 
methodologies, and differing types of governmental support. It 
also yields novel solutions, engages our Nation's best and 
brightest innovators, and ensures that we remain the 
technological powerhouse that has been our enduring strength. 
We must find new ways of tapping the incredible resource that 
is our entrepreneurial base to solve the challenges that face 
our Nation. This change will not be immediate, nor does it 
require astronomical capital to support. With concentrated 
effort, advocacy, and partnership we can bring government and 
the technology innovation sector together for our mutual and 
enduring benefit.
    Thank you.
    [The prepared statement of Mr. Mann follows:]

                 Prepared Statement of Mr. Julian Mann,
           Co-Founder and Vice President, Product Development
                      and Research, Skybox Imaging

    I co-founded Skybox Imaging Inc. to revolutionize the use of 
commercial satellite imagery in characterizing daily activity on the 
surface of our planet. At Skybox we combine our own low-cost 
microsatellite design with a Silicon Valley approach to storing, 
processing and disseminating massive quantities of imagery and derived 
data. Skybox was incorporated in January 2009, after a year of 
incubating the concept while conducting graduate research in 
Aeronautics & Astronautics at Stanford University. We received our 
initial venture investment led by Khosla Ventures in the summer of 
2009, with a second financing round a year later, in which Bessemer 
Venture Partners joined our initial investors. To date Skybox has 
received 21 million dollars in venture capital financing. Throughout 
the process of conceptualizing, funding, and growing a high-tech 
venture, we have been the beneficiaries of several opportunities 
without which our progress to date would not have been possible; we 
have also faced numerous challenges along the way.
    As graduate students at Stanford, my co-founders and I were 
presented with a number of resources that were instrumental in the 
creation of the company. From courses designed to help innovators 
understand business plan creation and the venture capital financing 
process to numerous investor introductions provided through the 
extended Stanford network, there existed a distinct pipeline to help 
educate and foster entrepreneurship from within the University. That 
being said, the University was also very clear through its practices 
and actions that, should one be truly interested in pursuing an 
entrepreneurial venture, the proper venue for such activity was outside 
the University.
    Even with these incredible resources at our disposal, we still 
found substantial barriers preventing us from getting our company off 
the ground. The primary hurdle, and the one faced by all entrepreneurs, 
was gaining access to capital. Venture investors are experts at pattern 
recognition, they observe opportunity trends that have been successful 
in the past, and look for new investments that exhibit the potential to 
follow the same trend. As a result, it is incumbent upon the 
entrepreneur to find a way of demonstrating how his or her venture has 
the potential to follow one of these valued trends. For some companies 
this is easy, but we were attempting to convince investors surrounded 
by opportunities vying to be the next Facebook or Twitter to invest in 
a company building, launching and operating satellites. Even with the 
myriad of introductions to venture capitalists that we received, it 
took months of restructuring the opportunity, and hundreds of meetings 
that ended in eloquent variations of ``no,'' to finally find a way of 
positioning our company as a good fit for venture capital.
    Although built upon a foundation of experience fostered within a 
university research setting, Skybox does not maintain any active 
research partnerships with universities. In general, it is very 
difficult for new ventures and universities to find productive 
methodologies for co-development of new technologies. Both entities are 
typically capital constrained, and often have competing goals with 
respect to commercialization of technology and publication of research. 
New companies are myopically focused on customer adoption and creating 
competitive barriers; universities are interested in maintaining a 
sustainable base of novel research.
    Beyond a difference in objectives and commonality in resource 
scarcity, direct collaboration between universities and new ventures is 
often challenged by a fundamental mismatch in operational tempo between 
the two types of organizations. Graduate students, conducting multi-
year projects, produce the majority of university research. Conversely, 
the pace within new ventures is much faster. For example, our 
organization has grown almost 400% over the last nine months. This 
inherent lack of synchronicity between the two groups makes productive 
collaboration restrictively difficult to pursue. Based upon these 
challenges, and the manner in which Stanford made it clear to us that 
it was time to take our idea outside the University if we were going to 
pursue it further, it is my strong opinion that the proper time for 
separation from universities is when a new venture moves beyond the 
realm of fundamental research and into the world of commercialization.
    Numerous universities have programs, Stanford University's Office 
of Technology Licensing, for example, that assist in fostering 
relationships between university researchers and organizations 
interested in the commercialization of their intellectual property. The 
difference between such programs and the aforementioned difficulties in 
collaboration is that these licensing programs are typically designed 
to facilitate the transfer of existing IP to external entities for 
commercialization rather than collaboration in research. There are 
numerous instances in which this type of intellectual property transfer 
has worked extremely effectively; Google and Yahoo were both founded 
through this mechanism, for example. Although Skybox is not based upon 
direct transfer of IP from the university, we exhibit the same 
transition from untargeted research to focused commercialization as we 
departed from academia into the world of entrepreneurship.
    It is similarly challenging for new ventures to engage and 
collaborate with larger, more entrenched companies. Large organizations 
often operate on similar time scales to universities, creating the same 
set of challenges addressed previously. Most start-up companies tend to 
be very flat organizations, lacking traditional organizational 
bureaucracies, and are characterized by their decisiveness and ability 
to change directions quickly. This nimbleness is one of the key reasons 
why startup companies are able to innovate. Larger, more established, 
organizations are often much more hierarchical and resistant to change. 
In fact, the type of rapid iteration and course-correction that is 
essential to new venture success is often characterized as high-risk 
activity when observed within large organizations. Consequently, this 
operational incompatibility makes it very difficult for startup 
companies to successfully collaborate with large organizations.
    A common thread found among most entrepreneurs in the technology 
sector is that they are working on technologies that are fundamentally 
transformative within their respective markets. Many, if not most, of 
these companies eventually come into conflict with existing regulatory 
environments. This stems from the fact that when the particular 
regulations were originally developed, the type of technology creating 
conflict was not even in the realm of consideration. As a member of the 
aerospace industry, Skybox has felt this pain since the day of its 
founding.
    As a commercial Earth observation satellite company, we must 
operate under NOAA, FCC and ITAR regulation. Each one of these has 
presented its own set of challenges in our growth. For example, in 
obtaining a license from the FCC to operate an Earth observation 
satellite, a company must post a five million dollar surety bond. While 
this may not be overly burdensome for a traditional imaging satellite 
program, which costs over 500 million dollars, our satellites are over 
an order of magnitude less expensive, resulting in greater than 10 
percent of the overall program cost being consumed by a federal 
licensing bond. This is a very difficult challenge for a new venture 
being funded with equity dollars to weather.
    The second major example of burdensome federal regulation is ITAR. 
As a satellite manufacturing company, virtually everything done by our 
engineering organization is governed under the ITAR. Even the most 
benign mechanical bracket can only be manufactured by an ITAR certified 
machine shop. The vast majority of local machine shops are not ITAR 
certified, and have no interest in becoming certified due to the high 
cost, burdensome documentation requirements, and increased liability. 
As a result we have an artificially reduced supply market, which has 
resulted in our manufacturing costs being increased by a factor of 10. 
Furthermore, these machine shops are typically very busy, which means 
we have a lead-time that is two to three times longer than if we were 
operating in a less regulated industry.
    Perhaps even more concerning is the fact that the ITAR regulations 
have had the unintended consequence of actually decreasing domestic 
competitiveness in the aerospace industry. As a relative newcomer to 
the industry, I have not seen the progression of the regulations over 
the years. What I have seen, however, is that when it comes to low-
cost, transformative, satellite technologies, international developers 
have significantly surpassed the state of domestically developed 
technologies. A number of our high-performance specialty components are 
obtained from international suppliers. Additionally, when we have 
approached these suppliers about the possibility of co-development or 
manufacturing support, they have declined due to the fact that their 
primary customer base is outside the United States. International 
developers are rejecting the idea of deeper collaboration with American 
companies due to the concern that they will not be able to export the 
resulting technology to their existing customers due to ITAR; this is a 
real problem for American innovation.
    While I have highlighted a few specific regulations that have 
impeded growth at Skybox, it is important to remember is that there is 
no ``one-size-fits-all'' solution when it comes to reducing regulatory 
burden for entrepreneurs. What are needed, however, are mechanisms to 
help entrepreneurs recast these issues as blockers to innovation, with 
the ultimate goal of alleviating the regulatory burden. No one wants to 
inhibit innovation within our nation, yet it is incredibly expensive 
and difficult for entrepreneurs to interact with the Federal 
Government. At Skybox we have spent thousands of man-hours and hundreds 
of thousands of dollars solely trying to better understand the 
regulations that are relevant to us, and educate regulators about what 
we are doing and how we are doing things differently. We are the lucky 
ones; we are well financed and have comparatively strong ties to the 
Federal Government. Many other entrepreneurs are not so lucky.
    I was asked to recommend ways in which the Federal Government can 
promote new business creation and growth in technology innovation. 
Ultimately, the private sector is very efficient at identifying 
technologies that have real commercial viability and providing the 
capital necessary to grow these technologies. The best way that the 
government can assist in this process is become a better customer to 
innovative companies. Existing government acquisition models have not 
kept up with the pace of technological innovation. Traditionally, the 
government has explicitly defined the technologies that it is 
interested in obtaining, and the contractors build systems that meet 
exactly those requirements. This is not how the private technology 
sector does business. I am not advocating government acquisition of 
technology merely to support private research and development. I am 
intimating that entrepreneurs in the technology sector have made 
numerous capabilities for the private sector, which may also be 
applicable to the public sector. Many innovative technology companies 
do not even consider doing business with the Federal Government because 
it is simply too costly to do so. Entrepreneurs are successful in the 
private sector because they find ways of delivering capabilities that 
do more with less; this is the same challenge that we face as a Nation 
today.
    Working with new ventures is dissimilar from working with other 
types of organizations. It requires alternate communication and 
outreach strategies, new acquisition methodologies, and differing types 
of governmental support. It also yields novel solutions, engages our 
Nation's best and brightest, and ensures that we remain the 
technological powerhouse that has been our enduring strength. We must 
find new ways of tapping the incredible resource that is our 
entrepreneurial base to solve the challenges that face our Nation. This 
change will not be immediate, nor does it require significant capital 
to support. With concentrated effort, advocacy, and partnership we can 
bring government and the technology innovation sector together for our 
mutual and enduring benefit.

    Chairman Quayle. Thank you, Mr. Mann.
    I now recognize Mr. Rothrock for five minutes for his 
testimony.

        STATEMENT OF MR. RAY ROTHROCK, PARTNER, VENROCK

    Mr. Rothrock. Chairman Quayle, Ranking Member Edwards, and 
the Committee, my name is Ray Rothrock and I am a General 
Partner of the venture firm Venrock, one of the oldest ventures 
capital firms in the United States. Venture capitalists like 
myself are always committed to funding America's most 
innovative entrepreneurs. I am also a member of the Board of 
Directors of the National Venture Capital Association. As the 
voice of the U.S. venture capital community, the NVCA advocates 
policies that support entrepreneurship, encourage innovation, 
and reward long-term investment.
    I am grateful for the opportunity to be here today and to 
answer your questions regarding the obstacles that 
entrepreneurs face in turning innovative ideas into successful 
companies and about what role public policy plays in that 
process.
    Venture capitalists work closely with entrepreneurs to 
transform breakthrough ideas and innovations into emerging 
growth companies that drive U.S. job creation, economic growth, 
and general well-being. The results of venture-backed companies 
is quite meaningful. Over 12 percent of all the private sector 
jobs in the United States today were originally venture-backed 
companies representing 22 percent of America's GDP. This 
ecosystem is well established and works very well. Congress and 
the American public should continue to support it and embrace 
it if we want to keep America competitive.
    Regrettably, in recent years, certain obstacles have 
impeded company formation and the building process. 
Fortunately, we have the opportunity to address many of those 
obstacles immediately and inexpensively by making some specific 
and limited adjustments to existing policies. These obstacles 
and how we can remove them are described in detail in my 
written testimony.
    I would like to use my time now to discuss the challenges 
that entrepreneurs face within the context of basic R&D, the 
role that it plays in fostering and commercializing innovation. 
I will also touch on the role of technology transfer.
    Further to this point, it should be known that no great 
company, not one, was ever created overnight. It was started by 
one or two people working very hard for a very long time. It 
started with an idea, an invention, a new process, but always a 
small group of people. This story has been repeated over and 
over and over for decades if not for hundreds of years in this 
country. You get a great, successful country by first 
supporting the creation of companies and making the road to 
success as smooth as possible. If successful, that first R&D 
dollar will be leveraged by thousands, even millions of dollars 
of investment and possibly billions of dollars of economic 
activity. It does take time and it works. It works very well 
for the benefit of all Americans.
    There are many steps from innovation to the market. Let me 
speak first of R&D. Maintaining America's global innovation 
advantage requires continued federal funding for basic research 
and development at every venue--national labs, universities, 
and all the agencies. Basic R&D is the lifeblood of innovation. 
It pays for the scientific breakthroughs from which innovative 
products, companies, and even whole industries are created. 
Without basic R&D, America's innovation pipeline would dry up. 
That is why we must maintain funding for basic R&D and keep the 
barriers that entrepreneurs face in bringing those innovations 
out to the marketplace as low as possible. Here are four 
suggestions:

     LFirst, we need to continue to support programs of 
R&D, programs such as the Advanced Research Projects Agency at 
Energy, or ARPA-E, is paramount. ARPA-E exists today because of 
good work of this committee. I realize there is some skepticism 
by Members of the Subcommittee about the program, but at a time 
when every program is at risk for reduction or elimination, 
Congress should weigh the immense benefit of ARPA-E-like 
innovations against the relatively small financial cost and 
understand how those successful investments result in further 
investment by the private sector, which leads to great 
companies and results in what we all know as the economic 
multiplier effect.

        Our global competitors, for example, are putting 
        billions of dollars into basic research to innovate in 
        the clean energy area. These innovations ultimately 
        generate economic growth in those geographies. We need 
        that innovation here in America, and I can tell you 
        with certainty that these investments will yield 
        tremendous results in the coming years and decades 
        ahead and they will help keep America competitive. 
        Without R&D, great companies are simply not born.

     LSecond, Congress should restore the eligibility 
for Small Business Innovative Research--or SBIR--grants to 
venture-backed companies. This exclusion, a recent innovation, 
works against the program's objectives because it has prompted 
many companies to end promising research projects. This 
jeopardizes future scientific advances and job growth. By 
explicitly restoring that eligibility for venture-backed 
companies, Congress and the SBA can ensure the pool of SBIR 
grant seekers comprises the very best companies. This will 
maximize the impact of every SBIR dollar--again, a leverage. 
This catapults ideas to reality in launching potentially great 
companies.

     LThird, Congress can encourage the Department of 
Energy to award more DOE grants to innovators. Venture-backed 
companies are not excluded by law from earning DOE grants, but 
most of them get passed over in favor of large, multinational 
energy conglomerates. Rather than continuing and reinforcing 
the status quo, the DOE should redirect at least a portion of 
those pools of grants and loans to clean-tech innovators with 
the potential to create entire new industries here in the 
United States. These grants should focus on the future, not the 
past.

     LFourth, we must ensure that all of our research 
institutions, all of them, have clear, transparent, and 
predictable processes for the transfer of innovation technology 
from the lab to the entrepreneur. Entrepreneurs face many 
burdens in starting a company. They have to raise the capital, 
they have to attract employees, they have to ultimately find 
customers who want to buy their products. Making it hard is 
just one more difficulty in that process.

    Every time those entrepreneurs go elsewhere to start their 
companies, even if the invention was developed here in the 
United States, this country loses a very special opportunity to 
start the process of creating jobs and possibly a whole 
industry. If we seize these opportunities to reduce uncertainty 
and obstacles facing entrepreneurs, we can ensure that 
innovation and the economic growth that continues will continue 
to thrive in the United States.
    Furthermore, the unique public-private partnership between 
government-funded research institutions, entrepreneurs, and 
venture capitalists may be America's greatest export. 
Therefore, we must do all we can to foster innovation in R&D.
    In closing, I want to personally thank you for the 
opportunity to discuss these important issues with you today 
and I am happy to answer your questions. I also wish to thank 
you for your service to our country in your capacity as Members 
of Congress. Thank you.
    [The prepared statement of Mr. Rothrock follows:]
        Prepared Statement of Mr. Ray Rothrock, Partner, Venrock

    Chairman Quayle, Ranking Member Edwards, my name is Ray Rothrock, 
and I am a General Partner of Venrock--one of the oldest venture 
capital firms in the United States. Venture capitalists are committed 
to funding America's most innovative entrepreneurs, working closely 
with them to transform breakthrough ideas into emerging growth 
companies that drive U.S. job creation, economic growth, and general 
well-being. Venture capital in the United States has been supporting 
entrepreneurs for over 70 years. Beginning in the 1960s, venture 
capital was professionalized, leading to an industry today of 500 firms 
and $180 billion of invested capital. During this time the industry has 
mastered, if not perfected, the process of allocating scarce capital 
and human resources towards the most promising new opportunities for 
companies. Today, the results of the industry reach across the country 
and the globe, and they touch every aspect of our lives. Venture 
capital is now a global activity with every developing nation pursuing 
it at some level. Putting the impact of U.S. venture capital in 
quantitative terms: Venture-backed companies accounted for 12 million 
private sector jobs and $3.1 trillion in revenue in the United States 
in 2010, according to a 2011 study by IHS Global Insight. That equals 
approximately 22 percent of the Nation's GDP. The U.S. venture capital 
industry has created this level of impact just in the last 50 years 
alone.
    I am also a member of the Board of Directors of the National 
Venture Capital Association. As the voice of the U.S. venture capital 
community, NVCA advocates for policies that encourage innovation and 
reward long-term investment. It shares industry-wide best practices 
with all its members, and participates in a number of forums, including 
testifying before Congress, to keep all beneficiaries of venture 
capital investment--including the public--apprised of the U.S. venture 
community's efforts impact.
    I am grateful for the opportunity to be here today and to answer 
your questions regarding the obstacles that entrepreneurs face in 
turning innovative ideas into successful companies and what role public 
policy plays in this process. I will address those issues within the 
context of the role of basic research and development and technology 
transfer in fostering and commercializing innovation. I'd like to 
begin, however, with a broad overview of some factors driving 
uncertainty for entrepreneurs today.

Overview: Entrepreneurs

    Being an entrepreneur and starting a company are very difficult. 
Within reason, the United States should do everything it can to foster 
entrepreneurial activity and to reduce the friction to success. Every 
company ever created began its life as the idea of a single person or a 
small team of people. This is true of Henry Ford, Thomas Edison, Thomas 
Watson, Fred Smith, Steve Jobs and Steve Wozniak, and on and on. These 
innovators were able to grow their ideas into some of America's most 
successful companies over time. Following these models, entrepreneurs 
have created entire new industries, including computers, electronics, 
pharmaceuticals, and telecommunications. These industries advanced the 
United States in every way.
    Building a business around an innovative product spurred by a novel 
scientific discovery involves an enormous amount of risk--for the 
entrepreneur and for investors. This risk persists through every stage 
of the company's development, but is particularly acute at the earliest 
stages. Failure is more common than success. For this reason, 
innovators crave any certainty and stability they can find when 
deciding if, when, and how to build a company out of a scientific 
breakthrough. In colloquial terms, the fewer number of moving parts, 
the better chance of success. Presently, a number of factors are 
working against entrepreneurs in this regard.
    One of the most significant sources of uncertainty for 
entrepreneurs and investors remains the current volatility in the U.S. 
economy and capital markets, and the sluggishness of their recovery in 
the wake of the Great Recession. As someone who speaks with 
entrepreneurs on a daily basis, I can tell you that the prospect of 
building a business from scratch--especially one based on a novel and 
unproven innovation--seems especially daunting under current 
conditions. I recognize that opinions may differ among the Committee 
Members regarding the extent to which public policy can mitigate these 
conditions, but as long as the adverse conditions persist, or the lack 
of action to remedy those adverse conditions persists, so too will the 
level of uncertainty facing entrepreneurs. This will result in fewer 
new companies being started. If such companies are not started, they 
will never have the chance to be great.
    In addition to the challenges created by current economic 
conditions, a number of policy issues are also generating obstacles for 
entrepreneurs looking to build innovative, emerging growth companies. 
In these cases, we have the opportunity to help reduce uncertainty for 
entrepreneurs and encourage the innovation they generate. Fortunately, 
none of them require increased government spending, but they do involve 
a closer look by government and more understanding on the part of those 
people making the laws and enforcing them.

Capital Markets

    We have an opportunity to reconnect privately held emerging growth 
companies with capital from the public markets, which they need in 
order to continue to grow to be great. In the early 2000s and even 
recently, well-intended and appropriate regulations have been enacted 
with the goal of policing large public companies and protecting 
investors. In the wake of Enron and WorldCom, these were important acts 
that have benefited many. Unfortunately, these regulations have had an 
unintended negative impact by increasing the friction for small 
emerging growth private companies seeking access to public capital. In 
short, it now costs more and takes twice as long for young companies to 
go public. This has produced negative impacts on U.S. job creation--
given that 92 percent of a company's job growth occurs after its 
initial public offering--and on the health of our entire capital 
markets system. Rather than explore this issue in depth with the 
committee today, I'll recommend to you a recently released report 
entitled Rebuilding the IPO On-Ramp, which was produced by my 
colleagues across the emerging growth company ecosystem at the request 
of Secretary Geithner and others. The report provides a comprehensive 
analysis of the U.S. IPO crisis and provides policymakers with a clear 
roadmap for reconnecting emerging growth companies with the public 
capital they need to create jobs and grow their businesses. The report 
is included with my submitted written testimony.
    [The report may be found in Appendix 2.]

Regulatory Review

    We have opportunities to reduce uncertainty for entrepreneurs who 
must seek regulatory approval for their innovative new products. Here, 
the specific situation at the U.S. Food and Drug Administration 
provides an illustrative example. For decades, the FDA provided a well-
organized method for evaluating new drugs and devices intended for the 
American market. During this time, entrepreneurs and venture 
capitalists worked with FDA to bring amazing health care benefits to 
our citizens and ultimately the world. The FDA function was 
understandable, predictable and allowed for the proper vetting of risk 
by the entrepreneur and investors going forward. This is a critical 
point, because it enabled entrepreneurs to judge--in a timely fashion--
whether to continue to raise private capital for more development in 
the event that the proposed drug or device had merit, or avoid wasting 
further time and money if the product idea was not suitable. Today, for 
most entrepreneurs and investors, the FDA review process has grown too 
cumbersome and unpredictable--with the later being the most critical 
concern. The result has been fewer groundbreaking treatments and 
technologies available to patients, and an exodus of innovators and 
investment to foreign shores, where the regulatory path to market is 
more predictable. That's why my colleagues at the NVCA and I support 
reforms to the FDA review and approval process that clarify the path to 
market, increase transparency at every stage, and restore the balance 
between the benefits and the risks of new therapies and technologies 
for seriously ill patients. If the situation is left unaddressed, 
critical therapies and technologies will not be funded and therefore 
will not reach the patients that need them; those that are funded may 
not be brought to market in the United States, which will cost American 
jobs and our global competitiveness in an industry we have led for more 
than 40 years. It would be a tragedy not to address this problem 
quickly and effectively. We must restore an otherwise well-established 
and effective FDA for the benefit of entrepreneurs and patients alike.

Immigration

    We have an opportunity to reduce uncertainty for entrepreneurs 
through legal immigration reform. Over the last decade, it has become 
increasingly difficult for foreign-born entrepreneurs and highly 
skilled workers to enter the United States and remain here, despite 
their enormous contributions to American innovation and economic growth 
throughout our history. This uncertainty with regard to their 
immigration status is compelling many of the foreign-born students who 
earn their degrees and who have conducted their breakthrough research 
at U.S. institutions, often with U.S. research dollars, to return to 
their native countries to work and found new companies, as opposed to 
doing so here. We can reverse this trend by streamlining the pathway to 
Green Cards for foreign-born graduate students who wish to remain in 
the United States upon completion of their studies. The proposed Start-
Up Visa Act would also help support foreign-born entrepreneurs who wish 
to innovate and build their companies here in the U.S. It would provide 
a temporary Green Card to entrepreneurs who raise venture capital 
investment to start a business. After a period of time, the Green Card 
will become permanent if they can show that they have created jobs in 
the U.S. or that they are continuing to grow their company by raising 
additional capital. This small program would be a breath of fresh air 
to budding foreign-born entrepreneurs and a great first step in keeping 
these innovations and the talent which created them in the U. S.

Basic Research

    Finally, we have an opportunity to encourage entrepreneurs and 
foster innovation by maintaining our national commitment to funding 
basic research and development activities at government-funded labs and 
universities. These institutions remain the germination points for the 
breakthrough ideas that can be commercialized by entrepreneurs and 
venture investors. I believe that how we get from point to point--from 
research to breakthrough to the transfer of that breakthrough from the 
lab to the entrepreneur--merits closer examination today. That's where 
I will now focus my remarks.

Fostering Innovation Through Basic Research and Development

    Maintaining America's global innovation advantage requires 
continued federal funding for basic research and development. Basic R&D 
is the lifeblood of innovation because it produces the scientific 
breakthroughs from which innovative new products can be developed and 
around which new companies can be built. Without basic R&D, America's 
innovation pipeline would dry up.
    For decades, the public sector of the U.S. has conducted such R&D 
through federal institutions and agencies such as the National 
Institutes of Health, the National Academies of Sciences and the 
Defense Advanced Research Projects Agency, or DARPA. The Federal 
Government has also funded research at universities across the U.S. 
through grants, scholarships and the like. This unique public-private 
partnership has delivered countless innovations to the American public. 
For example, the Internet grew from DARPA research on a ``best-
efforts'' communication infrastructure. Google was the result of 
government-funded Ph.D. research on search and taxonomy of language at 
Stanford. Sun Microsystems was government funded Ph.D. research on 
computer architectures at Stanford and computer operating systems at 
U.C. Berkeley. Genetech was formed from the invention and understanding 
of recombinant DNA, which was originally developed at U.C. San 
Francisco. These and many many more are just a few of the examples of 
successes have generated a decisive competitive advantage to the U.S. 
economy.
    To preserve this advantage, the U.S. must maintain its commitment 
to funding basic research at its labs and universities. That means 
keeping current funding levels where they are--even in the face of 
deficit reduction. In difficult economic times, budgets for basic R&D 
may look like easy targets, but future costs in lost innovation and 
economic growth are nearly impossible to estimate. But the costs in 
jobs, economic benefits, and societal well-being are easily imagined 
when you consider if Sun, Google, and Genetech were never created. R&D 
dollars are the highest multiplier dollars in terms of their ability to 
attract additional financing over the long term, once inventions are 
proven out.
    In addition to maintaining current general funding levels, we have 
the opportunity to provide certainty for entrepreneurs and foster 
innovation through three specific initiatives:

      First, thanks to the good work of this Committee, the 
Advanced Research Projects Agency-Energy, (ARPA-E) program is finally 
enacted. Congress established ARPA-E in 2007 under two broad rubrics. 
First, America's dependence on foreign fossil fuels cannot continue at 
its current rate. Second, the nation that grows its economy with clean 
energy will lead the global economy of the 21st century. Those two 
constructs remain true today. Presently, our global competitors are 
putting billions of dollars into basic research to develop innovative 
clean technologies. Those innovations will generate economic growth. We 
need that innovation and that growth to occur here in America. If 
Congress fails to commit to fully funding ARPA-E over the long term, 
the United States risks ceding its technology leadership position to 
foreign countries and potentially operating at a competitive 
disadvantage for decades. I want to thank this Committee for its 
leadership and commitment to supporting ARPA-E. At a time when every 
program is at risk for reduction or elimination, ARPA-E survived floor 
votes to cut funding and was able to increase its appropriation. I am 
very familiar with the work that ARPA-E does under the leadership of 
Director Majumdar, and I can tell you with certainty that this 
investment will yield tremendous results in the coming years and help 
to keep America competitive.

      Second, Congress should restore eligibility for Small 
Business Innovative Research, or SBIR, grants to venture-backed 
companies. Congress created the Small Business Innovation Research 
(SBIR) program in 1982 to stimulate technological innovation and to 
encourage small businesses to meet federal research and development 
needs. Today, however, the Small Business Administration's 
interpretation of the SBIR eligibility requirements excludes companies 
with majority venture funding--a complete reversal from the program's 
original intention and practice, which had worked well for decades. 
This exclusion works against the program's objectives, as it has 
prompted many such companies to discontinue promising basic research 
projects--jeopardizing future scientific advances and job growth. By 
explicitly restoring eligibility for venture-backed companies, Congress 
and the SBA can ensure that the pool of SBIR grant seekers comprises 
the very best U.S. companies, which in turn will maximize the impact of 
every SBIR dollar.

      Third, Congress can encourage the Department of Energy to 
award more DOE grants to innovators. Venture-backed companies aren't 
excluded by law from earning DOE grants and loans, but most get passed 
over in favor of large, multinational energy conglomerates. Rather than 
reinforcing the status quo, the DOE should redirect existing pools of 
grants and loans to clean-tech innovators with the potential to create 
entire new industries here in the U.S. These grants should focus on the 
future--not the past.

    Again, I want to point out that these initiatives do not require 
additional government spending. Rather, these programs should be 
reexamined or reprioritized so that they help enhance the innovation 
pipeline and sources of ideas and companies. This requires careful 
analysis and rethinking of many government sponsored activities.

Technology Transfer: From Lab to Market

    One of the first critical steps on the path from scientific 
breakthrough to marketplace is the transfer of an innovative technology 
from the laboratory where it was developed to the entrepreneur who will 
develop a commercial product from it and build a new company to market 
it.
    Here again, the entrepreneur seeks a clear, transparent, and 
predictable process to help minimize uncertainty and mitigate risk. 
Most research institutions have a technology transfer apparatus in 
place and an office dedicated to managing it. Typically, this apparatus 
comprises three functions: record-keeping and compliance, patenting and 
licensing, and commercialization support. The first function is fairly 
self-explanatory. The second, patenting and licensing, involves 
managing the institution's patent portfolio and prosecuting to 
completion its patents and license agreements. The third, 
commercialization support, aims to spin off innovative technologies 
into startup companies that can apply the technology to develop new 
commercial products and bring them to the marketplace. My firm has 
participated in scores of these transfers from universities from all 
over the United States.
    The essence of a successful transfer from lab to market is about 
the entrepreneur who will commercialize the innovation. Some university 
transfers involve the graduate student or professor who made the 
research breakthrough, but this is rare. Much more often, the 
technology transfers to an entrepreneur with some business experience. 
This entrepreneur, like all the others described in this testimony, 
faces all the burdens and risks of starting a company, raising capital, 
attracting employees, and ultimately finding customers. Every time 
those entrepreneurs go elsewhere to start their companies, even if the 
invention was developed within the U.S., then this country loses a very 
special opportunity.

Growing New Venture Ecosystems

    Throughout my testimony, I have described the crucial role that 
research institutions play in fostering innovation. They are also the 
key catalysts in building venture capital ecosystems like the ones in 
Silicon Valley, Boston's Route 128 Corridor, and the Research Triangle 
in North Carolina. That's because most successful venture capital hubs 
begin as communities of innovators.
    These innovators are usually drawn together by a top-flight 
research university, government laboratory or academic community. An 
innovative company with venture-capital roots--like Dell, in Austin, 
Texas, or Medtronic, in Southeastern Minnesota, for example--can often 
draw talent to the community, too. These companies regularly spin out 
new ideas and companies from existing operations. They also provide a 
pool of management talent.
    Often, these communities coalesce around a certain niche--like 
semiconductors at the birth of the Silicon Valley. Other examples 
include Tennessee with health care services and Orange County, 
California, with ophthalmology, as well as the biotech industry that 
thrives in the I-270 corridor in Congresswoman Edward's state of 
Maryland, and the energy and high-tech innovations that are coming from 
Congresswoman Biggert's home state of Illinois as a result of the 
partnership between Argonne National Lab, the university, and the local 
business community. Concentrating on these niches creates a virtuous 
circle that spurs research and innovation, draws more talent to the 
startup companies and the local universities, and attracts more capital 
to the area. All of this generates economic growth in the region.
    These innovators become entrepreneurs when they try to build their 
ideas into successful businesses. This can only happen consistently 
within a region if certain conditions are present. As explained 
earlier, there must be a sound mechanism for transferring technological 
innovations from the research institutions to the entrepreneur who will 
guide them to market. An educated workforce with the skills to fill 
high-tech jobs is also important, as is a robust network of lawyers, 
accountants, and other business professionals to help with networking, 
intellectual property protection, securities and IPO registration 
compliance, and hiring issues. In addition, the region must have an 
infrastructure that can support growing companies. That means efficient 
local and regional transportation systems, affordable housing, quality 
schools, and vibrant cultural and social scenes.
    Government and civic support is also essential. This starts with 
favorable tax policies, common-sense regulatory structures and 
encouragement of basic research. State and local initiatives that 
reward emerging growth companies through tax incentives also make a 
significant difference.
    These are the ingredients that make for successful venture capital 
hubs like Silicon Valley. I want to emphasize that venture capital is 
just one participant in such ecosystems. We do not create them from 
scratch. States should understand that growing such an environment is a 
long-term endeavor that requires local leadership. However, I'm sure 
that those States that have succeeded will tell you that the economic 
benefits are worth the effort.

Conclusion

    Entrepreneurs face many difficult hurdles in starting and building 
their companies. It is hard enough to identify an invention with 
product potential, then attract capital from a venture capitalist in 
order to build the invention into a great product, and then ultimately 
sell that product to a customer who will actually pay for it. 
Uncertainty regarding regulatory outcomes or a lack of transparency, 
along with sweeping financial regulation created from good intentions 
but adversely effecting the startup company ecosystem, have prevented 
more than one good company from growing into a large, industry-leading 
company. The legal obstacles for foreign-born entrepreneurs to remain 
in America after being educated here have also hindered our economic 
growth. These are extra--and in some cases, costly--burdens that either 
reduce the probability of success for well-meaning entrepreneurs or 
drive them away entirely. While some of these issues fall beyond our 
control, others present immediate opportunities for action on the part 
of Congress and local communities. The policy measures outlined above 
are not extensive. On the contrary, they are inexpensive to implement 
and would have an enormous multiplier effect on economic activity. 
Thus, if we seize these opportunities to reduce uncertainty for 
entrepreneurs, we can ensure that innovation and the economic growth it 
generates will continue to thrive in the U.S. Working with 
entrepreneurs, I, as a venture capitalist, have ``engineered'' more 
than 50 companies in the last 23 years. There is no shortage of 
enthusiasm for entrepreneurship or invention in America. As I said, 
venture capital was professionalized here 50 years ago; it may 
ultimately be America's greatest export. Therefore, we must do all we 
can to foster innovation with R&D support and keep the barriers to 
commercializing and investing in that innovation low. Most of all, we 
must ensure that America continues to be the destination of choice for 
anyone around the world with a great idea. I am confident that we can 
do so.
    In closing, I want to personally thank you for the opportunity to 
discuss these important issues with you today. I am happy to answer any 
questions you may have about venture capital or the business of 
building companies from scratch. And, I wish to thank you for your 
service to our country in your capacity as Members of Congress.

    Chairman Quayle. Thank you, Mr. Rothrock.
    I now recognize our final witness, Mr. Dubin, for his 
testimony.

                 STATEMENT OF MR. STEVE DUBIN,

                FORMER CEO, MARTEK BIOSCIENCES,

         AND SENIOR ADVISOR TO DSM NUTRITIONAL PRODUCTS

    Mr. Dubin. Thank you, Chairman Quayle and Members of the 
Committee, for allowing me to talk about the Martek Biosciences 
appropriations story, and I also want to thank Congresswoman 
Edwards, who was kind enough to visit our facility some months 
ago in Columbia, Maryland, and learn more about us.
    I have been affiliated with Martek since its founding in 
1985, first as a venture capitalist that helped arrange 
Martek's first round of financing and then as an employee for 
the last 19 years, ultimately serving as CEO from 2006 until 
last month.
    Martek is headquartered in Columbia, Maryland, and our R&D 
facilities are there. We have a research office in Boulder, 
Colorado, manufacturing facilities in Winchester, Kentucky, and 
Kingstree, South Carolina, and a consumer products business in 
Hartford, Connecticut. We were founded by five visionary 
scientists in 1985, and from those first five employees grew to 
become the world's leading producer of sustainably produced 
microbially sourced omega-3 and omega-6 fatty acids for human 
and animal health. Martek's nutrients, which are important for 
infant development and brain and eye and heart health for 
adults, can be found in infant formula products, prenatal 
vitamins, supplements, and food and beverage products by some 
of the leading consumer products companies around the world.
    So what started out as a five-person R&D company 26 years 
ago looking at algae and other microbes as potential sources of 
valuable products today has annual revenues of almost 500 
million, employs over 600 people and also an additional 100 
people at BSM's nutritional production plant in Belvedere, New 
Jersey. DSM is one of the leading materials and life sciences 
companies in the world. They have been our supplier of our 
omega-6 fatty acids and ultimately purchased Martek this past 
February.
    In addition to our nutritional product portfolio, our 
technology platform has expanded over the years to include a 
partnership with BP for the development of new biofuels from 
microbial sources. We have a partnership with Dow AgroSciences 
to develop BHA out of seed oils, and also we are in the process 
of developing new vaccine technologies that hopefully will 
result in faster production of vaccines when needed at much 
lower costs.
    It all sounds great, but it took a lot of factors and a 
combination of factors and great patience to enable Martek to 
become commercially successful. It took the combination of 
talented, hardworking people; outstanding technology; 
university, Federal, State Government support; and access to 
capital, over $400 million over the years. That kind of support 
is needed even more today than what we got because capital is 
less patient than it was in 1985.
    I remember when Martek started the company was just five 
scientists, great technology, and a dream. Martek took nine 
years to introduce its first significant product and 17 years 
to become profitable. It took early research contracts from 
NASA to help prove out some of our enabling technology and 
acceptance in the University of Maryland's Business Incubator 
to get the company's technology enough credibility to enable us 
to raise our first 1.5 million in venture capital. It took over 
30 SBIR grants totaling over $5 million to fund the early 
research that investors would not fund, and that validation of 
our technology enabled us to raise three additional rounds of 
venture capital.
    I am 100 percent certain that if any one of those factors 
was missing--the NASA support, the acceptance by the University 
of Maryland to their Incubator, the SBIR grants, a long-term 
patient capital from our investors, and the founders and 
employees that worked so hard for so many years when oftentimes 
we were a paycheck or two away from shutting our doors--we 
wouldn't have survived. And those over 700 high-paying jobs 
would not exist; our health-promoting products would not exist 
to be benefitting society.
    So government and university support of early-stage 
research is needed, I think, even more today than when we 
started. Investors are more short-term oriented, and I doubt we 
could have raised the first run of venture financing if we had 
to start over right now. In any case, early-stage research is 
rarely funded by venture or angel investors, and many early-
stage life sciences companies' existence depends on government- 
and university-supported research. This is especially true now 
when the current economic dynamics of venture funds creates 
larger and larger funds that are less and less able to provide 
early-stage funding. Large funds cannot efficiently put small 
amounts of money to work and use it to return the money to 
investors within a 10-year lifecycle of a typical venture 
capital limited partnership. This is not good for early-stage 
companies that are seeking smaller initial rounds of financing, 
and that especially impacts life sciences companies that just 
take so many years to create an exit for investors.
    So I believe more life sciences companies are in danger of 
running out of money today than I have seen in my 26 years in 
the business. The lack of early-stage funding will not only 
hurt employment in an important industry but will hurt us all 
down the road because important new discoveries will not be 
made, diseases will not be cured, jobs will not be created, and 
the financial spillover from these companies will not happen.
    Therefore, government support for early-stage research is 
now more vital than ever so that many more Marteks can be 
created in the future. Thank you.
    [The prepared statement of Mr. Dubin follows:]

           Prepared Statement of Mr. Steve Dubin, Former CEO,
   Martek Biosciences, and Senior Advisor to DSM Nutritional Products

    I would like to thank Honorable Ben Quayle, Chairman of the 
Subcommittee on Technology and Innovation, House Committee on Science, 
Space and Technology, Ranking Member Donna Edwards, and Members of the 
Committee, for holding this hearing today and for allowing me to share 
my perspective on promoting new business creation and growth in 
innovative sectors.

Introduction

    My name is Steve Dubin, and I served as the CEO of Martek 
Biosciences, a biotech company based in Columbia, Maryland, from July 
2006 until a few weeks ago. My involvement with Martek began in 1985 
while I was serving as Vice President of Suburban Capital Corporation, 
the venture capital subsidiary of Suburban Bank (now part of Bank of 
America). It was in that capacity that I helped lead Martek's initial 
round of institutional venture financing in 1986. I joined Martek as an 
employee in 1992, initially as CFO and General Counsel, and went on to 
fill a variety of additional roles there, including Treasurer, 
Secretary, and Senior Vice President of Business Development. In 2003, 
I was appointed President of Martek, and in 2006 I assumed the role of 
CEO.
    When I was first introduced to Martek, Martek was, by every 
definition, a startup. It consisted of five talented founding Ph.D.s 
with a fantastic idea, and a foundation of technology to drive that 
idea forward--and a long, difficult road ahead. Today, Martek 
Biosciences Corporation (now DSM Nutritional Lipids) is a leader in the 
innovation, development, production, and sale of high-value products 
from microbial sources that promote health and wellness through 
nutrition. The company's technology platform consists of its core 
expertise, broad experience, and proprietary technology in areas such 
as microbial biology, algal genomics, fermentation, and downstream 
processing. This technology platform has resulted in Martek's 
development of a number of products, including the company's flagship 
product, life'sDHA, a sustainable and vegetarian source of omega-3 DHA 
(docosahexaenoic acid) important for brain, heart and eye health 
throughout life for use in infant formula, pregnancy and nursing 
products, foods and beverages, dietary supplements and animal feeds. 
The company also produces life'sARA (arachidonic acid), an omega-6 
fatty acid, for use in infant formula and growing-up milks. Martek's 
life'sDHA, along with life'sARA, is found in 99 percent of U.S. 
infant formulas. Both fatty acids are also added to infant formulas 
sold in over 80 countries and, subsequently, have been consumed by more 
than 64 million babies worldwide. In addition, a range of supplements 
and functional foods containing life'sDHA for older children and 
adults continues to hit the market both in the U.S. and abroad. 
Martek's subsidiary, Amerifit Brands, develops, markets and distributes 
branded consumer health and wellness products and holds leading brand 
positions in each of its three key product categories. Martek's 
technology platform has also made it a sought-after partner on a range 
of groundbreaking projects in process, including the development of 
microbially-derived biofuels, new, faster, and less expensive ways to 
make vaccines and the development of DHA-containing oilseeds.

Factors in Martek's Success

    Finding private financing for early stage research was extremely 
difficult in Martek's early days, and is even more difficult today, but 
since Martek's inception, a range of government supported and funded 
programs--both at the state and federal level--have played a critical 
role in Martek's survival and growth. This support was leveraged to 
raise over $400 million from the capital markets to enable Martek to 
reach its current state. Without programs like the Small Business 
Innovation Research Grants, the University of Maryland Technology 
Advancement Program, and even NASA, I would not be standing here today 
to share our story of success.

NASA

    Martek had its start in a NASA program of the early 1980s known as 
CELSS (Closed Environment Life Support System). Under NASA funding, 
Martin Marietta Laboratories, Inc., in Baltimore, Maryland, 
experimented with the use of microalgae as a food supply, a source of 
oxygen, and a catalyst for waste disposal on future human-crewed 
planetary missions. When Martin Marietta decided to divest its life 
sciences businesses, the scientists involved in this project negotiated 
with Martin Marietta to take what they had learned with them and start 
their own company. The result was Martek Biosciences, founded in 1985.
    Soon after, Martek identified a strain of algae, Crypthecodinium 
cohnii, that is a naturally high producer of docosahexaenoic acid 
(DHA), an omega-3 fatty acid that plays a key role in infant brain and 
eye development as well as in maintaining brain, eye, and heart health 
throughout life. Martek then developed and patented a sustainable 
method of deriving DHA-rich oil from the algae. Continuing its 
exploration of infant nutrition, Martek also developed a patented 
process for developing arachidonic acid, ARA, another fatty acid 
important to infant health, from Mortierella alpina, a fungus. These 
innovations led to Martek's first license agreement in 1992 for the use 
of Martek's proprietary blend of DHA and ARA in infant formula. In 
1993, Martek went public after entering into similar license agreements 
with two additional leading infant formula companies. Today, nearly 
every infant formula product sold in the U.S. contains these 
ingredients, as well as infant nutrition products found in over 80 
countries around the world, and millions of infants benefit from these 
products each year.
    In 2009, Martek was inducted into the Space Foundation's Hall of 
Fame. The Space Foundation, in cooperation with NASA, honors 
organizations and individuals who transform technology originally 
developed for space exploration into products that help to improve the 
quality of life here on Earth. Martek is one of just a few dozen 
technology companies that have been inducted since the Hall of Fame was 
founded 20 years ago, and Martek's evolution from a NASA funded-project 
to a successful, independent company providing important, beneficial 
products to consumers worldwide is often heralded as the ideal example 
of practical innovation born from the Space Program.

Small Business Innovation Research Funding

    In many ways, Martek is also an ideal example of how SBIR funding 
can be the foundation of success for early-stage companies. For the 
first eight years of our existence, SBIR grants were our lifeblood--
Martek received more than 30 SBIR awards from DOD, DOE, HHS, USDA, and 
NSF totaling more than $5 million.
    This funding allowed us to more fully develop our platform of 
technology and, perhaps more importantly, provided a measure of 
validation of our technologies, allowing us to demonstrate our 
capabilities and secure additional venture capital funding and 
strategic partners. SBIR funding not only helped us to keep our doors 
open in the early years, it also provided the foundation of credibility 
necessary to convince investors that our company was a sound 
investment.Earlier this year, Martek was inducted into the inaugural 
Small Business Innovation Research (SBIR) Hall of Fame in recognition 
of its success in research, innovation and commercialization within the 
SBIR program.

Technology Advancement Program (TAP) and Maryland Industrial 
                    Partnerships (MIPs)

    Martek is a graduate of a business incubator, the Technology 
Advancement Program at the University of Maryland at College Park, a 
program of the Maryland Technology Enterprise Institute (Mtech.)
    Incubators typically offer office space at market or lower rates, 
along with shared conference and lab facilities, and offer business 
development and management programs to accelerate their startups' 
growth.
    Martek came to the program with a number of notable 
characteristics, including a talented scientific team with demonstrated 
skills, a unique niche market, and the technology to drive forward 
within that niche.
    Through the incubator, Martek accessed specialized facilities and 
equipment that Martek otherwise would not have been able to afford that 
served as a pilot development lab for its early products. Those 
facilities became a scale-up lab for much of Martek's early work, where 
company researchers could determine whether a number of individual 
cells they had grown in the lab were scalable to a larger market. 
Indeed, they were.
    TAP provided much more than access and support. In fact, a primary 
reason Martek was funded in 1986 was because we had been accepted into 
TAP, which provided a notable third-party validation of the feasibility 
of our technology to be commercialized.
    In addition to TAP, Martek leveraged Maryland Industrial 
Partnerships (MIPS) funding during the company's early stages to figure 
out how to scale-up its microbial processes through Mtech's Bioprocess 
Scale-Up Facility (BSF), which helps companies take bench-top or lab-
produced products and prepare them for mass production.
    Maryland's programs have served as best-practice models around the 
country. TAP was the first incubator in Maryland; there are more than 
20 now. Many universities have replicated the programs within 
Maryland's portfolio; two other State research funding programs were 
based on MIPS.
    This support for entrepreneurs has translated into concrete 
economic benefits for Maryland. In addition to the success of Martek, 
other TAP graduates such as Digene have continued to expand and add 
jobs in Maryland. The latest data from the Maryland Technology 
Development Corp indicates that Maryland's incubators have supported 
more than 14,000 jobs and generated more than $104 million in State and 
local taxes.
    Martek was an inaugural inductee to the Maryland Incubator Company 
``Hall of Fame,'' and we are often held up as a powerful example of the 
success that business incubators can produce through work with 
startups. It is very hard for early-stage companies to get off the 
ground. Martek certainly went through many struggles and near-death 
experiences over the years. Every day is a struggle when you are trying 
to get started. To have a support system like an incubator gives you a 
better chance for success. It is my hope that companies like Martek can 
serve as a positive example of success so that programs like TAP will 
continue to have support. If the resources that were available to 
Martek during our early years were available to entrepreneurs on a 
national level, I believe there would be many more success stories like 
ours.

NIH

    In 2006, Martek's flagship product, DHA, was the subject of a 
research project funded by a $10.5 million research grant from NIH.
    Sponsored by the National Institute on Aging (NIA), one of the 27 
Institutes and Centers of NIH, the study explored whether DHA 
supplementation slows the progression of cognitive and functional 
decline in patients with mild to moderate Alzheimer's disease. This 
study was funded by a NIA/NIH grant to the Alzheimer's Disease 
Cooperative Study (ADCS), a cooperative agreement between the NIA and 
the University of California San Diego that was founded to advance 
research in the development of drugs that might be useful for treating 
Alzheimer's, particularly those therapies that might be overlooked by 
industry. Approximately $10.5 million of the ADCS grant was earmarked 
to fund the DHA study.
    This funding was another important marker of credibility for 
Martek, and the study also provided important insights into the use of 
DHA to treat memory loss that may provide the foundation for future 
research and products.

Barriers to Success

    For the past 27 years, I have been involved in the financing or 
management of early-stage companies, as a co-manager of two small 
early-stage venture capital (VC) funds, as a member of the management 
teams of two companies while they were raising VC (including Martek 
Biosciences), and as an individual angel investor. Unfortunately, the 
economic dynamics of today's venture funds have resulted in larger and 
larger funds that are less and less able to provide early-stage 
funding.
    Large funds cannot efficiently put small amounts of money to work 
and usually need to return money to their investors within the 10-year 
life cycle typical of most VC limited partnerships. This process will 
not work for early-stage technology companies seeking smaller initial 
rounds of financing and is especially bad for life-science based 
companies that often take many years to create an exit event for their 
investors. At Martek Biosciences, we raised four rounds of venture 
capital between our founding in 1986 and 1992. We did not have an exit 
event until after we went public in late 1993. Because of our long 
product development life cycle, which is typical for life sciences 
firms, we did not become profitable until 2002--16 years after our 
first venture round.
    In today's economic environment, it is not likely that a company 
could go public so long before profits are anticipated, so early-stage 
investing in most life-sciences companies is outside the exit 
timeframes of most VC firms. Right now, many science firms are in 
danger of running out of money more so than at any time in my years 
working in the industry. The lack of early-stage funding not negatively 
impacts employment and growth in an important industry sector, but also 
has other long-term negative effects--new discoveries will not be made, 
diseases will not be cured, jobs will not be created, and the financial 
spillover from these companies will not occur.
    In my opinion, in today's environment, a company like Martek would 
have a much slimmer chance of survival. But if government can develop 
ways to help promote early-stage, long-term venture investing that 
would help fill the funding gap for early-stage research, particularly 
for science and non-IT companies that are in critical need of this kind 
of support, then we will see many more success stories like Martek in 
the future.

In Conclusion

    Martek is a great example of how government-supported programs and 
funding can be a critical differentiator between the success and 
failure of early-stage companies. I, along with the entire Martek team, 
am personally aware of the ways in which programs that I have discussed 
in my testimony today can serve as lifeblood during critical times of a 
startup company's evolution. In 1985, Martek had a fantastic idea, an 
amazingly talented team, and the energy and drive to take the seed of 
an idea from inception to commercialization, resulting in the thriving 
business that Martek is today. Our made-in-the-USA products benefit 
millions of consumers every year and meet an important demand for 
healthy, sustainable nutritional ingredients. In addition, our 
technology has provided the foundation for other important projects 
including improved vaccine development and microbial biofuels. Our 
business today produces revenue in excess of $470 million per year and 
supports more than 600 employees in Maryland, South Carolina, Colorado, 
Kentucky, and Connecticut, and more than 100 additional employees at 
DSM's Belvidere, New Jersey, manufacturing facility. Without the above-
mentioned programs that were available to Martek, I am certain that the 
company and the jobs that support many families today would not exist.
    We are now entering yet another phase of our evolution. Earlier 
this year, Martek announced that it had been acquired by DSM, a leading 
global life sciences and materials sciences company. The sale price was 
more than $1 billion. In partnership with DSM, we expect to continue 
our significant growth, significantly increasing U.S. jobs and 
revenues.

    Chairman Quayle. Thank you, Mr. Dubin. And I would like to 
thank all the witnesses for their testimony.
    I want to remind Members of the Committee rules limit 
questioning to five minutes.
    I will now at this point trade times with the gentleman 
from Texas because he has to leave, Mr. Smith for five minutes.
    Mr. Smith. Thank you, Mr. Chairman. And I do appreciate 
being recognized out of order. I have an obligation in now four 
minutes, so thank you for the time.
    Mr. Lindsey, let me address my first question to you. In 
your testimony you mentioned the Patent and Trademark Office, 
the PTO, and referenced the need to alleviate their backlog. As 
I am sure you are aware, now if you apply for a patent, you 
have to wait an average of over three years. Recently, we 
passed and the President signed the Patent and--America Invents 
Act for the Patent and Trademark Office. I was wondering if you 
felt that the bill addressed some of your concerns or if there 
are other things that we needed to do to reduce that backlog?
    Mr. Lindsey. Yeah, I think on the particular issue of the 
backlog, our favored approach was one that was adopted in the 
legislation, which is using market incentives to clear the 
backlog but to be able to get faster expedited service through 
paying of higher fees. That has been balanced with a lower fee 
schedule for individual inventors, and I think that is 
creditable as well. So I--there is a lot in that legislation. I 
think it is a mixed bag as far as overall impact on 
entrepreneurs, but on this particular point of clearing the 
backlog, it looks like the legislation is moving in the right 
direction.
    Mr. Smith. And obviously the PTO keeping the fees as well I 
am sure you support.
    Mr. Lindsey. Yes.
    Mr. Smith. Okay. Thank you, Mr. Lindsey.
    Mr. Rothrock, let me go to you and reference your testimony 
where you talk about the unintended consequences of legislation 
and regulations and their adverse effect on the formation of 
capital going to innovative companies. Now, could you be more 
specific as to what, let us say, regulations create the 
hardships that you had mentioned and also what remedies you 
might propose?
    Mr. Rothrock. In particular, Mr. Smith, Sarbanes-Oxley is a 
good example of that whereby the unintended consequences of 
that regulation making more transparent the financial reporting 
in large companies, that burden is all the way down to the 
smallest company trying to go public. So going public for a 
small private company is a very important event for a lot of 
reasons, but mostly it provides the capital which the company 
can grow to become very big. Most of the jobs created by 
venture-backed companies result after the IPO. So putting that 
burden on them on day one of being an IPO company slows down 
that process. And in fact many--we have survey data in the MBCA 
from many CEOs; they avoid going public and in fact it delays 
the whole process. And many good companies remain good and 
never become great.
    Mr. Smith. And the solution, therefore, is to lift some of 
those limitations.
    Mr. Rothrock. Lift that. We actually have sort of a ramp--
an onramp to becoming a larger company, yes.
    Mr. Smith. Okay. Thank you, Mr. Rothrock.
    And Mr. Mann, in your testimony you talked about the 
existing government acquisition processes and procedures that 
have not kept up with technological innovation. Why do you 
think we have the problem and, again, what do you think the 
remedy should be?
    Mr. Mann. Well, in my experience, traditionally, the 
acquisition model is one around developing custom solutions for 
the government and what that results in is a multiyear cycle 
just to get to the point of even letting an initial contract 
for that development to take place. At this point in time, 
technological innovation within the private sector is happening 
on an 18- to 12-month timescale, so by the time that initial 
contract goes out, you are already beginning the procurement 
process for an antiquated technology.
    Mr. Smith. Good answer. Thank you, Mr. Mann, very much.
    Thank you, Mr. Chairman, again for the time. I yield back.
    Chairman Quayle. Thank you, Mr. Smith.
    I now recognize Ms. Edwards for five minutes.
    Ms. Edwards. Thank you, Mr. Chairman.
    And thank you to all of our witnesses. I want to start with 
Mr. Mann. I enjoyed your testimony and learning about your 
company and really congratulate you on your instincts and your 
success. And while your testimony seems to attribute the advent 
of your game-changing microsatellite technology to 
nongovernmental consumer requirements, isn't it fair to say 
that the prior government investments in satellite technology 
laid the groundwork for the technical and economic feasibility 
of Skybox's microsatellites? And I would note that NASA in 
particular had been investing heavily in satellite research and 
technology since about 1960, long before the--you had--your 
company had this great idea, and so I wonder if you could 
actually speak to the role that investments--prior investments 
that NASA made, played in your ability to make a successful 
commercial venture.
    Mr. Mann. Yes, certainly. So I don't actually have specific 
examples of investments that NASA made, but to Mr. Rothrock's 
point in his testimony, we absolutely relied on the foundation 
of fundamental research investment that accelerated the 
technology just to the point of people recognizing that this is 
even feasible. But then, when we actually wanted to, you know, 
hit the gas pedal and accelerate the pace of development, that 
is when it was time to turn to the private sector and focus on 
commercialization rather than sort of pie-in-the-sky 
feasibility.
    Ms. Edwards. I guess I just want to point out that since 
1960, over the course of the last half-century, NASA has made 
significant investments in imagery satellite technology that, 
you know, has enabled lots of folks to transfer that into the 
private sector. And so the point is that you just can't--I mean 
clearly you need that fundamental research.
    But I think, Mr. Rothrock, if we could turn to you, I 
wonder if you could explain, then, how venture capitalists 
actually make investment decisions? Because I am guessing that 
venture capitalists wouldn't have just come up in 1960 and said 
oh, I think we need to invest in imaging technology for 
satellites. It really did take the government kind of doing 
that initially because venture capitalists wouldn't have been--
I am just curious about the steps that you would go through 
before you made a decision to make that kind of investment.
    Mr. Rothrock. Yes, the process of venture capital--there 
are two sides to it. We identify market opportunities where 
then we have sort of in the back of our minds from research 
and--reading and talking to entrepreneurs, lots of 
information--about technology. And then we would identify a 
business opportunity to take that technology from the 
laboratory and apply it to a particular market problem. That 
would be where we are the active creator of that company. More 
likely the case is that the entrepreneurs, whether they are a 
graduate student such as Andy Bechtolsheim who was a founder of 
Sun Microsystems who was a real hot hardware inventor, teamed 
up with Bill Joy at Berkley and put together a computer that 
was quite remarkable. And then they found Vinod Khosla and 
found some venture capital and off they went to make a great 
story.
    So it sort of is on both sides, but really at the end of 
the day it is about building technology on top of scientific 
endeavors and innovations. You don't know where that is going 
to go and you keep building up. I daresay that Mr. Mann's 
company, Skybox, he has built that on the shoulders of great 
giants and great thinking that was this broad, and his company, 
like most venture capitalists like their companies to be very 
focused. Lack of focus is failure typically, so we tend to 
focus. That is what the private capital does. It focuses the 
attention of the entrepreneur on success.
    Ms. Edwards. Thank you. And so if I could just turn to Mr. 
Dubin, and thank you so much for your testimony. And I was just 
blown away visiting Martek and learning about all that you do. 
I wonder if you--you talked about--in your testimony about 
leveraging the Maryland Industrial Partnerships funding during 
the company's early stage, and as I understand it, MIPs 
provided funding that was matched by private company for 
university-based research that helps companies develop new 
products. Can you tell us more about your experience and 
whether you believe that that is something that actually could 
be replicated?
    Mr. Dubin. In our early stages I mean we had no money and 
again we were very--doing pretty early-stage research again 
that venture capitalists didn't really totally want to fund all 
by themselves, so we were able to leverage all of these 
programs, I think, in a very effective way.
    And the early MIPs grants, what that was for was to kind of 
help us learn how to grow these microorganisms in a controlled 
way to get the products we wanted to and University of 
Maryland, all of the equipment and a lot of expertise and 
together working with our scientists, you know, we figured out 
some of the basic early-stage ways of moving forward. And we 
used that technology to kind of leapfrog to some of the 
commercial applications.
    So I think, you know, for the right circumstances where 
university infrastructure is in place and you can leverage the 
knowledge inside the university with some of the ideas from the 
company's side, it really--it worked great for us.
    Ms. Edwards. Thank you, Mr. Chairman.
    Chairman Quayle. Thank you, Ms. Edwards.
    I now recognize myself for five minutes.
    Mr. Lindsey, you talked about various tax incentives to 
allow startups to continue to innovate. There has been a lot of 
talk up here on Capitol Hill about fundamental tax reform which 
will get rid of many of the deductions while also lowering the 
rates. How do you feel about that in the context of it might be 
eliminating a lot of those deductions or incentives but 
allowing for a lower overall corporate tax rate?
    Mr. Lindsey. I think in the long term, the proper goal is 
fundamental tax reform with a wide base and low rates and as 
few exemptions as possible. Given the reality of our current 
byzantine tax structure and the formidable obstacles to getting 
to that truly clean kind of tax code, if we are going to have a 
dirty, messy tax code, then we should have some little, dirty, 
messy exclusions that benefit new businesses. But the long-term 
goal ought to be fundamental tax reform.
    Chairman Quayle. Thank you.
    And Mr. Rothrock, I want to talk--I want to ask about--in 
Arizona we have a thriving high-tech industry but we don't have 
a lot of VC funding that is going into Arizona, and this 
happens all across the country is that VCs seem to be mainly in 
certain geographic areas. How do VC firms plan or how do they 
go about getting outside of their geographic areas where they 
are located in finding the new companies in Arizona or 
elsewhere?
    Mr. Rothrock. I think that largely sort of relies on the 
philosophy of the firm. My firm, Venrock, starting in New York 
City, that was not exactly the hotbed of a lot of technology in 
the early days or even presently, but we have always--my firm 
always has had the DNA to go out and look for deals and people 
wherever they are. And we have invested in many States from 
Florida to South Carolina, Kansas, Texas, Arizona, and other 
places. So we actually seek out those entrepreneurs in those 
regions. There are a lot of local venture capital--I don't want 
to say clubs but associations that host and invite people in 
from afar, but I think it really goes to the DNA of the firm. 
Some firms just simply don't want to climb on airplanes.
    Chairman Quayle. In your testimony you were talking about 
VC-backed firms being involved in SBIR programs, and one of the 
things that we had testimony on that when we were going through 
the reauthorization of SBIR and one of the witnesses stated 
that, you know, VC firms act as a very good gatekeeper because 
they can actually see whether the technology will be able to be 
viable rather than a government agency trying to pick which 
ones. Do you think that is a correct assessment?
    Mr. Rothrock. It is largely correct. I think venture 
capital--the process of venture capital is about the most 
efficient way to find the best ideas with scarce capital and 
scarce people. I think the SBIR program is very important 
because it is a leverage effect. It always takes longer and 
costs more money to build a company, and just like Mr. Dubin 
was talking here, that was a tremendous example of how an SBIR 
led to venture capital so the two worked together to build his 
company. So I think that is really essential. It is the 
program, not one or the other. It is mutual.
    Chairman Quayle. Right. Okay, thank you.
    And Mr. Mann, you talked about ITAR and kind of the 
unintended consequences that have come out of that, especially 
for your company. Mr. Lindsey had talked about a 10-year sunset 
for regulations. There are also various pieces of legislation 
that--one that I am working on also is that after 10 years you 
actually have to go back, reevaluate, do a cost-benefit 
analysis to make sure that it is actually doing what it is 
supposed to be doing and if it can be done in a way that is, 
you know, less burdensome on the private sector. How would 
something--like the sunset provisions that Mr. Lindsey was 
talking or other types of legislation so that we reevaluate 
various regulations after a 10-year cycle--how would that help 
you? Would it help you in terms of getting rid of some of that 
overly burdensome and also unintended consequences from 
legislation passed that nobody thought was going to happen?
    Mr. Mann. I think the answer there is absolutely. You know, 
given the age of the ITAR, when it was initially conceived, 
international competitors were not in the same place when it 
comes to space technology. For example, obviously the ITAR 
covers much larger than space-based technologies. But I 
absolutely think with some kind of sunsetter or revisit on 
those regulations, we would have seen, at this point, 
international competition catching up and now eclipsing our own 
progress and hopefully made necessary change to the regulation 
to try to alleviate that problem.
    Chairman Quayle. Okay. Thank you very much.
    I now recognize Mr. Lujan for five minutes.
    Mr. Lujan. Mr. Mann, federally funded scientists could be a 
tremendous resource for small and startup businesses. I come 
from a State that has two of the three NNSA national 
laboratories with Los Alamos National Labs and Sandia National 
Labs, in addition to the Air Force Research Laboratory, Air 
Force Nuclear Weapons Center and Satellite Office, in addition 
to NASA with White Sands down in the southern part of the 
State; whether it can help with what material to use or how 
best to analyze a complex business problem, small businesses 
throughout the State have made good use of the program in New 
Mexico as well as some outside of New Mexico. Is there 
something that can be done on a federal level to facilitate 
federally funded scientists providing technical assistance to 
small businesses, taking into consideration this notion of the 
anticompetitive clause or things of that nature that exist with 
some of our national labs?
    Mr. Mann. I certainly think there could be benefit to that 
kind of collaboration. I am slightly speechless because I 
haven't really given that significant thought in the past. I do 
know, for example, one thing that I have been in conversations 
about is making the facilities available and our national labs 
available to small businesses because we have--you know, the 
taxpayers have put substantial investment in building out these 
facilities that often go underutilized and small businesses are 
particularly the ones that don't have access to sufficient 
capital to build up those facilities themselves. So that I can 
certainly see as being something.
    As far as more direct research collaboration, again, you 
know, in my testimony I address the idea of government not 
acting as a venture capitalist. That was, I realize now, a 
nuanced point in that venture capitalists take technologies 
that have been substantially validated and target them at 
markets. The government should be investing in technologies, 
bringing them up to that level of being ready for venture 
capitalists to move forward with, not picking the technologies 
that will actually be financial success.
    Mr. Lujan. So just for clarification there, so almost a 
true partnership with what the government is doing with VC 
helping to get through that valley of death?
    Mr. Mann. Yeah, exactly.
    Mr. Lujan. Mr. Rothrock, same question. Any thoughts or 
perspectives associated with how VC looks at the benefits 
associated with getting more of our physicists, scientists, 
engineers more involved with business and with projects, 
research, or even helping as that technology comes out to a 
commercialized perspective?
    Mr. Rothrock. One specific idea I have is I know a number 
of universities allow their professors--in fact some require 
it--to spend a day a week or some portion of their working time 
affiliated with commercial enterprises. It does two things: 
one, it makes them aware of what commercial enterprises are 
looking for and what is marketable and so forth; but it also 
brings a little bit of that market to the laboratory so the 
professor, when he is writing a grant or proposal to receive 
funding, he can sort of target it that way. That relationship 
is a very good one.
    The other is about using the assets. We actually have a 
company that has now found its way to North Carolina as a 
result of finding facilities that were available. Actually, 
they found equipment that was for sale and it was too hard to 
move it across the country, so the company relocated itself to 
the equipment rather than bringing the equipment to the 
company.
    So those kinds of things and having that available, NASA 
was very good for awhile publishing NASA tech briefs which 
allowed entrepreneurs to thumb through what was current, what 
papers were published. That sort of--with the Internet and 
what--all the communications facilities, that sort of transfer 
of information is good.
    You know, a research professor is a really good research 
professor, not necessarily a great entrepreneur. But 
facilitating those people getting in the same room and talking 
about things is essential.
    Mr. Lujan. I appreciate that very much. And one of the 
questions that I will be submitting to our panel--and I 
appreciate all of you being here today--is last Friday, the 
President issued a memorandum to the heads of executive 
agencies directing them to improve the results of its 
technology transfer and commercialization activities, and I am 
going to be very curious from your vantage point what 
suggestions would you give to those agency heads and maybe to 
this committee so that way we can work on that collectively.
    But Mr. Rothrock, I was intrigued by--in your testimony, 
first, America's dependence on foreign fossil fuels cannot 
continue at its current rate. Second, the nation that grows its 
economy with clean energy will lead the global economy of the 
21st century and talking about ARPA-E specifically and the 
importance of the competitiveness of the country. Can you just 
talk about that a little bit more? I really appreciate that 
being in there.
    Mr. Rothrock. Sure, happy to, sir. The--you know, the 20th 
century was built on the back of fossil fuel, and if you 
subscribe to the theory that we are going to run out of it, 
then we have to come up with something else. And the industry 
of energy is the largest industry on the planet, whether it is 
electricity or petroleum. And so transforming to that new 
industry, whatever form it is, whether it is solar, nuclear, 
wind, or just alternatives in general, is going to be 
essential. Otherwise, your existing society will not be able to 
function; it has to have energy. So whoever gets there first 
will probably--may dictate some standards, will certainly be 
further down the cost curves because commodities, it is all 
about cost in a commodity world of energy whether it is 
petroleum or electricity. So whoever gets there first, I think, 
will have a distinct advantage.
    You know, in the example here is a semiconductor 
relationship. Intel found itself quite competitive with Japan 
back in the '70s with the DRAM business. Well, they said we 
will let Japan have that and we will go after the CPUs, which 
is the brains of all these microprocessors. And look at the 
results. DRAMs are clearly a commodity and they are bought 
everywhere for practically no margin and no profit, whereas 
Intel is a huge successful company. So the ability to pivot, as 
they say in today's language, to these new industries, getting 
the energy industry to recognize the alternatives, investing 
taxpayer dollars into these programs whether they are in the 
universities or in the national labs and then bringing that out 
to the entrepreneurs, I think, is really, really essential. And 
who is there first probably wins.
    Mr. Lujan. Thank you, Mr. Chairman. I appreciate the time 
and I hope that collectively we might be able to be supportive 
of programs like that going forward, see what we can do to make 
sure we ensure the competitiveness of the country.
    Mr. Rothrock. Thank you.
    Chairman Quayle. Thank you, Mr. Lujan.
    I now recognize Mrs. Biggert for five minutes.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Thank you all for being here. This is a very important 
issue and I think you are very helpful to us.
    My first question would be for Mr. Lindsey. In your 
testimony, you argue in favor of allowing university faculty 
members to choose their own technology licensing agents. Can 
you explain in more detail how the current system inhibits 
innovation, and how might a change in licensing rules affect 
universities that fund a portion of the faculty research?
    Mr. Lindsey. Sure. There is a huge asymmetry at present 
between the freedom allowed to academics in their research 
capacity and the freedom allowed to them in their 
commercialization capacity. So no professor has to go and get 
permission or go through a queue and get clearance before he or 
she collaborates with academics in other institutions on a 
research project or on writing a paper. They are free agents in 
their academic research lives. They are not free agents, 
however, in their commercialization lives because to take any 
kind of--to get any kind of licensing of new ideas that they 
develop in their research, they have to go through their own 
university technology licensing office.
    Those licensing offices act effectively as venture 
capitalists, picking winners of all of the promising research 
ideas that are coming out of their university, focusing on 
particular ones, and devoting time and energy to helping those 
ideas get licensed. They aren't necessarily the best qualified 
people to be doing that job. There is always a backlog problem. 
They don't necessarily have the acumen to pick--to prioritize. 
They may be looking for home runs and leaving good singles and 
doubles moldering in a queue, and so as a result, we don't have 
competition amongst agents for helping academics commercialize 
their ideas.
    What we propose is moving towards a free agency model where 
an academic who has developed some promising new research 
finding and sees commercial possibilities with it could go to a 
private agent, could go to other universities' technology 
licensing offices, and so forth. The best way for the Federal 
Government to encourage a move towards a free agency model 
would be to condition its research grants on allowing 
researchers freedom to choose their own agents.
    Mrs. Biggert. Does this apply to the labs as well?
    Mr. Lindsey. It could, yes.
    Mrs. Biggert. So are these current limitations, then, they 
are really due to the university----
    Mr. Lindsey. They are university-based, yes, they are.
    Mrs. Biggert [continuing]. Not any federal policy?
    Mr. Lindsey. Yes.
    Mrs. Biggert. Thank you.
    And Mr. Rothrock, number one, you--as a venture capitalist 
and you are out and you decide to provide an innovative idea--
money, do you ever--some of the things I have heard from some 
companies is that the venture capitalists come in and they 
actually take over the company and start running it and kind of 
the innovators kind of, you know, lose out. I mean, they feel 
like it is not their company anymore and it is taken over. Does 
that happen very often or is it----
    Mr. Rothrock. I don't believe it happens very often. I have 
heard of some of those stories, too, but I think it is very 
rare.
    Mrs. Biggert. Okay. And then you talk about ARPA-E and what 
are the--are there--have you had anything to do with ARPA-E as 
far as this venture capitalist or the companies that have 
gotten money from ARPA-E?
    Mr. Rothrock. Yes, ma'am. In my firm, one company did 
receive ARPA-E funding, but it was after we and another venture 
firm had already invested $1 million in the project and had 
proven that what we were working on had some merit. And then 
they applied for the ARPA-E grant and received it.
    Mrs. Biggert. Have you done anything with the Office of 
Science in the Department of Energy?
    Mr. Rothrock. Nothing specifically. I do know Dr. Koonin, 
but that is just through the business.
    Mrs. Biggert. Um-hum. So you think that there is more 
innovation for ARPA-E?
    Mr. Rothrock. Yes, ma'am, I do think there is a lot more 
innovation opportunity for ARPA-E, electric vehicles, all the 
places that are presently not receiving what I think is 
sufficient amount of R&D capital. I think ARPA-E should be 
focusing much like DARPA did.
    Mrs. Biggert. Well, something like the SBIR, you know, 
phases in monies but ARPA-E is just one time that they would 
commit to a project?
    Mr. Rothrock. That is my understanding but it is over 
multiple years, for example. So it would be an amount of money 
over a period of time.
    Mrs. Biggert. All right. Thank you. I yield back.
    Chairman Quayle. Thank you, Mrs. Biggert.
    I now recognize Mr. Lipinski for five minutes.
    Mr. Lipinski. Thank you, Chairman Quayle.
    I would like to start by congratulating Ranking Member 
Edwards here for--congratulating her for stepping up to this 
position. I have enjoyed working with you on this Committee and 
our other committee in the past, and I know that--looking 
forward to your leadership here on the Subcommittee.
    I firmly believe that along with education, the most 
important issue that our Committee can consider is how to turn 
our advantages in research and development into jobs and new 
businesses, and it is something that I have really focused on 
since I started serving in Congress and serving on this 
Committee.
    I want to talk about getting to proof-of-concept programs 
and talking about I-Corps because when the SBIR/STTR 
reauthorization bill was passed by this Committee in the 
spring, I offered an amendment that was adopted with bipartisan 
support to create a proof-of-concept center pilot program 
within the STTR program at NIH. The proof-of-concept centers 
that I want to create would share many of the goals and 
strategies seen in the I-Corps program that the NSF has since 
announced.
    Both my initiative and their program were modeled after 
success at the Coulter Foundation, the European Research 
Council, and MIT's Deshpande Center. At its core, this is a 
simple idea--give researchers with an invention the tools they 
need to conceptualize and plan a new business. But it is a 
critical problem since academic researchers often don't know 
anything about developing and improving their small business 
idea--proving that it can work. I know that the Kauffman 
Foundation, along with Stanford Technology Ventures Program and 
MIT's Deshpande Center, has partnered with the NSF in creating 
I-Corps and I heard, as I was home on Monday mowing my lawn 
listening to NPR, I heard the story about I-Corps at Stanford.
    So I would like to ask Mr. Lindsey about his involvement in 
and perspectives on his program. Can you explain how--first of 
all, how I-Corps is working and what role--what the role of 
each organization has and any thoughts on how this can be 
expanded or replicated, especially to reach schools and 
researchers who haven't historically had success in 
commercializing their innovations? Mr. Lindsey.
    Mr. Lindsey. Thank you for the question.
    The Kauffman Foundation is a big and diverse place doing 
all kinds of wonderful things, including working on the I-Corps 
issue. That is not in my portfolio, so what I will do is talk 
to my colleagues who are involved to give you the most 
knowledgeable answer and get back to you.
    Mr. Lipinski. Okay. And I know Mr. Mann had spoken about--
you were at Stanford, correct? Were there courses that you took 
at Stanford that were helpful in terms of entrepreneurship?
    Mr. Mann. Oh, absolutely. In fact the original business 
plan for Skybox was created within an STVP course. So Stanford 
absolutely has an educational pipeline designed to help 
innovators understand what they need to do and then, as I have 
previously mentioned, also show them the door with the 
perspective of if you want to commercialize it, take it outside 
the university.
    Mr. Lipinski. You think this is something that can be done 
elsewhere? Is there something unique to--at Stanford with this 
location and its connections or how do--do you think this can 
be replicated?
    Mr. Mann. I absolutely think it can be replicated. MIT has 
done a phenomenal job of building up a similar type of base. 
Stanford is currently in a bid to build the Stanford New York 
City campus, which would similarly create a center for 
innovation, but I don't think it is just limited to those 
schools. I think really any university that has really active 
research and development capabilities should be investigating 
ways to create educational opportunities that facilitate that 
kind of external transition.
    Mr. Lipinski. Well, one other question before I run out of 
time or--maybe lead into a question I will put in for the 
record. I am currently developing legislation to improve the 
Bayh-Dole Act. One of my goals is to make sure whenever 
possible that taxpayer-funded R&D turns into American-made 
products and American jobs, and so since my time is expiring, I 
will put that in for a QFR to ask about what can be done and 
what Congress can do to better incentivize domestic production 
of inventions that began with federal R&D investments because, 
as I said, I think that is one of the critical things we need 
to do here. As people are asking where are the jobs going to 
come from, what is the future of American jobs? I think the R&D 
that we are doing here, a lot of it is funded by the Federal 
Government can better be turned into American jobs.
    With that, I will yield back.
    Chairman Quayle. Thank you, Mr. Lipinski.
    I now recognize the third member in a row from Illinois, 
Mr. Hultgren, for five minutes.
    Mr. Hultgren. Thank you very much. Thank you all for being 
here. I really appreciate it. I have a couple quick questions 
for you. First of all, as you I think are aware, for the last 
30 months, 28 of those months we have had unemployment here in 
America above nine percent. I mean these are brutal times. I am 
absolutely convinced that a big part of getting this turned 
around again is getting innovation and entrepreneurship growing 
again.
    One question I want to start with for each of you, if you 
could just give a brief answer on this, is really a question 
for us as policymakers, what our focus should be. And I know 
both of these things are important, but I am asking you which 
is more important. Is it more important for us to target 
policies designed to provide an immediate boost to our economy, 
or is it more important to have economic policies designed to 
create conditions for long-term economic growth? And if I can 
just get a thought. Again, I know you would say both, but which 
is more important?
    Mr. Lindsey. I would say that Congress doesn't have a lot 
of leverage or a lot of money right now to do short-term 
stimulus, so I think that is more in the hands of the Federal 
Reserve at this point than it is in the hands of Congress. So I 
think Congress' focus ought to be on the long-term growth 
issue.
    Mr. Mann. I, too, agree that it should be focused on long 
term, especially with regard to the fact that venture 
capitalists are looking at longer time horizons for return on 
investment. They are looking for scenarios in which that kind 
of investment will generate return.
    Mr. Rothrock. Yes, I would echo that. In fact, as a venture 
capitalist, I always like to say that entrepreneurs don't read 
the newspaper, they don't watch television. They are always 
optimistic about thinking very long-term and my style has to 
match that. So I am very much for that.
    I would emphasize in your thinking about that to make it 
stable and constant over time and predictable.
    Mr. Hultgren. Thank you.
    Mr. Dubin. I agree for the entrepreneurial economy, longer 
term is better. For our industry, long term is all there is and 
I think--I don't think there is any magic bullet. It is a 
matter of creating an environment and a culture and a support 
system that attacks the issue from many different angles and 
that--you can't do that overnight.
    Mr. Hultgren. I totally agree with you. Thank you. It got 
hot all of a sudden.
    But any suggestions you have on this of how we can bring 
more certainty to this over the long term? I absolutely agree. 
You know, that is what we have got to be focused on, especially 
in these times of very low resources.
    I do want to shift a little bit. And Mr. Mann, I appreciate 
your testimony. And really the experiences you had at Stanford 
that really led to the creation of your business, I wondered if 
each of you could just give me kind of a thought you might have 
of your current--the feel for current undergraduate and 
graduate students as how they are continuing to view 
opportunities for entrepreneurship. Do you see any recent 
trends in the way potential entrepreneurs view opportunities to 
create their own companies? And are there cost-effective ways 
that we can promote the benefits of entrepreneurship to 
undergraduate and graduate students?
    Mr. Mann. So I haven't actually seen a significant change 
in the way--that may just be because Silicon Valley tends to be 
a bubble. Stanford is a bubble within a bubble and I have had 
my head in the sand for the last three years trying to build a 
company. But ultimately, there is always a subset of undergrad 
and graduate researchers who are more interested in taking what 
they invent and going out and commercializing it than they are 
in sort of the pure pursuit of academic research. And I don't 
think that is something that has been changing in any large 
way.
    Mr. Rothrock. I would add that the sort of great man theory 
or great woman theory that--to the extent that important people 
that have an impact on an entrepreneurial ecosystem can be 
highlighted and emphasized I think makes people rise to the 
occasion. I think also a part--I participate as a mentor in a 
second-year program at the GSB at Stanford, team of people with 
ideas and I help them form it into a business plan. I think 
either formalizing or recognizing those kinds of programs may 
be--you don't need financial support but just acknowledging it 
and pushing it.
    Mr. Hultgren. Thank you. Let me jump in here. My time is 
winding down but one more question for Mr. Lindsey. I wonder if 
you could elaborate. In your statement you had said, `` . . . 
as countries get richer, they become more dependent on 
homegrown innovation to keep the growth machine humming.'' I 
wonder to you what that means for the United States in 
particular?
    Mr. Lindsey. First of all, let me just go back to your 
question on the university side. One of the great strengths of 
our system is bringing brilliant kids from all over the world 
and educating them and then shoving them back to their own 
countries. So I think a vital way to cash in on the strength of 
our system is to staple green cards to diplomas for people with 
STEM degrees or particularly to give visas to people who 
actually have plans to start their own businesses. Those would 
be enormous gains.
    Just to focus on one issue of how the sources of growth are 
changing in the United States and pushing more and more of the 
burden for keeping our economy growing onto innovation are 
demographic changes that haven't gotten a lot of notice but 
they are hugely important. Over the whole course of the 20th 
century, we got a big tailwind from the growing participation 
of women in the labor force. So one of the easiest ways to get 
higher GDP per capita is just to get a higher and higher 
percentage of people making GDP, getting them out of the home 
and into the workplace.
    But that has stopped, so women's labor force participation 
peaked in the late '90s, started trailing downward before the 
recession. Men's labor force participation has been going down 
gently for decades because of later entry into the workforce 
and because of early retirement, and so, as a result, our 
employment-to-population ratio is--even before the recession 
was lower--was going downward and as a result--according to 
McKinsey Global Institute research--labor force growth in the 
'70s contributed 2.0 percentage points to GDP growth--annual 
GDP growth. It is projected to contribute only 0.5 percent in 
the decade between 2010 and 2020. So that is a point and a half 
of GDP growth gone and we have got to make it up somewhere. 
According to McKinsey, we need an increase in productivity 
growth of 25 percent to just maintain historical growth rates.
    We have had great difficulty over the years in matching old 
productivity growth rates, so that just, I think, illustrates 
that we are now facing a big headwind on the demographic front 
and the only way we can make it up is through innovation.
    Mr. Hultgren. My time has expired. I yield back. Thank you 
very much.
    Chairman Quayle. Thank you, Mr. Hultgren.
    I now recognize Mr. Cravaack for five minutes.
    Mr. Cravaack. Not from Illinois so--hi. Thanks for being 
here today. I think this is really the crux of what we are 
seeing in colleges today. You know, some of the college 
students we have seen overseas, you know, they are crammed full 
of knowledge and they are encyclopedias basically, but what is 
different here in the United States is we are innovators, we 
are creators, we are--want to see what is on the next edge of 
the envelope. And that is what makes this country so great and 
that is what we need to keep on focusing on in the future.
    Mr. Mann, I have a question for you. You know, 
stereotypical--you know, expect the next great thing to be from 
some college student that is skipping class in a garage 
somewhere, you know, developing, you know, something. And would 
you consider that the same? Would you consider that a 
stereotype that is what we are seeing today? Are they--you 
know, are they in the college system? Are they out of the 
college system? Are they just using their own innovation to get 
this done? What do you think?
    Mr. Mann. I would definitely say that still exists today. I 
mean that is exactly my story. You know, we were at Stanford 
doing the research and ultimately left the university. You 
know, I dropped out of school in the long history of 
entrepreneurs chasing their vision because I believed we had 
the opportunity to fundamentally change the world.
    Mr. Cravaack. Well, kudos to you. You know, one of the 
things I--in your company I was reading about your company as 
well. You had a little bit of trouble trying to get some 
venture capitalists, drop out from Stanford, you know, 
basically come and believe in us, right? And here you are with 
this great idea, this fantastic idea that you know is going to 
work but yet you are finding trouble to get venture capital. 
How can we help young people like yourself to be able to get 
the capital that they need to follow that dream and ambition?
    Mr. Mann. Well, again, the biggest thing came down--came 
back to the education piece. You know, ultimately for Skybox in 
the summer of 2009 we were trying to convince investors used to 
investing in Internet companies to invest in a satellite 
company. That was not a particularly easy task, so through the 
activities of the STVP programs we came to understand how to 
position an opportunity in a way that it was ultimately 
fundable, you know, and ultimately it meant finding the node 
and enabling the node to see that we were doing to the 
satellite industry the exact same thing that he and his 
computers at Sun did to the mainframe.
    Mr. Cravaack. Mr. Rothrock, what do you think? You know, 
how do you see guys like Mr. Mann and how do you seek him out 
and say, wow, this guy has got a great idea. You know, how do 
we do this?
    Mr. Rothrock. We see--the funnel of entrepreneurs that walk 
in our front door or give us a call or send us an email ranges 
from all walks of life, all corners of the country, educated, 
college degrees, dropouts, you name it. It comes in all forms 
and we don't necessarily hold that against them or for them as 
an advantage in some cases. So I think it is a little bit of a 
myth about--it is really about the person, the thinking. 
Einstein said imagination was more important than knowledge and 
we seek that. In the presentation, is it really creative? Have 
they thought through contingencies? How do they deal with the 
competitive question? We call it leg drive at my firm. Does 
this person really, you know, get up in the morning and before 
they have their shower they have already got three ideas in how 
they are going to win? You look for that spark, and that comes 
whether you have got a college education or not. That is a 
human characteristic.
    Mr. Cravaack. Yeah, I understand that one.
    Mr. Lindsey, what do you think about all this from your 
perspective?
    Mr. Lindsey. I will just add that, of course, the college 
kid with a great idea is a part of the entrepreneurial reality 
but it isn't the only part. According to Kauffman Foundation 
research, the average entrepreneur or the average new business 
founder is 40 years old. He has been--he or she has been 
working her business and has a new idea and figures out that he 
can't get it done in his company and sets out on his own. So it 
takes all kinds.
    Mr. Cravaack. Yeah, it does. I had the fortune to go to the 
Naval Academy and fortunately those guys are kind of locked in, 
but you know, some of the great ideas that I saw from some of 
the guys working through there made their way up through the 
ranks and so it is great to see. So I had the pleasure of 
rooming with an electrical engineer so--but anyway, well, thank 
you very much. I appreciate it.
    And with that I will yield back, Mr. Chairman.
    Chairman Quayle. Thank you, Mr. Cravaack.
    And I would like to thank the witnesses for their valuable 
testimony and the Members for their questions. The Members of 
the Subcommittee may have additional questions for the 
witnesses, and we will ask you to respond to those in writing. 
The record will remain open for two weeks for additional 
comments and statements from Members.
    The witnesses are excused. Thank you all for coming. This 
hearing is now adjourned.
    [Whereupon, at 11:25 a.m., the Subcommittee was adjourned.]


                                Appendix

                              ----------                              


                   Answers to Post-Hearing Questions


Responses by Mr. Brink Lindsey,
Senior Scholar in Research and Policy,
Ewing Marion Kauffman Foundation
for Space-Based Positioning, Navigation, and Timing

 Questions Submitted by Subcommittee Chairman Ben Quayle

Q1.  It often seems that the Federal Government promotes ever-higher 
regulatory standards among States. In the Startup Act, the Kauffman 
Foundation calls for an assessment of the legal environment toward 
businesses in different States and major cities. How would you 
recommend developing the criteria for this assessment?

A1.  We recommend using criteria similar to those employed in the World 
Bank's ``Doing Business'' reports. For more information about the 
methodology used in those reports, see here: http://
www.doingbusiness.org/methodology.

Q2.  Your testimony detailed how changes in licensing rules might 
improve university technology transfer. Has Kauffman explored any other 
possible changes to the Bayh-Dole or Stevenson-Wydler Acts that might 
support more university or federal lab-generated innovation?

A2.  We have explored options for changing the Bayh-Dole Act but have 
come to the conclusion that it is not necessary to amend the Act to 
encourage or mandate ``free agency'' for researchers or, alternatively, 
a 90-day right of first refusal by the technology transfer office at 
the researcher's own university. The appropriate incentives--namely, 
conditioning federal grants on the university's allowing greater 
freedom for its researchers--could be embodied in appropriations for 
science research. Furthermore, appropriations language could authorize 
or direct funding agencies to allocate up to 1% of science grant awards 
to commercialization education for the principal investigators, where 
relevant. In addition, in the age of Web 2.0, universities are not 
taking advantage of the technology available today for online 
licensing. Kauffman Foundation funded the development of infrastructure 
to allow online licensing, and currently only seven universities in the 
U.S. are using it in a very limited fashion. Incentives for 
universities to be evaluated based upon science that quickly moves to 
the market should be put in place and utilized as a criterion for 
federal funding.

 Questions Submitted by Ranking Subcommittee Member Donna Edwards

Q1.  Some have proposed creating public-private research consortia--
consisting of small and large businesses, universities, and government 
entities--to work together on precompetitive research challenges that 
are driven by industry need. The successful Semiconductor Research 
Corporation initiative is an example of such a consortium. In your 
opinion, do you believe there is value to these sorts of industry-
defined research collaborations, and should the Federal Government be 
doing more to encourage them?

A1.  Whether Sematech was really that successful is open to dispute. In 
any event, given the shortage of federal dollars, funding additional 
consortia does not seem like an especially promising idea. It should be 
noted that the Kauffman Foundation was the seed funder of a large 
business/university collaborative model called the University Industry 
Demonstration Partnership. While this initiative has aided in 
collaborations, there have not been any outcomes focused on 
precompetitive research challenges.

Q2.  In his testimony, Mr. Mann mentioned the courses available to him 
as a student at Stanford to help educate and foster entrepreneurship. 
While Stanford is undoubtedly a leader in this area, there are many 
universities throughout the country that do not currently offer this 
type of education or these opportunities to their students. Do you 
believe this sort of entrepreneurial education should be made available 
to students throughout the country? If so, in you opinion, what are the 
key components of a successful entrepreneurial education program? What 
barriers exist to instituting these sorts of programs throughout the 
country?

A2.  Our experience has increasingly led us to the conclusion that 
entrepreneurship is best taught in real time, as students are actually 
undertaking a new business. Here, the Launchpad program, begun at the 
University of Miami and now being replicated at Wayne State and 
potentially other universities, shows great promise. The key to this 
program is that it is run out of the university's career counseling 
office, which provides mentorship and networks for finding money, 
employees, and customers. No policy barriers exist here, and so any and 
all universities, and community colleges as well, are capable of 
starting Launchpad-type programs. There is no need for federal funding 
here, as alumni and local businesses are likely supporters. In 
addition, Kauffman FastTrac has provided education and peer networks 
for over 300,000 individuals across the U.S. with no federal funding. 
Furthermore, universities like Stanford are now offering their more 
popular courses on starting your own venture online for free. There are 
many avenues for education, none of which should require federal 
funding.

 Question Submitted by Representative Randy Neugebauer

Q1.  Have you observed any small startup businesses having difficulties 
obtaining loans or accessing capital? Have you observed any changes in 
banks' underwriting standards or compliance costs affecting startups' 
abilities to obtain loans?

A1.  At present, there is only anecdotal evidence that banks have 
tightened underwriting standards for lending to all small business, 
including startups as well as existing enterprises. This is potentially 
important because Kauffman research shows that contrary to conventional 
wisdom, bank financing is quite important to startups. For the relevant 
Kauffman study, see here: http://www.kauffman.org/uploadedFiles/
Capital-Structure-Decisions-New-
Firms.pdf.

 Questions Submitted by Representative Daniel Lipinski

Q1.  Describe your experiences with federal R&D funding mechanisms, 
whether your companies do their manufacturing here in the U.S., and if 
there is anything Congress can do to better incentivize domestic 
production of inventions that began with federal R&D investments.

A1.  The Kauffman Foundation is not a manufacturing company, so the 
first part of this question is not applicable. One possible way for 
Congress to incentivize more domestic production would be to redirect 
some existing education funding toward matching grants to states to 
support community college training programs for manufacturing jobs, 
since a major reason U.S. companies move production offshore is a 
shortage of qualified personnel here.

Q2.  Please explain how the NSF Innovation Corps (I-Corps) program is 
working and the role of each of the participating organizations--NSF, 
Kauffman Foundation, the Stanford Technology Ventures Program, and 
MIT's Desphande Center. How will you decide if I-Corps is successful? 
Do you have any thoughts as to how it can be expanded or replicated, 
especially to better reach schools and researchers who haven't 
historically had success commercializing their innovations?

A2.  The Kauffman Foundation published a report by Christine 
Gulbrandsen that was a five-year evaluation of both the Desphande and 
Von Liebig Centers--both university-based proof-of-concept centers 
intended to accelerate science to market. Kauffman and Desphande 
Foundation leadership have worked together over the last three years to 
aid universities in understanding and replicating these programs. To 
date the only actual replications are QB3 at UCSF and the Institute for 
Advancing Medical Innovation at the University of Kansas. Desphande and 
Kauffman leadership have also worked with the NSF leadership to 
determine the potential to scale this model in a virtual manner, an 
effort that resulted in the I-Corps. While it is too early to report 
the results of the I-Corps program, we should look to scale the program 
not only within NSF but also within NIH as we are able to use the 
University of Kansas and UCSF models as examples. The only true metric 
for success for these programs should be the increase in volume of 
licensed technology from the university to the marketplace. Again, it 
will be imperative that the university faculty engaged and funded by 
the program be supported through the process to assure that the entire 
university is incentivized to move science to market rapidly in support 
of the process. It is not necessary for any additional federal dollars 
to be allocated in support of this program.

 Questions Submitted by Representative Ray Lujan

Q1.  Basic research is key to future innovation. But the direct 
products of basic research are publicly available, as it should be for 
the integrity of the scientific process. This means that entrepreneurs 
and innovators all over the world have access to this basic resource of 
new knowledge from which new innovative businesses can develop. So how 
can we foster the transfer of technology from our labs and universities 
to our entrepreneurs and innovators?

A1.  Our top recommendation here is to encourage universities to allow 
their researchers ``free agency'' in commercializing their research--
i.e., allow them to use any agent they want instead of having to rely, 
as at present, on their own university's technology transfer office. 
Short of outright free agency, universities could be encouraged to 
reserve a 90-day right of first refusal for their TTOs with free agency 
after that period.

Q2.  Recently, the President issued a memorandum to the heads of 
executive agencies directing them to improve the results from its 
technology transfer and commercialization activities. From your vantage 
point, what suggestions would you give to agency heads to accomplish 
this?

A2.  Agencies should condition grant funding on universities' 
implementing either free agency or a 90-day right of first refusal 
policy for their TTOs.

Q3.  The technology transfer process is full of difficulties. One of 
the most difficult is the gap, or valley of death as it is called, 
where the federal agencies funding the basic research don't want to 
fund the applied research and prototype development because they 
believe it to not be within their mission, and the private sector won't 
fund the work because it is too risky with so many ways for the early 
stage good idea to turn out to not be a viable business. So how do we 
bridge this valley of death?

A3.  Direct government funding as a way to bridge the valley of death 
is inadvisable, as all the recent problems with Solyndra make clear. 
The most constructive path for federal policy in this area is to exempt 
long-term (i.e., at least five years) investments in startups from 
capital gains taxation.

Q4.  Cooperative Research and Development Agreements (CRADAs) are a 
common contracting mechanism for federal labs to partner with private 
entities to mature technologies to the point where private capital is 
willing to invest in the technology. If the government does not pay its 
portion of the CRADA work and requires the private entity to pay the 
entire cost, will this deter small businesses from entering into CRADAs 
with labs and thereby reduce the amount of technologies that are 
transferred to the private sector?

A4.  We lack sufficient experience with CRADAs to respond to this 
question.

Q5.  Federally funded scientists could be a tremendous resource for 
small and startup businesses. In my State of New Mexico, we have two 
national laboratories and the State has a program to pay the time for 
personnel at these labs to provide technical assistance to small 
businesses. Whether it be help with what material to use or how best to 
analyze a complex business problem, small businesses throughout the 
State have made good use of this program. Is there something that could 
be done on a federal level to facilitate federally funded scientists 
providing tehcnical assistance to small businesses?

A5.  It is important to recognize that the majority of federal 
laboratories have contracted their management and these federal 
laboratory management contracts are not evaluated based upon advancing 
science in the lab to the marketplace or their collaborations with 
small or new businesses. If the government has expectations of 
commercial outcomes from the federal laboratories, it should review the 
management contracts and align incentives appropriately. Federal 
funding could come with a stipulation, at least in some cases, that 
technical assistance to small business is part of the scientist's job 
description.

Q6.  As Chair of the Congressional Hispanic Caucus' Economy and 
Workforce Task Force, I recently held a roundtable with representatives 
from the technology industry to focus on fostering innovation and 
ensuring that young entrepreneurs and startup businesses have the 
resources they need to succeed. One participant from the computer 
manufacturing industry emphasized that his company sought to ensure 
that its supply chain was diversified by partnering with small 
business. We can help drive prosperity and jobs in the U.S. by using 
small business services. What do you perceive as the major challenges 
to partnering with large manufacturers?

A6.  A large barrier is that many large companies do not know the 
quality of the services provided by smaller, newer companies. An 
Angie's List kind of service for smaller businesses would help. We are 
not aware of the existence of such a service, but if not it certainly 
seems like a great private sector opportunity. One of the key roles of 
the private sector-supported Startup America Partnership is the 
alignment of big companies with new businesses. While it is too early 
to evaluate the outcome of this project, data collected over the next 
year will provide insight into answering your question.

Q7.  How can large companies better support and mentor small businesses 
in order to ensure that small businesses and startups feel supported in 
their fields and have opportunity to grow? How do we get large 
companies interested in mentoring startups? Can we show these companies 
that helping to grow small business is beneficial to them as well?

A7.  The Startup America Partnership is encouraging large companies to 
offer precisely this kind of mentoring and support. In addition, the 
Kauffman Foundation has worked with or supported many mentoring 
organizations across the U.S., many of them having direct relationships 
with either a university (MIT Venture Mentor Service) or organizations 
like Young Presidents' Organization or Entrepreneurs' Organization.
Responses by Mr. Julian Mann,
Co-Founder and Vice President,
Product Development and Research,
Skybox Imaging

 Questions Submitted by Subcommittee Chairman Ben Quayle

Q1.  Do you have any recommendations on ways that you think would help 
a small company like yours utilize federal facilities, including 
national laboratories and other user facilities?

A1.  First, there is a general lack of publicly available information 
regarding the types of facilities and infrastructure available at 
national laboratories and other similar facilities. A standard 
mechanism for searching for the available infrastructure at local 
facilities is a prerequisite for any general program that opens such 
facilities and infrastructure to public use.
    Secondly, there needs to be a formal mechanism that establishes a 
relationship between the federal entity and the company. This process 
needs to be far less burdensome than traditional contract 
establishment.

Q2.  I understand that Skybox is still a privately held company. What 
will factor into your decision-making process down the road when 
considering whether to go public? Would lower compliance costs and 
regulations factor into this decision?

A2.  The decision to go public will be informed by a number of factors. 
Such factors include capital requirements for corporate growth, 
financial status of the business, and regulatory compliance burden. It 
is an unarguable fact that the regulatory burdens placed upon 
publically traded companies are most burdensome to rapidly growing 
companies that are looking to go public. A graduated approach to 
compliance that allows a company to adapt over time to the regulatory 
environment in which mature publically traded companies operate would 
certainly ease such burdens and improve the likelihood that privately 
held companies consider trading in the public market.

Questions Submitted by Ranking Subcommittee Member Donna Edwards

Q1.  In your testimony, you discuss the challenges that small 
businesses have in conducting collaborative research with universities 
and large businesses. Do you view these challenges as insurmountable? 
Is there anything that can be done to help facilitate more engagement 
and collaboration among these various players? If so, what?

A1.  I do believe that these challenges are predominantly 
insurmountable. The differences in mentality, operational tempo, and 
motivation make it extremely difficult for productive collaboration. 
This does not mean that universities and large companies do not play an 
important role in the overall innovation environment, however. 
Universities are an ideal ground for fundamental research to be 
conducted, before commercial viability for a given technology exists. 
Large companies, through small company acquisition, can significantly 
assist in the wide-scale adoption of new technologies by providing 
access to capital, sales and distribution networks, or integration with 
existing technologies. I believe that ensuring the health of these 
transfer mechanisms into and out of small technology companies is 
absolutely essential for the continued growth of the entrepreneurial 
technology sector. I also believe that a focus on collaborative 
research between fundamentally unaligned organizations is a misguided 
approach to fostering the desired sector growth.

Q2.  Some have proposed creating public-private research consortia--
consisting of small and large businesses, universities, and government 
entities--to work together on precompetitive research challenges that 
are driven by industry need. The successful Semiconductor Research 
Corporation initiative is an example of such a consortium. In your 
opinion, do you believe there is value to these sorts of industry-
defined research collaborations and should the Federal Government be 
doing more to encourage them?

A2.  I am not personally familiar with the work of the Semiconductor 
Research Corporation, so I cannot directly comment on their activity as 
a representative model for such public-private consortia. I believe 
that having forums for the public and private sector to communicate the 
areas in which technological innovation would be beneficial is not a 
bad idea. I do believe, however, that for such forums to be successful 
in their goal, they must strive to ensure that the line is drawn at 
identifying the problems that need solving, not the best solution. This 
is because large companies are notoriously bad at predicting the 
technologies that will ultimately solve the problems that exist. Rather 
than focus on how to improve large companies' or the Federal 
Government's abilities to develop these new technologies, we need to 
recognize that small entrepreneurial companies are best at generating 
new technologies. As the ultimate customer of these new technologies, 
government and large corporations have a deep understanding of the 
needs, but not the transformative solutions that will ultimately meet 
these needs. Any increase in the number or activity of such public-
private consortia must keep this in mind if they are to operate 
successfully.

Q3.  In your testimony, you mentioned the courses available to you as a 
student at Stanford to help educate and foster entrepreneurship. While 
Stanford is undoubtedly a leader in this area, there are many 
universities throughout the country that do not currently offer this 
type of education or these opportunities to their students. Do you 
believe this sort of entrepreneurial education should be made available 
to students throughout the country? If so, in your opinion, what are 
the key components of a successful entrepreneurial education program? 
What barriers exist to instituting these sorts of programs throughout 
the country?

A3.  I absolutely believe that replicating this kind of entrepreneurial 
education throughout the country is certainly possible, and a number of 
such programs have been successfully implemented at universities across 
the country to date. I do believe that there are a few key 
requirements, however, that need to be considered. First, these 
programs cannot be created in isolation from a strong technological 
research base within the university. Entrepreneurial education on its 
own is not particularly useful without transformative technologies to 
focus on commercializing. Additionally, several of the programs that I 
have observed fail to transfer the entrepreneurial activity outside the 
university. With a desire to realize the upside of this technology, 
many university programs end up incubating the entrepreneurial activity 
far too long. Ultimately, to ensure the success of such programs, 
universities must provide not only the education about 
entrepreneurship, but also the resources and guidance to transfer the 
concepts outside the university when the true pursuit of a commercial 
venture commences.

Question Submitted by Representative Lamar Smith

Q1.  At our hearing, you explained that existing government acquisition 
models have not kept up with the pace of technological innovation in 
the private sector. Would you say the challenge lies in internal 
acquisition rules, the culture at acquisition departments, or a 
combination of the two? How could the process be altered to allow for 
the government to move rapidly to adopt new technology?

A1.  I believe that the challenge is certainly a combination of both 
antiquated acquisition rules and the culture within acquisition 
organizations, though both of these stem from a common problem. 
Traditional government acquisition has been designed around the idea 
that the government is at the forefront of technological development 
and is effectively designing custom solutions to meet heretofore-unmet 
needs. The reality today is that in a significant majority of cases, 
technology in the private sector has eclipsed the state of technology 
within the government.
    The acquisition process required to use commercial technologies in 
novel ways to meet government needs is certainly different from that of 
a custom technology acquisition. This difference has been further 
exacerbated by the fact that the private sector has moved from 
traditional technology acquisition to service subscriptions. This is 
most clearly exemplified in modern software, where Software-As-A-
Service (SAAS) models have effectively replaced traditional approaches 
to software delivery. The private sector has adapted to this change by 
realizing that there is significant benefit to such a service-oriented 
model. The customer does not bear the technological risk of either the 
development or the ongoing operations of the solution. Unlike 
traditional acquisitions, where an initial development budget is 
approved, with little thought to the ongoing operational costs, in 
service-oriented models the customer needs to express the value that a 
given service provides on some sort of repeated basis (i.e., monthly, 
annually, etc.). These models provide better quality of service to 
customers, incentivize service providers to continue improving the 
systems that they deliver, and provide a more reliable ongoing revenue 
stream on which businesses can develop.
    Government acquisition is not designed to be able to acquire 
subscription services. These subscription models extend beyond the 
realm of just software as well; numerous companies are now providing 
Platform-As-A-Service (PAAS) or Infrastructure-As-A-Service (IAAS), 
providing the same type of quality of service and continuous 
improvement benefits as SAAS. The ``we must build it attitude'' 
prevents asking the question ``what is this worth to me?'' This needs 
to be changed if government acquisition of new technologies has a 
chance of keeping up with the pace of technological innovation.

Questions Submitted by Representative Randy Neugebauer

Q1.  I hear repeatedly from the small businesses in the 19th District 
of Texas that regulations and government intrusion are costing them 
valuable man hours of compliance and impacting their bottom line. Do 
you agree this is a problem? If yes, please provide and example of a 
regulation that you have witnessed impact a new business' ability to 
grow.

A1.  I certainly agree that regulatory compliance has had a direct 
impact on Skybox's bottom line. One set of regulations in particular is 
the ITAR. I reference a part of my previous written testimony to 
further explain:

         . . . As a satellite manufacturing company, virtually 
        everything done by our engineering organization is governed 
        under the ITAR. Even the most benign mechanical bracket can 
        only be manufactured by an ITAR-certified machine shop. The 
        vast majority of local machine shops are not ITAR certified, 
        and have no interest in becoming certified due to the high 
        cost, burdensome documentation requirements, and increased 
        liability. As a result we have an artificially reduced supply 
        market, which has resulted in our manufacturing costs being 
        increased by a factor of 10. Furthermore, these machine shops 
        are typically very busy, which means we have a lead time that 
        is two to three times longer than if we were operating in a 
        less regulated industry.

        Perhaps even more concerning is the fact that the ITAR 
        regulations have had the unintended consequence of actually 
        decreasing domestic competitiveness in the aerospace industry. 
        As a relative newcomer to the industry, I have not seen the 
        progression of the regulations over the years. What I have 
        seen, however, is that when it comes to low-cost, 
        transformative, satellite technologies, international 
        developers have significantly surpassed the state of 
        domestically developed technologies. A number of our high-
        performance specialty components are obtained from 
        international suppliers. Additionally, when we have approached 
        these suppliers about the possibility of co-development or 
        manufacturing support, they have declined due to the fact that 
        their primary customer base is outside the United States. 
        International developers are rejecting the idea of deeper 
        collaboration with American companies due to the concern that 
        they will not be able to export the resulting technology to 
        their existing customers due to ITAR; this is a real problem 
        for American innovation.

Q2.  I also consistently hear from my constituents that regulatory 
uncertainty is making it more difficult for potential entrepreneurs to 
take the leap of faith and invest in starting a new business. Some of 
you alluded to this in your testimony. Could you please provide a 
specific example of this uncertainty, and explain how the Federal 
Government could act to relieve this uncertainty?

A2.  Regulatory uncertainty has not really been a driving consideration 
in our business. While regulatory burden has certainly provided 
hardship, we have not really focused on how shifting regulations may or 
may not affect our business going forward. We really just focused on 
the development of our technology, the cultivation of our customer 
base, and the belief that if we did these two things successfully, we 
would be able to find ways of navigating any changing regulatory 
landscape that we encountered.

Q3.  Have you observed any small startup businesses having difficulties 
obtaining loans or accessing capital? Have you observed any changes in 
banks' underwriting standards or compliance costs affecting startups' 
abilities to obtain loans?

A3.  I do not have relevant experience from which to develop a response 
to this question.

Question Submitted by Representative Daniel Lipinski

Q1.  Describe your experience with federal R&D funding mechanisms, 
whether your companies do their manufacturing here in the U.S., and if 
there is anything Congress can do to better incentivize domestic 
production of inventions that began with federal R&D investments.

A1.  Prior to my experience with Skybox, I had been somewhat involved 
in SBIR funding processes for a few different federal agencies. Skybox 
has not had any formal relationship with federal R&D funding to date. 
Skybox does conduct all of our manufacturing domestically (due to ITAR 
regulations), and ultimately this has made us less competitive with 
international competitors because our costs are inflated. Ultimately I 
believe that trying to artificially incentivize domestic production 
will be of greater long-term detriment than benefit. We as a Nation 
need to focus on the areas of technology and innovation where we 
maintain a competitive edge on the global market, not use taxpayer 
dollars to create artificial incentives that continue to diminish our 
global position.

Questions Submitted by Representative Ben Ray Lujan

Q1.  Basic research is key to future innovation. But the direct 
products of basic research are publicly available, as it should be for 
the integrity of the scientific process. This means that entrepreneurs 
and innovators all over the world have access to this basic resource of 
new knowledge from which new innovative businesses can develop. So how 
can we foster the transfer of technology from our labs and universities 
to our entrepreneurs and innovators?

A1.  Ultimately, the knowledge conveyed through publicly available 
research is rarely sufficient to effectively commercialize the 
pertinent technology. Further, I believe that the concern that 
international innovators are going to take our entrepreneurial 
opportunity by cannibalizing our public research is misguided. The 
proportional amount of scientific innovation that the United States has 
been contributing to the global scientific community has been 
diminishing over the last 30 years. This is the real problem that we 
need to be addressing. As long as the United States continues to be a 
scientific powerhouse, we will continue to have a strong and growing 
technology entrepreneurship sector. If, instead, we continue to decline 
relative to the rest of the world, then our global position when it 
comes to entrepreneurship and innovation will certainly suffer.

Q2.  Recently, the President issued a memorandum to the heads of 
executive agencies directing them to improve the results from its 
technology transfer and commercialization activities. From your vantage 
point, what suggestions would you give to agency heads to accomplish 
this?

A2.  If executive agency heads want to increase the degree to which the 
technologies they develop are effectively commercialized, then they 
need to find ways of increasing the public's visibility into the 
technologies that they have within their portfolio. From my 
perspective, the greatest barrier to commercialization of this 
technology is that there is a lack of general knowledge into the 
technological developments that have been conducted by our federal 
agencies. Furthermore, those entrepreneurs that are best positioned to 
realize the full potential of these technologies in the commercial 
market are often some of the most removed from the activities going on 
within our federal research and development organizations.

Q3.  The technology transfer process is full of difficulties. One of 
the most difficult is the gap, or valley of death as it's called, where 
the federal agencies funding the basic research don't want to fund the 
applied research and prototype development because they believe it to 
not be within their mission, and the private sector won't fund the work 
because it is too risky with so many ways for the early stage good idea 
to turn out to not be a viable business. So how do we bridge this 
valley of death?

A3.  This so called ``valley of death'' is precisely the role that 
venture capital plays in spanning the gap between pure R&D funding and 
more traditional growth or debt capital sources. Ultimately, it is my 
experience that if the market potential of a technology is significant 
enough, then venture capital will gladly bear the technology risk 
associated with transitioning a technology from research to product. 
The issues that I have seen are that oftentimes innovators do a poor 
job of effectively determining and communicating the market potential 
for their technology. This is why I believe that an increase in 
entrepreneurial education in our Nation's leading research institutions 
is essential to seeing growth in the innovation sector.

Q4.  Cooperative research and Development Agreements (CRADAs) are a 
common contracting mechanism for federal labs to partner with private 
entities to mature technologies to the point where private capital is 
willing to invest in the technology. If the government does not pay its 
portion of the CRADA work and requires the private entity to pay the 
entire cost, will this deter small businesses from entering into CRADAs 
with labs and thereby reduce the amount of technologies that are 
transferred to the private sector?

A4.  I have very little experience with CRADAs and consequently don't 
feel prepared to be able to answer this question effectively.

Q5.  Federally funded scientists could be a tremendous resource for 
small and startup businesses. In my State of New Mexico, we have two 
national laboratories and the State has a program to pay the time for 
personnel at these labs to provide technical assistance to small 
businesses. Whether it be help with what material to use or how best to 
analyze a complex business problem, small businesses throughout the 
State have made good use of this program. Is there something that could 
be done on a federal level to facilitate federally funded scientists 
providing technical assistance to small businesses?

A5.  I can certainly see a program such as this being of some interest; 
I do not believe necessarily that it will accomplish the stated goal of 
the Committee in increasing the amount of technology entrepreneurship 
throughout the Nation. Ultimately, access to scientific talent has not 
been one of the major challenges that we have faced in the growth of 
Skybox. Furthermore, I have a number of professional contacts that are 
researchers in federal labs, and I am unsure that a structure like this 
would effectively motivate their support. While financial compensation 
for the time that they spend working with companies is certainly 
appreciated, many of these researchers that I have talked to believe 
that his or her time is the limited resource. The opportunity cost of 
working with a small company rather than working on proposals that can 
further his or her own research projects simply does not add up for 
these researchers. It is my belief that the financial resources that 
would be used for a program like this would be better spent directly 
funding novel research rather than through a construct such as this.

Q6.  As Chair of the Congressional Hispanic Caucus' Economy and 
Workforce Task Force, I recently held a roundtable with representatives 
from the technology industry to focus on fostering innovation and 
ensuring that young entrepreneurs and startup businesses have the 
resources they need to succeed. One participant from the computer 
manufacturing industry emphasized that his company sought to ensure 
that its supply chain was diversified by partnering with small 
business. We can help drive prosperity and jobs in the U.S. by using 
small business services. What do you perceive as the major challenges 
to partnering with large manufacturers?

A6.  At Skybox, we do not work with any large manufacturers. As a 
result, I cannot comment on the difficulty of partnering with large 
manufacturers.

Q7.  How can large companies better support and mentor small businesses 
in order to ensure that small businesses and startups feel supported in 
their fields and have opportunity to grow? How do we get large 
companies interested in mentoring startups? Can we show these companies 
that helping to grow small business is beneficial to them as well?

A7.  Large companies and startups do not work well together. 
Ultimately, when a startup is successful in a given field, it is 
typically detrimental to the large companies in that same field. On the 
other hand, it is beneficial to consumers, the economy, and the 
technological landscape at large. Furthermore, the ways in which large 
companies and startups operate is fundamentally different. If startups 
were to listen to the ``recommendations'' of large established 
companies, then transformative innovation would cease. As a Nation, we 
want innovators and their companies to continue to be the renegades 
within their respective industries if we are to continue to remain at 
the forefront of technological innovation.
Responses by Mr. Ray Rothrock, Partner, Venrock

 Question Submitted by Subcommittee Chairman Ben Quayle

Q1.   Do you believe the current budget environment offers an 
opportunity for smaller, innovative companies to compete for government 
contracts because acquisition officers will be increasingly looking for 
low-cost, high-efficiency options? How could acquisition officers be 
empowered by current systems to identify and pursue these options?

A1.  The goal for government acquisitions, whether high tech or low, 
goods or services, should be to maximize value for the taxpayer's 
dollar. Even absent the critical budget environment of 2012, 
acquisition officers should always seek the highest return on 
government investment and procurement. I believe smaller, innovative 
companies can thrive in such an environment, given smaller startups' 
superior ability to be nimble, more responsive to individual customers' 
needs and lack of legacy cost burdens and overhead. Further, new small 
companies may have better products more suitable to current needs. 
Government can best help such small businesses by continuing to drive 
demand as it purchases its goods and services in the marketplace, 
encouraging private sector competition, holding vendors accountable and 
measuring value.

Questions Submitted by Representative Randy Neugebauer

Q1.  I hear repeatedly from the small businesses in the 19th District 
of Texas that regulation and government intrusion are costing them 
valuable man hours of compliance and impacting their bottom line. Do 
you agree that this is a problem? If yes, please provide an example of 
a regulation that you have witnessed impact a new business' ability to 
grow.

A1.  In the last decade or so, there has been a series of financial and 
accounting rules, regulation, and compliance mandates that while 
initially directed at larger companies, were disproportionately and 
mostly negatively impacting the bottom line of smaller companies; one 
might say an unintended consequence. One of the best examples of new 
compliance requirements that impact a small business's bottom line is 
compliance with Sarbanes-Oxley (SOX) 404B. There are a number of 
challenges that small venture-backed companies face in complying with 
SOX 404, but I will focus my response on just a few. First, the cost of 
compliance with this regulation forces young companies to expend scarce 
resources, people, time, and capital, earlier in the process in order 
to be prepared and the ability to go public or be acquired by larger 
public companies. This diversion of resources is having an adverse 
impact on innovation and economic growth since in a capital-constrained 
startup, precious capital is taken from the work of innovation and 
manufacturing. The end result of these SOX compliance challenges is 
that small businesses that once aspired to become public companies are 
now questioning the benefits of going public or even merging with a 
public company. This is not in the Nation's best interest, given that 
90% of a company's growth and job creation comes after that company 
goes public.
    Studies show that significant job creation occurs when a venture-
backed company goes public. In the last decade, however, the market for 
venture-backed initial public offerings (IPOs) has suffered. From 
Sarbanes Oxley (SOX) to the Global Settlement for Reg FD, regulations 
intended for larger multinational corporations have raised burdensome 
obstacles and compliance costs for startups trying to enter the pulic 
markets. The venture industry strongly supports regulation that 
protects investors where necessary, but that regulatory approach must 
account for the unique challenges faced by young venture-backed 
companies and their investors. There are opportunities within existing 
regulations to tier compliance so as not to overburden emerging growth, 
pre-public and public companies at at time when they need support from 
the government, ther auditors, and the markets. In addition, the 
venture capital industry supports regulatory and tax policies that seek 
to encourage small, emerging growth companies to go public on U.S. 
exchanges. Such policies promise to bolster the economic recovery, spur 
job growth, and maintain our global comppetitiveness.
    I would direct your attention to a report that was recently 
presented to the Deparment of Treasury entitled, ``Rebuilding the IPO 
On-Ramp.'' This report discusses many of the challenges faced by 
emerging growth companies and offers tangible solutions to those 
challenges. The report can be found on the NVCA Website, www.nvca.org.

Q2.  I also consistently hear from my constituents that regulatory 
uncertainty is making it more difficult for potential entrepreneurs to 
take the leap of faith and invest in starting a new business. Some of 
you alluded to this in your testimony. Could you please provide a 
specific example of this uncertainty, and explain how the Federal 
Government could act to relieve this uncertainty?

A2.  One of the most impactful things the Federal Government can do to 
help the bottom line for small businesses is to create a regulatory and 
tax policy environment with as much certainty and predictability as 
possible. Entrepreneurs and investors are willing to take risks if we 
have a sense of the ``rules of the road'' and that those rules will not 
be subject to abrupt changes or lapses. One of the best examples of 
this uncertainty is around tax credits that are often allowed to expire 
and then are reauthorized retroactively. This uncertainty makes it very 
difficult to strategically plan and budget growth for small businesses. 
It is hard to plan for the long term if changes substantial and 
fundamental changes occur in the short term.

Q3.  Have you observed any small startup businesses having difficulties 
obtaining loans or accessing capital? Have you observed any changes in 
banks' underwriting standards or compliance costs affecting startups' 
abilities to obtain loans?

A3.  Loans into venure capital startups become available when a comany 
starts to produce revenues and cash flow. This cash flow is required to 
service the loan as equity capital and is far too expensive to be used 
for such uses. Generally, when startups are backed by strong venture 
firms, deals with commercial banks can be had, but at additional costs. 
Banks knowledgeable of the risks in startups and with the ability to 
complete due diligence have nonetheless pulled back from commercial 
loans to startups or added terms to the deals that basically increase 
the cost of debt to the company. These increased costs consume 
resources otherwise dedicated to innovation and other critical elements 
of the company and in general hamper growth as much as they contribute 
to it. Even further, banks are looking to the venture capital backers 
for guarantees, something they never asked for even three years ago. 
Personal guarantees are extraordinarily expensive but yet the banks are 
requiring it. it is sometimes easier to obtain equity capital rather 
than loan capital in the current environment.

Questions Submitted by Ranking Subcommittee Chairman Donna Edwards

Q1.  Some have proposed creating public-private research consortia--
consisting of small and large businesses, universities, and government 
entities--to work together on precompetitive research challenges that 
are driven by industry need. The successful Semiconductor Research 
Corporation initiative is an example of such an consortium. In your 
opinion, do you believe there is value to these sorts of industry-
defined research collaborations and should the Federal Government be 
doing more to encourage them?

A1.  Public-private partnerships or consortia have much to commend them 
and often receive lots of public support and outpouring of praise, but 
they are too often seen as a panacea or Holy Grail for federal research 
investments. In our experience, public-private consortia are 
constructive but hardly game changing. Private sector players rarely 
share their ``best'' proprietary technologies or deploy their most 
productive researchers in such collaborations, nor would we expect them 
to. I believe federal research initiatives should prioritize research 
outcomes over process inputs. Taxpayers benefit most when such research 
initiatives yield desired innovations leading to companies being 
formed, rather than collaboration without consequences of any economic 
meaning.

Q2.  In his testimony, Mr. Mann mentioned the courses available to him 
as a student at Stanford to help educate and foster entrepreneurship. 
While Stanford is undoubtedly a leader in this area, there are many 
universities throughout the country that do not currently offer this 
type of education or these opportunities to their students. Do you 
believe this sort of entrepreneurial education should be made available 
to students throughout the country? If so, in your opinion. what are 
the key components of a successful entrepreneurial education program? 
What barriers exist to instituting these sorts of programs throughout 
the country?

A2.  Entrepreneurship education is important, impactful, and in every 
business school in the country. The subject is ``red hot'' and 
ubiquitous, enjoying tremendous attention and scholarship. I am 
privileged to frequently guest lecture on topics including ``what VCs 
look for,'' ``how to best position companies seeking funding,'' and 
``growing businesses from concept to commerce.'' In fact, educating 
entrepreneurs is a core responsibility for all venture capitalists, as 
entrepreneurs are the lifeblood of the venture business, and the best 
VCs tend to be the best teachers, hand holders, and advisers. In 
general, all this activity is good if for nothing more than to provide 
alternatives and to make people seeking economic growth aware of this 
path.
    The only obvious barriers to further proliferation of 
entrepreneurship education programs are high tuition rates, the 
inherent ``busy-ness'' of those best able to teach from experience, and 
the fact that entrepreneurship, like ``innovation,'' is a subjective 
and inexact science. For what it's worth, in my experience, the 
entrepreneurship education that is most impactful occurs outside the 
classroom, in networks that connect real-time entrepreneurs with peers, 
veteran company builders, and funders. It occurs when people 
participate in entrepreneurial companies with fast growth and observe 
first hand the challenges, opportunities, and thrill of participating 
in one. Entrepreneurs are largely born, but there are many skills and 
lessons that can be shared in the classroom to lessen the failure rate.

Question Submitted by Representative Daniel Lipinski

Q1.  Describe your experiences with federal R&D funding mechanisms, 
whether your companies do their manufacturing here in the U.S., and if 
there is anything Congress can do to better incentivize domestic 
production of inventions that began with federal R&D investments.

A1.  The United States has led in the creation of the best and most 
successful and recognizable companies, and in some cases creating whole 
industries, in nearly every major industrial segment since World War 
II. United States R&D, public and private, has been the bedrock of 
those sectors--whether it is the aerospace industry, the 
telecommunications industry, the semiconductor industry, the personal 
computing industry, the biotechnology industry, the Internet, and now 
the clean energy sector. Federal Government support for early-stage R&D 
has been the key determinant that has led to inventions in all of these 
areas.
    Different sectors and technologies require different tools to best 
incentivize domestic production of inventions that were incubated with 
federal R&D investments, but there are some actions that can be taken 
that will lead to improvements across all sectors.
    First, high-tech companies that leverage federal R&D into 
commercial enterprises often require human capital that is skilled in 
science, mathematics, and engineering. Too often the U.S. workforce 
alone cannot fill those positions. Allowing high-skilled immigrants who 
perform jobs that cannot be filled by U.S. workers to remain in the 
country is a good first step. Foreign-born entrepreneurs contribute a 
great deal to the U.S. economy and should be allowed to remain in the 
U.S. after their schooling rather than going back to their home country 
to start up their new business there. The new Start-Up Visa Act, 
introduced by Reps. Lofgren and Polis, is an excellent piece of 
legislation that will go a long way toward creating jobs and keeping 
jobs here in the U.S. We can improve U.S. competitiveness and 
innovation when we embrace foreign-born entrepreneurs that want to 
create U.S. companies with manufacturing jobs. I don't have statistics 
for the venture industry, but a full 40% of the entrepreneurs in my 
firm's portfolio were foreign born.
    The job creation potential in the clean energy sector is enormous. 
Energy is the largest market in the world, and the United States 
represents 25% of the world's energy. The U.S. can and should take a 
leadership position in a worldwide clean energy technology marketplace, 
but it will take significant and sustained federal commitment to make 
this happen. Initial R&D innovation in technologies like hydro power 
(Hoover Dam), nuclear power (USS Nautilus), solar (NASA), and wind 
(DARPA) were derived out of our national labs and government-sponsored 
projects. The resulting industries represent the best means for 
leveraging this federal R&D into domestic manufacturing jobs. In the 
past, the U.S. has been an exporter of critical energy technologies. 
This can and should continue but requires sustained investment by the 
Federal Government.
    The biggest challenge in getting to scale on emerging clean energy 
technologies is getting through the ``valley of death''--that period of 
time and investment between a successful new energy product and fist 
commercial deployment. The cost of commercial deployment in the 
capital-intensive energy sector is simply too high for, and the public 
equity markets do not have the risk appetite for, these projects 
either. Debt financing is the only way to bridge this gap. The federal 
balance sheet with financing allows for the highest possible chance of 
success. Congress should look at enacting a Clean Energy Deployment 
Administration (CEDA), similar to what Senators Bingaman and Murkowski 
have introduced. CEDA would provide a government-backed lending 
authority for high-risk, capital-intensive, and first-of-a-kind 
manufacturing facilities. After the first or second facility is built 
and the risks are reduced, traditional lending will kick in as banks 
see and understand better the technology and benefits. Enacting CEDA 
would be the most important thing in the short run that Congress can do 
to incentivize domestic manufacturing.

Questions Submitted by Representative Ben Ray Lujan

Q1.  Basic research is key to future innovation. But the direct 
products of basic research are pulicly available, as it should be for 
the integrity of the scientific process. This means that entrepreneurs 
and innovators all over the world have access to this basic resource of 
new knowlege from which new innovative businesses can develop. So how 
can we foster the transfer of technology from our labs and universities 
to our entrepreneurs and innovators?

A1.  The great technology companies of the late 20th Century were all 
started by teams of people--Intel, Apple, Microsoft, Google, Cisco, 
Genentech, Gilead, and on and on. In all cases, there were a 
technologist and a business person. A national lab or university 
laboratory naturally attracts the technologist who spends all their 
time on innovation. In my experiences, there are no natural business 
persons at a national lab. Coupling the technologist with a potential 
business entrepreneur is what is required. Professional researchers 
need access to the business side, and the business people need access 
to the researchers and their innovations. It cannot be forced or willed 
by policy.
    I could see a series of conferences, e.g., adult science fairs, 
which expose both sides of the equation to each other. There they could 
learn to communicate with each other, explain their ideas, get other 
ideas, and take those to the lab or start the process of exiting the 
lab to a commercial setting. ARPA-E with its annual conference does an 
excellent job of bringing all the companies it has discovered (most are 
not ARPA-E investments) to one place for a week. Professional 
investors, engineers, managers, and many other walks of life all 
interact and the magic of startups continues as relationships are 
consummated.

Q2.  Recently, the President issued a memorandum to the heads of 
executive agencies directing them to improve the results from its 
technology transfer and commercialization activities. From your vantage 
point, what suggestions would you give to agency heads to accomplish 
this?

A2.  I applaud the President's directive to federal agency executives 
to improve technology transfer and commercialization activities. 
Incentives should be used to encourage those agency leaders in this 
regard. Maximizing on the Federal Government's ``crown jewels'' will be 
a boon to innovation and job creation in the near term. Each agency 
should asssemble a commericalization team that includes a network of 
experienced entrepreneurial managers, investors (VCs), and researchers 
to share best practices and experience. The agencies should publish 
often and broadly on their work and projects. NASA Tech Briefs is one 
such publication that is circulated at my firm.
    As described in #1 above, investors and entrepreneurs should have 
the ability to ``walk the halls'' of federal research institutions, 
meet and comingle with scientists, build relationships, and discuss 
ideas and opportunities with researchers, Steve Jobs is famous for 
having walked the halls of Xerox PARC and saw the mouse and windows 
that inspired the Macintosh computer. Doing all we can to build bridges 
between the federal researchers and the outside community will help the 
commercialization process and maximize the taxpayer investment.

Q3.  The technology transfer process is full of difficulties. One of 
the most difficult is the gap, or valley of death, as it is called, 
where the federal agencies funding the basic research don't want to 
fund the applied research and prototype development because they 
believe it to not be within their mission, and the private sector won't 
fund the work because it is too risky with so many ways for the early 
stage good idea to turn out to not be a viable business. So how do we 
bridge this valley of death?

A3.  Licensing challenges are critical to new company formation when 
taking from federally funded institutions. The license process must be 
streamlined and shortened to no more than 90 days. Standardization will 
help a lot in shortening the process and making it understandable for 
all. Small businesses are harmed by cumbersome, custom and lengthy 
licensing processing. Also, license agreements need exclusivity in 
order to attract private, outside investment.

Q4.  Cooperative Research and Development Agreements (CRADAs) are a 
common contracting mechanism for federal labs to partner with private 
entities to mature technologies to the point where private capital is 
willing to invest in the technology. If the government does not pay its 
portion of the CRADA work and requires the private entity to pay the 
entire cost, will this deter small businesses from entering into CRADAs 
with labs and thereby reduce the amount of technologies that are 
transferred to the private sector?

A4.  I have not had any experience with Cooperative Research and 
Development Agreements (CRADAs) so I am not well positioned to offer 
opinions on how that program will be impacted by changes to the federal 
payment portion.

Q5.  Federally funded scientists could be a tremendous resource for 
small and startup businesses. In my State of New Mexico, we have two 
national laboratories, and the State has a program to pay the time for 
personnel at these labs to provide technical assistance to small 
businesses. Whether it be help with what material to use or how best to 
analyze a complex business problem, small businesses throughout the 
State have made good use of this program. Is there something that could 
be done on a federal level to facilitate federally funded scientists 
providing technical assistance to small businesses?

A5.  Getting federal scientists out of the labs and integrated into the 
private sector can potentially yield significant benefits. A small 
percentage of leading scientists is generally responsible for most of 
the significant breakthroughs that occur. So it makes good sense to 
focus entrepreneurial services, funding, and support on the top 
scientists with breakthrough ideas.
    Top scientists should be given time, perhaps one day per week, to 
consult with startups. Leading universities offer this opportunity and 
it is beneficial to both sides. Lab scientists should be able to fully 
participate in entrepreneurial activities without fear of losing their 
federal benefits (i.e., pension, health insurance coverage) and without 
fear of conflict of interest. The standard of conflict of interest for 
scientists involved in entrepreneurial activity should be ``actual 
conflict'' as opposed to the ``appearance of conflict'' standard. The 
appearance standard allows program managers the ability to curtail 
entrepreneurial activities by pointing to unrealistic or imagined 
conflicts. In general, conflicts of interest exist at every layer of 
society. It is the lack of transparency of conflicts that causes 
trouble, not the tranparency or admission of relationships or 
conflicts.

Q6.  As Chair of the Congressional Hispanic Caucus' Economy and 
Workforce Task Force, I recently held a roundtable with representatives 
from the technology industry to focus on fostering innovation and 
ensuring that young entrepreneurs and startup businesses have the 
resources they need to succeed. One participant from the computer 
manufacturing industry emphasized that his company sought to ensure 
that its supply chain was diversified by partnering with small 
business. We can help drive prosperity and jobs in the U.S. by using 
small business services. What do you perceive as the major challenges 
to partnering with large manufacturers?

A6.  Large manufacturers are essential to small startup companies as 
customers, suppliers, and sources of talent. Large manufacturers 
likewise recognize and appreciate the benefits of small and medium 
customers, suppliers, and targets for strategic acquisition. Last year, 
the Business Roundtable produced an analysis of the symbiotic 
relationship between small and large businesses in the United States, 
quantifying many of the mutual benefits: http://businessroundtable.org/
studies-and-reports/mutual-benefits-shared-growth-small-and-large-
companies-working-togeth/.
    Venture capitalists do not generally see a market failure here for 
which government action is needed or warranted. Our competitive economy 
enables and encourages partnering driven by economics. Likewise the 
risks of unintended consequences are always high when policy makers 
attempt to influence market behaviors to assist indiviual classes of 
businesses. Small businesses tend to suffer along with big businesses 
when government limits access to capital, increases operation costs 
through regulation, or alters the cost-benefit equation to advance 
social policy goals. Public officials looking to help small businesses 
might best serve the marketplace through use of their bully pulpit, to 
highlight entrepreneurial role models and success stories.

Q7.  How can large companies better support and mentor small businesses 
in order to ensure that small businesses and startups feel supported in 
their fields and have opportunity to grow? How do we get large 
companies interested in mentoring startups? Can we show these companies 
that helping to grow small business is beneficial to them as well?

A7.  Many large technology companies whose roots were entrepreneurial 
or were venture backed have their own venture programs in place. The 
NVCA encourages this and has an entire program supporting corporate 
venture capital. Large companies provide not just capital but often 
technical expertise that may be very hard to acquire for the startup, 
infrastructure in the case of labs or special equipment and, 
importantly, demand for the products produced by the smaller startups. 
The vast resources of, for example, an Intel, are truly unique and 
often sought by startups. Rarely do corporates invest with the 
assistance of pure venture capital groups. Invariably, when a 
corporation engages in the process of small company formation, there is 
an advocate within that company's senior management ranks. Corporations 
are driven by economics and results for their customers and 
shareholders. It would be helpful if federal policy were explicit in 
the treatment of certain tax policies, investment credits, and other 
accounting elements as they may be applied to company formation and 
startup company support.
Responses by Mr. Steve Dubin, Former CEO, Martek Biosciences,
and Senior Advisor to DSM Nutritional Products

Questions Submitted by Representative Neugebauer

Q1.  I hear repeatedly from the small businesses in the 19th District 
of Texas that regulations and government intrusion are costing them 
valuable man hours of compliance and impacting their bottom line. Do 
you agree that this is a problem? If yes, please provide an example of 
a regulation that you have witnessed impact a new business' ability to 
grow.

A1.  I do not think there is any one thing that creates the problem. I 
think it is the totality of federal, State, and local regulations that 
creates a sense of being overwhelmed when trying to start a new 
business. There are withholding issues, licensing and permitting 
requirements, health care issues, and overly complex taxation issues, 
among others. It is hard to start a one- or two-person business (which 
will hopefully grow to hire many employees) when you have so many 
issues to face.

Q2.  I also consistently hear from my constituents that regulatory 
uncertainty is making it more difficult for potential entrepreneurs to 
take the leap of faith and invest in starting a new business. Some of 
you alluded to this in your testimony. Could you please provide a 
specific example of this uncertainty and explain how the Federal 
Government could act to relieve the uncertainty?

A2.  Aside from the current tax and economic uncertainties, in DSM/
Martek's nutrition field, for example, there are many uncertainties 
relating to health claims and regulatory procedures at the FDA that 
make it extremely costly for large companies, let alone small 
companies, to do business in the space. Why invest all of the time and 
money that goes into inventing a new nutritional product if the 
regulatory path is unclear and if a nutritional product will be held to 
unreasonable drug-type standards before you can say anything about your 
product? In addition, this uncertainty opens the door for plaintiff's 
attorneys to bring suits related to claims.

Q3.  Have you observed any small startup businesses having difficulties 
obtaining loans or accessing capital? Have you observed any changes in 
banks' underwriting standards or compliance costs affecting startups' 
abilities to obtain loans?

A3.  I have not dealt with bank debt in awhile, but equity capital is 
less abundant for long-term bioscience-related deals than I have seen 
in some time.

Questions Submitted by Representative Edwards

Q1.  Some have proposed creating public-private research consortia--
consisting of small and large businesses, universities, and government 
entities--to work together on precompetitive research challenges that 
are driven by industry need. The successful Semiconductor Research 
Corporation initiative is an example of such an consortium. In your 
opinion, do you believe there is value to these sorts of industry-
defined research collaborations and should the Federal Government be 
doing more to encourage them?

A1.  I think the concept of public-private research consortia is an 
excellent one. This is especially true where there is a big problem to 
be solved and the early work may be too risky or too complex to be 
performed by any one entity.

Q2.  In his testimony, Mr. Mann mentioned the courses available to him 
as a student at Stanford to help educate and foster entrepreneurship. 
While Stanford is undoubtedly a leader in this area, there are many 
universities throughout the country that do not currently offer this 
type of education or these opportunities to their students. Do you 
believe this sort of entrepreneurial education should be made available 
to students throughout the country? If so, in your opinion. what are 
the key components of a successful entrepreneurial education program? 
What barriers exist to instituting these sorts of programs throughout 
the country?

A2.  I am not an expert on this one, but I do know that more and more 
universities are emphasizing entrepreneurial education. The University 
of Maryland, for instance, is one such university. I think that the 
cultural aspects that foster entrepreneurs are as important as any 
specific curriculum. Such a culture can be fostered by such things as 
celebrating successes, rewarding professors that engage in 
entrepreneurial activities and bringing in notable entrepreneurs to 
speak to students.

Question Submitted by Representative Lipinski

Q1.  Describe your experiences with federal R&D funding mechanisms, 
whether your companies do their manufacturing here in the U.S., and if 
there is anything Congress can do to better incentivize domestic 
production of inventions that began with federal R&D investments.

A1.  My experience was excellent with the SBIR program. Martek would 
not have been successful without it. Most of Martek's production was 
done in the U.S., in Kentucky, South Carolina, and New Jersey.

Questions Submitted by Representative Lujan

Q1.  Basic research is key to future innovation. But the direct 
products of basic research are pulicly available, as it should be for 
the integrity of the scientific process. This means that entrepreneurs 
and innovators all over the world have access to this basic resource of 
new knowlege from which new innovative businesses can develop. So how 
can we foster the transfer of technology from our labs and universities 
to our entrepreneurs and innovators?

A1.  The fact that research is publically available may not always be a 
good thing. Companies will not invest in expensive commercialization 
efforts without being able to have intellectual property protection or 
other rights that protect their investments.

Q2.  Recently, the President issued a memorandum to the heads of 
executive agencies directing them to improve the results from its 
technology transfer and commercialization activities. From your vantage 
point, what suggestions would you give to agency heads to accomplish 
this?

A2.  The first step would be to incentivize government employees for 
their inventions. The second would be to publicize and catalogue any 
available technology. The third would be to have a licensing process 
that is fair to both sides and easy to use.

Q3.  The technology transfer process is full of difficulties. One of 
the most difficult is the gap, or valley of death as it's called, where 
the federal agencies funding the basic research don't want to fund the 
applied research and prototype development because they believe it to 
not be within their mission, and the private sector won't fund the work 
because it is too risky with so many ways for the early stage good idea 
to turn out to not be a viable business. So how do we bridge this 
valley of death?

A3.  I think this one is impossible to answer on a global basis. It is 
more of a case-by-case thing, but if the incentives are properly 
aligned, it believe that the risk can also be properly aligned.

Q4.  Cooperative Research and Development Agreements (CRADAs) are a 
common contracting mechanism for federal labs to partner with private 
entities to mature technologies to the point where private capital is 
willing to invest in the technology. If the government does not pay its 
portion of the CRADA work and requires the private entity to pay the 
entire cost, will this deter small businesses from entering into CRADAs 
with labs and thereby reduce the amount of technologies that are 
transferred to the private sector?

A4.  I believe that businesses will be skeptical if the government does 
not share in the costs.

Q5.  Federally funded scientists could be a tremendous resource for 
small and startup businesses. In my State of New Mexico, we have two 
national laboratories, and the State has a program to pay the time for 
personnel at these labs to provide technical assistance to small 
businesses. Whether it be help with what material to use or how best to 
analyze a complex business problem, small businesses throughout the 
State have made good use of this program. Is there something that could 
be done on a federal level to facilitate federally funded scientists 
providing technical assistance to small businesses?

A5.  The New Mexico program sounds like a great one. Why not copy that 
on a national basis?

Q6.  As Chair of the Congressional Hispanic Caucus' Economy and 
Workforce Task Force, I recently held a roundtable with representatives 
from the technology industry to focus on fostering innovation and 
ensuring that young entrepreneurs and startup businesses have the 
resources they need to succeed. One participant from the computer 
manufacturing industry emphasized that his company sought to ensure 
that its supply chain was diversified by partnering with small 
business. We can help drive prosperity and jobs in the U.S. by using 
small business services. What do you perceive as the major challenges 
to partnering with large manufacturers?

A6.  In my experience, there are two main problems. First is convincing 
large manufacturers that the smaller company is financially viable and 
stable enough to be relied upon, and second, it takes so much time for 
a large company to make a decision. Both are related to the larger 
companies' aversion to risk.

Q7.  How can large companies better support and mentor small businesses 
in order to ensure that small businesses and startups feel supported in 
their fields and have opportunity to grow? How do we get large 
companies interested in mentoring startups? Can we show these companies 
that helping to grow small business is beneficial to them as well?

A7.  I think everyone benefits when more small companies benefit. 
Larger companies look at the matter more narrowly most of the time, 
however. Most procurement departments are narrowly focused on cost and 
quality and generally do not take the bigger picture into account. I 
think it is a matter of raising the awareness at the top of companies 
that this is important to everyone and gaining an understanding of what 
larger companies require in order to be more responsive to smaller 
companies.
                               Appendix 2

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                   Additional Material for the Record


                      Rebuilding the IPO On-Ramp:

   Putting Emerging Companies and the Job Market Back on the Road to 
                                 Growth




























































































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