[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
OVERSIGHT OF THE SMALL BUSINESS
INNOVATION RESEARCH AND SMALL BUSINESS TECHNOLOGY TRANSFER PROGRAMS
=======================================================================
HEARING
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
MAY 21, 2014
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 113-069
Available via the GPO Website: www.fdsys.gov
__________
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HOUSE COMMITTEE ON SMALL BUSINESS
SAM GRAVES, Missouri, Chairman
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
BLAINE LUETKEMEYER, Missouri
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
JAIME HERRERA BEUTLER, Washington
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
DAVID SCHWEIKERT, Arizona
KERRY BENTIVOLIO, Michigan
CHRIS COLLINS, New York
TOM RICE, South Carolina
NYDIA VELAZQUEZ, New York, Ranking Member
KURT SCHRADER, Oregon
YVETTE CLARKE, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRAD SCHNEIDER, Illinois
RON BARBER, Arizona
ANN McLANE KUSTER, New Hampshire
PATRICK MURPHY, Florida
Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Sam Graves.................................................. 1
Hon. Nydia Velazquez............................................. 2
WITNESSES
Mr. John Clanton, CEO, Lynntech, Inc., College Station, Texas.... 4
Ms. Cartier Esham, Executive Vice President, Emerging Companies,
Biotechnology Industry Organization, Washington, DC............ 6
Dr. David H. Finifter, Professor of Economics, Emeritus, Research
Professor of Public Policy, The College of William and Mary,
Williamsburg, VA............................................... 7
Mr. Robert Schmidt, Chairman, Cleveland Medical Devices, Inc.,
Cleveland, OH, testifying on behalf of the Small Business
Technology Council............................................. 9
APPENDIX
Prepared Statements:
Mr. John Clanton, CEO, Lynntech, Inc., College Station, Texas 22
Ms. Cartier Esham, Executive Vice President, Emerging
Companies, Biotechnology Industry Organization, Washington,
DC......................................................... 26
Dr. David H. Finifter, Professor of Economics, Emeritus,
Research Professor of Public Policy, The College of William
and Mary, Williamsburg, VA................................. 34
Mr. Robert Schmidt, Chairman, Cleveland Medical Devices,
Inc., Cleveland, OH, testifying on behalf of the Small
Business Technology Council................................ 41
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
America's SBDC Statement Submitted by C.E. ``Tee'' Rowe,
President/CEO.............................................. 69
OVERSIGHT OF THE SMALL BUSINESS
INNOVATION RESEARCH AND SMALL
BUSINESS TECHNOLOGY TRANSFER
PROGRAMS
----------
WEDNESDAY, MAY 21, 2014
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 1 p.m., in Room
2360, Rayburn House Office Building, Hon. Sam Graves [chairman
of the Committee] presiding.
Present: Representatives Graves, Chabot, Hanna, Schweikert,
Collins, Velazquez, Schrader and Payne.
Chairman Graves. Good afternoon, everyone, and the hearing
will come to order. I want to thank you all for being here, and
I would especially like to express my gratitude to each of our
witnesses who have taken time out of their busy schedules to be
with us today. Thank you very much.
Today we are holding the first of two oversight hearings to
examine the programmatic changes made in the National Defense
Authorization Act for fiscal year 2012 to both the Small
Business Innovation Research, or SBIR, and the Small Business
Technology Transfer, STTR, programs. This hearing will focus on
private-sector impressions of the programs and the real-world
effect of the changes that were made 2 years ago to SBIR and
STTR programs.
Small businesses are a major driver of high-technology
innovation and economic growth in the United States, generating
new jobs, initiating new markets, supporting high-growth
industries, and in this era of globalization, optimizing the
ability of small businesses to develop and commercialize new,
highly innovative products is essential for U.S.
competitiveness and the national security. This is why programs
like SBIR and STTR are so important. Created in 1982, the SBIR
program was designed to increase the participation of small
high-tech firms in the Federal R&D endeavor. The driving force
behind its creation was the belief that while technology-based
companies under 500 employees tended to be very highly
innovative, and innovation being essential to the economic
well-being of the United States, these businesses were
underrepresented in the government R&D activities.
By including qualified small businesses in the Nation's R&D
effort, SBIR awards stimulate innovative new technologies to
help Federal agencies meet their needs in a wide variety of
areas including health, energy, and defense.
Although smaller, the STTR program is also an important
program that expands R&D funding opportunities for small firms
and promotes public-private sector partnerships, including
joint venture opportunities for small businesses and the
Nation's network of nonprofit research institutions.
Numerous programmatic changes were made to both the SBIR
and STTR programs in the 2012 reauthorization. This hearing
represents an opportunity for Members to learn more about these
programs and gain perspective from private-sector witnesses
about how they are functioning, and determine if Federal
agencies are complying with the various aspects of the laws
itself.
The primary goals when crafting this reauthorization
legislation were to increase commercialization of SBIR-funded
research, to promote greater participation from a wider array
of small businesses, and to increase the end use of the
technology developed through the SBIR program by Federal
agencies. This is especially critical in the Department of
Defense where technologies developed are often warfighter
focused and lack specific markets in the private sector.
I look forward to hearing the testimony today, and again I
want to thank all of you for being here with us. And I will now
turn to Ms. Velazquez for her opening statement.
Ms. Velazquez. Thank you, Mr. Chairman, and thank you for
holding this important hearing.
Since they were established, the SBIR and STTR programs
have helped launch tens of thousands of successful research
projects. Through their history, more than 146,000 awards have
been made for over $37 billion, making these initiatives a
major source of funding for small businesses. As a result of
this funding, these programs have led to breakthroughs in a
wide range of sectors, from agriculture to energy, to health
care. In turn, these discoveries have generated economic growth
and the job opportunities that come with it.
In 2011, Congress enacted a reauthorization of these
programs. One of the primary outcomes of the legislation was a
greater focus on commercialization. Such a focus is necessary
if we are to ensure that the programs remain a catalyst for
innovation as it was designed to be, rather than an annual
source of income for government contractors.
During today's hearing I am especially interested in
understanding how the reauthorization's various
commercialization initiatives have played out, and if they are,
in fact, resulting in more successful endeavors. In a similar
context, the legislation required agencies to track those
companies that continually win Phase I awards without
progressing to Phase II. I look forward to reviewing this data.
Among the most notable changes were significant increases
in permissible award sizes. In theory this should provide
agencies with more flexibility to make larger awards to the
most promising innovations; however, it could also reduce the
overall number of awards. While not necessarily a bad outcome,
such developments are worth monitoring by this committee.
Higher set-aside percentages have also gone into effect.
These gradual increases, however, may actually be upset by
sharp budget cuts to federal extramural R&D budgets. So even
though set-aside percentages are increasing, overall program
size is decreasing. In fact, based on official data, last
year's total SBIR and STTR award amounts were the lowest since
2003. Given the fiscal environment we are in, this is not a
surprising outcome.
Finally, there are two perpetual issues that continue to
raise concerns. The programs remain concentrated in California
and Massachusetts, who together receive 35 percent of the total
funds from these programs. Altogether the top 10 states receive
70 percent which results in programs largely serving just a
handful of states, while others receive very little benefit at
all.
Similarly, the participation of women-owned or minority-
owned firms have been declining. Women-owned firms' share of
SBIR awards decreased 30 percent in the last 17 years, while in
the same period awards for minority firms fell by 63 percent.
Overall last year, women-owned firms won 6.3 percent of SBIR
awards, while minority-owned firms won just 2.5 percent.
When it comes to geography and demographics, it is
important that the SBIR and STTR are serving the entire country
and are not becoming a regular source of revenue for the same
companies over and over.
The purpose of these programs is innovation, and for
innovation to take root, we cannot just serve a fortunate few
year after year. We have to ensure that all regions of our
country are able to participate as well as promote this program
as a means for women and minority entrepreneurs to grow.
During today's hearing I hope that we shed light on many of
these issues and can begin to evaluate how the changes included
in the 2011 reauthorization are performing, because before we
know it, we will be considering the next extension of these
important programs.
Since their inception, SBIR and STTR have played a vital
role in fostering innovation. While they continue to do so
today, it is important that we continue to oversee these
programs regularly, and for that reason I thank all the
witnesses for being here today and the chairman for calling
this hearing.
Thank you, Mr. Chairman. I yield back.
Chairman Graves. Thank you.
Our first witness is going to be Mr. John Clanton. He is
the CEO of Lynntech, Incorporated, which is located in College
Station, Texas. Lynntech is a technology development company
supporting research and development requirements of both
government and industry. Key Lynntech products or projects
include high-performance fuel cells for the military, enhanced
search-and-rescue components for the Coast Guard, and cost-
effective biohazard detectors for Homeland Security. Lynntech
employs 100 scientists, engineers, and support staff, and has
participated in the SBIR program since 1988.
Thanks for being here.
Mr. Clanton.
STATEMENTS OF JOHN CLANTON, CEO, LYNNTECH, INC., COLLEGE
STATION, TEXAS; CARTIER ESHAM, EXECUTIVE VICE PRESIDENT,
EMERGING COMPANIES, BIOTECHNOLOGY INDUSTRY ORGANIZATION,
WASHINGTON, D.C.; DAVID H. FINIFTER, PROFESSOR OF ECONOMICS,
EMERITUS, RESEARCH PROFESSOR OF PUBLIC POLICY, THE COLLEGE OF
WILLIAM AND MARY, WILLIAMSBURG, VIRGINIA; AND ROBERT SCHMIDT,
CHAIRMAN, CLEVELAND MEDICAL DEVICES, INC., CLEVELAND, OHIO,
TESTIFYING ON BEHALF OF THE SMALL BUSINESS TECHNOLOGY COUNCIL
STATEMENT OF JOHN CLANTON
Mr. Clanton. Thank you, Chairman Graves, Ranking Member
Velazquez, and members of the Committee. It is an honor and a
privilege to appear before you today to provide the views of
Lynntech on the implementation of the SBIR reauthorization
provisions contained in the 2012 Defense Authorization Act.
My name is John Clanton. I am the chief executive officer
of Lynntech, which is a small business based in College
Station. As the chairman said, we have 100 employees, 29 of
which are Ph.D.s. Lynntech's parent company, Astin Partners, of
which I am also CEO, has interests in real estate, data
centers, and airport operations. This gives Lynntech the
benefit of a broadly diversified ownership structure capable of
providing strong financial support for the high-risk endeavor
of technology development.
Since I purchased the company in 2007, Lynntech has
received five post-Phase II contracts from DHS and DOD, two of
which hold the promise of being very successful commercial
market opportunities.
SBIR reauthorization provided for modernization of a number
of SBIR policies, all of which Lynntech broadly supported. It
was clear that the SBIR program was sustained by a broad
bipartisan coalition of members that saw the value in
technological innovations developed by small business.
Lynntech strongly supports the changes included in the
reauthorization; however, there are two areas that I would like
to comment on today.
First, we support the inclusion of VC-funded firms in the
SBIR program; however, we do have an industry concern that the
Committee may find helpful. We believe that the allowance of a
certain percentage of awards to VC-funded firms should not be
interpreted as a target level of awards to VC-funded firms.
In the Department of Defense, we are concerned that using
the allowable level of awards as a target will create a
noncompetitive market. The participation level of VC-financed
firms which specialize in the defense market is limited as
compared to bio. The valuation multiples and the economic
fundamentals are simply not there. Small numbers of highly
specialized products do not generate the returns that high-risk
capital is looking to achieve. As a result, Lynntech believes
that if the implementation of policy effectively creates target
VC award levels out of what was understood to be allowable VC
award levels, it will reduce the effectiveness of the
competitive process within DOD and lead to diminished success
in the SBIR program. Forcing the DOD to compete up to 15
percent of the SBIR awards to only those firms owned by venture
capital will diminish the competitive pool.
The second area I would like to address today is the
renewed emphasis on technology transition. We applaud the
initiative of this Committee to pioneer and incorporate these
methods of joint accountability from both the small business
and the agency. We believe that holding companies accountable
for using Federal dollars effectively and requiring agency
participation in commercialization was one of the most
important parts of the legislation.
Unfortunately, as it relates to DOD, the transition support
that the Committee was attempting to achieve has been slowed by
the failure of the Department of Defense to ensure that its
processes for technology insertion are improved, and modernized
and harmonized with the reauthorization. To date we have seen
nothing that would suggest that an effective Department-wide
initiative to implement the statute has taken place.
Too often our personnel find themselves dealing with DOD
personnel who have not been trained or are even aware of the
new procedures put in place by the statute. We still see DOD
personnel who complain about having to execute small business
welfare programs, as well as personnel who do not realize that
they cannot deny submission of a Phase II proposal from any of
the Phase I awardees.
The Air Force still has too many people who cannot
articulate what the Phase II proposal process will look like in
an era where there are no longer any Phase II invitations.
Another real-life example is Army SBIR personnel who do not
understand that it is possible to make multiple Phase II awards
where an acquisition program manager is, indeed, interested in
further development. Even the Navy, which Lynntech has publicly
praised for its effective leadership in the SBIR program, has
too many people in the R&D community who actively work to kill
technology being developed not because of technical merit, but
because of personal biases or because of SBIR data rights.
There is growing concern that some SBIR technologies have been
transitioned without regard to the small business rights of
data ownership.
All of these comments indicate that the transition effort
requires more than just a motivated SBIR company. It requires
an informed and motivated agency presence as well as leadership
from senior acquisition executives to ensure that all
acquisition program managers are utilizing the full range of
technologies that the Federal Government has already paid for.
I thank you all for your work in support of this very
important program, and I appreciate the opportunity to share
our point of view with you today.
Chairman Graves. Thank you, Mr. Clanton.
Our next witness is Dr. Cartier Esham, executive vice
president for emerging companies at the Biotechnology Industry
Organization. In this role Dr. Esham manages and directs the
policy development, advocacy, research, and educational
initiatives for BIO's emerging companies, which comprise
approximately 90 percent of their membership. She works on
capital formation policy and health policy impacting emerging
companies, as well as supporting NIH funding and initiatives
such as the SBIR program.
Thank you for being here, Dr. Esham.
STATEMENT OF CARTIER ESHAM
Ms. Esham. Good afternoon, Chairman Graves, Ranking Member
Velazquez, and members of the Committee. As stated, my name is
Cartier Esham, and I am the executive vice president of BIO's
emerging companies. BIO's small member companies are developing
medical products and technologies to treat patients afflicted
with serious diseases, to delay the onset of these diseases, or
to prevent them in the first place.
The vast majority of BIO members are prerevenue companies
whose research is still in the lab or the clinic. These small
businesses spend more than a decade conducting R&D, during
which time they do not have any products to sell. Revenue does
not fund the biotech development process, which can cost
upwards of $1 billion. Instead, emerging biotech companies rely
on outside sources for innovation capital.
The SBIR program provides biotech companies an opportunity
to compete for early-stage research projects in order to
advance their R&D to the point that it can attract the hundreds
of millions of private-sector dollars necessary to develop the
initial project into a publicly available new medicine.
Programs like SBIR are important in difficult fundraising
environments for companies that generally depend on venture
investment to finance early-stage research. Early-stage venture
deals are currently on the decline, meaning that breakthrough
innovation is receiving less funding, and the next generation
of promising cures could be left on the laboratory shelf.
The mission of the SBIR program is to support scientific
excellence and technological innovation through the investment
of Federal research funds in critical American priorities. In
2012, Congress passed the SBIR-STTR Reauthorization Act to
ensure that agencies have the most competitive pool of
applicants, and that grants will be awarded based on the
projects that show the most promise in bringing breakthrough
and lifesaving therapies to the public.
The SBIR reauthorization made two vital reforms to the
program. First, it allowed majority venture-backed companies to
once again compete in the SBIR program. Second, it modified
affiliation rules so that SBIR applicants will not be
affiliated with their investors' portfolio companies simply on
the basis of a common investor. BIO strongly supported these
which allow many biotech companies to once again compete.
The restoration of eligibility to venture-backed companies
will be vital to the success of the overall program, especially
in the biomedical field. Virtually all biotechs depend on
venture financing at some point in their development cycle,
and, again, allowing them to compete will ensure they have the
ability to access early-stage research dollars that can be used
as leverage to attract further private-sector investment.
Similarly, the new affiliation rules ensure that growing
businesses will not be deemed affiliated simply on the basis of
a common investor. There are a limited number of VC firms that
invest in the biotech space, and those companies often share
investors, but the companies themselves do not share business
concerns or goals. These clear bright-line tests put forth by
the SBA reflect these realities.
The SBIR's final rule implementing the reauthorization went
into effect early last year. NIH reissued its SBIR omnibus
grant solicitation last spring, and the closing date for those
applications was this January. We do not yet have data on how
many venture-backed companies applied for or were awarded SBIR
grants under the new rules as they are still under review; and
according to the SBA policy directive, NIH has up to 12 months
to provide notice for recommendation of an award and up to 15
months to give the actual award. But we are optimistic that the
expanded pool of eligible companies will lead to increased
funding for breakthrough innovation.
We will continue to work with our member companies and this
Committee to monitor implementation to ensure that the program
provides access to majority venture-backed and all small
innovative companies, access to these critical funds. Again, as
stated, the SBIR plays a critical role in supporting small
biotech companies and funding for their early-stage research as
they navigate the ``valley of death,'' a critical time when
scientific concepts have shown promise, but the development is
not far enough along to attract further investment by the
private sector. BIO applauds Congress for making key reforms to
this program to ensure eligibility for all innovative small
businesses, and we look forward to continue to support this
vital program.
Thank you for your time, and I look forward to answering
any questions.
Ms. Velazquez. It is my pleasure to introduce Dr. David
Finifter, professor of economics emeritus and a research
professor of public policy at the College of William and Mary.
He has nearly 20 years of SBIR program evaluation experience,
including authoring portions of the landmark National Academy
of Sciences assessment of the program. He has also worked on
specific evaluations related to the Department of Defense,
Department of Energy, National Science Foundation, NASA, SBIR
programs. Formerly he was the dean of research and graduate
studies at the College of William and Mary, and also the
founding director of the Thomas Jefferson Program in Public
Policy. Welcome.
STATEMENT OF DAVID H. FINIFTER
Mr. Finifter. Thank you, Ranking Member Velazquez, and
Chairman Graves, and members of the Committee. I am honored to
have this opportunity to offer comments on the SBIR program. As
Ranking Member Velazquez mentioned, in addition to being a
faculty member for nearly 40 years at William and Mary, I have
been working as an economist on SBIR for around 20 years in
various ways. I won't go into that now.
I am going to speak today not as a representative of the
National Academy of Sciences, or the College of William and
Mary, or NASA, or DOD, any of those that I work for. I am
speaking as an independent economist. I will likely be
perceived as President Truman's nemesis, the two-handed
economist, but I do this as a policy educator who recognizes
that most, if not all, decisions involve trade-offs, and that
is why I title my remarks that way.
I am going to offer brief comments on seven areas,
observations that I have. It is a little early to determine
whether the reauthorization is doing what we hope it will do,
the data are not in yet, but I wanted to talk about these
issues one by one.
First, the overall health of the SBIR program. The SBIR
program, being in existence since 1982, is--in my view and from
all the extensive research, the program is working to achieve
its goals. While it is challenging the measured outcomes, the
studies have attempted to do it in terms of sales and
commercialization infusion into Federal agencies and to some
extent achieving participation in the program by women and
minorities. All of these have shown to be positive, although
all of them have issues attached. There is clearly room for
improvement. I have to admit I am a fan of the program even
though I try to look at it objectively.
Number two, the program goals should be remembered when
debating policy issues and consider implicit trade-offs. When
debating issues involving SBIR, it is important to consider
implicit trade-offs. For example, a stronger emphasis on
commercialization could mean less emphasis on serving agency
needs or possibly in recruiting economically disadvantaged
applicants and awardees. Also, an increase in participation by
small businesses serving R&D needs of Federal agencies could
lead to a somewhat less strong performance in
commercialization.
In addition, it is important to remember that there are 11
Federal agencies involved in the SBIR program, and they have
different needs and different approaches. Therefore,
flexibility is an important consideration in implementing the
program.
And finally, the inclusion of venture capital into the SBIR
arena should be perceived as leading to a deviation from the
original intent of the program. I will have more to say about
that in just a moment.
Number three, the so-called proposal mills. I wanted to say
that while there are multiple award winners, studies indicate
that they are not the stereotype of get a Phase I, and then get
another Phase I and another Phase I. Many, or probably most, of
these multiple award winners have succeeded in commercializing;
and, in fact, one-third of the applicants in any given year are
first-time applicants.
Number four is the issue surrounding venture capital. In a
recent report by the National Academies of Science, they looked
at venture capital and the NIH and essentially biotech area,
and I encourage you to look at that report. It came out before
the reauthorization act, I believe, but it does recognize
trade-offs. The new venture capital approach is a start to
resolving some of the trade-offs.
If you think about what is going on with venture capital,
how does that differ from a firm being run by someone who has
large amounts of personal capital? Essentially we don't talk
about need when we talk about SBIR, and I think we need to
separate that from that discussion.
Number five, and I am running out of time, number five, the
geographic dispersion, I can address that in Q&A perhaps, but
there is some question about while everything seems to come
from California and Massachusetts, is it desirable to spread it
out across the country? What are the pros and cons of that?
If there are questions about participation of minorities
and women, I have some thoughts on that as well.
And, finally, as an academic, of course I say there is
always a need for continued research and evaluation, and that
is only a little bit self-serving.
Thank you for allowing me to make these comments.
Chairman Graves. Up next is Mr. Robert Schmidt, a
participant in the SBIR program since 1991. He is the a founder
and CEO of several northern Ohio technology businesses,
including Cleveland Medical Devices, Incorporated, and Orbital
Research, Incorporated. Mr. Schmidt's company conducts a wide
array of research and development initiatives with new
innovations being found in home sleep testing technology, fluid
aerodynamics, and just about everything in between. He is
testifying today on behalf of the Small Business Technology
Council.
We appreciate your participation. Thank you.
STATEMENT OF ROBERT SCHMIDT
Mr. Schmidt. Thank you. I am primarily here because of the
SBTC. The SBIR program has allowed my companies, though, to be
able to develop products in medical and aerospace markets. We
sell on all seven continents, something I am kind of proud of,
for seven continents. Examples of our products are CleveMed's
SleepView, which this month will provide about 1,300 home sleep
apnea tests, making us one of the largest sleep apnea testing
services in the world. We are growing at 10 to 15 percent per
month, tripling our sales every year for the last 3 years. With
adequate capital, this one product could save Medicare or
Medicaid hundreds of millions of dollars a year.
The HomeView allows Parkinson's disease patients to improve
the titration of drugs in tuning the deep-brain stimulators to
lead more productive lives. Other products do brain monitoring
for anesthesia control, and seizure detection and mild TBI
detection; dry electrodes to be able to chronically monitor the
heart; and oxygen sensors for hypoxia monitoring on the F-22
Raptor; low-cost steering systems for advanced munitions; and
little tubes that we grow human brain cells in for drug
discovery. My companies employ about 75 people, about 13
Ph.D.s, and we train about a dozen students a year.
The last 5 years have been most difficult for SBIR
companies. The number of SBIR awards has dropped by 36 percent
in the last decade, and the dollar amount awarded has dropped
25 percent in the last 3 years. Entrepreneurism is at a 30-year
low. Since 2008, bank lending to small businesses has declined
by 18 percent, by $126 billion. The problem is compounded
because the largest banks that receive the most TARP funding
have reduced small business lending the most. Small businesses
like mine who have never missed a payment suddenly found their
notes are called by their bank. The banking lesson is if you
invest in your business and create jobs and have even a small
loss, you will have your bank credit line cancelled.
The climate for small business, and especially our SBIR
technology companies, growth and job creation is not good.
However, despite the funding declines, the SBIR program is
still the most important funding source for small, growing
high-tech businesses. In the first quarter there were only 41
seed start-up deals by VCs for only $125 million. Angel groups
reject 99 percent of their requests. SEC regulations are
squashing the JOBS Act and crowdfunding, and the Federal
Government has not made its procurement goals for small
business purchases. These changes have occurred at the same
time the regulatory burdens by Federal and State government
have been increasing. The patent reform bills are also hurting
company valuations and reducing available capital.
Our frustration is that for over two decades, DOD Under
Secretaries for Acquisition and Technology under both Democrats
and Republicans have come to the conclusion that SBIR is the
answer to getting the best technology to the warfighter faster
and at lower cost, as well as creating jobs and improving the
economy.
In early 1998, Jack Gansler, Under Secretary of Defense
under Clinton, called for Phase III goals and metrics. Again, a
decade later, James Finley, Deputy Under Secretary of Defense
under Bush directed sole-source SBIR Phase III contracting
attracting. Finally, 3-1/2 years ago, Congress legislated the
same; however, Phase III priority continues to be ignored by
the agencies.
It is time for more teeth in the law. While DOD has taken
some steps after 30 months, they have not revised the FAR; nor
have they produced new manuals or performed training, set
goals, developed incentives, all as required by the law. Most
importantly, they are not tracking their progress.
The agency culture that is adverse to small business must
be changed. Regulations and procedures should be immediately
updated to reflect the law and personnel trained in its
implementation. Full SBIR data and intellectual property rights
must be accorded to SBIR contractors in Phase III funding as
required by Congress. Agencies, and particularly DOD, have not
been protecting SBIR IP rights. As required by law, the
government employees and prime contractors must be provided to
encourage this cultural shift.
For small businesses, the government needs to meet small
business procurement goals, provide funding for R&D and SBIRs
so that America does not lose its technological edge to China,
provide an environment that makes credit and equity available
to grow small businesses, maintain strong intellectual property
protection. The law is clear: SBIR Phase III awards should be
used to the greatest extent practicable, and this should be
tracked in realtime.
Thank you for this opportunity to speak.
Chairman Graves. Thank you all, and we will start questions
with Mr. Collins.
Mr. Collins. Thank you, Mr. Chairman. I thank the witnesses
as well.
I think some of these, the STTR, SBIR, aren't fully
understood. I am curious, Dr. Esham, in the biotech area, do
you see universities and then with their small business
partners using STTR and then moving forward into SBIR? Do you
see them both utilized one after the other?
Ms. Esham. I believe universities are interested, you know,
sort of those universities are interested in STTR. I will be
frank; I am not entirely familiar with the use of STTR. For the
most part, biotech companies focus on the SBIR funding
opportunities.
Mr. Collins. Even though a lot of that will come out of a
university setting.
Ms. Esham. I personally--in my shop we personally don't
have any data. Again, we have mainly focused on the SBIR
program.
Mr. Collins. I am also curious. In the DOD, which is a
major, maybe, again funder on the STTR, there is only five
agencies. While it also may be speaking to your biotech, do you
see funding of any substance coming out of the DOD, or is it
mostly the NIH on----
Ms. Esham. Our membership, I would say most of our member
companies would be--the vast majority would be applying to NIH.
We are also interested in the Department of Energy. We have a
lot of renewable small companies that we think would benefit
from participating in the SBIR program as well.
Mr. Collins. So back in the anthrax days when the military
was very worried, you didn't see much, if anything, coming out
of the DOD on the anthrax front?
Ms. Esham. I would have to go back and look at that
historical data. I don't know that off the top of my head. I
apologize.
Mr. Collins. Yeah. Okay.
Mr. Clanton, I wonder if you see a link between STTR, SBIR,
if you've got any experience in that.
Mr. Clanton. We do. We have seen some successful
transitions for things that started out as STTR-funded
projects. We are located in College Station, which is where
Texas A&M University is located. We are fortunate to have that
resource there and have had a number of STTRs that have started
there. And some of those have been successful and then become
spin-outs, and we have seen that as a good avenue.
Mr. Collins. Have you seen any--because of budget
constraints--we have all got budget constraints--have you seen
any shifts at the university level with the STTRs moving into
SBIRs?
Mr. Clanton. We have seen much more interest on the part of
university professors to participate in the STTR program. They
see that as another funding source, obviously, and because of
the other funding sources that they have being constrained with
budget constraints, then we see a lot more openness and a more
entrepreneurial viewpoint from some of the professors at the
universities.
Mr. Collins. The idea--you know, I am familiar with one or
two companies who do live on grants. They have never
commercialized their product. I just wonder, it is a worry when
you see a company go after whether it is SBIR or other--I have
seen it especially in the energy world--grant after grant after
grant. I have seen a lot of it in the ceramics area. Do any of
you have any comment about at what point should the government
step in and say after you have had 14 grants, it is time to
call that to an end? Understanding each one is supposed to
stand on its own, but really, you know, after somebody has got
14 of them, you have to wonder.
Mr. Schmidt. Thank you for asking that question because it
really goes to culture. And so the question is should we shut
down Boeing, Lockheed, General Dynamics? Should we shut down
Johns Hopkins? They have had so many grants, it is time to cut
them off altogether. And so why would small businesses, where,
on 2.5 percent of the budget, you have got 25 percent of
America's R&D awards were 10 times more effective than large
business and universities. And that goes for just about any job
creation, number of patents, anything you can do, because I can
tell you there is one thing, when your house is on the line,
when you know your family is going to be living in a cardboard
box if you don't produce, there is a great deal of focus in
being able to make sure you meet deadlines.
It is not that I have tenure and I can--oh, it is 5:01, my
goodness, I am late, I need to leave right away. You know, you
are there. I have slept on my office floor many a day, and
there is just this huge focus to be able to produce, and that
is the reason why we give 10 times bang to the buck.
So I think that is the wrong question. I think the question
is how can the Federal Government provide enough incentive to
be able to help get these small companies up the curve, you
know, around that point of inflection to be able to get them up
to be able to truly commercialize? Because when 76 percent of
the VC money goes to just five States, when you are in one of
the fly-over States, like Ohio is and just about every other
State, you know, this means you are not going to get any other
funding. You have got to live on your own and be able to
produce your product and get it. And that would be a huge
incentive and help to be able to help create jobs by giving
these people that, you know, have devoted their lives to being
able to produce this stuff a little more incentive for testing
and evaluation.
Mr. Collins. I agree with you on 98 percent of companies,
but there are those 2 percent who live on grants, and I know
those are the outliers, and I know my time is expired, but just
suggesting at some point, and, again, I have seen it in the
ceramics world, you have got to call an end to it. But I agree
with you for 98 percent of them. Thank you.
I yield back, Mr. Chairman.
Chairman Graves. Ms. Velazquez.
Ms. Velazquez. Thank you.
Dr. Finifter, California and Massachusetts, as I mentioned
in my opening statement, together win 35 percent of awards
through the SBIR program. States like Oregon, New Hampshire,
Arizona receive less than 2 percent. This is supposed to be a
national program, but it is far from it, given the fact that
the top 10 states receive almost 70 percent of the awards.
What can we do to change this and channel more the taxpayer
R&D to all 50 States? Or why is it that only California and
Massachusetts receive the bulk of those awards?
Mr. Finifter. Thank you for the question. I think my view
is that SBIR, while it is a national program, the aspect of the
national program that I think we should look at is that it
develops technologies for the United States. In doing that, it
tends to generate economic growth for the United States. And if
we look at it in terms of regional equality, we are barking up
the wrong tree. In my little write-up I talk about Kansas,
Nebraska, and Iowa. I apologize if anyone here is from there.
We give them various assistance in farming, and that means we
don't give it to----
Ms. Velazquez. What about places like Oregon?
Mr. Finifter. Well, in terms--you mean in terms of
agriculture?
Ms. Velazquez. No, in terms of technology.
Mr. Finifter. The best answer to your question would be
that we ought to look for other clusters. It seems to be there
are corridors or clusters where this happens, and California
and Massachusetts are most notable. If Oregon is another one,
then we ought to encourage that. The agencies ought to go out
and recruit folks there. If they are not bidding, if they are
not applying, then that is a problem, and then the agencies
ought to encourage that. Oregon is one, but to aim it for 50
States or for half of the States is forcing--probably moving
away from the best of the projects that are not winning. I
don't think there is a bias.
Ms. Velazquez. Well, how do we know that they are the best
of the projects? It could be the one in Oregon or some of the
other states where we have clusters of technology start-ups,
and yet for whatever reason they are not participating in the
program.
Mr. Finifter. Well, I think collectively the program ought
to be thinking about how we can promote other regions, but I
also think it is up to the agencies to prove to an oversight
committee that they don't have a regional bias, that it is just
the outcome of the process.
Ms. Velazquez. Thank you. I am talking about oversight in
the agencies.
Mr. Clanton, you mentioned something that really caught my
attention, and that is, the fact that places like DOD are slow
to adopt some of these changes for either lack of training or
information given to them. Do you think that it is worth
bringing the agencies before the committee to testify to see
what are they doing to make sure the provisions and changes
that were included the last reauthorization are in place?
Mr. Clanton. I think that is an excellent idea. I don't
pretend to know how or what the process is for all of this
information to flow all the way down to the SBIR program
managers, but I suspect that there is something in place that
it isn't happening. And I think having accountability is the
cornerstone of the reauthorization act, both on the part of the
small business as well as on the part of the agency.
Ms. Velazquez. Thank you.
Mr. Clanton, the reauthorization ensured that federal
agencies can continue to award multiple Phase II grants. While
this may reduce the number of awards, it may increase
commercialization. Is this a trade-off you are willing to make?
Mr. Clanton. I think so. I think the way that it is
structured, those projects that have a value either to the Navy
or to whatever agency, there is an opportunity now for that
agency to use their resources on those projects which have a
specific need or solve a specific problem and have the
technological promise to achieve that, and I think it is a fair
trade-off for everybody involved to say that one of the
downsides is there may not be as many awards.
Ms. Velazquez. Thank you.
Mr. Schmidt, in your testimony you note a concern that the
SBA approved a blanket waiver for the NIH to exceed the caps
and award amounts in violation of the law. What concerns you
about these large awards?
Mr. Schmidt. Well, the law set clear caps, as you know, so
when the NIH gives a $10 million contract, that means it is
eliminating nine other SBIR Phase IIs. So it is clearly, you
know, how are you going to spend your money, or what are you
going to do? And the intent of the law was to be able to grow
new businesses.
So we have to remember that start-ups are to an economy
what births are to a population, and small businesses are to
the economy what children are to the population. But we don't
treat, you know, these small businesses the way we treat
children to be able to help grow them, and that is the
important thing. And this Committee has helped enormously over
the years and hopefully will continue to help out.
Ms. Velazquez. You said before, right, that one of the
things for the program is to increase more small business
participation?
Mr. Schmidt. Right.
Ms. Velazquez. But isn't that inconsistent with what you
said to Mr. Collins?
Mr. Schmidt. The problem is that you have so much money,
and so what our feeling is is that if the agency truly wants
this--you know, oh, we are going to cure cancer is always the
line--well, then put up your own money. You have got 97
percent. We are talking about the 3 percent to be able to make
sure that we are growing our economy with these new small
businesses.
Ms. Velazquez. So you think that large awards goes against
the statute?
Mr. Schmidt. I do.
Ms. Velazquez. One of your companies, Great Lakes
Neurotechnologies, actually won six SBIR Phase II awards----
Mr. Schmidt. That is correct.
Ms. Velazquez.--from NIH that exceeded the $1 million
limit, and four exceeded the----
Mr. Schmidt. That was before the law changed, though.
Ms. Velazquez. That was before the law.
Mr. Schmidt. Right.
Ms. Velazquez. But it is exceeding, even before the law.
Mr. Schmidt. I am sorry?
Ms. Velazquez. It is exceeding the limit.
Mr. Schmidt. No. Well, there was no limit before the law.
There was a guideline, and that is the reason why the law was
changed.
Ms. Velazquez. Well, there was a guideline, but you
exceeded it. So my question is how do you explain your
opposition to these large awards at NIH when your company is
actually benefiting from it?
Mr. Schmidt. Well, certainly we benefited. We followed the
law every time.
Ms. Velazquez. Okay. Thank you, Mr. Chairman.
Chairman Graves. Mr. Hanna?
Mr. Hanna. Thank you.
Dr. Esham, could you talk a little bit about how these two
programs, SBIR and STTR, impact your industry in terms of
global competitiveness and how they help? Go ahead, though. A
question for Mr. Clanton.
Ms. Esham. I will attempt to answer that question. I think
the STTR program, again, plays a critical role in the early-
stage projects of these companies, so often a typical biotech
company again is prerevenue, often dependent on venture or
other sorts of private-sector capital to advance their research
projects through ultimately the human clinical trial phases and
FDA, hopefully, review and approval.
But a lot of the venture dollars are tied specifically to
projects, so where it is difficult to raise money are for
additional projects, even if they show promise. So SBIR can
play a very critical role in helping companies derisk,
validate, do a proof of concept study that then becomes very
attractive for additional venture capital to advance that
project even further, and then usually that project will move
on to, you know, being funded completely by venture capital or
other financing mechanisms. So it really allows these companies
to get more shots on goal.
This is a high-risk, high-reward business, and the more
projects, the stronger the pipeline that we can ensure in these
small companies, the stronger the industry, and the more
potential beneficial outcomes for the public.
Mr. Hanna. Thank you.
Mr. Clanton, you talked about--and correct me because I am
not sure I have this exactly right--but target levels and
noncompetitiveness. Do you want to elaborate on that, the
mistake of target levels----
Mr. Clanton. Yes, I would be glad to.
Mr. Hanna.--or some other kind of way of going about it?
Mr. Clanton. We believe, and it is possible that it is not
absolutely the case, but we believe based on discussions with
some folks in DOD that there is an interpretation of the
allowance for a certain percentage of awards to go to VC-funded
companies to be viewed as that that is a target amount that
they should shoot for. In other words, effectively a----
Mr. Hanna. What I am driving at, though, and I think you
are, too, is how does that corrupt, if that is the right word--
how does that corrupt the system, and what does it encourage or
discourage?
Mr. Clanton. The reason that I am opposed to it is it is my
belief that the number of VC-funded firms that participate in
DOD and in military funding is significantly smaller than the
number of VCs that participate in BIO, for instance; and that
since that population is so small, that the number of awards
that might be made would be limited to a much smaller
competitive base in that it would keep the funding from being
available for small business firms that are not VC-funded.
Mr. Hanna. How would you change that? How would you improve
it?
Mr. Clanton. I believe that the intent of the Committee is
clear to us in that it was intended to be an allowable number
to reach, but it was not an attempt to create a set-aside for
VCs.
Mr. Hanna. You think that is the way it is being treated
within----
Mr. Clanton. I think that there may be some people in DOD
who are seeing it otherwise.
Mr. Hanna. And you have seen kind of anecdotal evidence of
that? So that is kind of a sign of some misappropriations or
waste or loss of opportunity.
Mr. Clanton. I think it is just another symptom of a lack
of thorough understanding on the part of DOD as to the elements
of the reauthorization.
Mr. Hanna. Mr. Schmidt, would you like to comment on that?
I am guessing you have an opinion on it.
Mr. Schmidt. Yes, we do.
You know, we are looking to be able to institutionalize
this, so the Small Business Technology Council, as I said, has
been working on this for 20 years. So 14 years ago--16 years
ago under the Clinton administration, we had somebody in DOD
that said, Jack Gansler, you know, you have got to do this; you
have got to be able to incorporate this. Unfortunately it takes
them so long to be able to fully understand the program and
what the best courses of action are that by the time they
finally come to that conclusion, you know, another year, year
and a half they are out of office because their boss gets voted
out of office. And the same thing happened with Finley when he
was under the Bush administration.
So finally the law has been institutionalized now, and you
have written it into the law, and I thank all of you for that.
It is a big deal. But what hasn't happened is we haven't
changed the FAR. We haven't written the regulations. We haven't
gone out and trained the contracting officers, the program
officers, the contract specialists, the contracting officers'
representatives.
You know, everybody that deals with contractors, they have
got to understand what the law is, and they don't. So that
needs to be a major effort in DOD to be able to have them
understand that, A, they want to get products to the warfighter
better, faster, cheaper, through SBIR; and they want to be able
to help grow jobs and keep them in America.
Mr. Hanna. My time is expired. Thank you. I saw at least
three heads nodding to that. So thank you very much.
Chairman Graves. Mr. Payne.
Mr. Payne. Thank you, Mr. Chairman, and to the ranking
member.
Dr. Finifter, in your testimony you mentioned that what we
can expect in the coming years from the Small Business
Innovation Research Program and Small Business Technology
Transfer Program. With the program authorization expiring 2017,
if there was one addition or one change that you could
recommend for the Small Business Innovation Research Program,
what would it be?
Mr. Finifter. It is always hard to come up with one, but I
think a major point I have is that flexibility across SBIR is
important. We need to realize that we have 11 different
agencies, and DOD and NIH and NSF are apples, oranges and
bananas. We ought to be setting requirements--we ought to let
agencies do what they do well and deal with their missions.
So I think recognizing that, for example, the VC, venture
capital question, clearly there is some merit in the NIH
biotech world because of the high cost of start-ups. That
wouldn't be true necessarily in the NSF SBIR program. So
flexibility, tailoring it to the needs of each agency, I think,
would increase the performance tremendously.
Mr. Payne. Thank you.
Dr. Esham, same question.
Ms. Esham. I agree with the concepts set forth about
ensuring agency flexibility, and I think there are some
safeguards in the law that passed regarding allowing agencies
to opt in to particularly the VC proposal.
One issue, and I hesitate to say this with my friends at
NIH, who, frankly, I know do have some budgetary constraints,
and that is something that we as an organization would like to
see reversed, but it is a fact that it does take a long time
for SBIR applicants to know if they got an award in, again, 12
to 15 months, and if there was a way to wave a magic wand, I
think that is something we would look to. But, again, I say
that with the caveat I understand the budgetary constraints
that our friends are facing.
Mr. Payne. Thank you.
Mr. Clanton.
Mr. Clanton. Thank you.
I will echo Dr. Esham. I think the time between submission
and award so that progress can be made would be a great
addition. I wouldn't be doing my part if I weren't here to say
that as a great custodian of the taxpayers' money through the
SBIR program, it may be examining how much of the set-aside is
appropriate, and whether that can be increased going forward is
something I would certainly like to see happen.
Mr. Payne. Mr. Schmidt?
Mr. Schmidt. Well, there is two things. From the agency
standpoint, we need to start tracking this data in realtime. We
are getting percentages where the agencies are saying they are
meeting their goals of 2.5 percent, but then they take out huge
chunks of money and say, oh, well, that is not included in the
base, even though it is clearly within the law of external R&D.
So it is like me going to the tax people and saying, well, you
can't tax me on that; that money was for my boat, you know, or
my airplane or something. That is not my general income. So
that has got to get changed.
On the congressional level, it is the downward trend in
R&D, and we are losing it to China, and unless we do something
as a Nation to be able to change that--right now the latest
Brookings report came out and said in 2 more years China is
going to have a bigger GDP, using the purchasing, parity index
to be able to outgrow us, and we need to start changing that.
We need to invest in our future.
Mr. Payne. And just a quick yes or no. Do you know the SBIR
and the STTR reauthorization required the SBA to develop and
implement policy and guidance for a large number of new
provisions? Do you believe that the lack of additional funding
for these new responsibilities plays a significant factor in
the lack of implementing the regulations, each of you? Yes or
no, do you? Very quickly.
[2 p.m.]
Mr. Schmidt. In one word, yes. They need more money to be
able to help support all of this.
Mr. Payne. Okay. Doctor?
Mr. Finifter. I would say yes as well, because it is very
short-sighted not to do that. We have to invest in R&D more so
than we are doing for our economic growth.
Mr. Payne. Thank you.
Ms. Esham. Yes.
Mr. Payne. Thank you.
Mr. Clanton. I will say yes as well, but also caveat that I
believe there is a cultural shift as it relates to DOD as to
really understanding how valuable the SBIR program is and what
a return it makes on the taxpayers' dollar.
Mr. Payne. Thank you.
Mr. Chair, I yield back.
Chairman Graves. Mr. Schweikert?
Mr. Schrader?
Mr. Schrader. Thanks, Mr. Chairman. I appreciate it.
I guess I would ask Dr. Esham about the Phase II funding,
how that is working in your opinion. Is that adequately meeting
our needs, and the rules and regulations rolled out to where
SBIR folks and companies can take advantage of it?
Ms. Esham. Again, I am going to speak somewhat
hypothetically because we are sort of waiting for the data from
the new rule, if you will. But I will say that the ability to
do sequential Phase II is something that I think we strongly
support in the sense that if you put in money to a project, and
it needs more money to reach systems, the critical milestone in
our industry to attract more venture capital, I think that is
an important aspect that was maintained.
Secondly, another key factor that was in the new law is the
``straight to Phase II,'' which and I understand NIH has just
recently announced that they are launching their pilot project
where applicants can apply for Phase II without having have
done a Phase I through the agency. So in other words, they may
have funded it themselves through other means, and I think that
may have very positive aspects to helping, again, ensure the--
meet the goals of the program; that is, to advance medical
innovation.
Mr. Schrader. It is alarming to the members of Committee
that it has taken such a long time to get these rules up and
going, frankly. Want to make sure that hopefully now that they
are up and going, the next time you all come back, you will be
able to report that this is actually working.
Ms. Esham. It is our hope as well. And again, as I
mentioned, you know, even though the solicitation closed in
January 2014, it may be another 12 months before we really
understand how things are being implemented, and the pilot
project, it is also known it takes a long time for the agency
to review and award these grants.
Mr. Schrader. Perhaps we will have you back at that time.
Mr. Schmidt, your testimony talked a little bit about the
lack of metric implementation despite clear intent of Congress
and stuff. Are we making any headway at this point finally, or
what can the Committee do to give better direction, shall we
say, to some of our agency partners.
Mr. Schmidt. Sure, it is always carrots and sticks, isn't
it? I am a big believer in carrots. I think that is always a
helpful thing. You know, we have got a lot of good people in
the Federal Government, and they are doing good work and, you
know, working hard to be able to make things happen. And
several of us have talked about culture, and it is that change
in the culture of, you know, SBIR is a tax, and we don't like
any of this.
And so by providing incentives of bonus plans for the
program officers and the prime contractors to be able to start
using this technology, for a very small amount of money I think
we can change the culture, which will help the economy.
And so how do we create jobs? You know, we keep waiting and
waiting for jobs, and we are slowly, slowly growing, but this
could give us a big boost as a Nation to be able to say we are
going to invest in these guys that give us 10-to-1 bang for the
buck: small business. And that is where we want to invest our
money, and I think that will be a huge help.
And, you know, part of this is the metrics because they
can't get their bonus unless they meet their metrics, so you
have got to have that. And that encourages them to keep track
of it as well.
Mr. Schrader. We like the metrics, obviously, too, to make
sure that the programs are working as intended and listening to
you all to figure out if it is actually what we want.
To you also, Mr. Schmidt, with regard to the venture
capitalists, I mean, government can't afford to do everything.
We do rely on venture capitalists. The recession took a lot of
steam out of the venture capital group, if you will. And I
wondered if there was a way that the SBIR is working with
venture capitalists to leverage maximum opportunity of funds
across the----
Mr. Schmidt. Well, it would be nice if we worked together
better. You know, I have been trying for over 20 years to get,
you know, some kind of other funding, venture funding. But
being with Ohio companies, we are one of those fly-over States,
you know? So we are somewhere between Wall Street and Sand
Hill, you know, and we are neither of those places. So that is
what I mentioned 45 States have to fight for 24 percent of the
money for venture capital.
So, you know, in order to be able to help provide that, the
VCs in general, as I said, only 41 deals in the first quarter
of this year in seed and start-up funding. So their focus is
not on new, small companies, or even the smallest companies,
you know? They are looking for home runs in big, growing
companies, and particularly now private equity in the same way.
So certainly one of the big things is to allow people with
the changes in the tax laws that we have had--that the capital
gains went from 15 to 20 percent plus all of the healthcare
funding, so it is almost 24 percent is what we are paying now--
to be able to have a tax change that allows people to invest
that money if they--you know, so they get a credit on their 24
percent back if they put it into a new, small, growing
businesses. That would be a huge help. And to be able to
provide other tax incentives for the venture capitalists. And
particularly if you want to say, okay, it is only for these
other 45 States; you know, we want you to diversify, and that
the part solves--addresses your question. I am not sure that it
is best for your State, but it certainly addresses your
question of how do we spread some of this around. That would be
hugely helpful.
Mr. Schrader. Thank you. I yield back.
Chairman Graves. A couple of questions, and the first one
is for Mr. Schmidt and Mr. Clanton. Last November we had a
witness that came and testified that the SBIR program was very
beneficial to her when it came to the early-stage growth, but
what she found was it wasn't necessarily that good when it came
to developing products. And what she talked about was the
process of going from Phase I to Phase II, then Phase II to
Phase III. It was too long, and the fact of the matter is that
the technology was developing so rapidly, it was easier for her
just to develop it, you know, outside of those programs.
And I am just interested in if you all have experienced
anything where the program was holding you back or where you
know of any examples. Mr. Clanton?
Mr. Clanton. We are living one of those examples right now.
We have a very promising technology that is currently in a
Phase III, and it has real-world application with the Coast
Guard to improve search and rescue results.
And if you ask a businessman should it be faster, then the
answer is always yes. I understand the constraints of
contracting, and the constraints of the government, and the
funding and all of those other things, but to the extent we
could do this, you know, in a 2- to 3-year period as opposed to
a 5-year period, it would be immediate results. And I think
there is probably an argument to be made that the total cost
would be less if you could complete a project in a shorter
period of time as opposed to starting, stopping, starting, and
stopping.
Chairman Graves. Mr. Schmidt?
Mr. Schmidt. My very first program in 1991 was called
Micro-Actuator Arrays for Adaptable Control Surfaces. So this
was a device to be able to steer munitions in flight. And here
we are 24 years later, and, you know, you get $100,000 one year
and maybe half a million the next year if you are lucky, and
this is the kind of thing that Lockheed goes and gets a $100
million for. And just it is happening very slowly. We are
showing that we have done this. We have shown it continually
each and every step. But it is this culture that needs to be
changed to be able to say, this is good technology; let us put
some money in it.
And we could do it two ways, one through a new program of a
Phase II testing and evaluation, which gets you out of TRL 4 up
to TRL 6, because it is TRL 6 that is critical for any of the
primes to start to look at you. So testing in an actual
environment.
And then a second thing is the Phase III, which uses the
agency's money, and by providing the bonuses and the incentives
for the agencies to say this is a good thing, that that will
help change this culture. Because otherwise it is like no one
likes you, we don't care about it, you know, you are not a big
boy, you know, why are you here at the baseball field?
Chairman Graves. All right. Dr. Esham, could you talk just
a little bit about National Institutes of Health and what they
are doing to attract VC-backed companies? We don't have a whole
lot of hard data, but it seems to appear that participation
rates are much lower than was anticipated. And I didn't know if
you had any ideas or thoughts on those problems or improving
them, whatever the case may be.
Ms. Esham. It was actually our intention to reach out to
NIH, having seen that data. We as an organization also feel a
personal responsibility to try to make sure we are getting out
the word to our industry. So, you know, we have State-
affiliated organizations in all 50 States, and we have been--in
the past we have done Webinars, and it is our intention maybe
to do some more to again ensure that these small companies in
all 50 States are aware of the opportunities of the program
generally and also of the changes made in case they may not be
aware that there have been changes.
So we will reach out to NIH and see if is there are ways to
partner, but, again, I think we as an organization also take
responsibility for trying to find out if it is a communication
issue. But there also was--there may be fewer companies than
there were 6 years ago. I think we looked at the public
markets, and those numbers were just now kind of getting back
to 2008 numbers, so sort of pre-fiscal crisis. So there were a
lot of companies that, when that fiscal crisis hit,
disappeared. We still have over 2,000, I think, U.S. biotech
companies, but that could be a factor as well that is still
catching up, if you will, to previous numbers.
Chairman Graves. Anyone else have any other questions?
With that, again I would like to thank all of our witnesses
for participating today. Small businesses renew and grow the
economy, and they do that by introducing new products and
finding lower-cost ways of doing business. And they do play--
you all play a key role in introducing new technologies to the
market, often responding quickly to market opportunities.
But we want the Federal Government and the taxpayers to
benefit from the contributions that you offer, and the
development of the SBIR and the STTR programs are critical to
both the national economy and to the unique needs of each of
the participating agencies.
So with that I would ask unanimous consent that Members
have 5 legislative days to submit statements and supporting
materials for the record, and, without objection, that is so
ordered.
And with that, the hearing is adjourned. Thank you.
[Whereupon, at 1:10 p.m., the Committee was adjourned.]
A P P E N D I X
STATEMENT OF JOHN CLANTON
CHIEF EXECUTIVE OFFICER
LYNNTECH, INC.
Before The
HOUSE SMALL BUSINESS COMMITTEE
WASHINGTON, D.C.
21 MAY 2014
Chairman Graves, Ranking Member Velazquez and Members of
the Committee, it is an honor and privilege to appear before
you today to provide the views of Lynntech, Inc. on the
implementation of the SBIR Reauthorization Provisions as
contained in the FY 2012 Defense Authorization Act. My name is
John Clanton and I am the Chief Executive Officer of Lynntech,
Inc., a small business based in College Station, TX. Lynntech
was founded in 1987 and I purchased the company in 2007 for the
express purpose of commercializing the technologies that had
been developed by Lynntech personnel. Lynntech currently has 90
employees, 29 of which are PhD's. Lynntech's parent company,
Astin Partners of which I am also CEO, has interests in real
estate, data centers, and airport operations, which gives
Lynntech the benefit of a broadly diversified ownership
structure capable of providing strong financial support for the
high risk endeavor of technology development. Currently,
Lynntech has about 70% of its SBIR contracts from DOD and the
remainder largely from NIH. Since I purchased the company,
Lynntech has received 5 post-phase II contracts from DHS and
DOD, two of which hold the promise of being very successful
commercial market opportunities.
Among other things, SBIR reauthorization provided for
modernization of a number of SBIR policies that Lynntech
broadly supported. It was clear that the SBIR program was
sustained by a broad bi-partisan coalition of members that saw
the value in technological innovations developed by small
businesses.
In Lynntech's view, there were four initiatives that were
propelling the desire for modernization forward.
First, there was a belief that venture capital owned firms
should be afforded an opportunity to participate in the
program. While Lynntech had no strong views in regard to
majority venture capital owned firms participating in the
program, we did recognize that denying access to VC owned firms
could potentially deny small business with an alternative
financing technique as a technology reached maturity.
Second, there was a strong desire to encourage small
businesses to transition their technologies to commercial and
government markets. The legislation made it clear that both
small businesses and the Government should focus on the
transition of these technologies. For the companies, it has
been anticipated, and was seen in January 2014, rules that
would mandate standards for transition success from Phase I to
II and beyond. In addition, the legislation mandated that the
Government agencies should focus on ensuring that SBIR-funded
technologies should be given preference for inclusion in
Government funded acquisition. This was particularly the case
for the Defense Department, and it is this subject that is the
core of my testimony today.
Third, there was a belief that SBIR policymakers needed
more tools to to support the development goals for any given
technology. Thus, SBIR program managers and policymakers could
award multiple Phase II contracts for technologies which are
not quite ready for Phase III funding. In addition, agencies
were prohibited from inviting Phase II proposals from Phase I
awardees. This provides an opportunity for all technology
developers who have already completed the competitive process,
to propose further development of their proof of concept.
Finally, in recognition that Agencies did not have the
quantitative tools to properly understand the impact of the
SBIR program, the Committee asked for a substantial increase in
reporting and data base management.
Let me address each of these initiatives in turn and
provide my assessment as a long-time SBIR contractor.
First, Lynntech has taken the position since 2008 that we
do not care who owns what company. We are happy to compete
against any other small business for any particular technology.
We believe it is the small business element, not the funding
source, that feeds the creative approach to solutions.
While we see no threat to SBIR competition, we do have an
industry view that the Committee may find helpful. We believe
that the allowance of a certain percentage of awards to VC
funded firms should not be interpreted as a target level of
awards to FC funded firms.
We note that the NIH is preparing to follow the legislative
requirements that allow for a certain portion of the SBIR
program to be awarded to majority-owned venture capitalists
small businesses. Given the size of the biotech sector owned by
VCs, we believe that this should continue to allow for
effective competition for NIH projects.
In the Department of Defense, we are concerned that using
the allowable level of awards as a target will create a non-
competitive market. The participation level of VC financing in
technology development firms which specialize in the Defense
market is limited. The valuation multiples and the economic
fundamentals are simply not there. Small numbers of highly
specialized products do not generate the returns that high-risk
capital is looking to achieve.
As a result, Lynntech believes that if the implementation
of policy effectively creates target VC award levels out of
what was allowable VC award levels, it will reduce the
effectiveness of the competitive process and lead to diminished
success in the SBIR program. Forcing the DOD to compete up to
15% of the SBIR awards to only those firms owned by majority VC
firms will diminish the competitive pool.
The second major thrust of the legislation was to enhance
the technology transition effort through holding SBIR firms to
transition success thresholds, as well as holding agencies
responsible for achieving commercialization objectives. We
applaud the initiative of this Committee to pioneer and
incorporate these methods of joint accountability from both the
small business and the agency. We believe that holding
companies accountable for using Federal dollars effectively,
and requiring agency participation in commercialization was one
of the most important parts of the legislation.
Unfortunately, as it relates to the DoD, the transition
support that the Committee was attempting to achieve has been
slowed by the failure of the Defense Department to ensure that
its processes for technology insertion in major acquisitions
are improved and modernized. To date, we have seen nothing that
would suggest that an effective, Department wide initiative to
implement the statute has taken place.
Too often, Lynntech personnel find themselves dealing with
SBIR personnel that have not been trained at all on the new
procedures put in place by the statute. We still have DOD
personnel who complain about having to execute a ``small
business welfare program''; personnel who do not realize that
they do not have the authority to deny submission of Phase II
proposals from any of the Phase I awardees; and where the
process for implementing the new rules has not been clearly
articulated.
For example, the Air Force still has too many people who do
not understand that they need to clearly articulate what the
Phase II proposal process will look like in an era where there
are no invitations. Another ``real life example'' is Army SBIR
personnel who do not understand that it is possible to make
multiple Phase II awards, where an Acquisition Program Manager
is indeed interested in further development. What is more
worrisome is when the program TPOC goes looking for assistance
from the Army SBIR office, there is none to be found or the
guidance is not clear.
Even the Navy, which Lynntech has publicly praised for its
effective leadership in the SBIR program, has too many people
in the Research and Development community who actively work to
kill the technology being developed, not because of technical
merit, but because of personal biases or the SBIR technology is
a threat to their preferred technical approach.
In fact, Lynntech has been told that SBIR technologies are
not desired because of SBIR data rights. There is growing
concern that some SBIR technologies have been transitioned
without regard to the small business rights to data ownership.
All of these comments indicate that the transition effort
requires more than just a motivated SBIR company, it requires
an informed and motivated agency presence as well as leadership
from Senior Acquisition Executives to ensure that all APMs are
utilizing the full range of technologies that the Federal
Government has already paid for.
The third major thrust of the legislation was to give the
SBIR policy makers additional tools in order to ensure that
sufficient funding exists to fully develop nascent
technologies. I have touched on some aspects of that issue
already but I will go on to note that while the Congress has
provided the tools; not all agencies have availed themselves of
those tools. Lynntech continues to be concerned that SBIR
officials in the field are either unaware of the tools or they
have chosen to ignore them.
Finally, the last major thrust of the legislation was to
provide for enhanced information gathering and the perfecting
of existing databases. It is incumbent on Government to ensure
that the databases used to score performance are accurate,
particularly where decisions may lead to termination of an
individual company from participation in the SBIR program. Such
termination decisions can be a life or death determination for
the SBIR firm. The Agencies have complained about the extent of
reporting requirements but if the goals of the Reauthorization
language are to be achieved, then the data bases and the
information they provide must be the best that we can achieve.
In summary, Lynntech believes that the Reauthorization
legislation achieved much of what it was looking to achieve.
But Congressional oversight still needs to be provided so that
the Committee can ensure that there is Agency compliance with
the intent of Congress. Hopefully, good Agency compliance with
the statute will mean that the next round of Reauthorization
scheduled for FY 2017 will require less tinkering and more
positive reporting on the success of SBIR transition.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Executive Summary
The Biotechnology Industry Organization (BIO)
represents over 1,100 innovative biotechnology companies,
academic institutions, state biotechnology centers, and related
organizations in all 50 states.
The vast majority of BIO's members, about 90%, are
pre-revenue companies whose research is still in the lab or the
clinic. Product sales do not fund their groundbreaking
research; instead, small biotechs rely on outside sources for
innovation capital.
The SBIR program provides biotech companies an
opportunity to obtain funding for early-stage research projects
in order to advance their research and development to the point
that it can attract the hundreds of millions of dollars from
the private sector necessary to develop the initial project
into a publicly available new medicine.
SBIR plays a critical role in supporting small
U.S. biotech companies and funding their early-stage research
as they navigate the ``valley of death,'' a critical time when
the scientific concepts have shown promise but the development
is not far enough along to attract later-stage investors that
could fund expensive clinical trails.
BIO strongly supported the SBIR/STTR
Reauthorization Act of 2012, which made two vital reforms to
the SBIR program:
It allowed majority venture-backed companies
to once again be able to participate in the SBIR
program; and
It modified affiliation rules so that SBIR
applicants will not be affiliated with their investors'
portfolio companies simply on the basis of shared
investors.
The restoration of SBIR eligibility to venture-
based companies will be vital for the success of the program in
the biotech industry. Virtually all biotechs depends on venture
financing at some point in their development cycle.
BIO applauds the SBA for issuing eligibility and
affiliation rules that implement clear, bright-line tests that
will not unduly ensnare growing companies.
Testimony of Cartier Esham, Ph.D.
Good afternoon Chairman Graves, Ranking Member Velazquez,
Members of the Committee, ladies, and gentlemen. My name is
Cartier Esham, and I am the Executive Vice President of
Emerging Companies at the Biotechnology Industry Organization
(BIO). BIO represents more than 1,000 innovative biotech
companies, academic institutions, state biotechnology centers,
and related organizations across the United States and in more
than 30 other nations. BIO's members develop medical products
and technologies to treat patients afflicted with serious
diseases, to delay the onset of these diseases, or to prevent
them in the first place.
The vast majority of BIO's member companies, about 90%, are
pre-revenue companies whose research is still in the lab or the
clinic. These small businesses--virtually all of which employ
fewer than 100 workers--spend more than a decade conducting R&D
in their search for groundbreaking medicines and life-saving
treatments. During this years-long process of research and
clinical tests, biotechs do not have any products to sell.
Revenue does not fund the biotech development process, which
can cost upwards of $1 billion. Instead, emerging biotech
companies rely on outside sources for innovation capital. From
early-stage angel investors and government grants to later-
stage venture capitalists and public financing, biotechs are
constantly searching for the capital to support their research.
The Small Business Innovation Research (SBIR) program
provides biotech companies an opportunity to obtain funding for
early-stage research projects in order to advance their
research and development to the point that it can attract the
hundreds of millions of dollars from the private sector
necessary to develop the initial project into a publicly
available new medicine.
Programs like SBIR are particularly important in a
difficult fundraising environment for companies that generally
depend on venture capital investment to finance early-stage
research. In 2013, first-round venture financings (which
support the earliest stages of breakthrough research) were down
35% compared to 2008 and in 2012 they were at a 15-year low.\1\
Further, the first round's share of the total venture market is
decreasing each year. As a result, breakthrough, early-stage
biotech innovation is receiving less funding, meaning that the
next generation of promising cures could be left on the
laboratory shelf.
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\1\ PricewaterhouseCoopers, National Venture Capital Association.
``MoneyTree Report.'' https://www.pwcmoneytree.com/MTPublic/ns/
index.jsp.
The importance of supporting biomedical research and
innovation and the development of new treatments and therapies
in the United States cannot be overstated, especially in a time
where we are driving towards building a 21st century economy
while simultaneously facing increased competition from around
the globe to sustain our world leadership in biomedical
innovation. We must focus on creating and delivering new
solutions to our nation's most critical and costly public
health issues and work towards continuing to improve the
quality of life for patients and their families. For example,
by 2030, almost one out of every five Americans--some 72
million people--will be 65 years or older.\2\ Every year,
American taxpayers spend $203 billion on Medicare and Medicaid
expenses related to Alzheimer's, and this cost is projected to
reach $1.1 trillion by 2050.\3\ As almost 84 cents of every
health care dollar spent is for taking care of individuals
suffering from a chronic disease,\4\ it could not be more clear
that we have a national imperative to find new solutions to how
we treat patients and diseases.
---------------------------------------------------------------------------
\2\ Alzheimer's Association. ``2014 Alzheimer's Disease Facts and
Figures.'' Alzheimer's & Dementia, Volume 10, Issue 2 (2014). http://
www.alz.org/downloads/Facts Figures 2014.pdf.
\3\ Alzheimer's Association. ``2014 Alzheimer's Disease Facts and
Figures.'' Alzheimer's & Dementia, Volume 10, Issue 2 (2014). http://
www.alz.org/downloads/Facts Figures 2014.pdf.
\4\ Anderson, Gerard. ``Chronic Care: Making the Case for Ongoing
Care.'' Robert Wood Johnson Foundation 2010. www.rwjf.org/content/dam/
farm/reports/reports/2010/rwjf54583.
We are also facing unprecedented competition from around
the globe to be the leader in biomedical research. In 2008,
China pledged to invest $12 billion in drug development, and in
2011, the Chinese government named biotech one of seven
industries that will receive $1.7 trillion in government
funding.\5\ Further, the European Union's Innovative Medicines
Initiative is pumping $2.65 billion into Europe's
biopharmaceutical industry.\6\ While America has developed more
cures and breakthrough medicines than any other country and is
home to over 2,500 biotech companies, this is not a position
that will be sustained without continued investment and
policies focused on supporting and incentivizing the next
generation of biomedical discoveries, treatments, and cures.
---------------------------------------------------------------------------
\5\ Buckley, Chris. ``China to invest US $1.7 trillion over 5 years
in `strategic sectors': US official.'' The China Post 23 November 2011.
http://www.chinapost.com.tw/business/asia-china/2011/11/23/323724/
China-to.htm.
\6\ Hodgson, John. ``C2 billion IMI launched with European
pharma.'' Nature Biotechnology 26, 717-718 (2008).
Additionally, the U.S. biotech industry is an economic
driver, directly employing over 1.6 million workers and
supporting an additional 3.4 million jobs.\7\ Small companies
are the heart of the industry, and SBIR plays a critical role
in ensuring that these companies are able succeed and provide
the next-generation of medicines to the public.
---------------------------------------------------------------------------
\7\ Battelle Technology Partnership Practice. ``Battelle/BIO State
Bioscience Industry Development 2012.'' June 2012. http://www.bio.org/
sites/default/files/v3battelle-bio 2012 industry development.pdf
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SBIR/STTR Reauthorization Act of 2012
The mission of the SBIR program is to support scientific
excellence and technological innovation through the investment
of federal research funds in critical American priorities to
build a strong national economy. In 2012, Congress passed the
SBIR/STTR Reauthorization Act to ensure that agencies have the
most competitive pool of applicants and that grants awarded
will be based on the projects that show the most promise in
bringing breakthrough and life-saving therapies to the public.
The SBIR/STTR Reauthorization Act of 2012 made two vital
reforms to the SBIR program:
It allowed majority venture-backed companies
to once again be able to participate in the SBIR
program; and
It modified affiliation rules so that SBIR
applicants will not be affiliated with their investors'
portfolio companies simply on the basis of shared
investors.
BIO strongly supported these important changes, which allow
many small biotech companies to once again participate in the
SBIR program and fund early-stage research that will lead to
groundbreaking medical advances. Small businesses that are
majority-owned by multiple venture capital companies, private
equity firms, or hedge funds are now able to compete for 25% of
SBIR funding at the National Institutes of Health (NIH),
Department of Energy (DOE), and National Science Foundation
(NSF), and 15% of SBIR funding at all other participating
agencies. Similarly, SBA rule changes directed by the law also
created a commonsense approach to affiliation that ensures
companies are no longer affiliated with unrelated businesses
simply on the basis of having common venture capital investors.
Under the new rules, a small business must meet one of the
following ownership requirements at the time of award of an
SBIR Phase I or Phase II funding agreement:
Be more than 50% directly owned and
controlled by one or more individuals (who are citizens
or permanent resident aliens of the U.S.), other
business concerns (each of which is more than 50%
directly owned and controlled by individuals who are
citizens or permanent resident aliens of the U.S.), or
any combination of these;
Be more than 50% owned by multiple venture
capital operating companies (VCOCs), hedge funds, or
private equity firms, or any combination of these (but
no single VCOC, hedge fund, or private equity firm may
hold a majority stake in the small business); or
Be a joint venture in which each entity to
the joint venture must meet the requirements above.
The restoration of SBIR eligibility to venture-backed
companies will be vital for the success of the program in the
biotech industry. A 2009 National Research Council study
conducted stated, ``Restricting access to SBIR funding for
firms that benefit from venture investments would thus appear
to disproportionately affect some of the most commercially
promising small innovative firms.'' \8\ The study specifically
touched on the lost potential for life-saving research, noting
that the VC restriction had ``the potential to diminish the
positive impact of the nation's investments in research and
development in the biomedical area.'' \9\
---------------------------------------------------------------------------
\8\ National Research Council (US) Committee for Capitalizing on
Science, Technology, and Innovation, ``An Assessment of the Small
Business Innovation Research Program.'' National Academies Press
(2009).
\9\ National Research Council (US) Committee for Capitalizing on
Science, Technology, and Innovation, ``An Assessment of the Small
Business Innovation Research Program.'' National Academies Press
(2009).
BIO applauds Congress for restoring SBIR eligibility to
venture-backed companies. Because of this change, innovative
biotechs across the country will benefit from early-stage
---------------------------------------------------------------------------
funding for the next generation of cures and treatments.
Affiliation Rules
The SBA's general principles of affiliation state that
``affiliation exists when one business controls or has the
power to control another or when a third party (or parties)
controls or has the power to control both businesses.'' \10\
These specific affiliation rules are important because they
determine whether a company or individual should be considered
``affiliated'' and therefore which businesses' employees should
be added to the SBIR applicant's employee count to determine if
the company falls below the 500 employee threshold for SBIR
eligibility.
---------------------------------------------------------------------------
\10\ U.S. Small Business Administration, ``Small Business
Compliance Guide Size and Affiliation.'' March 2014. http://
www.sba.gov/sites/default/files/affiliation ver 03.pdf
A limited number of venture capital firms invest in the
biotech space, and thus many companies share investors--but the
individual biotech companies do not have shared business goals
or risks. Before the 2012 SBIR reauthorization, many biotech
companies were deemed ineligible because they had multiple
investors who owned 10-20% of the SBIR applicant, which was
considered large compared to other investors' ownership. Not
only were these investors deemed affiliated, but all of their
portfolio companies where they owned 10-20% of a company (and
their ownership was considered large compared to other owners)
---------------------------------------------------------------------------
were also affiliated to the SBIR applicant.
The SBIR/STTR Reauthorization Act of 2012 explicitly states
that affiliation should not be determined solely on the basis
of one or more shared investor, a provision that BIO strongly
supported. The new rules put in place appropriately focus on
determining if indeed the SBIR applicant has shared business
goals and risks. Further, the new tests are clear, concise, and
consistent so that small companies can more easily determine
their eligibility.
Specifically, under the new rules, an SBIR applicant is
affiliated to any individual, business, or entity that owns or
has the power to control more than 50% of the applicant's
voting stock. The rule provides a clear, bright-line
affiliation test for companies whose stock is widely held. When
determining affiliation based on equity ownership:
An SBIR applicant is an affiliate of an
individual, business, or entity that owns or has the
power to control more than 50% of the SBIR applicant's
voting equity.
The SBA may deem affiliated an individual,
business, or entity that owns or has the power to
control 40% or more of the voting equity of the SBIR
applicant based on the totality of circumstances.
If no individual, business, or entity is
found to control the SBIR applicant, the SBA will deem
the Board of Directors to be in control of the SBIR
applicant.
BIO strongly supports this rule, and applauds the SBA for
implementing clear, bright-line tests that will not unduly
ensnare growing companies. In the biotech industry, there are a
finite number of investors, which often have investments in the
same biotech small businesses--but they remain individual
investments for each venture capital firm. Emerging biotechs
are generally a collection of research projects with one lead
product and an average of five other therapies or candidates in
early-state/pre-clinical research. It is the goal of each
investor to succeed in developing and commercializing each
individual research project they have funded. The success of
each investment is based on scientific outcomes, which are not
influenced by the progress of other companies' research within
the same portfolio. The new affiliation rules reflect this
reality by only determining affiliation if an SBIR applicant is
truly controlled by another entity.
Measuring the Success of the 2012 SBIR Reauthorization
On May 15, 2012, SBA published a proposed rule for
determining ownership, affiliation, and size standards. On
December 27, 2012, SBA published the final rule, which went
into effect on January 28, 2013. In May 2013, NIH reissued its
SBIR Omnibus Grant Solicitation announcement, and stated that
small businesses majority-owned by multiple venture capital
operating companies were eligible to apply for those SBIR
grants and any other NIH SBIR funding opportunities announced
after January 28, 2013. We do not yet have data on how many
majority venture-backed companies applied for or were awarded
SBIR grants under this new rule as the closing date for
applications was January 2014 and many of these applications
are still being reviewed.
The SBIR/STTR Reauthorization Act also provides authority
for three participating agencies to give Phase II awards to a
small businesses concern that did not receive a Phase I award
for that research/R&D. This allows companies that may have
funded their own Phase I-type research to apply for Phase II
funding. In February 2014, NIH announced its SBIR Direct Phase
II pilot program. BIO strongly supported this provision in the
reauthorization process and will be monitoring NIH's pilot
program to determine success.
Lastly, BIO did have some concerns regarding the numerous
reporting requirements for companies that are majority backed
by venture capital. We will be monitoring our members to
determine whether these requirements are effective or unduly
burdensome to small companies. We will also be working to
encourage other SBIR participating agencies to `opt-in' and
allow all U.S. small businesses the opportunity to compete for
SBIR grants.
Conclusion
The extended biotech development timeline, driven by the
complicated nature of scientific advancement, means that it can
cost more than $1 billion to bring a single life-saving therapy
to market. This entire process is undertaken without the
benefit of product revenue--instead of using the sale of one
product to finance the development of another, growing
innovators turn to external sources to fund their breakthrough
R&D.
SBIR plays a critical role in supporting small biotech
companies and funding their early-stage research as they
navigate the ``valley of death,'' a critical time when the
scientific concepts have shown promise but the development is
not far enough along to attract later-stage investors that
could fund expensive clinical trials. Biotech innovators and
entrepreneurs use these funds to speed the delivery of the next
generation of medical breakthroughs--and, one day, cures--to
patients who need them. BIO applauds Congress for making key
reforms to the SBIR program to ensure eligibility for
innovative small businesses in the biotech industry, and we
look forward to continuing to support this vital program.
Comments on the SBIR/STTR Program: Always Trade-offs
Introduction:
Thank you Ranking Member Velazquez, Chairman Graves, and
Members of the Committee. I am honored to have this opportunity
to offer comments on the SBIR program. As Ranking Member
Velazquez mentioned, in addition to being a faculty member for
nearly 40 years at The College of William and Mary, I have been
working as an economist and program evaluator for the SBIR
program for nearly 20 years. As an economist from academia, my
comments will not be advocating a particular point of view or
perspective of any organization, but will be based on my
research, my objective conclusions, and the research of others
in the public, private, and academic sectors. I will likely be
perceived as President Truman's nemesis--the two-handed
economist, but I do this as a public policy educator who
recognizes that most, if not all, decisions involve trade-offs.
That said, I am admittedly a fan of the SBIR approach to
Federal government support for achieving several important
goals including encouraging hi-tech research from small
businesses, encouraging commercialization and infusion (into
Federal agencies) of the technologies generated, and
encouraging women and minorities to participate in this
important sector. It is widely accepted that small business is
an important source of productivity and employment growth and
that technological advances are a pre-condition for long-term
economic growth and international competitiveness.
The original design of the SBIR program in 1982 identified
4 main goals:
1. Stimulation of technological innovation;
2. Use of small businesses to help meet the R&D needs of
the Federal government;
3. The fostering and encouragement of participation by
minorities and women in the innovations; and
4. The increase in private sector commercialization
emanating from Federal R&D.
While the program has evolved over time (including the
creation in 1992 or the STTR program), in 2011 the Congress
passed and the President signed the National Defense
Authorization Act of FY 2012.
My comments today will address what we might expect in the
post-reauthorization period in terms of the process and
outcomes of the SBIR program. However, it is important to note
at the outset that the time since the passage of the
reauthorization is relatively short. I am a firm believer in
Congressional oversight and program evaluation more generally.
However, it is important to identify what can be observed at
various points in time. From what I have been able to
determine, the various SBIR sponsoring agencies have been
working to reorient their operations, goals, and metrics to
adapt to the reauthorized program. They are at various points
in that adaptation. Therefore, my comments will be based on
what we can expect from the various elements of the revised
program over the next few years, including possible unintended
consequences.
I would like to offer some brief comments and observations
on the following 7 issues.
1. Overall Health of the SBIR Program
2. Program Goals Should be Remembered When Debating
Policy Issues and Consider Implicit Trade-offs
3. The So-called Proposal Mills
4. Dimensions of the VC Issue
5. Geographical Dispersion of Awards
6. Participation by Minorities and Women in the
Program
7. Need for Continued Research and Evaluation
Seven Issues for Consideration
Overall Health of the SBIR Program
The SBIR program has been in existence since 1982. In my
view and based on nearly all the extant research (including the
various reports by the National Academies as well as my own
reports), the program is working to achieve its goals. While it
is challenging to measure outcomes, the studies that have
attempted it, indicate that program outcomes of sales and
commercialization, infusion into Federal agencies, and to some
extent achieving participation in the program by women and
minorities have all shown to be positive. But there is clearly
room for improvement on all these dimensions. I would posit
that the program itself is well-conceived.
In what follows, I display a convenient summary from the
SBA website of the key changes in the program as a result of
the reauthorization:
Funding:
Set-aside percentages are increased. For FY 2012, SBA
has issued guidelines to the agencies that the set-
aside share is increased to 2.6%, prior to the new
Policy Directives being issued. The share will increase
by 0.1 percentage point each fiscal year until it
reaches 3.2% for fiscal year 2017. It will remain at
that level after that. For STTR, the set-aside percent
was increased to 0.35% for 2012 and 2013, and will
increase to 0.4% for 2014 and 2015, and to 0.45% for
2016 and thereafter. Note that agencies may exceed
these minimum percentages.
Award sizes. STTR award sizes (guideline amounts) are
increased to match SBIR amounts: $150,000 for Phase I
and $1 million for Phase II. Awards may not exceed
guideline amounts by more than 50% ($225,000 for Phase
I and $1.5 million for Phase II). Agencies must report
all awards exceeding the guideline amounts and must
receive a special waiver from SBA to exceed the
guideline amounts by more than 50%.
Administrative funding pilot. A new pilot program
permitting agencies to use 3% of their SBIR funds for
administration of SBIR and STTR programs.
Technical assistance. The amount of SBIR funds
permitted to be used for technical assistance is raised
from $4000 to $5000 per award per year.
Eligibility:
VC-owned firms. The biggest change in eligibility
required by the reauthorization legislation will be
allowing firms that are majority-owned by multiple
venture capital operating companies (VCOCs), hedge
funds and/or private equity firms to receive SBIR and
STTR awards.
Company Registry. All applicants will be required to
register with the Company Registry Database at
www.sbir.gov at the time of application.
Cross-program awards. Agencies have the option to
allow STTR Phase I awardee to receive SBIR Phase II
award and SBIR Phase I awardee to receive STTR Phase II
award. Implementation is at agency discretion.
Cross-agency awards. Clarifies that a Phase I awardee
may receive a Phase II award from an agency other than
the one that awarded the related Phase I. Reporting to
SBA by both agencies is required.
Direct to Phase II pilot. For fiscal years 2012-2017,
the NIH, DoD, and Department of Education may issue
Phase II SBIR awards to firms to pursue Phase I
solicitation topics without requiring the applicant to
have received a Phase I award for related work.
Implementation is at agency discretion.
Open Phase II competition. Beginning 10/1/2012,
agencies must allow all Phase I awardees to apply for a
follow-on Phase II award. Issuing Phase II awards via
invitation only will not be permitted. Agencies will
need to include information on the Phase II application
process in all Phase I solicitations released on or
after 10/1/2012 and notify their Phase I awardees of
this change in practice.
Second Phase II. Agencies may award a second,
sequential, Phase II to continue a Phase II project.
Streamling the award process:
The Reauthorization Act requires changes aimed at
reducing gaps in time between close of the solicitation
and notification of award. Agencies are to implement
these measures as soon as is practicable. In addition,
the Policy Directives include new reporting
requirements for the participating agencies to develop
data needed to monitor and analyze these time lags.
Data & Reporting:
Central data system. An improved program-wide data
system will be developed to facilitate administrative
reporting and program evaluation. The system will
enable applicants and agencies to provide the required
information into the Tech-Net database (www.SBIR.gov).
New measures to guard against fraud, waste, abuse:
Company certification. Awardee firms must certify
they are meeting program requirements not only at the
time of award, but also at points during the lifecycle
of the award.
Information systems. Agencies must: include of their
website, and in each solicitation, a telephone hotline
number or web-based method for reporting fraud, waste
and abuse; include on the agency's website successful
prosecutions of fraud, waste and abuse in the SBIR
Program; designate at least one individual to serve as
liaison for the SBIR/STTR Program to the Office of
Inspector General (OIG) and the agency's Suspension and
Debarment Official (SDO); and maintain procedures to
enforce accountability (e.g., creating templates for
referrals to the OIG or SDO).
Increased support for commercialization:
Technical assistance. Amounts increased to $5000,
flexibility on use, applies to STTR as well.
Commercialization Readiness Program. DoD
Commercialization Readiness Pilot is made permanent and
includes the STTR program; Commercialization Readiness
Pilot programs for civilian agencies are authorized
allowing agencies to use up to 10% of SBIR/STTR funds
to support commercialization and Phase III efforts.
Phase III preference. Agencies directed to support
SBIR/STTR awardees in their efforts to commercialize
SBIR/STTR work through, among other things, Phase III
sole-source contracts.
Program Goals should be Remembered When Debating Policy
Issues and Consider Implicit Trade-offs
When debating the issues involved in the SBIR program, it
is important to consider the implicit trade-offs. For example,
a stronger emphasis on commercialization could mean less
emphasis on serving agency needs or possibly on emphasis on
recruitment of economically disadvantaged applicants and
awardees. Also, increasing the participation of small business
in serving the R&D needs of Federal agencies could lead to
somewhat less commercialization. In addition, it is important
to remember that there are 11 Federal agencies involved in the
SBIR/STTR program, and they have different needs and
approaches. Therefore, flexibility is an important
consideration in implementing the program. Finally, the
inclusion of VCs into the SBIR arena could be perceived as
leading to a deviation from the original intent of the program
(see below for more on this issue).
The So-called Proposal Mills
The concept of ``SBIR Mills'' or ``Proposal Mills'' has
been discussed for several years. This is the notion that a
relatively small number of small firms have figured out how to
win SBIR awards and have become basically SBIR contract
research companies. A look at the data tells us that there is
some degree of multiple award winners. If they were firms that
win Phase I awards and go no further, it could easily be argued
that something drastic should be done about this. However,
based on various studies (NAS and my own), more of the multiple
award winners are also successful in commercialization,
receiving additional investment dollars from other sources,
and/or successful in having their technologies infused into
Federal agencies. Overall, this is an issue to watch, but I
think it would likely be counter-productive to restrict number
of proposals for an SBC without considering the trade-offs. The
notion that these multiple award winners generally become
dependent on SBIR awards (without other outcomes occurring) or
that these firms will no longer need early start-up funding is,
in my view, a limited way of thinking about such firms. In some
ways, many of these firms could be the most successful,
depending on how and when success is measured. One final point
is that there are approximately \1/3\ first-time applicants in
SBIR (program-wide) every year.
Dimensions of the VC Issue
The recent report by the National Academies on venture
capital and the SBIR program notes that during the first 20
years of the program, there were some majority venture-funded
companies participating in the program, and received SBIR
awards along with the outside equity funding. Over that period,
participation of majority venture-funded firms was not raised
as an issue and there seemed to be no adverse effects on the
program. Following a rule change by the SBA, there was much
debate about the issue. The reauthorization led to a new
provision regarding an option by and SBIR agency to permit
allow participation by firms that are majority-owned by
multiple venture capital operating companies, private equity
firms or hedge funds.
The new VC approach is a start to resolving the trade-offs
but will need to be monitored. It appears that so far it has
not had much of an impact.
Geographical Dispersion
It is true that the top 10 states make up 68 percent of
awards, with California and Massachusetts making up the lion's
share. The issue of geographic dispersion is complicated and
can be taken to extreme. What if agriculture assistance
programs were thought to be biased if corn or wheat oriented
assistance went more to Kansas, Nebraska, and Iowa and was not
disperse across a wider variety of states. There is seems
obvious to most people that the nature of the subsidy is going
to be fairly regionally concentrated. Efforts to make the
assistance more disperse would likely lead to a misallocation
of resources and not achieve what the program is intending to
achieve. Furthermore, one could argue that the benefits of a
regionally focused program would redound to the entire nation
in the form of lower and/or more stable food prices.
The existence of geographical concentration of SBIR awards
is subject to similar reasoning. Certainly, SBIR could have
been designed with regional quotas in mind in the name of some
sort of equity. But it wasn't and for good reason. The SBIR
program has several goals including increasing the level of
technology investments (and their payoff) and targeting the
small business sector (at least partly on equity grounds but
also because of the notion that small business producing
innovation will be beneficial to the extent that large
businesses may have size and bureaucratic barriers to producing
innovative R&D). If every state in the U.S. had the same share
of science and technology human capital and related
infrastructure, then it would likely be efficient to have a
program such as SBIR be very geographically diverse. But, while
every state/region has significant scientific/technology human
and infrastructure (including strong educational institutions),
there seems to be a certain amount of regional clustering in
R&D activities. This pattern long preceded the creation of the
SBIR program. Therefore, if the SBIR program is to achieve its
maximum return to taxpayer investment, it will be necessary for
the program awards to mirror those regional cluster patterns
and take advantage of them. While that is perhaps not the best
political answer in terms of Members of Congress ``bringing
home the bacon'' of SBIR awards to their district, it could be
argued analogously to the wheat and corn example, that the
nation as a whole benefits from most from putting the scarce
SBIR dollars where they can have their highest return. It would
not be completely out of the question to mandate that Federal
agencies ensure a less geographically concentrated award
pattern. However, in mandating such a pattern, the SBIR program
would yield a lower national return on investment. Therein lay
the political tradeoff. That said, monitoring of the SBIR
programs at the agency level could be feasible by requiring
each agency to explain how they have ensured that their award
allocation does not take geography into account at all.
Increasing Participation in Awards to Minority and Women:
It is well known that there is low (and declining) levels
of minority and women involvement. The low and declining levels
of participation in SBIR by minorities and women is a somewhat
different concern than the regional dispersion issue. This
concern is built directly into the legislation. One could use
similar arguments about efficient allocation of human resources
given the relatively lower availability of scientific and
technological. But that could be seen as a static view of the
way we produce science and technology in the U.S. With
demographic and labor force composition patterns changing
dramatically, it is essential to ensure that women and
minorities have opportunities to participate fully in the
technology field. This would include targeting educational and
opportunities such as SBIR awards. Therefore, both in terms of
long-term research allocation and economic growth of the U.S.
and the explicit legislative intent, it makes sense to
encourage increased women and minorities for awards.
Need for Continued Research and Evaluation
As is evident from the discussion above, there is
continuing need for data and analysis of the complex SBIR
program. This should be done by the agencies themselves, the
Congress, and independent researchers and evaluators.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Graves, Ranking Member Velazquez, I want to thank
you for allowing America's SBDC to submit written testimony for
the hearing record. I am the President of America's SBDC, the
Association that represents the nationwide small business
development center (SBDC) network of over 950 locations and
over 4,000 dedicated professional counselors, advisors,
specialists and support staff.
For 34 years the SBDC network has been providing services
to small business owners and aspiring entrepreneurs. Over the
years our member networks have developed a wide variety of
services for small businesses of all sizes that are customized
to meet the needs of regional businesses throughout the nation.
One of the most important service we offer is assisting small
business owners to apply for grants under the Small Business
Innovation and Research program (SBIR). Over the years SBDCs
all across the country have developed resources and training to
enable more and small businesses access grant funds through
this program.
To promote the SBIR program SBDCs have developed numerous
coaching and training programs. In Missouri, for example, the
SBTDC offers technology commercialization services that
evaluate intellectual property and provide preliminary patent
searches, assists with building the business model and with
prototype design, conducts market and technical viability
review of technologies and help prepare SBIR/STTR proposals.
Similarly, in Virginia they have developed the Innovations
Commercialization Assistance Program. By partnering with SHINE
Systems and Technologies in Charlottesville to provide each
participant with a Client Market Assessment (CMA), which
provides an unbiased SWOT analysis of the client's strengths,
weaknesses, opportunities, and threats, with a Summary, Grade,
and Recommended Next Steps. Clients, whose innovations were
assessed to have commercial promise, are selected for further
assistance. Starting with in-person sessions with the subject-
matter experts, the client, the SHINE project manager, and the
client's SBDC counselor dip deeper, beyond the information
already provided. From this session, a commercialization
Roadmap is developed, offering tangible steps and directed
counseling to guide the entrepreneur in taking the innovation
into the market.
In West Virginia, In-Tech was created as a unit of the West
Virginia Small Business Development Center (WVSBDC) to provide
business coaching and technical assistance to West Virginia
based pre-venture and small businesses in which innovation
serves as a catalyst for economic impact via technology-based
products, services, and improved processes. The WVSBDC has a
full time Manager for this program whose core services are:
Technology Development and Commercialization; Market and
Commercialization Needs Surveys; Business Model Generation and
Customized & Confidential Product Development and Business
Coaching.
Similar programs exist in North Carolina, Massachusetts,
Vermont, Arkansas, South Dakota, Utah, Delaware, Ohio and
Maryland and throughout the national SBDC network. All these
programs share consistent themes--Assistance with the grant
writing and submission process, research into market needs and
viability, access to Capital (Conventional and Venture),
intellectual property protection, prototyping and
manufacturing, and most important--commercialization.
In the National Defense Authorization Act of 2012 (NDAA)
the Committee made several valuable changes to the SBIR
program. One of the most significant was the emphasis the
Committee placed on supporting research with a clear goal of
commercialization. This has been one of the key components of
SBDC assistance to SBIR grantees. By working with grantees from
the perspective of creating a viable business SBDCs have
ensured the strength and success of SBIR awardees in reaching
commercial success. The goal of SBDC assistance is to create
viable businesses, and so our SBIR assistance is geared solely
to getting the businesses into the program, getting their
technology developed and getting that technology into the
market. SBDCs aren't helping with proposals for the grant's
sake; they're doing it for the business.
An excellent example of that focus is the efforts of the
Arkansas Small Business Technology Development Center working
with Fauxsee Innovations, LLC of Magnolia, Arkansas.
Brothers-in-law Brandon Foshee and Timothy Zigler
launched their startup company, Fauxsee Innovations, to
develop technology to assist sight-impaired people like
Brandon. The company, based in Magnolia, Ark., has won
two rounds of funding from the National Science
Foundation to support the development of its patent-
pending Roboglasses device.
Roboglasses are designed to dramatically reduce head
and upper-body injuries to the sight impaired.
Traditional mobility devices, such as the guide dog or
walking cane, do not protect the user from upper-body
hazards. Studies have shown that almost half of the
11.4 million visually impaired people in America
experience head injuries at least once a month, with 23
percent of those injuries requiring medical attention.
The idea for Roboglasses came after Zigler met Foshee
and grew curious about the lack of available modern
technology to assist sight-impaired individuals.
``I came up with the idea while backing up my car and
listening for the beeps from my reverse detection
system,'' said Zigler. ``I instantly called Brandon and
told him my idea and he liked it. In the beginning it
wasn't a business idea at all, but simply a guy trying
to help this brother-in-law out.''
The company co-founders first turned to the Arkansas
Small Business Technology Development Center (ASBTDC)
at Southern Arkansas University for help
commercializing their concept. The SAU center helped
the pair with their business plan and market research,
and then connected them to ASBTDC's technology and
innovation specialist, Rebecca Norman, at the
University of Arkansas at Little Rock.
Zigler and Foshee worked extensively with Norman on
their SBIR proposals. At first, the two were
overwhelmed by the requirements to participate in the
SBIR program and were considering raising only private
money to support their research and development
efforts. ``Rebecca Norman of the ASBTDC talked us back
into going after SBIR funds,'' said Foshee. ``She not
only encouraged us to try again but was there in the
trenches with us every step of the way.''
Fauxsee Innovations received a $150,000 Small
Business Innovation Research (SBIR) Phase I award from
NSF in 2013, followed by a $15,000 Phase IB grant. The
company has applied for Phase II funding.
``Our NSF SBIR Phase I award allowed us to prove that
the Roboglasses theory and concept works,'' said
Zigler. Foshee, who has no light perception and uses a
guide dog to navigate, said the Phase IB ``In Between''
funding ``will allow us to further refine our prototype
from what we call the `carryable' version to the
`wearable' version. In other words, it will help us to
miniaturize our prototype.''
The specialized assistance ASBTDC was able to offer
Fauxsee Innovations was made possible through Federal
and State Technology (FAST) funding from the U.S. Small
Business Administration. ASBTDC has received the
nationally competitive FAST award each year since 2010.
The combination of SBDC assistance and Brandon and
Timothy's innovative thinking is what created a new business
with a potential to help thousands of vision-impaired people.
However, this road is far from easy and oftentimes small
business owners run into serious roadblocks. This is why the
Committee's efforts were so important. Many clients with
worthwhile innovations face hurdles that seem to defy the logic
of the SBIR program, and defy their capabilities to
successfully apply.
Those hurdles were faced by a client of the Massachusetts
SBDC (MASBDC), a small company engaged in the development of
anti-cancer drugs. The founder, a PhD with two decades of
cancer research experience, contacted the MASBDC office for
assistance with submission of their SBIR proposals. He had
previously submitted 2 Phase I SBIR proposals, both of which
were rejected. He was already well into the process of writing
a revised proposal when he contacted the MASBDC. Dan Lilly at
MASBDC worked with him to finalize the submission and after
submitting the proposal, he worked with Dan to better
understand the previous rejections.
This created a roadmap to make substantive positive changes
to the submission. That is what's amazing, a veteran researcher
with a long history having difficulty understanding the SBIR
process. Luckily, with SBDC help he was able to gain insight
into the reviewers and their thoughts about the proposals's
strengths and weaknesses.
Unfortunately the next proposal was also rejected, although
the score had improved. MASBDC and the firm continued to review
the results and comments in order to further improve the
application. Armed with a number of rejections and perplexing
reviewer comments, they set out to submit another proposal to
overcome the reviewer concerns.
The next version of the proposal came back very close to
the funded scoring range. In that proposal, one reviewer
commented that the proposal was very well written, thus leaving
the success of future applications to the convincing nature of
the science. At this point the client became further confounded
by the process, particularly since the science had been
previously published in top peer review journals. Most of the
proposal reviewers loved the science, but others questioned its
level of significance as parts of the technology were perceived
to be used previously, and thus not novel. It now seemed to be
a matter of perception of the science as to whether the
proposal would be funded.
Using comments from previous reviewers, the challenge of
presenting the significance and impact of the science was
tackled head on. The revised proposal sought to overcome the
weakness that the technology platform utilized existing
technologies. The new proposal now highlighted that other
reviewers had specifically commented that ``although all the
components of the technology may not have been novel, the
approach and the utilization of them was truly innovative and
could result in great strides in cancer therapy''.
Using this new strategy to present the technology and
approach, they submitted another version of the Phase I SBIR
application which was successfully funded by NIH.
This typifies the difficulty many SBIR applicants face, a
proposal process that seems opaque and is often geared towards
outstanding grant writes, not outstanding innovators looking to
produce a commercially viable product. To that end, the
Committee's improvements have made a great difference. SBDCs
and their many prospective clients appreciate the effort to
refocus the program on commercially viable innovations.
As a final point, the members of America's SBDC would like
to encourage continuation of the FAST program. That program was
designed to increase the ability of small businesses in
``rural'' states that did not traditionally succeed in winning
SBIR grants. Small business in Utah, Arkansas, South Dakota and
Missouri and many other rural states have benefited greatly
from the FAST program. It has enabled them to access resources
that have greatly improved their success rate. For some time
the SBIR program appeared to be almost a ``coastal''
opportunity, with very limited opportunities for small
businesses in the Midwest and Plains states. The FAST program
has helped the SBIR program tap the intellectual resources of
small businesses all over the country. We at America's SBDC
consider that a significant benefit.
Thank you again for accepting our testimony.
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