[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.
---------------------------------------------------------------------------
    \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

---------------------------------------------------------------------------
    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.


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    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.

                                 [all]
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