[Senate Hearing 113-386]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 113-386

 
       DRIVING JOB GROWTH: SMALL BUSINESS INNOVATION AND RESEARCH

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

                             FIELD HEARING

                               BEFORE THE

                      COMMITTEE ON SMALL BUSINESS
                          AND ENTREPRENEURSHIP
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 24, 2014

                               __________

    Printed for the Committee on Small Business and Entrepreneurship


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            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                    ONE HUNDRED THIRTEENTH CONGRESS

                              ----------                              
                 MARIA CANTWELL, Washington, Chairwoman
                 JAMES E. RISCH, Idaho, Ranking Member
CARL LEVIN, Michigan                 DAVID VITTER, Louisiana
MARY L. LANDRIEU, Louisiana          MARCO RUBIO, Florida
MARK L. PRYOR, Arkansas              RAND PAUL, Kentucky
BENJAMIN L. CARDIN, Maryland         TIM SCOTT, South Carolina
JEANNE SHAHEEN, New Hampshire        DEB FISCHER, Nebraska
KAY R. HAGAN, North Carolina         MICHAEL B. ENZI, Wyoming
HEIDI HEITKAMP, North Dakota         RON JOHNSON, Wisconsin
EDWARD J. MARKEY, Massachusetts
CORY A. BOOKER, New Jersey
                Jane Campbell, Democratic Staff Director
           Skiffington Holderness, Republican Staff Director


                            C O N T E N T S

                              ----------                              

                           Opening Statements

                                                                   Page

Cantwell, Hon. Maria, Chairwoman, and a U.S. Senator from 
  Washington.....................................................     1

                               Witnesses

Contreras-Sweet, Maria, Administrator, U.S. Small Business 
  Administration, Washington, DC.................................     5
Afzal, Rob, Lockheed Martin Aculight, Bothell, WA................    11
Barry, Robert, Co-Founder and CEO, Stasys Medical Corporation, 
  Kirkland, WA...................................................    15
Rhoads, Linden, Vice Provost, Center for Commercialization, 
  University of Washington, Seattle, WA..........................    20
Brown, Adriane, President and CEO, Intellectual Ventures, 
  Bellevue, WA...................................................    26
Neumann, John, Acting Director, U.S. Government Accountability 
  Office, Washington, DC; accompanied by Hilary M. Benedict, 
  Assistant Director, U.S. Government Accountability Office, 
  Washington, DC.................................................    33
Weed, Russ, UE Technologies, Mukilteo, WA........................    50

                          Alphabetical Listing

Afzal, Rob
    Testimony....................................................    11
    Prepared statement...........................................    13
Barry, Robert
    Testimony....................................................    15
    Prepared statement...........................................    17
Benedict, Hilary M.
    Biography....................................................    49
Brown, Adriane
    Testimony....................................................    26
    Prepared statement...........................................    28
Cantwell, Hon. Maria
    Opening statement............................................     1
    Prepared statement...........................................     4
Contreras-Sweet, Maria
    Testimony....................................................     5
    Prepared statement...........................................     7
Neumann, John
    Testimony....................................................    33
    Prepared statement...........................................    35
Rhoads, Linden
    Testimony....................................................    20
    Prepared statement...........................................    23
Weed, Russ
    Testimony....................................................    50
    Prepared statement...........................................    52


       DRIVING JOB GROWTH: SMALL BUSINESS INNOVATION AND RESEARCH

                              ----------                              


                        THURSDAY, APRIL 24, 2014

                      United States Senate,
                        Committee on Small Business
                                      and Entrepreneurship,
                                                       Seattle, WA.
    The Committee met, pursuant to notice, at 9:30 a.m., in the 
Microsoft Lakefront Pavilion, Museum of History and Industry 
(MOHAI), Hon. Maria Cantwell, Chairman of the Committee, 
presiding.
    Present: Senator Cantwell (presiding).

  OPENING STATEMENT OF HON. MARIA CANTWELL, CHAIRWOMAN, AND A 
                  U.S. SENATOR FROM WASHINGTON

    Chairwoman Cantwell. Good morning. This is the Small 
Business and Entrepreneurship Committee hearing entitled 
Driving Job Growth: Small Business Innovation and Research. We 
have a very distinguished panel of witnesses here today, and I 
thank all of them for being here.
    I am very pleased that Administrator Maria Contreras-Sweet, 
the new Administrator of the Small Business Administration, is 
here to join us to participate in this hearing about how 
innovation and job creation is happening in Washington State.
    This hearing, for me, is part of a two-week listening tour 
around Washington State, including a field hearing that we had 
last week in Vancouver, Washington, on access to capital; a 
contracting and innovation discussion in Pasco that was led by 
the Department of Energy on how to get small businesses to be a 
larger part of the small business contracting program; and 
tomorrow I will be with the ranking member of the committee, 
Senator Risch, in Spokane and Idaho to talk about the STEP 
program, a program administered by the Small Business 
Administration on small business exports.
    After this hearing, Administrator Sweet and I are going to 
the Oso-Darrington-Arlington SR-530 corridor to talk about 
disaster assistance. And I want everyone in the Puget Sound 
area in Washington State to know that upon her confirmation, 
the very first thing the administrator said to me is, ``I want 
to go to the Oso-Darrington area and make sure we're doing 
everything we can as a nation to help that community.''
    So I thank you for that and your willingness to be here in 
Puget Sound.
    When she said she would come and do that, we also thought 
of all the many things that we could ask her to do while she is 
here. But nothing could be more important following the Oso-
Darrington visit than to talk about the innovation economy and 
how much the perspective of entrepreneurs here can help us 
shape the direction of our country.
    Everyone knows that Seattle is the hub of innovation, and 
there's no place like right here at MOHAI to look at that 
innovation. We're here today to talk about how small business 
integrates the key tools to help innovate, in particular, the 
SBIR program, the Small Business Innovation Research Program, 
that requires that federal agencies with large external 
research and development budgets set aside a percentage of that 
funding specifically for small business.
    That funding is used by these innovators to confront and 
address the challenges facing our nation, anything from medical 
diagnostic tools to advanced polymers for energy research. And 
this program, in 2012, amounted to over $2 billion in 
investment in small businesses across the United States.
    The Small Business Technology Transfer Program is similar. 
It also focuses on stimulating partnerships between businesses 
and nonprofit institutions. So I'm sure we'll hear a little bit 
about that today. But when we think about these programs here 
in the Pacific Northwest, you know that we have been 
successful.
    Beginning with a modest SBIR investment through the Health 
and Human Services Department in the early 1990s to explore 
commercial potential for an electronic toothbrush, Optiva 
created what we all know now as Sonicare. The original six 
employees grew to more than 600, and when it was sold in the 
year 2000 to Philips, annual sales were $175 million. So we can 
say that the SBIR program was a big success.
    Small business and innovation ideas have led to many other 
successes here in the Northwest. Today, we're going to hear 
from two of those companies. One is Aculight, which used an 
SBIR defense investment to develop technology to avoid heat-
seeking missiles and commercialized it and grew a firm of six 
employees to more than 100. And we're also going to hear from 
Stasys, a medical device company using SBIR, and UniEnergy 
Technologies, which wants to use SBIR to help facilitate their 
growth.
    So these opportunities are what has helped us here, along 
with the University of Washington and their Center for 
Commercialization. So we're glad they're here to give us a 
global perspective on that, as well as Intellectual Ventures to 
give us a larger perspective on what we need to do to further 
stimulate the innovation economy.
    Obviously, we have some challenges we have to face. Today, 
the Government Accountability Office will discuss a recent 
report which sheds light on the fact that eight out of the 11 
federal agencies participating in the program didn't 
consistently comply with the obligations for small business 
research. In fact, the agency found that overall use of the 
program fell $80 million short of the small business investment 
goal between 2006 and 2011.
    So I know that the administrator and I agree that there's 
more to be done here to make sure that we are getting research 
dollars out to help small businesses create new jobs. That will 
be part of our discussion today.
    I know that we have many things to be thankful for. We're 
also going to hear from businesses who are in the process, or 
should I say want to make sure that the SBIR program works for 
them as well, particularly in the area of energy, which is an 
access to capital issue for many new job creation activities 
here in the Puget Sound area on clean energy products and 
services. So we certainly take to heart what the Government 
Accountability Office says about making sure all agencies, 
including the Department of Energy, meet their goals in small 
business research.
    So with that, I'm going to turn it over to Administrator 
Contreras-Sweet. She's already had bestowed upon her the advent 
of bringing this great sunshine with her.
    So we're very glad you're here, and thank you for coming to 
the Pacific Northwest.
    [The prepared statement of Chairwoman Cantwell follows:]

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 STATEMENT OF MARIA CONTRERAS-SWEET, ADMINISTRATOR, U.S. SMALL 
            BUSINESS ADMINISTRATION, WASHINGTON, DC

    Ms. Contreras-Sweet. Thank you so much. Thank you, Chairman 
Cantwell, for convening this hearing and for your outstanding 
leadership in the United States Senate, not only for America's 
innovators but for the great state of Washington and our entire 
country, indeed. When we think and remember and respect the 
fact that one in two of our people work for a small business 
and two out of three new jobs are created by small businesses, 
we're delighted that you are now at the helm of the United 
States Senate Committee on Small Business. Congratulations once 
again.
    And thank you to the good folks at MOHAI. What a beautiful 
site and how appropriate to have this hearing.
    I'm just pleased to be here in the state of Washington. You 
have been a laboratory for how to create high-tech, high-paying 
jobs of the future. From software to aviation to manufacturing, 
this beautiful evergreen state is showing the world, indeed, 
what the 21st century economic leadership looks like.
    At the SBA, I look forward to working with you to help 
create more success stories like these here in Seattle. But 
nationwide, across every field of innovation, the Small 
Business Innovation Research Program, along with the STTR 
programs, have awarded 145,000 grants totaling more than $35 
billion to America's small businesses. In 2012, these programs 
put over $2.5 billion directly into the hands of small 
businesses.
    SBIR and STTR are true gems, and nowhere is that more 
evident than here in the great state of Washington. We are 
pleased to report that over the last decade, more than 1,100 
small businesses have received 1,800 grants totaling $629 
million. Since the programs' inception, Washington's small 
businesses have received a total of more than $1 billion under 
these two programs alone to spur innovation.
    Additionally, the University of Washington, Washington 
State University, and Gonzaga University have all participated. 
Since 1998, small businesses working with these schools, these 
universities, have received more than 250 STTR grants totaling 
$70 million. These programs have created many success stories 
throughout the state.
    The SBIR, for example, helped Hummingbird Scientific in 
Lacey become a global leader in the design of electron 
microscopes. Their achievements have helped scientists do 
amazing work in fields like 3-D mechanical design, complex 
circuitry, and software development. They have gone from a 
four-person team to employing 25 professionals at their 
facility in Lacey.
    Just up the road, SBIR supported Micronics in Redmond. This 
company patented new technology that lets health professionals 
perform medical tests on the spot and get results in minutes 
versus having to go to a lab and wait hours. And when we're 
talking about medical situations, life-altering situations, we 
know that minutes mean life.
    Madam Chairwoman, these are just two of the successes made 
possible by one of the federal government's most powerful and 
effective programs. I want to take a moment to thank you again 
for your leadership in passing a six-year reauthorization of 
the SBIR and STTR programs in 2011. This long-term 
reauthorization provided certainty and stability for the small 
business community and included a number of improvements to the 
programs.
    Our work to foster innovation through SBIR and STTR is an 
important part of SBA's core mission to ensure that 
entrepreneurs have access to capital, to counseling, and 
contracting opportunities. And, of course, while we don't wish 
this on anybody, and we lament the grim situation that we're 
confronted with here in Oso, we also, as you know, provide 
disaster assistance in times of emergency.
    I'm also focused on exploring new opportunities to expand 
our exports, because we know that where there is global demand 
for cutting edge products and opportunities that are made here 
in Seattle's high-tech corridor, we want to make sure that 
you're able to sell them abroad.
    I look forward to this opportunity to listen to you all 
today. I share your strong commitment to innovation, and 
through SBIR, I think we can work more closely together. I look 
forward to working with you to help our high-tech entrepreneurs 
create excellent jobs, high-paying jobs, economic growth, and a 
better world for all Americans, including you.
    Thank you so much.
    [The prepared statement of Ms. Contreras-Sweet follows:]

    [GRAPHIC] [TIFF OMITTED] T9442.002
    
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    [GRAPHIC] [TIFF OMITTED] T9442.005
    
    Chairwoman Cantwell. Well, thank you, Administrator.
    We will start with our witnesses, and we're going to just 
go right down the line. So if you'll introduce yourself along 
with your testimony, we appreciate it, and we'll do questions 
with all of you at the end of everyone's testimony.

 STATEMENT OF ROB AFZAL, LOCKHEED MARTIN ACULIGHT, BOTHELL, WA

    Dr. Afzal. Thank you, Administrator Contreras-Sweet and 
Senator Cantwell, for inviting me down.
    Chairwoman Cantwell. You might pull that a little closer.
    Dr. Afzal. Is that better?
    Chairwoman Cantwell. Yes.
    Dr. Afzal. My name is Robert Afzal, and I'm a senior 
technical fellow at Lockheed Martin Aculight Corporation and 
formerly the Vice President of Research and Development at 
Aculight Corporation in Bothell, Washington.
    In 1994, Aculight Corporation was founded by five 
scientists after being laid off from another company following 
the fall of the Berlin Wall and the end of the Strategic 
Defense Initiative Program, or at least its reduction in 
funding. Not wanting to leave the beautiful Pacific Northwest, 
they started a company to focus on research and development on 
lasers for aerospace and defense but with an eye towards one 
day commercializing their laser technology.
    They started off by doing studies and analysis and slowly 
but surely their business grew as they continued to secure 
contracts from the United States government and from the prime 
aerospace corporations. As they hired more scientists, 
engineers, and technicians, they secured more contracts and 
were able to establish development laboratories to build 
hardware and prototypes to validate their ideas.
    Their core business was creating and generating new ideas 
in lasers and electro-optics to be demonstrated in experiments 
and prototypes to serve the United States government and prime 
contractors. They were able to focus their core laser 
technology to the applications for infrared counter measures, 
which is the defeat of heat-seeking missiles; 3-D airborne 
lidar mapping to generate high resolution maps for geospatial 
information systems; and for directed energy lasers for our 
next generation weapons capability. These are still core 
applications that we are working today.
    The SBIR program played a crucial role in the development 
of Aculight and the development of the technology in two 
tangible ways. First was the SBIR call for topics. This was a 
way for the United States government departments to communicate 
their needs so that small, innovative businesses could bring 
their ideas forward and establish relevancy.
    This method helps ensure the innovative ideas brought 
forward are related to the national need. Second and most 
importantly, it provided the funding to develop the ideas 
further, and in the cases of Phase II and Phase III, funding to 
demonstrate the ideas in tangible proof of concept 
demonstrations.
    Although the SBIR Program did not provide sufficient funds 
to fully develop a product for production, it did enable the 
product to be developed to a point where the risk of product 
development was significantly reduced for further investment 
paths such as equity capital or partnerships with larger 
corporations. That said, at Aculight, there were two examples 
of how SBIR programs led directly to products that were 
developed and sold to the market.
    First, leveraging an Air Force SBIR for pulse fiber lasers 
for target identification, Aculight was able to develop and 
sell a similar laser for the airborne laser mapping market. 
These lasers are sold throughout the world and are helping 
generate foundational data for geospatial information systems 
used today. Second, leveraging an SBIR from the Missile Defense 
Agency, Aculight developed a product which is still being sold 
to universities and research labs worldwide for groundbreaking 
scientific research in the area of spectroscopy, including some 
of the Nobel Prize winning labs.
    As successful as those examples are, as Aculight continued 
to mature its concepts and technology, its targeting for 
acquisition by Lockheed Martin is an even larger measure of its 
success. In September of 2008, Lockheed Martin acquired 
Aculight, and now the innovative small company has the strength 
and resources to bring those ideas and technology to bear to 
address our pressing national needs.
    We have continued to develop and advance those core 
technologies, but now have the opportunity to bring them to 
support our warfighters. At that time, Aculight was 85 people 
and has now grown to over 120 locally, and we are continuing to 
hire.
    Lockheed Martin has brought in many tens of millions of 
dollars in contracts that are feeding the economy for jobs in 
Washington State, but also supporting work at other Lockheed 
facilities throughout the country. Now, as a prime, we are 
looking back into the SBIR program and looking at those new 
small innovative businesses developing the next generation of 
solutions that we can one day utilize.
    The SBIR program helped enable our growth. It provided a 
playing field where small innovative companies could respond to 
national needs and where the marketplace of ideas can bear them 
out. It provides an additional funding pathway that's not tied 
to equity investment and, more importantly, has the patience to 
advance technology with a somewhat longer time scale.
    Thank you very much.
    [The prepared statement of Dr. Afzal follows:]

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    [GRAPHIC] [TIFF OMITTED] T9442.007
    
    Chairwoman Cantwell. Thank you very much.
    Mr. Barry.

 STATEMENT OF ROBERT BARRY, CO-FOUNDER AND CEO, STASYS MEDICAL 
                   CORPORATION, KIRKLAND, WA

    Mr. Barry. Thank you for the opportunity to discuss SBIR 
and how it has helped companies like Stasys Medical. My name is 
Robert Barry. I'm the Co-Founder and CEO of Stasys Medical 
Corporation. I am also an entrepreneur in residence at the 
University of Washington. I have 25-plus years of medical 
device experience. I've worked for large companies like Pfizer 
and Boston Scientific, and I've also started three medical 
device companies here in the Seattle area.
    I do have experience with SBIR grants, as well as private 
capital and seed funding, angel funding, and venture capital 
funding, most recently founding Stasys Medical Corporation, 
which was a spinout from the University of Washington, with two 
other co-founders, Dr. Nathan White, who is a trauma physician 
at Harborview here in Seattle, and Dr. Nate Sniadecki, who is a 
professor of mechanical engineering at the University of 
Washington.
    The company was started on a clinical need, and that 
clinical need was brought to us by Dr. Nathan White, who works 
in the emergency room at Harborview and was frustrated by the 
fact that as patients showed up who were bleeding, it was 
difficult to determine if they had clot dysfunction, and, if 
so, why. There are tests that determine clot dysfunction, but 
those tests are lab-based tests, and they take quite a while, 
up to a half an hour to obtain. We all know that in trauma, 30 
minutes is too long.
    In working with Professor Nate Sniadecki at the University 
of Washington, Nate White was able to basically develop 
technology, microfluidic and micropost technology, that enabled 
measuring clot dysfunction within minutes. We are currently 
working on that technology. I would like to say that in the 
very beginning, as this technology was being developed, the 
Center for Commercialization, along with Coulter Foundation and 
the Life Sciences Discovery Fund, helped to support the initial 
development of the base technology.
    Once that was done, we then formed a company, and that's 
when I became involved. Looking at the business opportunity, as 
I did due diligence on whether or not this was a viable 
commercial entity, there were several things that really struck 
me about this particular opportunity. It's a 510(k), which, if 
you're familiar with 510(k), means that the regulatory path is 
rather short. The reimbursement is in place with the current 
lab-based tests. So the time to get to revenue is also fairly 
short.
    And, finally, the technology did not require a tremendous 
amount of capital, and yet there is the opportunity for several 
hundred million dollars per year of revenue. So it's a good 
business opportunity, and I think a high-growth potential for 
the Seattle community.
    We have received an SBIR grant, Phase I NSF grant, for 
$150,000. We received that in January of 2014. We are currently 
applying for a Phase II grant for approximately $1 million and 
are hoping to obtain that. We think that the SBIR grant is 
crucial for us, and I say that having been in this industry for 
a long time and having seen the decline in private capital 
wanting to invest in early medical device companies.
    In fact, in the last five years, there's been over a 50 
percent reduction in private capital for early medical device 
companies. That is why I feel that now, more than ever, the 
SBIR grants can help to fill that gap, to de-risk companies and 
help them develop to the point where then they can obtain the 
private capital in the Series A round, which then helps to 
really launch the project and the company quickly forward to 
become a provider of valuable jobs for the region.
    Thank you.
    [The prepared statement of Mr. Barry follows:]

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    Chairwoman Cantwell. Thank you very much.
    Linden, welcome and thank you for your work at the 
university.

     STATEMENT OF LINDEN RHOADS, VICE PROVOST, CENTER FOR 
    COMMERCIALIZATION, UNIVERSITY OF WASHINGTON, SEATTLE, WA

    Ms. Rhoads. Thank you. My name is Linden Rhoads, and I 
would like to thank Senator Cantwell and Ms. Contreras-Sweet 
for the opportunity to present today on behalf of the 
University of Washington.
    I spent two decades as a technology entrepreneur and am now 
a Vice Provost at UW and lead the university's Center for 
Commercialization, known as C4C. I'm here to express gratitude 
for how the SBIR program is working to help one of America's 
leading public research universities really fulfill the promise 
of seeing our researchers' discoveries reach patients and 
society.
    Over the past five years, C4C staff have helped UW startups 
win $20.5 million in SBIR-STTR grants, and we have another $10 
million of proposals filed and pending. These grants provide a 
critical bridge to private investment for our university life 
science, materials, and technology startups.
    C4C is more than tech transfer for the University of 
Washington. Five years ago, the university reorganized Tech 
Transfer into C4C to provide the greater assistance and 
functions, mentorship, talent recruitment, and, above all, of 
course, funding necessary if UW was really to emphasize spinout 
of startup companies around our innovations rather than rely on 
license to larger existing companies, which isn't always an 
available option, even if we wished that it were.
    We have built an extensive ecosystem for innovation 
entrepreneurship around the UW, recruiting, by way of example, 
veteran entrepreneurs such as--to be entrepreneurs in residence 
such as Bob Barry, who just gave testimony. But talent is 
really not enough. So as part of our gap funding initiatives, I 
think we're unique as a university perhaps in providing a full 
time grant writer to help UW startup teams apply for SBIR and 
STTR grants.
    In interrogating researchers who we thought should be 
eligible for this kind of support, we found that they didn't 
understand SBIR grants nearly as well as we might expect, 
despite the fact that their primary career is based on winning 
research grants. The process and focus of these proposals is 
different enough from those for basic research grants that C4C 
is able to provide real assistance to our researchers in 
pursuing these funding opportunities. And, as I said, over the 
last five years, we've provided direct assistance to our 
startups in winning over $20 million in SBIR and STTR, with 
great results.
    The University of Washington is currently ranked number one 
in the nation for licenses executed annually. That's to 
startups and existing companies together. We were number one 
for the number of distinct innovations under license, so we 
don't only have one lucky technology that's being licensed 
hundreds of times. Probably, though, most importantly for our 
regional economy and our faculty, who care deeply about the 
opportunity to start companies around their work, last year, we 
were suddenly among the top five universities in the United 
States for launching startups.
    We launched 17 technology startups last year, and that was 
more than double UW's 10-year run rate of seven, on average. We 
are on track to launch another 17 this fiscal year which ends 
in just a few months--so a really big change with the support 
of SBIR.
    C4C supported startups are qualitatively improved from the 
past. On average, they have larger target markets, customer 
validation, more experienced management, and they're more 
worthy of funding. But the reality is that they are still often 
painfully early in stage, and SBIR and STTR awards are often 
the only capital that makes it possible for university founders 
and outside talent to take that pivotal step, to decide to take 
the risk, and to convince their families to allow them, and 
alongside them take the risk of committing themselves to the 
risky endeavor of starting up a company, suffering the 
opportunity cost of dedicating themselves to the success of a 
new company.
    I think the key aspects to UW's success in spinning out 
companies are, first and foremost, a world class research base; 
our expert commercialization staff, which includes this life 
science PhD grant writer; deep engagement of our business 
community, as well as our researchers and students; and gap 
funding.
    A persistent challenge to technology startups in our region 
is this dearth of early-stage funding that I'm sure you hear 
about early and often. In Washington, the angel and venture 
communities mirror our industry, and they're strongest in 
software, in retail, and in e-commerce. There are sector 
specialized angel groups for clean tech and medical device that 
are increasingly active. But it is just so much harder to raise 
money in life sciences or material science, despite the fact 
that we have a proliferation of innovations in those areas at 
UW.
    For startups in the life sciences, there is a painfully 
predictable valley of death between the point to which NIH will 
fund and the proof of concept that we all know investors 
require to risk their capital. For startups in a nascent 
sector, such as clean tech, where it's often unclear whether 
technology is proven to perform technically and scientifically 
and better for the environment, can compete on price in the 
marketplace. There's no carbon tax yet. In sectors where there 
is this much uncertainty, investors have a hard time 
understanding which investments won't be strategic 
philanthropy. Young companies really need SBIR grants to give 
them the time to make that necessary showing of venture 
worthiness.
    I think the funding gap actually has many dimensions, and 
our startups and their investors try to formulate an overall 
funding plan. UW C4C has somewhat of a variety of funding 
entities and strategies to address the gap. Bob Barry mentioned 
a number of foundations that we actually work together with to 
provide a combined funding initiative, where we all grant in 
concert so that instead of spreading out money in such a 
dispersed way that no startups actually get over the line, we 
are making our bets collectively on the best opportunities.
    However, while we have a significant budget at UW to 
provide up to $50,000 in commercialization grants and support 
while the project is inside the university, we took the 
extraordinary step of a big effort that resulted in a venture 
fund, university affiliated, committed to--the W Fund, which I 
run for UW--committed to investing exclusively in innovation-
based startups spinning out of the research institutions in 
Washington State.
    I thought it was worth mentioning that even where a 
university has taken the step of raising its own affiliated 
venture fund, at least half of the W Fund investments--and I 
think more--went to SBIR recipients. So we were investing 
alongside companies that had the benefit of SBIR support.
    SBIR provides what I call but-for non-diluted capital to 
our technology startups. Often, this SBIR award is the only 
capital that really enabled us to launch the company that led 
us to 17 companies last year. An SBIR or STTR award helps 
technology startup companies go on to raise private risk 
capital.
    I've seen that angel investors see an advantage, not only 
in believing that there'll be a leverage effect on their own 
investment, because the money will take that company much 
further alongside federal money, and the runway for that 
company to make progress is that much more significant, but 
also they believe in the technical validation that an SBIR or 
STTR award provides.
    Finally, it's occurred to me that to produce even more 
impact from investments in the SBIR and STTR programs, I'd love 
for us to think about a way where the federal government could 
give preference to those companies that don't plan to remain an 
R and D operation, but can demonstrate that they are actively 
pursuing private investment to fund growth and to reach 
patients in the marketplace. We have numerous examples of UW 
spinouts which I see as having fulfilled the promise of SBIR in 
that they leveraged your critical federal support to hire 
talent, but then went on to succeed in garnering risk capital 
and traction with development partners and customers.
    Thank you.
    [The prepared statement of Ms. Rhoads follows:]

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    Chairwoman Cantwell. Thank you very much.
    Adriane, welcome.
    I'm sorry about the microphones here, so thank you for 
everybody sharing.

  STATEMENT OF ADRIANE BROWN, PRESIDENT AND COO, INTELLECTUAL 
                     VENTURES, BELLEVUE, WA

    Ms. Brown. My name is Adriane Brown. On behalf of 
Intellectual Ventures, I would like to thank Senator Cantwell 
and the Senate Committee on Small Business and Entrepreneurship 
for the opportunity to speak today on the subjects of 
innovation, job growth, the invention economy in the Pacific 
Northwest, and how government can best support innovation. I'd 
also like to welcome Administrator Contreras-Sweet to our 
region and thank her for her leadership. Your combined 
commitment to fostering our region's iconic and dynamic high-
tech economy is extraordinarily important.
    I'd like to briefly introduce Intellectual Ventures and our 
work to the committee and make three points about the invention 
economy based on our experience. Intellectual Ventures is an 
invention capital company and is the global leader in the 
business of invention. We believe ideas are valuable, and we're 
not alone. According to the U.S. Commerce Department, IP-
intensive industries currently contribute more than $5 trillion 
per year or nearly 35 percent of the U.S. GDP.
    Our mission is to energize and streamline the invention 
economy in a manner which allows us to generate a return on our 
invested capital, and which should also allow others to be 
motivated to invest their capital into the invention economy in 
expectation of earning a return as well.
    My first point: We recognize the value of feeding the 
invention economy and encourage the committee to support a 
variety of business models that fuel the marketplace of 
invention. Intellectual Ventures manages more than $6 billion 
in committed capital and has paid more than $720 million to 
startups and small businesses, as well as more than half a 
billion dollars to individual inventors since 2000, and we will 
continue to do so.
    One of the questions we are asked frequently is why 
invention matters. The old proverb often ascribed to Plato says 
``necessity is the mother of invention.'' The constant need to 
make faster, smaller, cheaper, better versions of nearly 
everything requires constant innovation, which leads to a 
continuous cycle of invention.
    Most people don't realize that smartphones contain, on 
average, 25,000 to 30,000 patents and innovations. That's a 
mountain of technology and intellectual property to either 
protect or access from many sources. It's critical for there to 
be a marketplace that represents and rewards innovation and 
intellectual property rights accordingly.
    Inventors want to be paid for their work, companies of all 
sizes want to be able to make a return on their invention 
investments, and universities, like our own University of 
Washington, one of the world's foremost research institutions 
that you've just heard about, want to further their research 
and development programs. I urge this committee and the SBA to 
do everything possible to keep the invention economy vibrant by 
supporting startups and small businesses that thrive because of 
investments in patents and intellectual property and benefit 
from grant programs like the SBA's SBIR grants.
    My second point: Intellectual Ventures is also creating 
companies, jobs, and public good through innovation. Two 
examples with local impact are Kymeta and TerraPower. Kymeta, a 
2012 spinout from Intellectual Ventures, currently employs more 
than 100 people in Redmond, Washington, and is focused on 
commercializing a new, innovative, metamaterials-based antenna 
for satellite communications. TerraPower, a nuclear energy 
company based on early IV inventions, employs more than 80 
people in Bellevue, Washington. And, finally, our Passive 
Vaccine Storage Device, which is on display here in MOHAI, is 
one of our Global Good inventions that enables medical 
professionals to reach remote health posts and treat people, 
especially children, throughout the developing world. I urge 
this committee and the SBA to make it possible for companies to 
continue to create jobs and public good through invention.
    My last point: Our startup initiative allows us to bring 
our network of more than 4,000 inventors to bear on ideas and 
growth opportunities for small businesses, joint ventures, and 
spinouts based on our customers' interests and our portfolio of 
technologies. We also support the SURF Incubator, a local 
Pacific Northwest initiative that fuels local innovation. Our 
work together has allowed us to develop a rich pipeline of 
opportunities that we are exploring.
    The future of innovation remains bright, and we continue to 
invest in research and development efforts on multiple fronts. 
We encourage the committee and the SBA to continue to support 
policies and programs which allow for investment and 
partnership in startups and incubator programs like those I 
have highlighted here in the Pacific Northwest.
    So, in summary, Intellectual Ventures is committed to the 
invention economy, and it is our hope that this committee and 
the SBA, as well as Congress overall, will continue to support 
a strong invention economy. So thank you, Chairwoman Cantwell 
and Administrator Contreras-Sweet and all of the members of the 
committee here today.
    [The prepared statement of Ms. Brown follows:]

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    Chairwoman Cantwell. Thank you.
    John.

  STATEMENT OF JOHN NEUMANN, ACTING DIRECTOR, U.S. GOVERNMENT 
ACCOUNTABILITY OFFICE, WASHINGTON, DC; ACCOMPANIED BY HILARY M. 
 BENEDICT, ASSISTANT DIRECTOR, U.S. GOVERNMENT ACCOUNTABILITY 
                     OFFICE, WASHINGTON, DC

    Mr. Neumann. Chairwoman Cantwell and Madam Administrator, 
my name is John Neumann, and I'm an Acting Director with the 
U.S. Government Accountability Office leading our portfolio of 
audits related to the science and technology area. I am pleased 
to be here today with my colleague, Ms. Hilary Benedict, to 
discuss our recent work on federal small business research 
programs.
    As you know, the Small Business Innovation Research 
Program, SBIR, and the Small Business Technology Transfer 
Program, STTR, were established to use small businesses to meet 
federal research and development needs. Since their inception, 
federal agencies have awarded about 150,000 contracts and 
grants totaling nearly $40 billion to small businesses to 
develop and commercialize innovative technologies.
    As you mentioned, currently, 11 federal agencies 
participate in SBIR and five participate in STTR based on their 
annual budget for research and development conducted outside of 
the government, including at private companies and 
universities. This morning, I would like to briefly highlight 
two key points from our September 2013 report on these 
programs.
    First, when we reviewed data from fiscal years 2006 to 2011 
from the agencies that participated in these programs, we found 
that most did not consistently comply with spending 
requirements. Specifically, eight of the 11 agencies that 
participated in SBIR and four of the five that participated in 
STTR did not comply with spending requirements for all of the 
six years we looked at. Some of the agencies cited difficulties 
in spending the required amounts each year, particularly when 
their appropriations were late, which, in turn, delayed their 
contract awards to small businesses, among other reasons.
    Second, in our 2013 report, we also found that 
participating agencies had not consistently complied with 
certain annual reporting requirements. For example, the 
majority of the agencies did not itemize each program that they 
excluded from their calculations for their extramural research 
and development budgets as required by SBA policy directives.
    This made it difficult for SBA to determine whether 
agencies were accurately calculating their spending 
requirements. SBA did not always know which research and 
development programs the agencies excluded and why they were 
excluded.
    I also want to note that we made several recommendations to 
SBA to address our findings, including recommending that it 
provide guidance to participating agencies to improve their 
compliance with spending and reporting requirements, as well as 
to increase transparency in SBA's reports to Congress. We 
understand that SBA is in the process of addressing these 
recommendations.
    Chairwoman Cantwell and Madam Administrator, this concludes 
my prepared statement. But my colleague and I are pleased to 
respond to any questions you have about our work.
    [The prepared statement of Mr. Neumann and Ms. Benedict 
follows:]

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    Chairwoman Cantwell. Thank you.
    Mr. Weed.

     STATEMENT OF RUSS WEED, UE TECHNOLOGIES, MUKILTEO, WA

    Mr. Weed. Thank you, Senator Cantwell, Administrator 
Contreras-Sweet, and your staffs and MOHAI for the opportunity 
to speak today on the importance of small business innovation 
and research, including the SBIR program, driving job growth 
through commercialization.
    My name is Russ Weed. I'm the VP of Business Development 
for UniEnergy Technologies based in Mukilteo, Washington, and 
also its general counsel. UniEnergy Technologies, or UET for 
short, manufactures and delivers large-scale energy storage 
systems for utility and grid, micro-grid, commercial and 
industrial, and other applications. The core technology is an 
advanced vanadium, element number 23, flow battery, with its 
technology origins at the Pacific Northwest National Laboratory 
here in Washington State, with funding from the Office of 
Electricity at the U.S. DOE.
    Because of the critical problems solved by the technology 
developed at PNNL, and with the support of a multinational 
private equity group, the PNNL energy storage program leader, 
who is here today, and his chief scientist came out from the 
lab and formed UET in March 2012. UET agreed upon a license 
agreement with PNNL and, fortunately, with full funding, put in 
place a world-class engineering, manufacturing, and business 
team which has designed and delivered a commercial product now 
available for sale in just two years.
    I've brought for you an impromptu picture taken yesterday 
of one of our Uni.Systems--it's on the front corner of your 
table there--which at the end of this year will be installed at 
a distribution substation for a Washington State utility. As I 
said, this was an impromptu photo with the short amount of 
time. This is a utility class system, storing a large amount of 
energy, up to a maximum of 1.8 megawatt hours, with a peak 
power of 600 kilowatts.
    With further research and development, including supported 
by SBIR and other SBA programs, as I will further comment on, 
we plan for our system's performance measures to grow further 
in scale. Our constant objective is to increase the cost-
benefit effectiveness of energy storage, called the holy grail 
for the grid for some years, before the concept of a smart grid 
arrived on the scene. It is imperative for the integration of 
renewably-generated energy, implementation of the smart grid, 
and our clean energy future that our utility and other large-
scale energy systems have the ability to buffer energy supply 
and demand, from millisecond bursts to hours-long, even day-
long shifts, in other words, to have utility-class energy 
storage.
    UET has a 67,000 square foot engineering and manufacturing 
facility in Mukilteo, about 30 minutes north of here next to 
Boeing's Paine Field. We are scaling up to produce 100 
megawatts of advanced vanadium flow batteries annually.
    As you can see from the second photo I brought, again taken 
impromptu yesterday, presently we are 40 people, scaling up to 
about 100 people by the end of 2015. This includes scientists, 
engineers, technicians, and business people. We are a capital 
equipment manufacturing company, as you can see--these are big 
systems--with our biggest employment need now being 
technicians, mechanical, electrical, and other skilled 
technicians.
    Thus, we are working closely with local community colleges 
that either have or will have programs producing the 
technicians we need. UET is very glad and proud to be growing 
skilled manufacturing jobs in Washington State with family 
wages and health care.
    Of course, UET is only one company in the clean tech 
cluster growing here in the evergreen state. It is important 
for us to acknowledge UET has gotten to this point and will 
only go further with the critical help of our partners in 
ecosystem. That includes the DOE, PNNL, the Washington Clean 
Technology Alliance, whose president is here today, the 
Washington State Department of Commerce, Avista Utilities, 
Snohomish Public Utility District, Energy Northwest, Puget 
Sound Energy, and the Trade Development Alliance.
    While UET is a manufacturer of large-scale energy storage 
systems for commercial use, we are a product company. We were 
not, at the beginning of the company, a research company. 
Nonetheless, we aim to keep and hopefully extend our technology 
lead by continuing to press ahead with our R and D efforts. The 
UET R and D team has eight PhDs who are pushing night and day, 
literally, on innovation related to energy storage systems, 
stacks, which are large-scale electrodes in flow batteries, 
electrolyte for flow batteries, and controls, among other 
areas.
    Two research projects we have in mind for SBIR funding are 
the cost-benefit effective combination of energy storage and 
solar generation, and the full automation of manufacturing of 
stacks which could enable on-shoring of production in the 
United States. With real megawatt-sized projects soon in 
Washington State, UET will have the ``iron in the ground'' to 
show we would use SBIR and other SBA funds for a sound business 
purpose, to reference Linden's comments on the challenge of 
clean tech companies making this showing, and we are very 
pleased that we will be able to do so.
    Then we will need to work through some of the Small 
Business eligibility requirements, such as the size standards 
of 1,000 employees for primary battery manufacturing, but 500 
employees for storage battery manufacturing. We look forward to 
that process and would very much appreciate your help as we do 
so.
    Thank you again for the opportunity to speak today on 
behalf of UET, and please let me invite you, Senator Cantwell, 
Administrator Contreras-Sweet, and your staffs, to visit UET's 
facility just a bit north of here.
    [The prepared statement of Mr. Weed follows:]

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    Chairwoman Cantwell. Well, thank you all very much for your 
ability to paint a picture of the opportunity and challenges 
that we face and for your specific recommendations on SBIR and 
small business programs. You know, I'm struck by some of the 
very specific things that each of you have said.
    I don't know, Administrator, if you wanted to start with 
the questioning.
    Ms. Contreras-Sweet. I have a couple of questions, but 
please, go ahead.
    Chairwoman Cantwell. Thank you.
    Adriane, you talked about 35 percent of our GDP based on 
innovation. And Linden specifically pointed out that this was 
about negating the risk that the rest of the market--that SBIR 
is basically taking the risk out of the first phase of the 
investment that Level A funding isn't willing to do.
    So my question is how do we categorize the right amount of 
investment by our country in SBIR? Because I would say, looking 
at what you guys are presenting today, and Linden, what you 
just talked about with your incredible success at the 
University of Washington, we should be doing more. And who's to 
say that that 35 percent couldn't be 40 percent if we made the 
right level of investment?
    Ms. Rhoads. You know, it occurs to me that there's a common 
platitude among venture capitalists that's pretty self-serving 
to existing venture capitalists, that they often say that for a 
good idea, there's always capital, and you're going to find it. 
And I guess I can say that from my chair at the University of 
Washington, we see venture worthy--you know, good ideas that 
are very close to proof of concept or have rudimentary proof of 
concept that we think would be successful in the marketplace 
not find that early stage funding and die on the vine all the 
time, or not find it in time and lose all momentum, because the 
recent PhDs can't wait around and have to take that academic 
job or that job in industry, sometimes even to stay in the 
country.
    So, I mean, if we're asking is there more unfulfilled 
potential, are there additional opportunities that if they only 
had seen even a few hundred thousand dollars in early stage 
funding might have become successful companies bringing 
innovation to our country, I think the answer is yes. So I 
think we're underserved today.
    Chairwoman Cantwell. Is there any way to quantify that?
    Ms. Brown. I don't know that we can quantify it, but when I 
look at the variety of sources that a startup might have access 
to, particularly when they have been investing in inventions 
that support their business, sometimes we have found that 
they've invented some things that they didn't need along the 
way. And a company like Intellectual Ventures or others might 
be able to fulfill some value for those inventions which helps.
    But there's nothing like the kind of support that SBIR can 
give where--what did you say that it was?
    Ms. Rhoads. But for.
    Ms. Brown. The more that we can increase this and find ways 
to step it, the more we'll see an increase in economic 
outcomes.
    Chairwoman Cantwell. Well, I think to your point, Rob 
mentioned the LIDAR technology. I can guarantee you when we get 
to Oso, you're going to see a LIDAR map of the challenges that 
we face in rebuilding there because of the potential for 
mudslides in the future. And that LIDAR mapping, as you said, 
was not what he was exactly going for to begin with, but ended 
up with that technology as well. So there is something to be 
said for that.
    Robert, you mentioned taking risk out of the equation. How 
would you judge the level of investment for SBIR, given--you 
know, what we're trying to do in the future is lower health 
care costs and keep pace with the level of invention that we 
can do in the medical area.
    Mr. Barry. As I mentioned, there has been quite a drop in 
the early investment of private capital. On the late end of 
private capital for medical devices and biotech, the investment 
has been okay. It's maintained. But those companies are much 
closer to--there's much less risk on the investment because 
it's usually developed, there's usually revenue, and they're 
closer to an exit.
    So if you take the early companies, you have to be willing 
to look at an investment over a longer period of time, say, on 
average, 10 years. And many of the venture capital funds today 
are just not geared for those longer-term investments. They're 
looking for the shorter-term investments to get--to prop up 
their funds so that they can raise more funds. That's been part 
of the issue with the inability or the unwillingness of venture 
capital funds, especially to fund the early companies.
    So I think, as I said, now more than ever, the SBIR grants 
to get a company ready for Series A are very important. And 
what I mean by that is it's basically trying to take out as 
much risk to the investor as efficiently as you can prior to 
them coming in. So the less risk, the more things that you've 
ticked off in terms of does it work, can it be built, is there 
a market, the more likely those investors are to come in.
    Chairwoman Cantwell. Administrator.
    Ms. Contreras-Sweet. Thank you. I thank you again for your 
good stories. They're so important to us. You know, with 
competing priorities and interests and limiting resources, it's 
important for us to show the why of what you're doing. And so 
to the extent that you can track longitudinally--and I really 
appreciate that each of you talked about your job creation. So 
I think it's important for you to continue to track that 
longitudinally so we can make a case for these resources. So 
thank you, number one, for that.
    Number two, what I wanted to say is that I would hope that 
along the way, wealth should not be a prerequisite to creating 
innovation. So I've always concerned myself, having had just a 
little stint in investments--I've concerned myself that, you 
know, the question was always, ``Well, how much skin in the 
game do you have? How do we make sure that you're invested if 
I'm going to invest in you?''
    So I think that this program helps to address some of those 
issues. So I'd want to know about how that works in that 
regard, because I want to make sure that all people can be 
innovators, and if they don't have skin in the game, if they 
don't have the initial anchor investment, they can still spur 
activity in innovation. So I'm concerned about that.
    Third, what I'd like to know--and I'm just sort of throwing 
these out, generally speaking. What I'd like to learn from you 
if any of you could address this third question, which is: How 
did you learn about our programs? Because I want to know if 
we're getting the information out to the vast audiences that we 
should be reaching to make sure that we're allowing everybody 
to invent, to innovate. And if they're not in a university, how 
do we get out to them?
    So I'd be interested, just generally, in those three areas 
of commentary, because I want to make sure that I can come back 
and learn about how we can continue to promote SBIR. Again, the 
notion was not that we wanted to put a cap. It was supposed to 
be a floor. If universities and other agencies can actually 
promote more, then we want them to allow small businesses to 
spur.
    We know that small businesses, as I said at the top of my 
comments, are the innovators of job creation. And so I would 
hope that to the extent that you all can partner with us--you 
know, I'm a sales person at heart, and if I don't call for the 
sale, you know, you don't make the sale. So I really think it's 
important for all of us to collaborate and to agree that we're 
going to help promote programs like this so that they're 
funded, that all people can access the programs, and that 
they're getting the right return on investment.
    So if you could just--you know, each of you sort of 
addressed job creation. But if you could help me address those 
questions, I'd really appreciate it.
    Dr. Afzal. Maybe I can address job creation almost from a--
looking back from a large corporation, now that I look at 
things from that perspective. Decades ago, the large 
corporations in America had very extensive, deep research labs 
that did fundamental research--Bell Labs, for example, IBM, et 
cetera. Much of that has gone away, not completely, but what's 
opened up is a marketplace for the new ideas, and it's really 
in the small businesses. They can take the risk. They can 
generate new ideas, and as they blossom, then they can be 
brought to market, either by acquisition by a large corporation 
to be brought into their space, or they get venture funding and 
grow their company. Either way, that is the validation of the 
ideas. It brings the products forward, and then, ultimately, 
that leads to jobs.
    So it's critical that we now have kind of a new paradigm in 
how R and D research, new product development, invention is 
being done, and it's not just stove-piped within corporations 
that then only feed themselves.
    Chairwoman Cantwell. So research is flat, too.
    Dr. Afzal. Yes. That's unfortunate.
    Chairwoman Cantwell. Well, no, I don't mean flat as in a 
budget perspective.
    Dr. Afzal. Oh, I see.
    Chairwoman Cantwell. I mean if everything is becoming more, 
you know--horizontal research, you're saying, has become or 
needs to become, because it's not as hierarchical as it used to 
be, given the investments.
    Dr. Afzal. Absolutely. Yes.
    Mr. Barry. Maybe a way to talk about this is the last 
company that I started, Uptake Medical. We raised $70 million 
from venture capitalists. The company was started here in 
Seattle. This was before I was aware of things like SBIR. I 
went out and raised angel money, a million and a half dollars, 
which was great, and we were able to get the company started on 
that.
    However, as you come to learn, you lose ownership. So 
another important point about SBIRs is that they're non-
dilutive, and that's an important aspect when you talk about 
whether the company that you start will remain in Seattle. In 
this case, I'll be selfish here. We're in Seattle. Will it 
remain in Seattle?
    There will be forces that will want to move the company 
closer to the venture capitalists who have the ownership. The 
only way to resist that is for the co-founders of the company 
to maintain ownership. So I think that's another really 
important aspect of the SBIR program, and it helps to keep jobs 
in this region.
    As I mentioned, in the last company, yes, we've maintained 
the technical group here in Seattle, which is only a handful of 
people. There are 25 people that are employed with very good 
jobs, high-paying jobs, in California, unfortunately, rather 
than in Washington.
    Ms. Rhoads. Well, I remember what didn't work. I mean, 
there used to be an economic development agency with some state 
funding. TASK was going out and promoting SBIR. And I explored 
that before deciding to dedicate a full time position to 
popularizing and assisting with SBIR application in our office. 
I think very few universities have a large enough research 
enterprise or commercialization budget to use as their 
strategy. We're fortunate in that regard.
    And what they were doing was going around and giving 
seminars. I have to tell you that post-seminar, even if you 
made your way to one of them, it remains a daunting and obscure 
universe to think about how to go about applying for these 
grants. And it's challenging for the university world. I mean, 
SBIR is invaluable, as I said, but still imperfect, because the 
grants are small compared to many basic research grants.
    So if we're trying to prevail upon a principal investigator 
to take some of the time that they might be using to try to win 
a research grant from the NIH to keep their very large research 
organization going, and if the percentage opportunity of 
winning them is lower, they don't often see the merits to 
trying.
    And, also, there's confusion over whether there will need 
to be a full time person available to be inside the company or 
the new co if the award is won and how that will be structured 
and how equity will be divided. And without a lot of coaching, 
sometimes there's fear around whether a team might lose control 
of their invention.
    I see SBIR as invaluable because we're working very hard to 
recruit the talent necessary to pair with our great innovations 
if we're going to see a successful spinout. And, often, even if 
we find talent that has had success in the past, they do need 
to be paid something, and these companies aren't at a point 
where they can raise any private money now.
    And we also have this phenomenon we call the great PhD 
diaspora, which is that suddenly someone has won their PhD, and 
there's another six months or a year it's going to take to 
really get that technology, which they spent three years 
working on alongside their research faculty, to a point at 
which it could attract risk capital. But they need a job now, 
maybe even to have a visa so they can stay in the country now.
    If they leave, sometimes all momentum will be lost, because 
there isn't anyone else in that research group within the 
university who would be the right person to be part of a four 
or five-person early stage team, as the person really familiar 
with the technology, and maybe investors won't see the 
principal investigator, the faculty member, deciding to be 
willing to be a chief scientific advisor for when--and the 
university is quite reassuring enough, I think, often for good 
reason.
    So if we don't have some mechanism to keep the Robert 
Barrys, you know, foregoing all of the more secure and 
immediately remunerative opportunities that they might take on, 
or these recent PhDs working on this project, the opportunity 
is gone. And the shame of that to me is always that we're going 
to see maybe millions of dollars in federal funding that led to 
something that could have potentially been very useful to 
society wasted, if you want to look at it that way.
    So at any rate, I think there's, you know, changes that 
could be made to make it clearer how you staff an SBIR funded 
company in a way that is congruent with being part of a 
university spinout, and also maybe grants like goals and even 
maybe to Maria's point about the amount of funding, the greater 
likelihood of winning one, that would be encouraging.
    Chairwoman Cantwell. Thank you.
    Ms. Brown. I'll come at this maybe from a different 
perspective. Last year, Intellectual Ventures launched a study, 
a commissioned study, to ask smaller companies, CFOs, chief 
technology officers, and CEOs what were their perceptions about 
intellectual property and invention. And it was really pleasing 
that we got over 200 respondents, and it was clear that patents 
are very important to them. They understand that they need to 
have patents and intellectual property in some of their 
business models in order to succeed.
    We've had a number of people with really bright concepts 
and a real nugget of an idea, but didn't feel like they had 
enough to really be able to launch a company. We've been able 
to work with companies like Coffee Flour, which launched last 
month, a partnership between an entrepreneur and Intellectual 
Ventures, where we provided some capital, but also some support 
that would provide, you know, product definition and 
prototyping and testing to really help it launch.
    So I see that if an entrepreneur has that idea and can work 
with others to really get the IP that's necessary to give them 
the foundation, they have more options to drive the kind of 
investments that they need. And when you have that IP, when you 
have the clarity of how broad this market can be, I think it 
becomes a real attractant for those who would like to make 
investments, or the ability to then go to the Small Business 
Administration and say, ``Here is how we expect to drive this 
market, how we want to develop the product, how we want to get 
it to customers and commercialize it.''
    So I think the use of IP in addition to the concepts and 
the innovations that are coming forward from the business 
really can use SBIR dollars to help drive the supporting 
growth. So I would really encourage that we continue to do this 
to try to raise the numbers so that we can see the economic 
impacts that come from this.
    Ms. Contreras-Sweet. Right. You know, I don't know how many 
of you had an opportunity to read the Wall Street article that 
addressed that certain segments of our population are not 
accessing capital in the same way as others. And so I'm 
particularly concerned to make sure that we're leveling the 
playing field for all of our good innovators, particularly 
focused on the African American community.
    So I'm trying to understand how we, as the SBA, as your 
federal government, can make certain that we are promoting the 
program in all circles and all opportunities. So I was trying 
to get at that a little bit as well.
    Ms. Brown. Well, I think as you look at entrepreneurs and 
where perhaps there hasn't been that level playing field, that 
access, finding where that community gets its information--you 
know, there are organizations that have deep ties, and I think 
leveraging communications in that area would help spur what it 
takes to get this idea developed and built, and they can get 
that support, and then learning how to do the grant writing, 
learning what it takes to actually apply, so that you can be 
eligible to get these dollars. There are absolutely ways that 
that can happen, and I think it's a great opportunity for 
growth as well for those that are underserved.
    Mr. Weed. So on your three questions in terms of job 
creation, skin in the game, and learning of the SBIR program, 
you know, I mentioned we're 40 people now. We're scaling up to 
be 100 people. But that's just to make 100 megawatts of systems 
a year. California now has a procurement program for 1.325 
gigawatts of systems.
    So from our factory that we are scaling up, we could 
produce from that for 13 years and meet the procurement needs 
of California. In other words, it's a huge market.
    Ms. Contreras-Sweet. May I just say before you get to the 
second point, the senator knows that when I was going through 
my confirmation hearing, I acknowledged the role--as a 
Californian, I can say to you that I acknowledge the role that 
the state of Washington played in helping us get through our 
energy crisis. Few people were there for us, but the state of 
Washington allowed us the access to some of your energy, and so 
you sort of literally kept the lights on for us.
    So, indeed, as a Californian, I am very grateful to the 
state of Washington for being there in a time of need. Thank 
you.
    Mr. Weed. I would mention that one of our utilities here is 
looking at using energy storage as further providing a broader 
support in the energy markets for California. And, hopefully, 
you won't mind that our plan is, of course, to get iron in the 
ground in Washington State and then to invade California.
    [Laughter.]
    Because it's a very large market. There are other states 
that are important, of course. New York is important. Texas is 
important. And we are aiming to help make Washington State to 
be in that same list of the important energy storage markets.
    The skin in the game part--of course, we're a private 
company, so I should be a little demure. I will say that the 
private equity fund that has invested in us has been quite 
generous, has the ownership positions of management and of 
employees through a stock option plan. Frankly, it's not 
something you always see in the United States. This private 
equity firm comes out of Australia and China.
    And I would say the United States, in terms of--and you've 
heard some discussion on this already in terms of the approach 
of VCs and so forth. We need more long-term thinking. That's 
actually a term that we hear from our private equity funder 
very frequently. That's a very frequent phrase, long-term 
thinking.
    In terms of learning of the SBIR program, of course, we 
knew about it. But in terms of really forming our intent to go 
after it, that actually came out of some discussions with the 
head of the DOE's Advanced Manufacturing Program, Mark Johnson, 
as we discussed what the different possible uses of funds were 
and how we could fit the different programs together under the 
different eligibility requirements.
    Ms. Contreras-Sweet. Thank you.
    Chairwoman Cantwell. Well, I'd like to turn to the GAO on 
this issue, obviously, of your report, which is very 
concerning, because as we talk about how to increase SBIR use, 
all you have to do is say, ``Okay, make these agencies who have 
so many dollars available--make them meet their requirements.''
    One of the things that you talked about, Mr. Neumann, was 
the fact that some of these agencies said--I mean, you 
mentioned six years running that they hadn't met this mark. So 
it isn't just the downturn of 2008 that caused it. Or you 
mentioned that, oh, well, they didn't get appropriations bills 
done in time. Well, the Department of Health is meeting this 
standard, and they're one of our biggest federal agencies. So 
the fact that they are actually meeting their set-aside--I 
would think that they have as complicated challenges on a 
budget as anybody.
    And the Department of Energy, which Mr. Weed--who's to say 
that he wouldn't have been funded already if, in fact, DOE had 
met its requirements? So what do we need to do to get these 
agencies to live up to this requirement?
    Mr. Neumann. That's a good point. Although we didn't focus 
on best practices in our 2013 report, during the course of that 
work, we did note that the Department of Health and Human 
Services intentionally set aside and spent more money. So 
that's, in part, why they met the spending requirement in every 
year that we looked at. But there is some good news in----
    Chairwoman Cantwell. Because they went above the----
    Mr. Neumann. Yes. They intentionally set aside more than 
the required amount in their planning for it. So in the end, 
they ended up going above or at least meeting the requirement 
without a problem in each of the six years we looked at.
    But there is some good news. If you look at 2011 with some 
of the other agencies, it did get a little better for 10 out of 
the 11 that participate in SBIR. Only the National Science 
Foundation didn't meet spending requirements for that year. So 
I think there's some movement in the right direction. And I 
think coupled with SBA's continued oversight of the agencies 
and as SBA implements some of the recommendations we made in 
that report, I think we will start to see improvement.
    Chairwoman Cantwell. Do we need to go back and ask about 
best practices? Do we need to qualify best practices for an 
official record, or do you think we can do that informally?
    Mr. Neumann. I'll let my colleague mention the ongoing work 
and whether or not we're getting at any of that.
    Ms. Benedict. Sure. In our ongoing work, we are looking 
currently at the 2012 spending for SBIR and STTR. We did not 
ask about best practices this year, but we certainly could 
incorporate it into our methodology, if that's something that 
would be useful to the committee.
    Chairwoman Cantwell. Well, I think it's interesting to 
think about why a federal agency like the Department of Health 
and Human Services meets that standard. And, of course, the 
University of Washington is probably number one in the country 
as far as public institutions with NIH research. So it all 
works well.
    But I always remind people--what is it--$300 million, 
something like that, of research between UW and WSU. Maybe it's 
increased since I got my numbers. But just on the other side of 
the mountains, we have PNNL that gets, you know, three or four 
times--at least, definitely, it gets, you know, in the $800 
million to $900 million range. And yet where is the advent of 
that technology spinout?
    So it's just--you know, there's something that's working on 
the health side, and it's working on many fronts. And there's 
something that's definitely not working on the energy side, and 
it's definitely not working on many fronts. So it says to me 
that, you know, either focus over time, and maybe--I don't 
know, Mr. Barry, if you have comments on that, or if you 
think--you know, like there's a threshold period here for SBIR 
funding within certain sectors, and until you reach that 
credibility, you have a challenge.
    But it's clear with certain sectors of these research areas 
that we're not making the goals on any front. It's not 
happening from the top down, and it's not happening from the 
bottom up.
    Ms. Contreras-Sweet. I'll also say, Senator, that I think 
it's important that now the SBA has been elevated to the 
cabinet level, and that I'd be sitting at the table with some 
of my cabinet colleagues, that it's also about leadership. So, 
certainly, I would, you know, sort of put on myself the 
opportunity to make sure that I am promoting it among my 
cabinet peers and raising this as an important opportunity for 
us to spur job creation and economic activity. So that would be 
number one.
    And number two, as I said, to the extent that we are 
promoting the program, that there's also a demand in the 
marketplace so that people are approaching the departments, the 
agencies with these requests. And I think that both ends will 
help spur more compliance.
    Chairwoman Cantwell. That's good. I appreciate that. I like 
you sitting at the cabinet level reminding all of these cabinet 
officials that they're not meeting their research standards for 
working with the SBA.
    Mr. Neumann. And let me add that the SBA has a very 
powerful tool for encouraging agency compliance, and that's the 
annual report to Congress. So to the extent that you provide 
some robust analysis in that report, I think it'll shed some 
light on which agencies are doing well and which ones are not 
doing as well. I think that's a very powerful tool.
    Ms. Contreras-Sweet. And reminding them that we're coming 
up on this report, and I think that's right. The score cards 
are really important. Thank you.
    Chairwoman Cantwell. Well, we're about at time. I don't 
know if anybody has any further comments they want to give for 
the record. I will point out at this moment that this is an 
official hearing, and so we do leave the record open for two 
weeks for all our colleagues to comment on this. And then this 
gets published as recommendations, and we take this as part of 
our official capacity to improve these programs. So we very 
much appreciate all the witnesses here today.
    And I don't know--do you have any further questions?
    Ms. Contreras-Sweet. Well, I think it's really important, 
you know, in promoting something, to celebrate the successes. 
And so I really want to thank this great state, the senator, 
and each of you who have presented your stories, because to the 
extent that we can celebrate your successes, success begets 
success.
    I'm delighted with the ideas, the diversity of thought 
here, the diversity of opportunities that have been generated 
from this program. As I mentioned, the idea of storing energy 
is just fascinating to me, and I'm really interested in that 
technology. So maybe on the next trip out, we'll come out and 
visit you. That's okay. I mean, California needs more energy, 
so we're happy to have you come on down.
    But I really want to challenge us--you know, I want to make 
sure that the Native American community is able to access these 
programs, and rural communities and urban centers alike, and 
that women are able to access this program. America is such a 
wonderful, beautiful place of diversity of thought, of ideas, 
of opportunity.
    So to the extent that you can help me think of ways to 
promote this program to make sure that more of our programs are 
available, particularly this one, but also--you know, again, as 
I said, I'm calling for the sale. I want to make sure that 
folks understand that not only is SBA here for access to 
capital, but that we do counseling, and we do contracting, so 
that those of you who are now finally launching your companies 
and are able to grow, that you think about the federal 
government as a partner, as a client.
    You know, so many of us have an uncle, and now I want to 
make sure that Uncle Sam is also available to you, to be able 
to diversify your portfolio so that you have private sector 
opportunities but also public sector opportunities. So think of 
those ways that we can help you get the word out throughout the 
state in all corners to make sure that everybody is able to 
reach this. That would be a great gift that you would bestow 
upon us.
    Thank you, Senator.
    Chairwoman Cantwell. Well, thank you. And I want to mention 
that, as I said, the record is left open, but we have--I know 
tomorrow, I'm going to be with Senator Risch, who is the 
ranking member, and he'll be very interested in DOE meeting its 
research standards that are being set, because there's a lot of 
research being done in the state of Idaho.
    And we have with us people from Senator Risch's Small 
Business Committee staff. We have Mr. Holderness, who is the 
staff director back there; and Ms. Kristen Granchelli, 
professional staff for the SBIR program. So we have people from 
the Small Business Committee staff that will stay here after we 
have to depart. So please feel free to talk to them.
    Also, Calvin Goings, our regional Small Business 
Administrator--Calvin, just wave--is here. He's the Region 10 
Administrator for the Small Business Administration, and he 
obviously is familiar with this program and many other 
programs. And we have many other staff here for people if you 
want to continue to talk to them afterwards, they'd be more 
than happy to have your input and comments, either as official 
or unofficial parts of the record.
    This has been very helpful. As I said, we wanted to have 
this hearing because the administrator was so generous to give 
her time to come to the Northwest. We think we represent a very 
unique perspective on how much job growth can happen with 
innovation. We hope that we can take today's feedback and look 
at ways to increase the SBIR.
    As I mentioned earlier, I believe that we need to make 
something in America besides exotic financial instruments, and, 
clearly, the innovation here is an example of that. And if we 
can get the right amount of capital into the marketplace to do 
that, to me, I feel like that is a lot less risky than what 
happened with the implosion of our marketplace.
    I feel like we have an administrator who knows the capital 
markets well and will be a great asset to the administration. 
So we're so happy that she was able to take this innovation 
hearing in and to digest some of your input. So we'll look 
forward to working with her.
    Ms. Contreras-Sweet. Just in closing, I want to thank you 
for mentioning that. I have to tell you that after I left 
office in California--I was California's Secretary of 
Transportation and regulator of businesses and promoter of 
housing--but the point is that I felt that the common 
denominator to prosperity for America was through financing. We 
need to be able to finance our innovation, to finance our 
housing strategies, our transportation systems. So I learned 
very quickly that it was really essential that we focus on 
access to capital.
    So in that regard, after I left office, I decided to just 
start a financial institution to do just that. I started with 
private equity and then learned that, you know, not everybody 
wants to give up--as you said, they don't want to be diluted. 
They don't want to lose their equity position, and it's a very 
expensive way to get capital.
    So then I studied what financial institutions were doing, 
the depository institutions, and decided that maybe that was 
the way to go. And in financing that, Senator, it was quite 
interesting, because, again, it's like how do you finance a 
financial institution. So I did what anybody would do. I went 
to friends and family, and that's the way that it worked for 
us. I just went to friends and family and emboldened them with 
the idea of doing this work.
    So I'm interested in understanding crowd sourcing and the 
other mechanisms, so that when our traditional financial 
institutions don't come through, what is the proper role of 
government in oversight, in seeding opportunities, in creating 
models, pilots that might be contemplated in the future. So 
this is the great state that innovates in so many ways, and so 
I was delighted to make this my first road trip in all of two 
weeks of service already.
    The senator was very good to ask me to defend my budget on 
day two. But we got through, and she's just been an ardent 
champion for all of you, and as I said at the top of my 
comments, for the country. So I'm delighted to be a part of 
this hearing. I'm delighted to get to know you all, to hear 
your stories, and I look forward to you communicating with us. 
We've got to deepen this relationship. This should not be a 
one-time visit. I want this to be an ongoing relationship.
    And I was delighted that Calvin was able to be here with us 
representing us here in the district. Our district office is 
also represented here. And we have nice representation here in 
terms of the disaster relief team. So know that SBA stands 
ready to help you in your time of need as well as in your time 
of creative thinking. God bless you. God speed. Thank you.
    Chairwoman Cantwell. Thank you. And on that note, we're 
adjourned.
    [Whereupon, at 10:50 a.m., the hearing was adjourned.]
  

                                  
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