[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
OVERSIGHT OF THE OFFICE OF INVESTMENT AND INNOVATION AT THE SBA
=======================================================================
HEARING
before the
SUBCOMMITTEE ON HEALTH AND TECHNOLOGY
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
JANUARY 12, 2016
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 114-038
Available via the GPO Website: www.fdsys.gov
_________
U.S. GOVERNMENT PUBLISHING OFFICE
98-247 PDF WASHINGTON : 2016
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HOUSE COMMITTEE ON SMALL BUSINESS
STEVE CHABOT, Ohio, Chairman
STEVE KING, Iowa
BLAINE LUETKEMEYER, Missouri
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
CHRIS GIBSON, New York
DAVE BRAT, Virginia
AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
STEVE KNIGHT, California
CARLOS CURBELO, Florida
MIKE BOST, Illinois
CRESENT HARDY, Nevada
NYDIA VELAZQUEZ, New York, Ranking Member
YVETTE CLARK, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRENDA LAWRENCE, Michigan
ALMA ADAMS, North Carolina
SETH MOULTON, Massachusetts
MARK TAKAI, Hawaii
Kevin Fitzpatrick, Staff Director
Emily Murphy, Deputy Staff Director for Policy
Jan Oliver, Deputy Staff Director for Operation
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Mike Bost................................................... 1
Hon. Seth Moulton................................................ 2
WITNESS
Mr. Mark Walsh, Associate Administrator, Office of Investment and
Innovation, United States Small Business Administration,
Washington, DC, accompanied by Mr. John Williams, Director,
Innovation and Technology, Office of Investment and Innovation,
United States Small Business Administration, Washington, DC,
and Ms. Carol Fendler, Director, Licensing and Programming
Standards, Small Business Investment Company (SBIC) Program,
Office of Investment and Innovation, United States Small
Business Administration, Washington, DC........................ 4
APPENDIX
Prepared Statement:
Mr. Mark Walsh, Associate Administrator, Office of Investment
and Innovation, United States Small Business
Administration, Washington, DC, accompanied by Mr. John
Williams, Director, Innovation and Technology, Office of
Investment and Innovation, United States Small Business
Administration, Washington, DC, and Ms. Carol Fendler,
Director, Licensing and Programming Standards, Small
Business Investment Company (SBIC) Program, Office of
Investment and Innovation, United States Small Business
Administration, Washington, DC............................. 18
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
None.
OVERSIGHT OF THE OFFICE OF INVESTMENT AND INNOVATION AT THE SBA
----------
TUESDAY, JANUARY 12, 2016
House of Representatives,
Subcommittee on Health and Technology,
Committee on Small Business,
Washington, DC.
The Subcommittee met, pursuant to call, at 3:02 p.m., in
Room 2360, Rayburn House Office Building, Hon. Mike Bost
presiding.
Present: Representatives Bost, Luetkemeyer, and Moulton.
Mr. BOST. Good afternoon. Thank you all for being here
today. We want to conduct this oversight hearing of the Office
of Investment and Innovation at the Small Business
Administration, or SBA. Providing robust oversight for the SBA
is one of the most important functions of our Committee. The
SBA plays a significant role in providing assistance to
American entrepreneurs. The SBA provides small business with
financing, entrepreneurial development, education, and
government contracting assistance. Oversight helps ensure that
the agency is effectively utilizing its resources to provide
the service mandated by Congress and expected by the American
people.
Throughout the month of January, our Committee is holding a
series of oversight hearings examining all aspects of the SBA,
its management, and its programs. We began last week and we
heard an assessment of the Government Accounting Office, or
GAO, on a report detailing inefficiencies and ineffective
management operations throughout the SBA. Today we will examine
the programs implemented by the Office of Investment and
Innovation, or the OII, and its efforts to deliver effective
assistance to entrepreneurs in an efficient manner.
The OII is responsible for administrating several very
popular programs offered by the SBA. The Small Business
Innovation Research and Small Business Technology Transfer
Programs provide government contracts for small business to
develop cutting-edge technology needed by government agencies.
OII also administers the Small Business Investment Company
Program or SBIC. The SBICs are privately owned and managed
investment funds. They are licensed and regulated by SBA. And
the SBICs use their own capital plus funds borrowed with the
SBA guarantee to make equity and debt investment in qualifying
small businesses.
As I mentioned earlier, last week, our full Committee heard
testimony from the GAO regarding several persistent problems
with the SBA's management. The testimony and accompanying
reports were quite troubling, to say the least. Bill Shear, the
GAO's Director of Financial Market and Community Investment,
testified that the GAO saw that certain recurring themes
happened over and over again all across the agency. This
affected all aspects of its operations and its programs. Mr.
Shear also testified that the SBA needs to commit to deal with
these issues. The services provided by the SBA are too
important not to take significant action to ensure the agency
faithfully executes its duties.
It is my hope that through vigorous oversight, such as this
Subcommittee hearing, we can begin to right these wrongs and
get the SBA back on track. Our goal is making sure that the SBA
continues to provide a service America's Small businesses need.
We must work together to solve these problems because America's
small businesses are counting on all of us.
Again, I want to thank you all for being here. I am looking
forward to today's discussion.
I now yield to ranking member Moulton from Massachusetts
for his opening remarks.
Mr. MOULTON. Thank you, Mr. Chairman.
Thank you for joining us here today.
The Office of Investment and Innovation performs a number
of critical missions that help small businesses flourish. Many
of the companies served by this division of the SBA are
cutting-edge, high-technology enterprises with great potential
for job creation. Entrepreneurs in these sectors have often
different capital requirements than businesses operating in
more traditional spaces. For instance, while a traditional bank
loan may be the best financing for a new mom-and-pop hardware
store, for a cutting-edge small pharmaceutical developer,
equity capital is often a better fit for their capital needs.
OII helps meet this important need through its Small
Business Investment Company, SBIC, program. In 2014, this
initiative channeled $50.7 billion to small emerging firms,
helping many innovative firms mature, grow, and bring new
products to market. While this important program has had great
success, it is important that there is sufficient oversight so
that it may reach its full potential. In the most recent
appropriations legislation, the omnibus, Congress raised the
leverage caps for family of funds SBIC licensees, permitting
groups of funds to draw $250 million in SBA leverage. Already,
20 SBICs are within 10 percent of the previous $225 million
cap. Six SBICs are already maxed out.
We can expect this additional leverage capacity to be
utilized. Therefore, we should also ensure that there are
appropriate safeguards in place to limit the exposure of
taxpayer dollars. I look forward to hearing how SBA is managing
this risk during the course of this hearing.
It is also worth looking at diversity among recipients of
SBIC investment. Last year, only 6 percent of investments went
to firms owned by women, minorities, or veterans. It is
important that we encourage entrepreneurship among these
disadvantaged groups. I would like to hear how today we can
improve in this area.
In addition to the SBIC program, the OII oversees the Small
Business Innovation Research Program and the Small Business
Technology Transfer measure. The SBIR program is an important
partnership between Federal agencies' R&D efforts and
entrepreneurs, harnessing small businesses' innovation to
develop new products that meet Federal needs, which can later
become commercialized for broader use. I have seen firsthand
how this program has worked in the Boston area and recently met
with the New England Innovation Alliance to discuss this
important program.
One SBIR firm in my district, Aerodyne Research, makes
state-of-the-art scientific instruments. These products measure
gases or aerosol particles in real time and with great
sensitivity. The firm has grown to over 60 employees and
engages in millions of dollars in sales to the private sector.
The related STTR program helps commercialize R&D performed
by small companies affiliated with universities and Federal
laboratories. Like SBIR, this program harnesses the expertise
of small firms on the cutting edge of research. Both programs
are vital to our country's ongoing technological
competitiveness. It is important that they too operate
effectively and efficiently.
In 2011, Congress reauthorized both of these programs while
making changes to ensure that small businesses are able to
participate in the program and increase oversight. I am
particularly interested to see the progress in implementing
these changes and what the SBA is doing to ensure that the
program is working effectively for small firms.
Mr. Chairman, small businesses in every sector are vital to
the innovation that creates new products, sparks job growth,
and will ensure that our Nation remains at the forefront of
technological development. OII's programs provide critical
support to small firms that are advancing this goal, and I look
forward to hearing about how improvements can be made at SBA to
maximize the value of these initiatives.
Thank you, and I yield back.
Mr. BOST. If Committee members have any opening statement
prepared, I ask that they submit them for the record.
I would like to take a moment first off to explain the
timing lights for you. Okay. You will have 5 minutes to deliver
your testimony. The light will start out on green. When you
have 1 minute remaining, the light will turn to yellow. Then,
finally, at the end of the 5 minutes, it will turn to red. We
just ask that you kind of adhere to these limits.
Our witness today is Mr. Mark Walsh, the SBA's Associate
Administrator of Office of Investment and Innovation. He has
over 30 years of experience as a technological entrepreneur,
manager, and investor prior to serving at SBA. Mark was
executive chairman of Homesnap.com, a computer application for
residential real estate; and CEO and cofounder of GeniusRocket,
a leading provider of crowdsourced marketing, right, for major
brands of global non-for-profits. He has been a division head
and a senior executive at technological and content companies
like GE, AOL, HBO, and others.
More recently, he has been an active angel investor,
shareholder, or board member adviser in a number of successful
startups and high-growth companies and has been named one of
the 100 Tech Titans by Washingtonian Magazine for each edition
since 2009 until today.
Mr. Walsh, thank you for being here with us today. We
recognize you for 5 minutes.
STATEMENT OF MARK WALSH, ASSOCIATE ADMINISTRATOR, OFFICE OF
INVESTMENT AND INNOVATION, UNITED STATES SMALL BUSINESS
ADMINISTRATION, WASHINGTON, D.C.; ACCOMPANIED BY JOHN WILLIAMS,
DIRECTOR, INNOVATION AND TECHNOLOGY, OFFICE OF INVESTMENT AND
INNOVATION, UNITED STATES SMALL BUSINESS ADMINISTRATION,
WASHINGTON, D.C.; AND CAROL FENDLER, DIRECTOR, LICENSING AND
PROGRAMMING STANDARDS, SMALL BUSINESS INVESTMENT COMPANY (SBIC)
PROGRAM, OFFICE OF INVESTMENT AND INNOVATION, UNITED STATES
SMALL BUSINESS ADMINISTRATION, WASHINGTON, D.C.
Mr. WALSH. Congressman Bost, Ranking Member Moulton, and
distinguished members of the Subcommittee, thanks for inviting
me to discuss SBA's Office of Investment and Innovation. I am
pleased to detail our flagship programs, Small Business
Innovation Research, Small Business Technology Transfer, and
Small Business Investment Companies, as well as our successful
support for accelerators and incubators.
I want to begin with a little more background on me. I
joined the SBA about a month ago. Prior to my arrival, I was a
venture capitalist, an angel investor, and a corporate director
for a number of high-growth startups and more mature companies
in a wide variety of industries. In addition, I spent the bulk
of my career in the technology arena and served as CEO for a
business-to-business content and e-commerce company during the
late 1990s. Having spent over 30 years in the private sector,
as was mentioned, I know the importance of this Committee and
the contributions the programs in the Office of Investment and
Innovation offer. I am honored to testify before this
distinguished group and to serve as the new head of OII.
One of the best ways to communicate power of our programs
is through examples. One of those is a San Francisco startup
called Lift Labs. We all know the effects of Parkinson's
disease, the tragic effects. Lift Labs creates an anti-tremor
spoon that cancels up to 70 percent of the hand tremors
associated with this disease. With this spoon, an affected
individual is able to eat with dignity and confidence. This
life-changing product received early stage capital from the
National Institute of Health's SBIR program. This early influx
of capital allowed Lift Labs to take its product from the
research and development stage to market. Today, Lift Lab
spoons can be purchased on Amazon.
Successful trajectories like these are a priority for my
office in SBA. Last year alone, through my office's flagship
programs, the U.S. Government provided $2.5 billion to over
5,000 SBIR and STTR projects. And our 303 Small Business
Investment Company investment partners managed over $25 billion
in private capital and SBA-guaranteed leverage and commitments,
benefitting over 100 small businesses.
Our SBIR STTR program, labeled America's Seed Fund, is a
key pillar in the Federal Government's strategy to provide seed
capital to talented entrepreneurs in science, technology, and
engineering. Since its inception in 1982, the program has
awarded over 50,000 awards with $30 billion in funding to early
stage companies. SBIR- and STTR-funded companies have made
lasting contributions to the advancement of science and
industry, and will continue to do so, like the example in
Massachusetts that was cited.
Companies, like Lift Labs, with SBIR support look to be the
next potential big employers like past SBIR recipients,
companies like Qualcomm, Biogen, iRobot, and Symantec.
Our growth accelerator competition enters its third year.
To date, this program has invested nearly $7 million in 138
accelerators across these great United States. Accelerators in
43 States, including the District of Columbia and Puerto Rico,
have received awards through this program. Last year alone, we
awarded 88 prizes to accelerators of $50,000 each. In the
coming year, resources will be made available in the fiscal
2016 omnibus appropriation to all us to continue this valued
program.
Our growth accelerator competition plays a crucial role in
the entrepreneurial ecosystem by enhancing the effectiveness of
organizations committed to providing financial and technical
assistance to American startups and small businesses.
And speaking of buses, we plan to continue our SBIR bus
tour with SBIR partners, including incubators in over 21 States
later this year, spreading the good word about their work and
their potential.
The Small Business Investment Company's history is equally
rich. It channels long-term investment capital to America's
small businesses. Since it was created in 1958, over $80
billion has been invested, helping finance 170,000 American
small businesses. In fiscal year 2015, the SBIC has invested
over $6.2 billion in total financing between the SBA leverage
and our fund partners to 1,210 portfolio companies, which
created or sustained roughly 130,000 jobs. That is a 15-percent
increase in financing compared with fiscal 2014.
To conclude, as head of the SBA's Office of Investment and
Innovation, I am committed to ensuring that more and more of
our Nations' innovators and investors know about our programs
and know how to access them. The SBIR, STTR, and SBIC
initiatives are foundational components of our mission. All of
us look forward to increasing success and demonstrable outcomes
from the access to capital that we provide to America's most
exciting arena: small businesses. Thank you.
Mr. BOST. Thank you. And because Mr. Walsh has been only in
this position for a short time, we have asked that he be
accompanied by senior members of his team during the
questioning and answer portion of the hearing. Joining him at
the table now will be John Williams, Director of Innovation and
Technology for the Office of Innovation and Investment; and
Carol Fendler, Director of Licensing and Programming for the
SBIC program.
Thank you both for being here as well.
And I would like to yield myself 5 minutes for the
questioning to start off with.
Mr. Walsh, I understand that you have experience in the
private business sector, from what you explained. What were
your initial impressions of how the SBA functions and what you
have seen that would immediately--that you would like to
improve on?
Mr. WALSH. Well, I spent my career, really, in innovation
and investments. So the two I's of our office of OII were
directly DNA-level related to my background. So I was expecting
to see a lot of alignment in the day-to-day of my team over
there. And I have seen that, Congressman. We help small
companies, be they startups with very small staffs using
innovation and research for labs to more successful companies
with positive cash flow and hundreds of employees through the
various funding efforts that we have, point one.
Point two, we have a rich and robust network of over 300
professional investment firms whose debt leverage we help send
out or their investment decisions are helped by the investments
that we make with them.
My first impression is very positive to the overall
structure of the program. Secondly, perhaps as importantly, I
must admit I am incredibly impressed with the teammates that I
have over at the office. I mean no disrespect to government in
general, but sometimes people walk in expecting government to
be more dysfunctional. In fact, I have found zero of that. I
have been incredibly impressed with the professionalism, the
caution, the care, and the, frankly, futuristic outlook of all
of my teammates at OII.
I don't know enough about SBA in general. I am still
learning my way through the hallways, but I do expect that
across the board, I will find SBA to be as impressive as my
teammates in OII in their professionalism and, lastly, in their
commitment to the mission. SBA is one of the few organizations
I see in the Federal Government with no regulatory power. We
are about helping companies. I find that that both maps against
my personal goals and my personal background. And it has been
very, very encouraging to see it day-to-day in my office.
Mr. BOST. So the office works perfectly.
Mr. WALSH. I meant not to say that, Congressman. There is
room for improvement in every single organization, believe me.
Mr. BOST. Okay. There is an important time change coming up
here. We have a very short time for this President to be in
office, and we are coming up on 2017. What action is being
taken right now to ensure that the SBA leadership team can pick
up right where it leaves off with a new administration? Do you
have a transition plan in place, and what is your strategic
plan for the long goal?
Mr. WALSH. I was lucky to have actually two predecessors in
a row, both of whom I knew personally. In fact, my predecessor
I helped recommend to get the job. So his transition plan that
he left me was rich and robust and we, being friends, were able
to have a very productive time together conversing before I
physically took over. I arrived with a pretty good transition
plan in place for the day-to-day operations of what I oversee
at OII. I would expect I won't tweak that too much if I resign
and move on in January of 2017.
But to the second part of your question, an important part,
in my opinion, what kinds of initiatives do we think we can
make some progress on in this coming year or start and leave in
place with some energy behind them for my successor to take
over and that man or woman to progress forward with those
initiatives. I will give you one example. The accelerator and
incubator program that we have initiated where we visit--we
test--we had 800 applications from innovation incubators and
accelerators around the U.S. We awarded prizes to over 88 last
year. That is an amazing team and family of offices all around
the U.S. in your States and many, many other States that are
ready to give advice and help to companies that need that kind
of commercialization advice. SBIR companies, which today often
get grants but have a tough time crossing that desert, that
chasm of investment in the innovation and research and becoming
a commercialized company, we are looking to apply our
innovation incubators and accelerators to map them
geographically--against our SBIR awardees to give them that
innovation incubation and accelerator advice to help them
become more commercializable. That is a synergistic use of
assets we are currently doing. We hope to get that started in
2016 and 2017 and have it ready for my successor if and when
that man or woman comes aboard.
Mr. BOST. Wonderful. My last question before my time runs
out, before we turn it over to the ranking member, is actually
for Ms. Fendler. As part of the omnibus legislation passed last
year, Congress increased the leverage allowable to the SBICs
from $225 million to $350 million. This will help the SBICs
raise more private capital and increase leverage for investment
in the domestic small business. Have the standard operating
procedures governing the SBICs' licensing been updated to
reflect this change? If not, why?
Ms. FENDLER. Yes. We don't believe that there are any
specific changes that need to be made to our standard operating
procedures to accommodate this change. We think that the
procedures that we have in place are the correct procedures for
risk management. There are two things that we think will happen
as a result of the increase in the family of funds limit. One
thing is that we think there are managers of existing SBICs who
will come to us sooner than they might have otherwise to launch
a new SBIC. Second, we think that there are existing SBICs that
are going to come to SBA for additional leverage commitments to
take advantage of the higher ceiling. In either case, we think
that we have got the right rigorous standards in place to
manage that risk.
In the case of a brandnew SBIC, if we have a management
team coming in to apply for a second fund or a third fund, our
subsequent fund SBICs go through the same full licensing
process that any other SBIC does. That begins with in-depth
analysis of the financial performance and also the regulatory
compliance of the existing SBIC or SBICs that we are already
very familiar with. We have a very meaningful license review
and approval process that involves approval right up to the
highest level of the SBA, meaning final approval by the SBA
Administrator.
With respect to existing SBICs coming in for additional
leverage commitments, again, those commitments--any request for
a new commitment is going to go through SBA's really very
strict credit underwriting process. That includes financial
analysis, risk analysis and, again, requires approval at
multiple levels of SBA, concluding with Mr. Walsh.
The other aspect that really applies both to new SBICs or
more highly leveraged SBICs is our monitoring process. We have
really the same set of risk management and oversight procedures
that we apply to all licensed SBICs. We are continuously
looking at each fund's financial performance and repayment
prospects.
Now, the one key thing, obviously, not having unlimited
resources is that we do focus our monitoring on funds where the
exposure is highest. Certainly, we will be looking particularly
closely at families of funds where our exposure has gone up to
that full $350 million.
Mr. BOST. Thank you.
With that, my time has definitely expired.
I want to turn 5 minutes over to the Ranking Member
Moulton.
Mr. MOULTON. Thank you, Mr. Chairman.
Ms. Fendler, Mr. Williams, thank you very much for your
service.
Mr. Walsh, you and I share our fellow alumni of a halfway
decent business school up in Boston. You have a business career
that far outstrips my own, however. There are many other things
that you could be doing. We are very grateful that you have
taken on this job in public service. So thank you.
Mr. Walsh, in the last SBIR reauthorization, Congress
included a 3-year pilot program that allows agencies to use 3
percent of their SBIR funds to cover administrative costs
associated with the program. However, we have yet to see any
reports from the SBA on the effectiveness of the pilot and
whether agencies are using these funds on allowable costs. With
the recent extension of the pilot, what steps is your office
take--what steps are your office taking to ensure that there is
effective oversight of this pilot program? How many projects
does each employee currently oversee?
Mr. WALSH. The 3 percent of the 3 percent--and thank you
for your compliment about my educational background. I probably
graduated a few years ahead of you just, for the record. But I
did learn a lot there and thank you for your recognition of
that.
The 3 percent of the 3 percent, as the shorthand to your
point, is something that we still are relatively fresh to, and
I may ask my colleague Dr.--John Williams--I call him Dr.
Williams around the office sometimes--to flesh out the
specifics of your answer. The idea of having that type of
subset of the overall granting power from each of the agencies
that we use to find innovative companies, one of which you
cited, is something that we want to learn more about because
whether we are the actual spender of those dollars from an
infrastructure perspective or they are the spender of those
dollars is something that we are learning more about.
With that, I will plead my 30-day ignorance level, which I
have yet to use, but I will use it right now, Congressman, and
I will ask John Williams to weigh in.
Mr. MOULTON. Fair enough. You have how many life lines
left?
Mr. WILLIAMS. The program started with a slow start. And so
we are actually just really getting into our third year where
we are spending that money in contracts and things to provide
assistance. We actually don't spend any of the money. All the
money is out at the agencies. We are playing a role of
monitoring. We are working on reports. We do have reports on
what they plan to do with the money. They submit those to us
every year. We are working, and we have got preliminary reports
of what they have done with it. But what we want to see is
results. And so----
Mr. MOULTON. Mr. Williams, when do you think we can expect
to see those reports?
Mr. WILLIAMS. Next six--within 6 months.
Mr. MOULTON. Within 6 months.
Mr. WILLIAMS. Yes.
Mr. MOULTON. Okay.
Mr. WILLIAMS. 30 June.
Mr. MOULTON. Okay. Let me move on to the next question, Mr.
Walsh.
Civilian agencies were given the authority to create
commercialization pilot programs similar to the one currently
in existence at the DOD in the last SBIR reauthorization. Can
you tell us which agencies have taken advantage of this
authority and created such programs?
Mr. WALSH. Again, I will plead--how many do I have? Two
left? Is there three in ``Who Wants To Be a Millionaire?''
My initial impression is clear that DOD is the lead dog in
the example or the scenario that you have questioned us on. But
I think others are becoming more and more robust. And, with
that, again, I will look for validation.
Mr. WILLIAMS. Rephrase that question again.
Mr. MOULTON. So which other agencies besides DOD have taken
advantage of this program?
Mr. WILLIAMS. Of the 3 percent?
Mr. MOULTON. It is the authority to create
commercialization pilot programs similar to the one that
currently exists in DOD. My understanding is that previously
only DOD was authorized to do this. Now other agencies have
been authorized as well. Have any of these agencies actually
taken advantage of this authority?
Mr. WILLIAMS. Yes, they have. And the programs for the
civilian agencies are a little bit different than the DOD's
programs.
Mr. MOULTON. Okay.
Mr. WILLIAMS. There is a program called the
Commercialization Pilot Program that both NIH and DHS use. And
that is a program where they fund universities--dollars or push
money through the universities using the SBIR dollars--to help
do commercialization assistance to SBIR companies. Those two
organizations, DHS and NIH, do it. NIH is a much larger
program, and thus, their effort is larger.
Mr. MOULTON. My last question, because I am running short
on time, Mr. Walsh, again, I understand that you have only been
there for 30 days, but perhaps your colleagues can help with
this. Last week, our Committee heard from the GAO on a number
of open recommendations it had for the various programs at SBA.
There are currently 10 open on the SBIR and STTR programs. Why
are there so many pending recommendations for these programs?
And what actions is your office taking to implement these
changes?
Mr. WALSH. I will take a shot at that. As you might
imagine, there has been a significant amount of energy directed
to the specific challenge that you lay out. And my new office
is not immune from that. The 10 or so that you suggest are SBIR
centric. I think a couple at least are expired; i.e., that we
actually have taken care of, but the reporting process is not
as robust as I would like to see. But of the eight or so that
are remaining, John Williams' team and I have really made a
commitment to ourselves that we will investigate each and every
single one and try and take it off the docket so it is no
longer an issue of conversation between the Committee and what
we do.
I am not able to give you a specific date. But I can
guarantee you; I pledge that I look forward to conversing with
you and your teams and keeping you fully informed as to how we
are knocking off each and every one of those over time.
Mr. MOULTON. And my time has expired, but I just want to
emphasize, I think you are right that if we could just have
some more communication about how this is going, it may reduce
some of the friction between the SBA and the Committee.
Mr. WALSH. I look forward to you seeing me do that.
Mr. MOULTON. Great.
Thank you, Mr. Chairman.
Mr. BOST. With that, I want to recognize the gentleman from
Missouri, Mr. Luetkemeyer.
Mr. LUETKEMEYER. Thank you, Mr. Chairman.
Welcome, Mr. Walsh.
To follow up on the last question a little bit because I am
kind of concerned you are walking into a quagmire here. You
know we had 69 open recommendations from GAO. You still had 10
when you walked in in your area. This isn't something that
happened last year. This is stuff that has been dragging on for
years. Same thing with standard operating procedures. Had one
example here, SOP for licensing SBICs in 1984, which was not
modified until 2014, despite the fact that SOP failed to
address the application for new types of SBICs credit in 1984.
You know, some of your predecessors were pretty lax. Not
very competent, quite frankly, in getting things done. We are
looking forward to your expertise being able to get some things
done, hopefully shake up what is going on here. Because,
obviously, the taxpayers and our citizens deserve better. I am
a big fan of SBA. I think it has got lots of opportunities to
help lots of people. But, obviously, when GAO comes in with
recommendations that 80 percent across the board of other
agencies get their recommendations done and the recommendation
of Small Business is 50 percent, we got a problem. These are
important. They are not something to just blow off. Hopefully
you take it seriously. I am willing to give you a pass on it
because I have been in places before where we started 30 days
in, and it takes a while to get things done.
One of the other questions I have: Over all the programs
that you see, how many of them are loan programs versus grant
programs?
Mr. WALSH. The SBIC program is a loan program. We grant
debt leverage to professional investment entities, venture
capital firms, private equity firms, business development
corporations or banks in some cases, and they take that
leveraged debt to add on to their investment. That is SBIC.
SBIR is a grant program.
Mr. LUETKEMEYER. Okay.
Mr. WALSH. The accelerator and incubator program is also a
grant to those incubators. So two are to grant; one debt.
Mr. LUETKEMEYER. Very good. How is the past-due ratio? What
is the size of your portfolio on your loans, and what is the
past--if you don't know, I wouldn't----
Mr. WALSH. Well, the debt portfolio stands today at about
$25 billion.
Mr. LUETKEMEYER. Okay.
Mr. WALSH. Our loss ratio all in is about 3.5 to 4 percent.
Mr. LUETKEMEYER. What is your past-due ratio?
Mr. WALSH. Past-due ratio I do not know. I will have to get
back to you on that.
Mr. LUETKEMEYER. That is fine. I was just curious. It is a
question that I ask quite often of people who oversee different
programs, loan programs. I was formerly in the financial
services world. If you don't watch those things, how do you
know what is going on? I asked this of your colleague
yesterday, Ms. Sanchez, and her answer to me was--she had a
$1.4 billion portfolio--``Oh, we don't have any past dues. The
banks take care of that,'' which was a breathtaking comment.
Absolutely stunning that she had no idea, being there for a
significant amount of time, what her past due ratio was of over
a billion dollar portfolio. That is unacceptable. This is
something that, to me, is important. Hopefully you will take
that to heart and continue to watch it very carefully. We want
to make sure we are good stewards of the taxpayers' dollars
here and make sure they get good value for their investment.
Mr. WALSH. I will not return without knowing that ratio,
Congressman.
Mr. LUETKEMEYER. That is not a knock on you, by the way,
today. It is something that I think you should know. It is
something that you should look at every month on your monthly
reports where you are at. See what the economy is doing and how
your loans are doing and see what your loan officers that are
out there in the field how they are doing.
Just some general questions. Mr. Shear was here last week
and used the term siloed where he--because various parts of the
agency can't effectively communicate with other parts, believes
some mistakes can be repeated. He talked about that. How do you
see your part of the agency? Do you interact a lot with other
SBA administrators--administrative personnel throughout the
agency, with the executive officer themselves, herself? Do you
feel isolated by where you are at? Quite frankly, with your
background, you may be isolated. I don't know anybody else in
the whole place who has got more background to do what you are
doing and what you do compared to everybody else. Quite
frankly, the rest of them scare the heck out of me. My question
is, your interaction with other folks within your agency, how
has it been so far? What are your concerns?
Mr. WALSH. I am flattered with your opening description of
me. Thank you for that.
I worked for some very large private sector organizations
like General Electric and a wide variety of others. As we know,
there is siloing in every organization, be it private sector or
public sector. I, frankly, was expecting more, Congressman.
But, for instance, I came to the Hill to speak to you today
directly from a weekly staff meeting that the chief of staff
has with all of the--my level associate administrators for each
and every part. We go around the room and try and keep each
other informed. I am very encouraged, bluntly, on the lack of
siloing, at least my access to each people at my level, the
Deputy Administrator, and the Administrator herself.
Now, to your point on whether that siloing ends up becoming
duplicative, I look forward to learning more and more about
that and reporting to all of you on the types of things that I
see. But early returns from my experience are I have access to
anybody at my level that I wish to. In fact, they welcome me
with lunches and other types of informational sessions. I have
access to the Administrator, the Deputy Administrator, the
chief of staff, whenever I need to. I see no siloing as far as
behavior. But I look forward to learning more and more about--I
hesitate to use the term, but more and more about commonality
amongst our efforts.
Mr. LUETKEMEYER. Very good. I see my time has expired.
Thank you, Mr. Chairman.
Mr. BOST. Thank you.
And I would like to take another 5 minutes if I can. Just a
couple more questions. And these are directed toward Mr.
Williams.
All right. We are going to give you a chance to throw
somebody under the bus. Okay? How well do the agencies provide
the SBA with the information that they need to produce the
yearly SBIR reports?
Mr. WILLIAMS. How well do they do it?
Mr. BOST. How well do they provide you with that
information?
Mr. WILLIAMS. Well, so what has happened, and the fault
goes on all agencies and all sides, and SBA is part of that, is
that we have been working over the last probably 2 years--so I
came in December 1--2 to 3 years on developing a more automated
upload system called SBIR.gov where we will pull in all the
information. In the past, we almost got information in access
form--Excel documents. There was a real challenge of getting
that information. It was easy to put it into a report, but our
goal was to actually pull that information up on our Web site.
Now realtime you can look at data up until 2014 and kind of do
mapping and tracking so you could look at what was in
Massachusetts, Illinois, how many awards, what the companies
were, and things like that. Our focus over the last year since
I have been there is to work with each agency's system because
each agency has a different database system, a different
contractor. That effort was a lot harder than I thought. It
takes money and resources on both our side and their side to
get everyone to kind of do this different way of uploading
information in more realtime.
We made a lot of progress there. We are behind on the
reporting now taking that data and actually put it into
documental reporting. We hope to have some of that to you
pretty soon. It is moving through our agency. But my first goal
was to be able to get that information transparently out on our
SBIR.gov so everyone could see it as opposed to focus on
reports.
Mr. BOST. Which leads to the other question. Because that
was a major concern of GAO's. Okay? It is you are required by
law to give the annual reports. So the SBIR reports right now
that we are missing are 2013, 2014, 2015.
Mr. WILLIAMS. Correct.
Mr. BOST. How quick do you think that we could actually get
those and be in compliance with the law?
Mr. WILLIAMS. 2013 I think can be--well, so it is hard to
put a date because the way those work is then we release them
to OMB, OMB releases them to the agencies. Agencies comment
back, and then we release them to the public. There are a lot
of dates that aren't in my control. I am uncomfortable saying
it will be by this date, but we are working on it. We are close
to releasing them, the 2013 to OMB, and then, shortly after
that, depending on what the comments back from the agencies
are, it can go faster or----
Mr. BOST. Maybe that is something that you can give to our
Committee as to what we can do to help you get that done
because it is very hard to explain to the general public----
Mr. WILLIAMS. Right.
Mr. BOST. --that we have in law that you will be reporting.
Then whenever these investigations come out, and all of a
sudden, they are 2, 3 and 4 years behind, that we haven't done
it. So----
Mr. WILLIAMS. I would be glad to follow up with the
Committee on that.
Mr. BOST. Let's shift. The Department of Commerce operates
regional cluster initiatives, which received about $10 million
in fiscal year 2015 and $15 million in fiscal year 2016. The
SBA also operates a cluster program. And the Small Business Act
provides SBA with duplicating the programs of other agencies.
You can't--why does the SBA continue to allocate funds to this
program when it appears that that would be duplicative from the
Commerce program?
Mr. WALSH. Cluster is not--right?
Mr. WILLIAMS. It is not under----
Mr. WALSH. Cluster is--the cluster program at SBA is not
part of OII. But I will look forward to researching it and
getting back to your team, if you like.
Mr. BOST. That is what we are needing to try to find out
because our understanding is we are not supposed to be
duplicative with this and----
Mr. WALSH. That is an admirable goal. We will gather more
data and get back to you, but OII is not the administrator of
the cluster program at SBA.
Mr. BOST. Okay.
With that, I will yield.
Mr. Moulton, do you have any more questions?
Mr. MOULTON. Mr. Chairman, I just have one additional
question.
Mr. Walsh, I realize that there are concerns regarding
proprietary information related to SBIR, STTR programs,
particularly when the SBIR grant is related to the Department
of Defense. As we begin the reauthorization process, it is
important that we know more about the effectiveness of this
program so that we can understand what parts need to be
reauthorized. Where traditional metrics, such as how many jobs
are created, revenues created, or companies created, are not
applicable, we look for output measures instead, like papers
and patents. Where SBA programs funded by NASA and DOD might be
effective but not provided for--but not provide traditional
metrics, what is the measure we should be using to judge the
success of these programs?
Mr. WALSH. Congressman, I think you have touched on one of
the questions that in my time in this job I look to get more
traction on. I think that you can ask a wide variety of people,
even amongst my team, and potentially get different answers.
Not that that is wrong, but you can get different answers.
To your point, clearly, one obvious metric would be the
number of SBIR grants that become commercializable companies
with employees, products, and sales. Based upon an Air Force
study using that as an indicator of SBIR grants writ large,
about 48 percent of SBIR grants turn and generate revenue. Now
that is a second broader interpretation.
Mr. MOULTON. Sorry, what percent?
Mr. WALSH. Forty-eight percent of SBIR grants generate
revenue.
Now, I have said that specifically because that is not
necessarily selling products to companies----
Mr. MOULTON. Sure.
Mr. WALSH. --with a product, per se. It is getting a
license for your technology and a wide variety of other ways to
generate revenue. I personally, again, 30 days in, prefer
revenue as a judgment yardstick to continue to look at how many
SBIR grants turn into an entity that either licenses its
technology, is sold as a full entity to another larger entity,
be it commercial entity, or has a contractual revenue-
generating relationship with DOD or some other force in the
company, or has in the private sector a commercializable
product that sells itself to customers and is paid for?
Although that sounds very broad, that would be my personal
yardstick I am looking to apply against SBIR grants. Hopefully
we will have a robust percentage of those that generate
revenue.
Mr. MOULTON. Okay.
Mr. Williams or Ms. Fendler, do you have any other comments
on that?
Mr. WILLIAMS. No. Those are the marks we look at. It is,
you know, spinouts, licensing, revenue dollars, and any
potential job growth are all good measures. The challenge is
they all take time, you know, from the investment to when you
hit those marks. We have to measure them over time. But that is
something that we are responsible to do, and we are taking
action to try to do a better job with that.
Mr. MOULTON. Okay.
Thank you very much, Mr. Chairman, and I yield back.
Mr. BOST. Mr. Luetkemeyer, do you need 5 minutes?
Mr. LUETKEMEYER. Thank you, Mr. Chairman.
Yesterday, we had also someone in here, and they were
authorized to have 30 different people help them with the trade
portion of SBA. They only had 19. It begs the question, number
one, who pulled 30 out of the air? Was it the Congress said,
``Well, we need to have 30,'' or was it the SBA who said, ``We
need 30"? And if so, do we need 30? Are we underfunding or
overfunding? Are they overworked, underworked? As a result, we
got into some interesting conversations and found out that they
really don't even do much with the 19 they have got.
My question to you, sir, is, in your brief time there, have
you looked at the personnel? You already commented you like
what you have--but I am looking at the numbers--to adequately
do your job. Do you need more? Do you need less? Are you
overemployed? Underemployed? What do you see, and where do you
see it going?
Mr. WALSH. I might remind the Committee that I worked for
Jack Welch at GE. And Jack Welch was famous for saying, ``You
can always do more with less.'' I am not quoting nor am I
channeling Chairman Jack Welch in this conversation. But it is
certainly one of my goals during this coming year to employ
every possible technology--and I use that term in a pretty
broad perspective--every possible use of technology to make the
folks on my team as productive as possible in the hours in the
office and when they are traveling. Now, that can be something
as small as perhaps maybe a better BlackBerry. I use that
advisedly. I got my government-issued BlackBerry, and it is
great to see that technology again. I say that with a small
smile on my face. But, no, using technology that makes them
more productive in the office and on the road. Technology to
process the paperwork that we get more rapidly and to keep that
paperwork in the cloud in a digital way more efficiently and
more accessibly by the other elements of SBA or other elements
of the government. And then, perhaps most importantly, because
the question thematically has been this way, tracking, using
technology to track what happens, both with our SBIR partners
at the agencies, the companies that get SBIR grants, the
companies that get SBIC investment, and the accelerators and
innovators that we touch every year.
Now, technology is something that you can lean upon too
hard sometimes in my professional career, I have seen, and the
output is not that appealing. Technology is not a solution, but
it is a way to make each and every one of the 80 or so people
on my squad be more productive.
As far as the initial part of your question, I like our
number. We have a few open reqs, but I think we have an
extraordinarily productive group of people. I like the team I
have got, and I think we are going to have a really productive
2016 with them.
Mr. LUETKEMEYER. Along those lines, you are talking about--
one of the weaknesses that GAO pointed out in their report was
IT, informational protections. In your particular area, do you
have that problem, or do you see that as a weakness?
Mr. WALSH. I do not see it as a problem or a weakness.
However, vigilance is our middle name. I refuse under my watch
at OII to let our vigilance on the concern and protection of
the data drop. It is something we think about every single day
and we have meetings about. So, like you, I think that
vigilance on our data is a primary concern.
Mr. LUETKEMEYER. You haven't been there a long time, but I
am sure you have kind of gone through everything. What do you
see as the weaknesses of your agency that you oversee, the
departments you oversee, and what are your solutions at this
point, or have you got some? And I have got about a minute and
a half left. So----
Mr. WALSH. I will give you one brief example.
Mr. LUETKEMEYER. Yeah.
Mr. WALSH. We have not attracted venture capital companies
to the SBIC program in as robust a fashion as I would like. I
spent a lot of time in the venture capital industry prior to
arriving here. We all know the major venture firms out in
Silicon Valley, et cetera. But there are many venture firms
throughout the U.S. that invest in great companies in States
represented by you that I would like to reach out more to. Part
of my job, and even when I ran a publicly traded company as
CEO, part of my job was in sales. So I perceive that part of my
job in this coming year is to travel to those States and to
those venture capital companies and show them that SBICs are
open for business. It is an efficient way to add leveraged
capital to a venture capital fund that is investing in American
businesses, both in debt and equity. I think if you look back
at my year, it is a sprint, but I would like to look back on
the track and see that I made some progress in that specific
arena.
Mr. LUETKEMEYER. Well, that is a fabulous idea. I was going
to elaborate on that. Can you--you would partner--have the
SBICs partner with the venture capitalists on the outside,
which they do not do now. Is that what you are trying to say?
Mr. WALSH. No. We have a new type of SBIC--I say ``new.''
It is a new initiative in SBIC. It is called Early Stage Fund.
It is structured financially so that the interest is paid out
on the back end of the decade of the interest, which means that
the first 5 years, the interest fee--interest payments are not
made. They are paid in the second 5 years, which means that a
venture capital fund, like, you know, Andreessen Horowitz, some
of the famous ones that we know out in the West Coast or in ZIP
Codes that currently are not served by traditional venture
funding, can take those dollars and invest in equity, in
equity, in innovative and transformative companies and not have
to pay the interest fees which traditionally SBICs have. Today
SBIC is really a debt shop. We loan money to professional
investors, and they put it out to companies that can afford to
pay the interest. With this new early stage investment fund, we
can get with venture funds who will invest in companies that
are pre-revenue but have a great product and a great future
ahead of them. That is part of my sales job is to get out and
get that message out there.
Mr. LUETKEMEYER. Impressive. Thank you very much for your
service and willingness to do what you do. Thank you, sir.
Mr. BOST. With that, Mr. Moulton has no other questions.
And, Mr. Luetkemeyer, do you have--okay.
With that, again, we want to say thank you to Mr. Walsh.
I want to thank you each for being here.
The hearing in which we discussed GAO last week showed
recurrent and systemic problems with the management at SBA.
These deficiencies must be addressed because so many
entrepreneurs depend on services that you provide through the
SBA. We must work together to ensure that good incentives, like
the SBIR, STTR, and SBIC programs, continue to help small
businesses stimulate the economy, create jobs, and rebuild our
country.
I sincerely hope that you, Mr. Walsh, in your new position,
and all of your colleagues at the SBA, will be willing to work
together with us in Congress in achieving that goal.
I ask unanimous consent that the members have 5 legislative
days to submit statements and supporting material for the
record.
Without objection, so ordered.
The hearing is now adjourned.
[Whereupon, at 3:53 p.m., the subcommittee was adjourned.]
A P P E N D I X
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairwoman Radewagen, Ranking Member Moulton and
distinguished members of the Subcommittee, thanks for inviting
me to discuss the SBA's Office of Investment and Innovation.
I'm pleased to detail our flagship programs--Small Business
Innovation Research (SBIR)/Small Business Technology Transfer
(STTR) and the Small Business Investment Companies (SBIC)--as
well as our successful support for Accelerators and Incubators.
I want to begin with a little background on me. I joined
the SBA a month ago. Prior to my arrival, I was a venture
capitalist, angel investor and corporate director for a number
of high growth startups and more mature companies in a wide
variety of industries. In addition, I spent a bulk of my career
in the technology arena--and served as CEO for a business to
business content and ecommerce company during the late 1990s.
Having spent over thirty years in the private sector, I know
the importance of this committee and the contributions that
programs in the Office of Investment and Innovation (OII)
offer. I'm honored to testify before this distinguished group
and to serve as the head of OII.
One of the best ways to communicate the power of our
programs is through examples. One of those is a San Francisco
startup called Lift Labs. We all know about the effects of
Parkinson's disease. Lift Labs created an ``anti-tremor'' spoon
that cancels up to 70% of the hand tremors associated with the
disease. With this spoon, an affected individual is able to eat
with dignity and confidence. This life changing product
received early stage capital from the National Institute of
Health's SBIR program. This early influx of capital allowed
Lift Labs to take its product from the research and development
stage to the market. Today, Lift Labs spoon can be purchased on
Amazon.
Successful trajectories like these are a priority for my
Office in SBA. Last year alone through my Office's flagship
programs, the U.S. government provided $2.5 billion to over
5,000 SBIR and STTR projects and our 303 Small Business
Investment Companies investment partners managed over $25
billion in private capital and SBA guaranteed leverage and
commitments, benefiting over 1200 small businesses.
Our SBIR/STTR program, labeled ``America's Seed Fund'', is
a key pillar in the federal government's strategy to provide
seed capital to talented entrepreneurs in science, technology
and engineering. Since its inception in 1982 the program has
awarded over 50,000 awards with $30B in funding to early stage
companies. SBIR/STTR funded companies have made lasting
contributions to the advancement of science and industry and
will continue to do so. Companies like Lift Labs, with SBIR
support, look to be the next potential big employers like past
SBIR recipients--companies like Qualcomm, Biogen, iRobot, and
Symantec.
Our Growth Accelerator Competition enters its third year.
To date, this program has invested nearly $7 million in 138
accelerators across the United States. Accelerators in 43
states, including the District of Columbia and Puerto Rico,
have received awards through this program. Last year alone, we
awarded 88 prizes to accelerators at $50,000 each. In the
coming year, resources made available in the FY 16 Omnibus
appropriation will allow us to continue this valued program.
Our Growth Accelerator Competition plays a crucial role in the
entrepreneurial ecosystem by enhancing the effectiveness of
organizations committed to providing financial and technical
assistance to American start-ups and small businesses. And
speaking of ``Buses'', we plan to continue our SBIR bus tour
with SBIR partners including incubators, in 21 states later
this year, spreading the good work about their work and their
potential.
The Small Business Investment Company's history is equally
rich. It channels long-term investment capital to America's
small businesses. Since it was created in 1958, over $80
billion has been invested helping finance 170,000 American
small businesses. In FY 15 the SBICs invested over $6.2
billion, in total financing between the SBA leverage and our
fund partners, to 1,210 portfolio companies which created or
sustained roughly 130,000 jobs. That is a 15% increase in
financings compared with FY 14. Each year we acknowledge two
SBICs of the year. In 2015, these awards when to Monroe Capital
of Chicago, IL which has had three licensed SBICs, and has
invested $260 million in 33 small businesses that employ. The
second SBIC of the Year for 2015 was NewSpring Capital from
Radnor, PA. NewSpring has had three licensed SBIC funds, and
has invested in 55 companies.
As head of the SBA's Office of Investment and Innovation, I
am committed to ensuring that more and more of our nation's
innovators and investors know about our programs and know how
to access them. The SBIR/STTR and SBIC initiatives are
foundational components of our mission. All of us look forward
to increasing success and demonstrable outcomes from the access
to capital we provide to America's most exciting arena: Small
Businesses.