[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]





FIELD HEARING IN LYNN, MA: COMMERCIALIZING ON INNOVATION: REAUTHORIZING 
 THE SMALL BUSINESS INNOVATION RESEARCH AND SMALL BUSINESS TECHNOLOGY 
                       TRANSFER PROGRAMS PART II

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

                                HEARING

                               before the

               SUBCOMMITTEE ON CONTRACTING AND WORKFORCE

                                 OF THE

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD
                             MARCH 8, 2016

                               __________

        
        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
        
        
                               

            Small Business Committee Document Number 114-048
              Available via the GPO Website: www.fdsys.gov
              
                                 ______

                         U.S. GOVERNMENT PUBLISHING OFFICE 

99-447                         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, Chief Counsel
                  Michael Day, Minority Staff Director
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                            C O N T E N T S

                           OPENING STATEMENTS

                                                                   Page
Ms. Judy Kennedy, Mayor, City of Lynn, MA........................     1
Hon. Richard Hanna...............................................     2
Hon. Seth Moulton................................................     3

                               WITNESSES

Mr. Walter M. (Jerry) Bird, President, MassVentures, Boston, MA..     6
Charles E. Kolb, Ph.D., President, Aerodyne Research, Inc., 
  Billerica, MA..................................................     8
B. David Green, Ph.D., President and CEO, Physical Sciences Inc., 
  Andover, MA....................................................     9
Ms. Ann Eskesen, President, Innovation Development Institute LLC, 
  Swampscott, MA.................................................    11

                                APPENDIX

Prepared Statements:
    Mr. Walter M. (Jerry) Bird, President, MassVentures, Boston, 
      MA.........................................................    21
    Charles E. Kolb, Ph.D., President, Aerodyne Research, Inc., 
      Billerica, MA..............................................    23
    B. David Green, Ph.D., President and CEO, Physical Sciences 
      Inc., Andover, MA..........................................    26
    Ms. Ann Eskesen, President, Innovation Development Institute 
      LLC, Swampscott, MA........................................    29
Questions for the Record:
    None.
Answers for the Record:
    None.
Additional Material for the Record:
    None.
 
                    COMMERCIALIZING ON INNOVATION: 
                   REAUTHORIZING THE SMALL BUSINESS 
                     INNOVATION RESEARCH AND SMALL 
                     BUSINESS TECHNOLOGY TRANSFER 
                           PROGRAMS, PART II

                              ----------                              


                         TUESDAY, MARCH 8, 2016

                  House of Representatives,
               Committee on Small Business,
     Subcommittee on Contracting and the Workforce,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 1:00 p.m., at 
the Lynn Massachusetts City Council Chambers, 3 City Hall 
Square, Lynn, Massachusetts, Richard Hanna [chairman of the 
Subcommittee] presiding.
    Present: Representative Hanna.
    Also Present: Representative Moulton.
    Ms. KENNEDY. Good afternoon, everybody. My name is Judy 
Kennedy. I am the mayor of the City of Lynn, Massachusetts, and 
we are so proud to be able to host this field meeting on behalf 
of Congressman Hanna and Congressman Moulton.
    I would just like to tell you a little bit about the SBIR 
Program that will be discussed today. The Small Business 
Innovation Research Program, which is known as SBIR, is a 
highly competitive program that encourages domestic small 
businesses to engage in Federal research and research and 
development, that has the potential for commercialization. 
Through a competitive awards-based program, SBIR enables small 
businesses to explore their technological potential, and 
provides the incentive to profit from its commercialization. By 
including qualified small businesses in the Nation's R&D arena, 
high tech innovation is stimulated, and the United States gains 
entrepreneurial spirit as it meets its specific research and 
development needs.
    I am so pleased that today's hearing is going to be chaired 
by Congressman Richard Hanna from New York, who is here 
visiting with us today, as well as our own congressman from the 
6th District, Seth Moulton. It is very nice to see this 
bipartisan cooperation. With everything that goes on in 
Washington and the stories we hear, you would think that this 
would be a rare sight. And I am truly hoping that it is not, 
and I am hoping that more of our congressmen and women will 
follow the lead of these two fine gentlemen.
    So, again, welcome to all of you, and I would like to turn 
this hearing over now to Chairman Richard Hanna. Chairman 
Hanna?
    Chairman HANNA. Thank you, Mayor. Thank you, everyone. I 
call this hearing to order.
    Again, I want to thank you all for being here. It is a 
pleasure to be here. I have never seen a city hall as nice as 
this in my life, and I have visited a lot of them. It really 
shows the foresight of the people who built it to be a 
wonderful auditorium, and it is just great.
    Today we are holding the second of two hearings our 
Committee has conducted this month concerning the 
reauthorization of the Small Business Innovation Research and 
Small Business Technology Transfer Programs, also known as 
``SBIR'' and ``STTR.''
    Before I begin, though, I want to thank our ranking member, 
Mr. Moulton, for inviting us to be in his district today. In 
the short time we have served together in the House, I have 
found him to be a tenacious advocate for his constituents and 
for the causes he cares about. I would expect nothing less from 
a marine, especially one with his pedigree. Although we have 
only worked together for about a year on the Small Business 
Committee, he has shown a great willingness to work across the 
aisle, find solutions for the challenges facing America, and 
further improve small businesses climate. I am very happy to be 
here with him, and I can say that honestly. It is not just 
rhetoric. I have watched Seth work, and he is a very bright and 
dedicated individual.
    Innovation is the engine that drives our economy. 
Technological breakthroughs in entrepreneurship build our 
economy by finding state-of-the-art solutions to difficult 
problems. In this era of globalization, making it easier for 
small businesses to develop and commercialize new innovative 
products is essential for America's competitiveness and 
national security.
    This is why programs like SBIR and STTR are so very, very 
important. Their purpose is to increase government of small 
businesses that conduct R&D with a focus on technology and high 
commercial potential. By including small businesses in the 
Nation's R&D effort, SBIR and STTR awards stimulate innovative 
new technologies that help Federal agencies in a wide variety 
of areas. These programs are important because the awards go to 
small innovators who have always been at the cutting edge of 
science and technology, like the folks here on our panel today.
    You are the ones that have the ideas and the willingness to 
take big risk and search for big rewards. Maybe you quit your 
job and started your business in your garage. Maybe you worked 
on the side with one of your colleagues to turn an idea into 
reality. Whatever your individual story is, the entrepreneurial 
spirit is what drove you to create this new technology that 
your country benefits from.
    The next big thing does not just materialize. It happens 
with a lot of late nights and even more sweat. Ideas matter, 
but it is executing those ideas is what is most important. 
Obviously not every idea is a good one. I work in Congress. 
I've seen this firsthand. But the long odds rarely discourage 
entrepreneurs. The successful ones keep driving forward, 
thinking, inventing, and renewing our economy in the process.
    That is why these programs are so vital, whether it is a 
new software system, or tracking contract payments, a new 
medical device to help with cancer treatment, or a new piece of 
technology that saves lives on the battlefield, the SBIR and 
the STTR programs have consistently delivered results across 
many, many agencies.
    These programs were last authorized in 2011. In order to 
give entrepreneurs stable predictability, we are getting a jump 
start on reauthorizing them before next year's deadline, which 
is part of why we are having this hearing and had the last one 
a couple of weeks ago.
    Today we have a very distinguished panel of private sector 
witnesses who have participated in the programs or worked with 
small firms that have participated in the programs. We look 
forward to hear from your experiences and listening to your 
suggestions on how we can make these good programs even better.
    Again, I want to thank you for allowing me the privilege of 
being in your community. I would like to yield now to my good 
friend, Ranking Member Mr. Moulton, for his opening remarks.
    Mr. MOULTON. Thank you, Mr. Chairman. Let me first thank 
you for driving all the way out here from New York to be with 
us here in the 6th District in Lynn, and to tangibly thank you 
for your trip. I have a small gift for you.
    Chairman HANNA. Oh.
    Mr. MOULTON. It is not a product of the SBIR program, but 
it is a proud product of Lynn that makes your trip entirely 
worthwhile. It is, of course, a big tub of marshmallow fluff.
    [Laughter.]
    [Applause.]
    Chairman HANNA. I always thought this stuff came from 
space.
    [Laughter.]
    Well, thank you. Thank you very much.
    Mr. MOULTON. Mr. Chairman, your leadership on this 
Subcommittee and your leadership on the Committee at large 
means a lot to me as a freshman, and as a freshman who is in 
the minority and was elected on a platform of bipartisanship, 
but has had to go to Washington to figure out how to actually 
make that happen. And I will tell you, I found a welcome home 
on the Small Business Committee.
    I passed my first bill in the House of Representatives out 
of the Small Business Committee, which is because of the 
bipartisan working spirit that we have on that Committee. And 
it is thanks to people like you who are willing to across the 
aisle, even when it may, you know, create trouble in primaries 
back home or whatnot, that I am able to do that. So thank you 
very much for your leadership in this difficult Congress.
    We are very glad to be here with you today to discuss the 
SBIR and STTR programs. Since their establishment, these 
programs have helped launch tens of thousands of successful 
research projects, many of them right here in Massachusetts. In 
the past 30 years, the SBIR and STTR programs have become major 
sources of funding for small businesses, and on average, more 
than $2 billion each year is awarded through these programs.
    With these awards, companies in Massachusetts are working 
on a wide array of research, from a business in Wilmington 
working with the Navy to develop a smaller lightweight laser 
module for NAVSEA, to a Cambridge firm designing a system for 
modeling cyber behaviors to assess risk. Firms are researching 
and developing products that have helped increase military 
efficiency and minimize adversarial threats, and these are just 
some examples coming out of the Department of Defense.
    At HHS, another Massachusetts firm is developing a device 
that provides compression to amputees with poor blood flow in 
their limbs. And at the EPA, an awardee in Marlborough is 
developing a nanofiltration system that targets emerging 
contaminants in the water supply like pharmaceuticals and 
pesticides. After today's hearings, a few SBIR participants 
showcase their research and technology around the room, further 
demonstrating the innovative solutions that businesses in the 
6th District and beyond are coming up with to solve the 
problems that agencies are facing today.
    Not only do these discoveries aid government agencies, they 
also help our communities by allowing small companies to be 
innovative and think big. SBIR and STTR funded firms generate 
economic growth and create job opportunities in local 
communities. I look forward hearing the personal stories of our 
witnesses as to how these programs have allowed them to 
contribute to our community.
    These programs were last reauthorized in 2011, and are set 
to expire, as the chairman said, in 2017. It is the Small 
Business Committee's goal to pass a reauthorization during this 
Congress so as to provide both agencies and businesses the 
certainty that these programs will continue.
    Yet before we do so, it is important to take stock of the 
most recent reforms and determine how we can improve these 
programs to better suit small businesses. Last week the 
chairman and I had the opportunity to hear from various 
agencies about the administration of these programs and ways by 
which they are making them more accessible to applicants. But 
equally, if not more important, is feedback from the actual 
small business owners who are participating in these programs.
    The last reauthorization contained various provisions aimed 
at commercialization, and I am interested to hear how the SBIR 
and STTR communities have received these reforms. Additionally, 
there have been several efforts made to diversify the 
applicants to these programs. Unfortunately, there has not been 
as much success on this front, so I am especially looking 
forward to hearing from our panel to learn how we can get new 
companies interested in the programs.
    I hope that today's hearing can shed light on some of the 
issues small businesses face in this program to help us 
identify ways to improve these programs during the upcoming 
reauthorization. As we have seen, Massachusetts SBIR and STTR 
participants are leading the way in research, and I am 
privileged to be here today to solicit their advice.
    With that, I would like to thank the panel for their 
testimony, and, again, thank Chairman Hanna for joining us here 
in Lynn. Thank you, and I yield back.
    Chairman HANNA. Maybe you would like to introduce your 
witnesses.
    Mr. MOULTON. It would be my pleasure to introduce our 
witnesses. And I will start with Ann, Ann Eskesen, the 
president of Innovation Development Institute located in 
Swampscott. At the institute, Ms. Eskesen helps SBIR and STTR 
participants bring their technology from the labs to the 
marketplace. She is a long-time advocate of these programs and 
we are happy to have her here today to share her expertise.
    Next we have Dr. David Green, President and CEO of Physical 
Sciences, Incorporated, located in Andover, who will today 
testify on behalf of the New England Innovation Alliance. NEIA 
is an informal association of small high-technology companies 
in New England. It acts as forum for small businesses, allowing 
them to share their experiences and challenges as they have 
done business with the U.S. government. Dr. Green has a Ph.D. 
from MIT in physical chemistry and is active in the R&D 
operations of PSI, a company with approximately 200 active 
programs annually.
    Next, we are also joined by Dr. Charles Kolb, President of 
Aerodyne Research, Incorporated. I am proud to say that 
Aeorodyne is located in Billerica, right here in the 6th 
District, and specializes in advanced sensor and software 
projects. Dr. Kolb first joined Aerodyne in 1971 after 
completing his Ph.D. in physical chemistry at Princeton.
    He has authored or co-authored over 225 publications, and 
has actively participated on various National Academy of 
Sciences boards and committees related to atmospheric and 
environmental science. I had the opportunity to speak with Dr. 
Kolb in December at the SBIR/STTR Innovation Awareness Day, and 
I am grateful that he is here today to share more about his 
company. Thank you.
    Lastly, we have Mr. Jerry Bird. Mr. Bird is the President 
of MassVentures, located in Boston. Mr. Bird has over 25 years 
of experience advising and financing companies, including 19 
years working in venture capital. He has operated both as an 
investor and an active partner in helping entrepreneurs build 
their firms. We have heard from many small businesses that they 
have difficulty accessing additional capital for their 
research, so I look forward to hearing from Mr. Bird about what 
businesses can do to attract investors.
    Thank you all for being here today.
    [Applause.]
    If Committee members have an opening statement prepared, I 
ask that it be submitted for the record.
    We do not have lights for the 5 minutes. We do, okay. Got 
it, right there in front. Okay.
    So let me just explain the timing lights here in front of 
us, familiar to those of us who spend time in Washington, but 
certainly new to me this year. So basically you all have 5 
minutes. The light will start out as green. When you have 1 
minute remaining, the light will turn yellow, and then finally 
at the end of your 5 minutes, it will turn to red. And try as 
best you can, please, to adhere to the time limit.
    Okay. Mr. Bird, why do we not start with you?

STATEMENTS OF WALTER M. (JERRY) BIRD, PRESIDENT, MASSVENTURES, 
   BOSTON, MASSACHUSETTS; CHARLES E. KOLB, PH.D., PRESIDENT, 
  AERODYNE RESEARCH, INC., BILLERICA, MASSACHUSETTS; B. DAVID 
   GREEN, PH.D., PRESIDENT AND CEO, PHYSICAL SCIENCES INC., 
ANDOVER, MASSACHUSETTS; AND ANN ESKESEN, PRESIDENT, INNOVATION 
      DEVELOPMENT INSTITUTE LLC, SWAMPSCOTT, MASSACHUSETTS

              STATEMENT OF WALTER M. (JERRY) BIRD

    Mr. BIRD. Thank you. I want to thank Chairman Hanna and 
Congressman Moulton for inviting me to testify today on the 
critical need to reauthorize the SBIR/STTR program. My name is 
Jerry Bird and I'm the president of MassVentures.
    MassVentures is a quasi-public venture capital firm based 
in Boston and focused on fueling the Commonwealth's innovation 
economy by funding early-stage, high-risk, high-growth 
potential Massachusetts startups as they move from concept to 
commercialization. We were honored last year to receive the 
prestigious Tibbetts Award from the SBA, recognizing our 
significant role in driving innovation and creating new jobs 
through the SBIR and STTR programs.
    When MassVentures was formed 38 years ago, it was the first 
program of its kind in the country. As if often the case here 
in Massachusetts, our model and our mission, which is to 
provide start-ups with early funding, guidance in operations, 
finance, and sales, and position them for additional rounds of 
funding from the traditional VC sources, has now been 
replicated across the country and across the world.
    In our 38 years, MassVentures' portfolio companies have 
raised an additional $1.1 billion in other investors' capital. 
They've directly created 7,500 jobs in Massachusetts, and 16 
have gone public. In many cases, these companies got going 
based on SBIR/STTR funding.
    The SBIR/STTR programs have played a vital role in 
harnessing the immense human capital of Massachusetts' higher 
education, medical and research institutions. The programs 
provide opportunities to small firms which create great ideas, 
but are unable to attract traditional venture capital funding, 
or need seed funding to pursue those projects because the 
private sector has decided they are too high-risk, too early, 
or not lucrative enough. However, it's exactly these high-risk, 
high-reward projects that truly drive innovation in 
Massachusetts.
    There is no question SBIR/STTR was been effective in 
allowing concepts to begin the road to commercialization, but 
even after 2 years of funding, many companies weren't ready. 
Research was still ongoing, prototypes needed testing, or often 
the company's founders weren't ready to juggle innovation with 
the everyday demands of operations, finance and sales. It's 
hard to master your elevator pitch when you're spending all 
your time in a lab trying to create something that's never been 
created before.
    The Federal government has played its role. SBIR/STTR has 
brought many companies to the verge of commercialization, but 
there were still too many instances where we were left asking 
what could've been. A gap remained.
    In 2012, we created the SBIR Targeted Technologies 
program--START--to bridge that gap and ensure growing 
Massachusetts companies would be able to commercialize 
technologies that had been developed under SBIR/STTR contracts. 
Recognizing that innovation, invention, and disruption take 
time, the START program provides up to 3 additional years of 
funding for these SBIR projects.
    Stage 1 companies get $100,000 grants. A year later, stage 
2 companies receive $200,000 grants, and the third year, two 
companies are eligible for $500,000 grants. So the most 
successful ones received $800,000 strictly to commercialize. In 
just 4 years, START has provided $9 million in grant funding to 
40 deserving companies. These companies have already gone on to 
raise an additional $138 million of capital, and seen at least 
a 30 percent employee growth in Massachusetts.
    We've created an ecosystem of more than 200 companies, 
reviewers, service providers, and advisors. For example, 
Energid of Burlington and Cambridge started as a robotic 
software company serving that created software to control the 
robotic arm on the space shuttle. It was clear that there was a 
broader application for their software and expertise, so it 
took the risk of creating a small arm-sized robot to 
demonstrate the power and potential of its software. In 2013, 
we awarded it a stage 1 grant.
    The company has gone on to sell its robots to early 
adopters, and is now in discussions with major global 
corporations and poised to sell thousands of units. Again, 
technology developed to control the robotic arm of the space 
shuttle is now to assemble components and even pick oranges. A 
Massachusetts-based software company, supported through 
MassVentures, the SBIR program, and START, Energid has emerged 
as a leading robotic technology company.
    START has proven innovation can happen anywhere. While we 
evaluate them as investment professionals, there is nonetheless 
a remarkable geographic diversity among START winners. 
Companies outside of Boston and Cambridge that might have 
otherwise lacked the time, resources, support, or network 
necessary for success now have it. There are START companies in 
Barnstable, Canton, Charlton, Georgetown, Newburyport, and 
Wilbraham, and they all have the potential to be economic 
anchors in their community.
    Just as MassVentures was, we believe the START program 
should serve as a national model for how States can best 
leverage the Federal government's investment through the $2 
billion a year coming out of the program. These programs are 
essential in order to allow American scientists and researchers 
to innovate, invent, and discover the technologies of tomorrow. 
But States must also do their part to build on the progress 
made through the SBIR/STTR funding, and ensure those 
technologies of tomorrow are not always a day away.
    We encourage you to reauthorize the SBIR/STTR program so 
Massachusetts can continue to work with the Federal government 
to grow and commercialize world-changing companies. Thank you.
    [Applause.]
    Mr. MOULTON. Thank you very much, Mr. Bird.
    Dr. Kolb?

              STATEMENT OF CHARLES B. KOLB, PH.D.

    Mr. KOLB. Mr. Chairman and distinguished Ranking Member, 
thank you for inviting me to testify today about the 
effectiveness of the Small Business Innovation Research and the 
Small Business Technology Transfer programs.
    My company, Aerodyne Research, Incorporated, was founded in 
late 1970 as a contract research organization focused on 
improving the Nation's strategic defense systems. We have 
subsequently broadened our range of expertise to include energy 
technology and major environmental issues such as stratospheric 
ozone depletion, ambient air quality, acid deposition and 
climate change.
    The SBIR program, started in 1982, and the STTR program, 
started in 1992, have become major sources of federal R&D 
funding for many scientists and engineers employed by small 
businesses. However, the Federal agencies' expectations for 
successful SBIR and STTR grants or contracts are significantly 
higher than expectations for normal research funding.
    SBIR and STTR funding is expected to produce the same level 
of new scientific understanding and technological advances as 
normal R&D funding, all properly documented in scholarly 
articles and patents in most cases. However, SBIR and STTR is 
also expected to produce an innovative product that either 
solves a mission agency's designated need or can be easily 
engineered to compete successfully in commercial markets. 
Ideally both mission agency adoption and commercial sales 
success are achieved.
    At ARI we have adopted a strategy of using SBIR and STTR 
funds to develop proprietary technology that we can use to 
expand our own staff's research capabilities, then we sell to 
our R&D peers worldwide. Our most successful tactic is to 
develop new and better ways to measure both gas phase and small 
aerosol particle pollutants in real time and with very high 
sensitivity and specificity.
    Starting in the mid-1990s we have used SBIR and STTR funds 
to develop three lines of mobile, robust instruments that can 
be used both in the laboratory and in field measurements to 
measure the properties and concentrations of air pollutants.
    Since 2000, the increases in the capabilities and sales of 
these three instrument lines have evolved dramatically. From 
2000 to 2015, our instrument sales have grown from less than a 
million to over $14 million per year. In Fiscal Year 2015, 
instrument sales provided 60 percent of our corporate revenue 
with R&D projects supplying 35 percent.
    Over the past 15 years, we have earned $80 million from 
instrument sales to customers on six continents, with 
approximately 80 percent of the sales outside the U.S., helping 
our Nation's balance of payments. We have also hired a 
significant number of instrument engineers and assembly 
technicians to help develop, assemble, test and service our 
instrument product lines.
    We are proud of our scientific accomplishments as well. 
During the Fiscal Year 2000 to 2015 period, we were supported 
by other funding sources to perform over $18 million worth of 
laboratory and field measurements using our instrument 
products. Recent sponsored research projects have measured 
methane and other pollutant emissions from oil and gas 
operations, including fracking well pads, gas plants, 
transmission pipeline compressors, and gas storage facilities 
all over North America, including the recent Aliso Canyon gas 
storage facility mega leak near Los Angeles. We have also 
recently mapped air toxic pollution levels in poor 
neighborhoods near the Houston Ship Channel, and measured trace 
gas and fine particle air pollution levels in Beijing.
    Our research staff contributes to our Nation's reservoir of 
scientific knowledge. In 2015, ARI scientists published 75 
peer-reviewed archival papers, most based on measurements using 
our instrument products. We also received three U.S. patents 
for innovations to improve instrument performance.
    ARI has twice been named the Department of Energy's SBIR/
STTR Company of the year in 2006 and 2013. These awards 
recognize our staff's contributions to DOE's environmental 
research programs as well as our supplying national laboratory 
scientists with important new research tools.
    At our company and many hundreds of others, support from 
SBIR and STTR programs has successfully stimulated the 
production of the full range of scientific, technological, and 
economic benefits envisioned when Congress creates these 
programs. Reauthorizing them will serve our Nation well.
    Mr. MOULTON. Mr. Kolb, thank you very much.
    Dr. Green?

               STATEMENT OF B. DAVID GREEN, PH.D.

    Mr. GREEN. Yes, good afternoon, Chairman Hanna and Ranking 
Member Moulton. Thank you for your interest in the SBIR program 
and allowing our innovative companies to participate and share 
their stories with you today.
    SBIR represents America's seed capital and has created many 
new companies, excellent high technology jobs, and many 
publications and patents. Its success has not been duplicated 
anywhere in the world.
    The SBIR program funds concepts at a very early stage where 
no other similar funding source exists. It allows the risk 
takers to retain and reap the rewards of their dedicated 
efforts. The government and the agencies are patient investors; 
however, ultimately the investment is returned through taxes. 
Recent studies by the National Academies and by the mission 
agencies report its great success. Every government dollar 
results in over $3 of revenue after the phase 2 program.
    SBIR is a great program, but I wish today to make three 
suggestions for your consideration to make it even better.
    The SBIR program has demonstrated its value over the past 
33 years. Please make it permanent. A long-term charter for the 
program allows for better agency planning and staffing. The 14 
short-term continuations before the last reauthorization made 
it difficult for the agencies to execute the program, and made 
it impossible for the small businesses to maintain staff and to 
advance their technologies.
    Since reauthorization, the SBIR program managers and staff 
at SBA and at all the agencies have shown great dedication and 
commitment to making this good program even better, and to make 
ever more companies aware of it existence, and we thank you.
    My second suggestion is to increase the allocation to the 
SBIR program. This program is budget neutral. Our request is to 
shift more resources to the program that has proven its 
effectiveness. Currently only 3 percent of the R&D funding in 
Federal agencies is allocated to SBIR. I ask that you increase 
that allocation gradually to 5 percent over the next decade, 
and to focus the funds from that increase to maturing 
technologies after the initial phase 2 program.
    For years, many worthy technologies have died at the 
conclusion of phase 2 programs because the technology, although 
demonstrated, is not in a form recognized as viable by a 
commercial company or by a mission agency. The gap has become 
known as the Valley of Death for SBIR technologies. Too many of 
them do not make it through to become viable commercial 
products. Many receive some post-phase 2 funding, but it is too 
little, too fragmented, and too restrictive.
    The Commercialization Readiness Program created in the 2011 
Reauthorization has begun to address this need. I urge you to 
consider increasing the SBIR allocation and focusing it on 
further maturation of promising technologies after phase 2.
    My last suggestion is to make access to the SBIR program 
easier so that a wider diversity of companies compete and win 
programs. We all understand that it is not easy doing business 
with the Federal government. Instructions are complex. 
Submission is complex. Regulations are complex. The requirement 
for a government-approved accounting system is a very large 
barrier to new participants. We ask you to consider strongly 
encouraging the agencies to use fixed price best efforts 
contracts for phase 2 programs, with the prototype remaining at 
the small business to enable its transition to a commercial 
product. This will reduce the burden on both the companies and 
the government contracting officers to a fraction of the level 
that is needed in cost plus type contracts.
    Fixed price will enable speedier contract awards and more 
rapid advances in technology. The innovators will spend more 
time on their technology rather than complying with the FAR. 
Most importantly, this will encourage many new entities to 
participate in the SBIR program.
    Our employee-owned company, PSI, has successfully 
transitioned many SBIR technologies. We find the fastest way to 
move the technology to market. Just one example. Under NIH-NEI 
sponsorship, PSI, working with clinical researchers, developed 
a retinal tracking method permitting greatly improved eye 
examinations. We partnered with a leading eye equipment 
manufacturer, and they have sold 16,000 systems containing our 
technology over the last 8 years, producing $1 billion in 
revenues for that company, and also, more importantly, 
providing better eye care for tens of million Americans.
    We've also developed a variety of other technologies and 
environmental monitoring. Through DNDO sponsorship, PSI has 
implemented novel algorithms that vastly improve radiation 
sensor performance at screening portals. And under Army 
sponsorship, we have developed a small UAV to provide our 
warfighters, law enforcement, firefighters with situational 
awareness. This capability increasing national security and 
already being used outside of this country, saving lives of our 
military.
    The SBIR program is one of the most successful in the 
government. Today I have offered three suggestions to improve 
this wonderful program. I ask you to please move to reauthorize 
this program now, to increase its allocation, and to use 
contracting methods that encourage new companies to 
participate. SBIR's success is documented in the National 
Academy studies. I ask you to reauthorize it to keep technology 
innovation strong in America.
    Mr. MOULTON. Thank you, Dr. Green.
    Ms. Eskesen?

                    STATEMENT OF ANN ESKESEN

    Ms. ESKESEN. Thank you, sir. First of all, I appreciate 
your scheduling this hearing because it is a different type of 
hearing, I think, than those that we've had previously, and for 
giving me opportunity to be one those involved.
    As you mentioned, I was part of the small group that was 
involved in the development, and the passage, and the 
implementation of the original enabling legislation. And that 
means that I bring a very different perspective to this hearing 
than some of those we've heard from individual awardees.
    Clearly, as a long-time SBIR advocate, I strongly support 
reauthorization, and I think the ideas you've heard mentioned 
are ones very well worth consideration. But I'd also argue that 
if we're truly to draw down the full value of what SBIR has 
created, we must understand what that full value is and factor 
it into our discussions. In my judgment from over 35 years of 
SBIR involvement, SBIR is better understood not simply as a 
small business program, but one with enormous, powerful, and 
considerable impact in the debt of new technologies, new 
businesses, and an economic development resource that should be 
managed as such.
    I might even argue, just as Roland Tibbetts who recently 
died, the creator of much of SBIR's program structure, it is 
probably one of the most important pieces of legislation the 
Congress has ever passed. With hundreds of success stories and 
so many studies by the National Academy and the GAO, that if 
you stacked them up in front of me, you wouldn't be able to see 
me.
    It seems like the 23,000 companies that have been involved 
in the SBIR have stories to tell that are enormously important 
in their extent and in their diversity. But even after all this 
debate and discussion, truly unique, what is important to 
recognize is that what SBIR has created is half a million 
graduate-level engineers and scientists making that population 
probably the largest single concentration of technical talent 
that exists anywhere.
    When I was asked to testify, I was asked to include in my 
testimony some mechanisms to educate you on some of those 
program impacts, and I did that in a fair amount of detail, and 
I will quickly go over some of it here. But what it comes down 
to is that perhaps reauthorization is to argue that we live in 
radically changed and changing times. And in a very real sense, 
we're still managing SBIR as we did when we created it 35 years 
ago. And it is important that in order to make decisions about 
how we're going to change the program, we need to be basing 
those decisions on actual. There's a novelty, making policy 
decisions based on factual information.
    A caveat: I am not suggesting in some of my recommendations 
that SBIR is a causative agent. It isn't. SBIR funding has made 
it possible for a whole lot of people, some here at this table 
and others in the room, to do things that are quite 
extraordinary. They got the tools that they needed to do the 
job.
    What I'm trying to argue is that the $43 billion you have 
so far invested, and that's a term very carefully chosen, has 
created an identifiable, verifiable pool of technical talent 
and capacity that the VC community, evidence is clear, and the 
major corporate community are already tapping into. We should 
as a country be systematically mining and engaging this talent 
to include moving away from the stovepipe type approach to 
project management, which defines SBIR, to doing something 
about the balkanization of the program that is now clearly 
occurring where companies in one agency are not known in any 
sense by any other agency, and all the agencies are now very 
different in the way they operate.
    When I organized the thoughts I put together for this 
presentation, I looked up the term ``realize.'' I want you to 
realize the value of what SBIR has created. The easy part is 
you understand that there has been this enormous impact. The 
second part, which is a new thought for many, is that 
``realizing'' as a verb means drawing down and making a profit 
from what it is you have created.
    So what I've tried to do in the testimony I provide you is 
give you an overview of the extent of venture capital 
involvement in the SBIR program. We track every venture capital 
transaction, and we now have solid data that $90 billion worth 
of venture capital has already followed the $43 billion, but 
has gone to a very small subset of the SBIR program.
    We're the largest single creators of intellectual 
property--on a daily basis, between 10 and 14 patents issued to 
SBIR companies in the United States. That's 365 days a year, 7 
days a week. We have an incredibly high, extensive activity of 
M&A transactions. Nearly 9 percent of SBIR companies are being 
acquired. They're being acquired by major and mid-source 
corporations, who, for reasons I probably don't have time to 
discuss in my 5 minutes, have enormously reduced their own 
internal R&D capability, and are compensating for that lack of 
capability by bringing in and engaging the small business 
community.
    We also provided you data to give you indication of the 
employment impact that the SBIR community has had. We 
collectively as a group, and the data is very solid, have 
created, are responsible for almost 7 percent of all STEM jobs 
in the United States economy, 20 percent here in Massachusetts. 
Unfortunately, sir, less than 60 percent in the State of New 
York.
    What I'm trying to suggest is that we continuously track 
the SBIR program, and in my testimony I gave you a list of some 
of the things that we track. And what we're seeing is that SBIR 
is a mirror. It's almost like a mirror for what's going on in 
the economy overall, but it is also, when you break it out in 
detail, gives you a clear indication of how the economy is 
functioning. And our job becomes not simply to modify now the 
program runs for those who are in it, but how it can be 
effectively drawn down as the economic asset that it truly is.
    Forward thinking of members of the Senate allowed us to get 
the legislation passed for SBIR originally almost unanimously. 
We hit the skids in the House. But the upshot was despite that, 
we finished up getting the legislation passed. We were 
subjected to the ultimate of torture, which was a 7-committee 
sequential referral.
    But after the legislation was passed, I was recruited by 
the SBA to get out the word to the SBIR community potential of 
the availability of this resource. And the second was to make 
sure that the agencies who had been a primary source of the 
opposition to the creation of the program were, in fact, in 
compliance with the law.
    That two-pronged requirement resulted in my doing what I 
needed to do, which was simply to follow the money, and to keep 
the SBIR record. And I have no intentions of that becoming my 
life's work, but eventually that is what it's actually become.
    So what I've given you in the full testimony is a clear 
indication of how the money has flowed. One of the things that 
we did do is we looked at things like understanding who's new 
to the program and who isn't. And one of the charts, which I 
hope you pick up on, if to give you clear indication that 
despite, since the last reauthorization, an increase in the 
availability of funding, the number of awards, the number of 
companies that are involved in the program has dropped 
precipitously.
    And that precipitation, I'm suggesting, is partly to do 
with the change in the rules when it came to who's eligible for 
venture capital in the SBIR program. Venture capital has always 
been a factor in the SBIR program, and I have a table in my 
testimony that plots that by every single agency. But it's 
startling when you realize that a full 61 percent of all of the 
venture capital funded firms in the SBIR program have an NIH 
connection.
    What's interesting and not nearly so obvious is that there 
is also a similar connection of something like 32 percent of 
all those who are VC funded are in DOD. Those are very exciting 
numbers, but as a practical matter, it also means that there 
are huge percentages of companies that are not getting venture 
capital, and whose access to the additional resources they need 
are seriously curtailed.
    One thing I will finish up on the VC component is that it 
is important to recognize that, and we document this very 
carefully, $1 in $6 invested by the venture capital community 
in the United States is going to an SBIR company. Those guys 
are not fools. They are going to where the quality is, where 
the value is, and where the potential is. And we should very 
proud of the fact that they're coming, but also very scared of 
the fact that they're coming in such very large numbers.
    I find myself asking the question, when we are funding 
companies that are in receipt of major amounts of venture 
capital, whom are we not funding where that company's access is 
not into the venture capital funding which is available to so 
many others. I mentioned that we have been very active in the 
patent area and in the VC area, but one of the things I want to 
move on to is the fact that the large corporations are 
increasingly, for a whole lot of reasons I can explain, 
downsizing their internal R&D operation, and coming in major 
numbers to the SBIR program. The data I gave you on M&A shows 
clearly who's buying SBIR companies, and it's predominantly the 
major corporations.
    There is a steady stream of people who are from major and 
mid-sized corporations who are coming to SBIR because it is the 
largest single concentration of technical talent. When we were 
passing SBIR originally, 15 percent of engineers and scientists 
with graduate-level degrees were employed in small firms. That 
number is now 37 percent. 37 percent. And yet the amount of 
money that we're getting in the SBIR program has not 
substantially increased over that same time period.
    What I also tried to do because you asked me to look for 
talking points, and obviously I've run out of time, and so I'm 
going to give these very quickly. We think there are lessons to 
be learned from how the venture capital community managed their 
portfolio that could be applied managing SBIR as a portfolio, 
not the whole program, but let's try it out as a pilot. The 
second is my judgment, based on what we're looking at right 
now, is that the agencies have become much more risk averse 
than they used to be. They are increasingly asking for projects 
that have a near-term application and requirement, and we are 
no longer doing the work, the call contact work, where Irving 
Jacobs told you in Congress that SBIR funded their work at a 
point in time when nobody else would give them the time of the 
day. We're doing far less of that than we used to be doing.
    We need to be looking at ways in which the SBIR community 
has access to demonstration funding. There is in every agency a 
pool of money that is designated for those regularly in receipt 
of R&D funding to go on to the prototype development activity. 
We don't have any sort of access, and a second phase to is, 
frankly, not the answer which is what the last legislation did, 
because that simply reduces the pool that's available for other 
companies.
    We need to empower the program managers to allow them to do 
things that are different from the way that they have 
previously been doing. Navy years ago, for example, 
deconstructed a project for containership and security, divided 
it into nine component pieces, recruited nine SBIR companies, 
put them together as a team. And that technology is now the way 
that the system for containership and security in the United 
States is completely handled.
    We should be doing more of these types of things, not 
expecting the small firm to put the whole pathway to 
commercialization, but to bring their talents to bear in team 
type projects that are far more valuable. We need to empower 
the SBIR program managers, probably the most dedicated group of 
Federal employees you're ever going to find. Give them an 
opportunity to try out ideas and not be looking over their 
shoulders to see whether or not that will draw them trouble.
    We need to encourage SBIR companies to look at other ways 
of generating revenue. In the VC community, it is a commonplace 
condition that the technology that you own has a broader set of 
applications than you can apply, and so you license that 
technology out and generate a revenue stream. We don't do that 
in the SBIR program, and we should be doing that.
    And here ends the lesson. Thank you.
    [Applause.]
    Chairman HANNA. Thank you very much. I will yield to 
Congressman for the first question.
    Mr. MOULTON. Thank you, Mr. Chairman. Ann, in our 
compelling and lengthy testimony, you mentioned that there are 
different agencies that oversee programs, and this is something 
that we heard during our recent hearing in Washington, that not 
all the agencies handle things the same, and the results differ 
as well.
    And so, I would like to ask the rest of the panel to 
comment on any differences that you have seen among the 
agencies' administration of this program. And where are there 
lessons to be learned? Charles?
    Mr. KOLB. I think as you know, Representative Moulton, in 
addition to running Aerodyne, I have served since 2002 on the 
National Research Committee that at Congress' request compares 
the program's 5 largest agencies, and tries to identify best 
practices and identify core practices, and encourage them to 
learn from one another.
    We find that, for instance, in some agencies, SBIR and STTR 
programs are run really as a single entity. There is very 
little distinguishing the two except for some rules about how 
much money might go out to a non----
    Mr. MOULTON. And is that a positive thing or negative thing 
when they are run as----
    Mr. KOLB. Well, our interpretation, and this is brought out 
clearly in the STTR report for the five agencies that was just 
published by the National Academy, is that in the various 
agencies, some agencies have a desire to promote more basic 
research as we heard, and others do not. And the areas where 
more basic research is not as highly valued as some of us thing 
it should be, this special access to universities and other 
non-corporate nonprofit research agencies, research institutes 
that STTR promotes directly particularly is not an added 
attraction for some of the agencies.
    Mr. MOULTON. Well, let me just get to the heart of it. I 
mean, do you think it is a good thing or a bad thing when these 
programs are managed together?
    Mr. KOLB. Well, our conclusion is that the program managers 
are using the STTR in the way that works best for their agency, 
and it is just a fact that some agencies are moving away from 
sponsoring as much fundamental research as the program used to 
have. And I think there is a wide feeling among the SBIR 
companies that maintaining some very fundamental research 
topics in the solicitations actually would be very good for the 
program going forward.
    Mr. MOULTON. Thank you. David?
    Mr. GREEN. I agree that there should be a different 
approach. There are certain agencies that, let me us the 
expression, mission agencies such as the Department of Defense, 
in which they would be a potential customer, not the exclusive, 
but a customer for the technology. And I think that over the 
last decade the Department of Defense has become aware of how 
valuable this new technology development program can be to 
provide technology spiral upgrades toward the national mission.
    And so, clearly their emphasis should be, would be, of 
necessity different than perhaps the National Science 
Foundation. But I think there needs to be a room for both of 
those opinions and those emphases. Even within DOD, there 
should not be an emphasis only on the highest technology 
readiness level, TRL, that there needs to be some in this 
valley of death.
    This technology has reached a certain maturity, but it is a 
long way away from the TRL-9, if you will let me use jargon, 
the highest technology readiness level where you can hand it to 
a warfighter or put it on the fleet. And so, the SBIR takes it 
so far. One of the suggestions I was making was to let the 
program take it a touch further to where in DOD the mission 
agency would then begin to put core funds against it.
    For the non-mission agencies, they should reach out toward 
the commercial world, but once again I am advocating that 
perhaps more funds be placed in after the phase 2 to move it 
closer to a commercial product. We have transitioned things to 
commercial products, and the result of a phase 2, which worked 
in the laboratory, is not a compelling story to the 
pharmaceutical company who wants to buy a sensor to put on its 
analytical line. And so, there still is a gap.
    Mr. MOULTON. Thank you. Thank you very much, Mr. Chairman.
    Chairman HANNA. Thank you. You have the Massachusetts and 
Connecticut SBA person here in the regional director. I want to 
ask you about risk because a lot of what we are doing here 
today is talking about risk, engaging in risk, how do we 
measure risk, and what are the benefits of risk. Therefore, on 
that continuum, and you talked about continuing that risk 
through phase 2 with presumably marginal things at the moment, 
but with great potential.
    I want to ask you if you think that in general we measure 
risk appropriately, if that is a fair question.
    Mr. BIRD. Is that for me or the----
    Chairman HANNA. Anybody. No, I mean, you have a chance to 
talk to the couple of big shots here. You might as well take 
advantage.
    Mr. BIRD. I think it is a $2 billion a year program. It 
should be managed like a portfolio.
    Chairman HANNA. Maybe move your microphone a little closer.
    Mr. BIRD. It should be managed like a portfolio, and there 
should be higher risk components of the portfolio and lower 
risks. And how to measure it is a very inexact art, but I think 
technology readiness levels are a proxy for risk that we are 
taking. And so, I like the idea of experimentation, that some 
agencies might be focused more on pure research and others on 
product development. NSF certainly is strong on 
commercialization, but I think it needs to be managed as a 
portfolio.
    Chairman HANNA. Mr. Kolb?
    Mr. KOLB. My personal opinion is that not only in the SBIR 
and STTR program, but in fairly funded research in general, 
there is too little high-risk, high potential reward work going 
on, things that can really change the game. And given the fact 
that budgets and money agencies, DOD in particular, in terms of 
their normal 6-1 to 6-3 research and development funding, those 
dollars are not nearly as plentiful as they were during the 
Cold War and so on when there was a lot of opportunity to do 
research to help with our Nation's military.
    So now, many of the DOD sub-agencies use the SBIR/STTR 
program to solve current and relatively narrow problems, and I 
do not fault them for that. They have these problems. They do 
not have options to get money to solve them any other way than 
to----
    Chairman HANNA. You know, about 15 percent of the 
applications are actually accepted.
    Mr. KOLB. Yeah, that is correct as well. But I think all 
the agencies would benefit from having some funds identified to 
put on what would look very high-risk proposals, but if they 
prove to be true could really change how the agencies run their 
businesses.
    Chairman HANNA. Mr. Green?
    Ms. ESKESEN. If I could bring a different perspective than 
the ones we are hearing, we are tracking newcomer, old comers 
into various agencies, and we were asked to do that by the SBA. 
And one of the things left out is that there is a significant 
percentage of the agencies are going with the guys they already 
know. And the ability of newcomers to get into the program is 
dropping quite precipitously.
    And if you are talking about, for example, any one of the 
Air Force, Navy, Army, and the like, their percentage of 
newcomers in any one year is incredibly small. Interestingly, 
in NIH, it is quite high. It is almost 40 percent. The 
conversion rate to phase 2 and the ability of that company to 
go on is an issue to be discussed.
    But I think there are ways that the agencies are mitigating 
their own risk by who they are choosing to fund. One of the 
things I did not get a chance to mention is that when you look 
at venture capital in the SBIR space, there used to be a clear 
patent. A company would be formed or get his SBIR award or vice 
versa, but it was happening in the same sort of time horizon, 
and sometime later, venture capital would come onto the scene.
    There is virtually no venture capital being awarded anymore 
to a company that started with SBIR and no venture capital. All 
the venture capital is going to companies that already have 
venture capital, that all the companies----
    Chairman HANNA. So what you are saying, the whole process 
has become risk averse.
    Ms. ESKESEN. That is right. I am.
    Chairman HANNA. Mr. Green?
    Mr. GREEN. I guess, remember the SBIR program is 3 percent 
of the R&D and T&E budget. And so, your statement really needs 
to be reflected more broadly across the whole research 
structure of the United States. I mean, I think this SBIR when 
it was created to address America's, at that time, inadequacy 
to transition great ideas to products. That was the concept the 
Japanese were doing far better a job at it than we were at that 
time.
    So I think it began with a bent toward the practical. 
However, your question is a very good one. Fundamentally, 
America has become, I believe, focused too much on the 
immediate payoff.
    Chairman HANNA. Well, what I am suggesting is that, and 
this is going to sound strange coming from my side of the aisle 
maybe, but that the fact that this program is so successful is 
actually in a strange way a counter indicator. Thank you for 
nodding your head. I appreciate it. That if you were doing 
things correctly, you would push that environment until you 
reached a point where you actually started to lose.
    That would be that inflection, that X-Y axis that suggests 
to you that you are taking the maximum amount of risk with the 
minimum amount of lost opportunity. And it is hard right now to 
get anything authorized. You know, I am fairly confident this 
will be reauthorized.
    So I wanted to ask you, Mr. Green--with your indulgence.
    Mr. MOULTON. Of course.
    Chairman HANNA. You mentioned phase 2, and you are 
disappointed that you see these wonderful things at phase 2 
that are not carried on because at some point somebody says 
this is too risky. It is not going far enough fast enough. How 
do you change that dynamic? Who is the guy who makes that 
decision? And why should not he make, or she, make that 
decision since it is public money?
    Mr. GREEN. The SBIR programs have a legislated amount of 
money, and, yes, different companies have demonstrated 
different efficiencies. And I am sure there are cases where the 
phase 2 program is adequate to create a commercial product, but 
most often it matures it to a certain level, and it is a 
competitive process. But when we take that experimental 
prototype and we go to a commercial company, they say that is 
fine, give me the part number, and I want to buy it.
    The commercial entity does not want to fund any R&D. They 
want to have essentially a finished product. So that gap can 
either be filled with the company's retained earnings, external 
investment, and often even to go from that point of the 
prototype to the product takes a long time.
    Chairman HANNA. Can you give me an example?
    Mr. GREEN. We are building an instrument for the 
pharmaceutical industry, and it measures freeze drying 
efficiency. And the benefits are many-fold in that in that 
industry, a lot of the medicine could cost millions of dollars. 
But yet, they want to buy an instrument that is proven and will 
cost $100K.
    The NIH/SBIR and NSF/SBIR that we had to mature it took it 
along a certain distance, but we still needed to invest 
significant money. Our company, we explore all the pathways. We 
invested our own money. We took money from another commercial 
company as essentially an advanced loan, if you will, an 
advanced payment. And we eventually matured that to a product, 
but it took many years. If the SBIR, as it has done in the 2011 
reauthorization, permits there to be the next stage of 
investment of SBIR funds, then that would have moved much more 
quickly, and it would have probably produced a better product.
    We have also tried to spin technologies out to a new 
company with venture-funded partners. And in that case, the 
SBIR technology was a certain maturity, but it was still a very 
long road to a product. And so, as a result, the venture 
funding needed sequential rounds of funding to have that 
technology reach product and reach the market. And oftentimes 
those companies fail just because the technology takes a 
certain amount of time, and it takes a certain amount of money.
    And in that process, often the founders are diluted out of 
the process, and the venture entity itself faces, as we know 
these statistics, that only a small fraction actually become 
homeruns, and many fail. And I would argue yet a little more 
development funding on the government's part would increase the 
yield out the other end.
    Ms. ESKESEN. And I would concur, and I think a related 
issue to that is that small firms almost by definition are 
component, not full systems builders. And no matter the fact 
that I think SBIR is amazing, we shift the primary burden of 
risk resolution to the small firm. It becomes your job, their 
job to get together the other assets that are required to 
continue the process.
    And I think there is an argument to be made by standing 
back, not the whole program, just parts of it, but standing 
back from some of these types of concerns and experimenting 
with different ways of mitigating the risk so that we are not 
putting the whole entire program at risk, but we are seeing 
whether or not trying certain things----
    Chairman HANNA. But does it not at some point become 
almost, I mean, it is scientific and it is practical, but at 
that level it becomes very subjective. Do you not think, Mr. 
Green? So how do you do that?
    Mr. GREEN. How do you do that? Well, it does require the 
engagement and involvement of the government program managers 
in that evaluation, not necessarily so much the commercial, as 
the commercial and the technical together. I will simply state 
that we did have, we had two SBIRs on this technology from 
different agencies for different missions. But we have had to 
seek many, many times that amount of money afterwards to see 
through to a product, and it has also taken many years because 
it was moving to get accepted in by the government. It took 
many years for the government to recognize, test, evaluate, and 
then put it into their planning documents.
    Chairman HANNA. Well, thank you. Thank you all. It has been 
wonderful testimony, especially from people who have had 
experience with the programs. So I would imagine there is no 
one in the country that knows more than you do about this 
program. So we are grateful and grateful for your statements. I 
thank you all again.
    Independent research conducted by the National Research 
Council, at the National Academies of Science, and the 
Government Accountability Office have shown that the SBIR and 
STTR programs are meeting or exceeding most of their statutory 
requirements. They are good programs that do what they were 
supposed to do, and that is very good for our country as you 
have heard today, but we can do better.
    We will take the suggestions you have made and provided us 
with today, work to incorporate them. And I would urge you if 
you have an idea that we can put in the form of an amendment or 
a bill, that Congressman Moulton and I will certainly in our 
position are capable of carrying that forward and trying to 
sell your suggestions.
    And I will turn to you for your closing statement if you 
have one.
    Mr. MOULTON. Sure. Thank you, Mr. Chairman. I just want to 
thank all of you for coming here, not just those of you who 
came to testify, but all of you who came to participate and to 
listen to this hearing. It is difficult for us to do our job in 
Congress without truly acting as your representatives, and that 
means coming here and listening to you, and to understand at 
the ground level how these programs are working. We are looking 
forward to reauthorizing this program, but we hope to do with 
some necessary improvements, and some improvements that will 
help the program not only continue its amazing track record to 
date, but really expand on that success for the years to come.
    As a member of not just the Small Business Committee, but 
the Armed Services Committee as well, I see every single day 
how important it is that we continue our technological 
development to compete with our adversaries across the world. 
So in that particular window for DOD, I understand how critical 
this program is. And we have a little bit of catching up to do, 
so it is time to make sure that we not only reauthorize this, 
but improve it for the future. And your testimony today has 
been immensely helpful for that, so thank you all very much for 
participating.
    And, Mr. Chairman, I yield back.
    Chairman HANNA. Thank you, and I think along with my 
ranking member here, we both go back with, I certainly, a more 
enthusiastic vision about this program. I am grateful for that. 
And there is a difference between expense and investment. These 
are clearly investments in our future. I have heard that from 
everyone here today.
    I ask unanimous consent that members have 5 legislative 
days to submit their statements and supporting materials for 
the record.
    Without objection, so ordered.
    This hearing is now adjourned, and thank you very much.
    [Applause.]
    [Whereupon, at 2:11 p.m., the Subcommittee was adjourned.]
                            A P P E N D I X


    MASSVENTURES
    I want to thank Chairman Chabot, Ranking Member Velazquez 
and Congressman Moulton for inviting me to testify today on the 
critical need to reauthorize the SBIR/STTR program.

    My name is Jerry Bird and I am the President of 
MassVentures. MassVentures is a quasi-public venture capital 
firm focused on fueling the Commonwealth's innovation economy 
by funding early-stage, high-growth, Massachusetts startups as 
they move from concept to commercialization. We were honored to 
receive the prestigious Tibbetts Award in 2015 from the U.S. 
Small Business Administration, recognizing our significant role 
in driving innovation and creating new jobs through the SBIR 
and STTR programs.

    As is often the case here in Massachusetts, when 
MassVentures was formed 38 years ago, we were the first program 
of our kind in the country. Our model and our mission to 
provide start-ups with early funding; guidance in operational, 
finance and sales, and; position them for additional rounds of 
funding from the traditional venture capital community has now 
been replicated throughout the country and across the world.

    In our 38 years, MassVentures' portfolio companies have 
raised $1.1 billion in additional funding; directly created 
7500 jobs in Massachusetts, and; 16 MassVentures backed 
companies have gone public. In many cases, the companies we've 
been able to invest in and help grow got their start through 
SBIR/STTR funding.

    The SBIR/STTR programs have played a vital role in 
harnessing the immense human capital of Massachusetts' higher 
education, medical and research institutions. The SBIR and STTR 
programs provide opportunities to small firms to create great 
ideas but are unable to attract traditional venture capital 
funding or need seed funding to pursue those projects that the 
private sector has decided are too high-risk or not lucrative 
enough. However, it's exactly these high-risk, high-reward 
projects that truly drive innovation in Massachusetts.

    There is no question SBIR/STTR has been effective in 
allowing concepts to begin the road to commercialization. But 
even after two years of funding, many companies weren't ready.

    Research was still ongoing. Prototypes needed testing. Or 
often the company's founders weren't ready to juggle innovation 
with the everyday demands of operations, finance and sales. 
It's hard to master your elevator pitch when you're spending 
all your time in a lab trying to create something that's never 
been created before, or attempting to solve a problem long 
thought unsolvable.

    The federal government had played its role. SBIR/STTR had 
brought many companies to the verge of commercialization. But 
there were still too many instances where we were left asking 
``what could've been.''

    A gap remained.

    In 2012, we created the SBIR Targeted Technologies 
program--START--to bridge that gap and ensure growing 
Massachusetts-based companies would be able to commercialize 
technologies developed under SBIR and STTR contracts. 
Recognizing that innovation, invention, disruption take time, 
the START program provides up to three additional years of 
funding for SBIR/STTR projects. Stage I companies are awarded 
$100,000 grants. Stage II companies receive $200,000 and Stage 
III companies receive up to an additional $500,000. The most 
successful START applicants can receive a total of up to 
$800,000.

    In just four years, START has provided $9 million in grant 
funding to 40 deserving SBIR projects. START companies have 
raised additional capital of $138 million and seen a 30% 
employee growth. MassVentures has created an ecosystem of more 
than 200 companies, reviewers, service providers and advisors.

    Energid started as a robotic software company serving 
almost exclusively NASA and the Department of Defense. However, 
it was clear there was a broader application for their software 
and expertise in robotics. The company took the risk of 
creating small arm-sized robots to demonstrate the power and 
potential of its software. In 2013, MassVentures awarded 
Energid a Phase I START grant.

    Energid sold their robots to early adaptors and is now in 
discussion with major global corporations and poised to sell 
thousands of units. Technology which had been developed to 
control lunar excavation for NASA is now being used to drill 
for oil in the North Sea, conduct surgery and even pick 
oranges. A Massachusetts-based software company, supported 
through MassVentures and START, Energid has emerged as one of 
the world's leading robotic technology companies.

    START has also proven that innovation can happen anywhere. 
While we evaluate START applicants through our prism as 
investment professionals, there is nonetheless a remarkable 
geographic diversity among START companies. Companies outside 
Boston and Cambridge that might have otherwise lacked the time, 
resources, support or network necessary for success now have 
it.

    There are START companies in Barnstable, Canton, Charlton, 
Chelmsford, Georgetown, Littleton, Newburyport, Wakefield and 
Wilbraham. These companies have the potential to be economic 
anchors in their communities, spurring much needed 
revitalization and attracting new businesses and residents. 
Without SBIR/STTR, these companies likely never would have 
begun; without START these companies likely never would have 
survived.

    Just as MassVentures was, we believe the START program 
should serve as a national model for how states can best 
leverage the federal government's investment through the SBIR/
STTR program. The SBIR/STTR programs are essential in order to 
allow American scientists and researchers to innovate, invent 
and discover the technologies of tomorrow. But states must also 
do their part to build on progress made through SBIR/STTR 
funding and ensure those technologies of tomorrow are not 
always a day away.
                  Testimony of Charles E. Kolb

          President and CEO of Aerodyne Research, Inc.

                    Billerica, MA 01821-3976

           Subcommittee on Contracting and Workforce

               House Committee on Small Business

   ``Commercializing on Innovation: Reauthorizing the Small 
  Business Innovation Research and Small Business Technology 
                  Transfer Programs Part II''

                   Lynn City Council Chambers

                  3 City Hall Square, Lynn, MA

                     Tuesday, March 8, 2016

    Mr. Chairman and Subcommittee Members:

    Thank you for inviting me to testify today about the 
effectiveness of the Small Business Innovation Research and 
Small Business Technology Transfer (SBIR/STTR) Programs. My 
company, Aerodyne Research, Inc. (ARI), was founded in late 
1970 as a contract research organization focused on improving 
the nation's strategic defense systems. We subsequently 
broadened our range of expertise to include energy technology 
and major environmental issues such as stratospheric ozone 
depletion, ambient air quality, acid deposition and climate 
change.

    Until Congress passed the Competition in Contracting Act 
(CICA) in 1984, small high technology companies like ARI could 
submit unsolicited proposals to research and development (R&D) 
programs in relevant federal agencies and often win sole source 
contracts to pursue their best ideas. However, CICA regulations 
essentially eliminated unsolicited proposals. Also in response 
to CICA regulations many agencies greatly reduced the number of 
R&D contracts they issued to small businesses, relying instead 
on large and complex contract solicitations that required large 
company led teams to adequately respond. Businesses too small 
to credibly lead these more substantial requested proposals 
then had to sell their capabilities to large ``system 
contractors'' to be included in proposals. Further, even when 
small companies managed to join a winning proposal team, they 
might not receive the funding they expected, since the large 
prime contractors controlled the flow of project funds and 
often would prioritize funding distributions to their own 
employees.

    After the CICA took effect the SBIR program, which had 
started in 1982, and the STTR program, started in 1992, became 
major sources of federal R&D funding for many scientists and 
engineers employed by small businesses (<500 employees). 
However, the federal government's expectations for 
``successful'' SBIR and STTR grants or contracts are 
significantly different than expectations for normal research 
funding.

    Normal federal research funding is generally deemed 
successful if a novel scientific understanding is achieved or a 
successful technological advance is implemented. These 
successful outcomes are traditionally documented in patents 
and/or peer reviewed archival publications, adding to the 
nation's reservoir of scientific and technological knowledge 
and capabilities. Of course, the purpose of R&D funding from a 
mission agency may be to produce information and/or 
capabilities applicable to some part of the funding agency's 
mission.

    SBIR/STTR funding is expected to produce the same level of 
new scientific understanding and/or technological advances as 
normal federal R&D funding; all properly documented in 
scholarly articles and/or patents in both cases. However, it is 
also expected to produce an innovative product that either 
solves a mission agency's designated problem or can be easily 
engineered to compete successfully in commercial markets 
(ideally both mission agency adoption and commercial success 
are achieved). In addition, the ``successful'' SBIR/STTR 
company also hires additional, well-paid staff members or spins 
off new companies that commercialize the parent company's SBIR/
STTR funded technologies.

    At ARI we have adopted a strategy of using SBIR/STTR funds 
to develop proprietary technology that we can use to expand our 
own research capabilities as well as sell to our R&D peers 
worldwide. Our most successful tactic is to develop new and 
better ways to measure both gas phase and small aerosol 
particle pollutants in real-time and with very high sensitivity 
and specificity. Starting in the mid 1990s we have used SBIR/
STTR funds to develop three lines of mobile, robust instruments 
that can be used in both laboratory and field experiments to 
measure the properties and concentrations of air pollutants. 
Initial versions of these instruments were tailored for skilled 
scientist users, while some subsequent models can operate 
autonomously and are suitable for routine pollutant monitoring 
stations.

    Since 2000 the increases in the capabilities and sales of 
these three instrument lines have evolved dramatically. From 
2000 to 2015 instrument sales have grown from less than 1 
million to over 14 million $/year. In FY2015 instrument sales 
provided 65% of our corporate revenues and R&D projects 35%. 
Over the past 15 years we have earned $80 million in instrument 
sales to customers on six continents; with--80% of the sales 
outside of the U.S., helping our nation's balance of payments. 
We have also hired a significant number of instrument engineers 
and assembly technicians to help develop, assemble, test and 
service our instrument product lines.

    Some of our U.S. instrument sales have been to U.S. federal 
laboratories, including DOE National Labs, NASA Center Labs, 
DOD Laboratories, EPA Labs, and the NSF's National Center for 
Atmospheric Research. So our instrument products have not only 
been successfully commercialized worldwide, but they have also 
directly served the needs of the agencies whose SBIR/STTR funds 
enabled their development.

    We are also proud of our scientific accomplishments, during 
the FY 2000-2015 period we were supported by other funding 
sources to perform over $18 million worth of laboratory and 
field measurements using our instrument products. Recent 
sponsored research projects have measured methane emissions and 
other pollutants from oil and gas operations, including 
fracking well pads, gas plants, transmission pipeline 
compressors and gas storage facilities all over North America, 
including the recent Aliso Canyon gas storage facility's mega 
leak near Los Angeles. We have also recently mapped air toxic 
pollutant levels in poor neighborhoods near the Houston Ship 
Channel and measured trace gas and fine particle air pollution 
levels in Beijing. In fact, ARI has twice been named the 
Department of Energy's SBIR/STTR Company of the year (2006 and 
2013) for our contribution to their environmental research 
programs as well as our equipping their scientists with 
important new research tools.

    We also contribute to our nation's scientific reservoir; in 
2015 ARI scientists published 75 peer reviewed scientific 
papers, most based on measurements using our instrument 
products. We also received three U.S. patents for innovations 
to improve instrument performance.

    I believe that we have demonstrated that SBIR/STTR funding 
stimulates scientific discoveries and technological inventions 
that both meet federal agency needs and can be successfully 
commercialized, serving both national and international 
markets. Further, SBIR/STTR awards promote successful science 
based companies that provide well paying jobs to talented 
scientists, engineers, technicians and business staff 
employees.

    At our company, and many hundred others, support from the 
SBIR/STTR program has successfully stimulated the production of 
the range of scientific, technological and economic benefits 
envisioned when Congress created these programs. Reauthorizing 
these programs will serve our nation well.
Commercializing on Innovation: Reauthorizing the SBIR and STTR 
                       Programs Part II.

Testimony by Dr. B. David Green, Physical Sciences Inc. Andover 
                      MA on March 8, 2016

    Good afternoon Congressman Hanna and Congressman Moulton:

    Thank you for your interest in the SBIR program and 
allowing our innovative companies to participate and share 
their stories. SBIR represents America's seed capital and has 
helped create new companies, excellent high technology jobs, 
and a great many publications and patents. It is the envy of 
other countries, and its success has not been duplicated due in 
part to America's unique entrepreneurial culture. The SBIR 
program funds concepts at very early stage where no other 
funding source exists. It allows the risk takers to retain and 
reap the rewards of their dedicated efforts. The government and 
the agencies are truly patient angel investors. Ultimately the 
investment is returned through taxes. Recent studies by the 
National Academies and by the mission agencies report its great 
success. Every government dollar results in over $3 of revenue 
after Phase II.

    The SBIR is a great program. I wish to make three 
suggestions for your consideration to make it even better. The 
SBIR program has demonstrated its value over the past 33 years. 
First, please make it permanent. A long term charter for the 
program allows for better agency planning and staffing. Before 
the 2011 reauthorization, there were 14 short term 
continuations that made it difficult for the agencies to 
execute the program and made it impossible for the small 
businesses to maintain staff and advance their technology. 
Since the 2011 Reauthorization, the SBIR program managers and 
staff at all the agencies have shown great dedication and 
commitment to making this good program even better--making ever 
more companies aware of this opportunity. We recognize and 
commend the dedicated efforts by the staff at SBA and the many 
agencies.

    My second suggestions is to increase the allocation to the 
SBIR program. This program is budget neutral--and our request 
is to shift more resources to a program that has proven its 
effectiveness. Currently only 3% of the R&D funding in federal 
agencies is allocated to SBIR. I ask that you increase that 
allocation gradually to 5% over the next decade--and to focus 
the funds from that increase to maturing technology after the 
initial Phase II program. For years, many worthy technologies 
have died at the conclusion of Phase II programs because the 
technology, although demonstrated, is not in a form recognized 
as viable by a commercial company or a mission agency. At the 
end of Phase II it has not been demonstrated outside the lab 
under real world conditions. This gap has become known as the 
Valley of Death for SBIR technologies. Too many do not make it 
through to become viable commercial products. A good many 
receive some post-Phase II funding ut it is too little, too 
fragmented, too restrictive. The Commercialization Readiness 
Program created in the 2011 Reauthorization has begun to 
address this need. I urge you to consider increasing the SBIR 
allocation and focusing it on further maturation of promising 
technologies after Phase II.

    My last suggestion is to make access to the SBIR program 
easier so that a wider diversity of companies compete and win 
programs. We all understand that it is not easy doing business 
with the federal government. Recently there has been 
significant effort to involve nontraditional ventures and new 
companies in providing technology to address our national 
needs. Instructions are complex. Submission is complex. 
Regulations are complex. A very large barrier to those new 
participants is the requirement for a government approved 
accounting system. We ask you to consider strongly encouraging 
the agencies with an SBIR program to use Fixed Price Best 
Efforts contracts for Phase II programs with the prototype 
remaining with the small business to enable transition to a 
commercial product. This will reduce the burden on both the 
companies and the government contracting officers to a fraction 
of the level needed in Cost Plus type contracts. Fixed Price 
will enable speedier contract award and more rapid advance of 
the technology. The innovators will spend more time on their 
technology rather than complying with the FAR. Most 
importantly, this will encourage many new entities to 
participate in the SBIR program.

    Our employee owned company, PSI, has successfully 
transitioned many SBIR technologies. We find the fastest way to 
move the technology to market. Under NIH NEI sponsorship, PSI, 
working with clinical researchers, developed a retinal tracking 
method permitting greatly improved eye examinations. We 
partnered with a leading eye equipment manufacturer, and have 
sold 16,000 systems containing this technology over the last 
eight years--producing over $1B in revenue, and providing 
better eye care for tens of million Americans. Under EPA 
sponsorship we developed a handheld LIDAR to detect natural gas 
leaks. Our partner has sold over 3000 systems and a large 
fraction of American homes have been made safer using this 
technology. Under Air Force sponsorship we have developed 
critical optical components that are now integrated into 
aircraft systems.

    In emerging technology areas we have sought external equity 
investment and created new companies. And PSI has also 
manufactured and sold the technology directly into specialized 
markets. Under NASA sponsorship we created accurate space 
simulation chambers that have been sold around the world, and 
offered testing services. Nearly every material that has been 
put into space has been tested in our chambers. Under Army SBIR 
sponsorship we have developed and sold sensors to detect 
chemical warfare agents remotely at distances permitting troop 
safety. Under Navy sponsorship we have developed fuel quality 
monitors for naval and commercial aviation. Under DNDO 
sponsorship PSI has implemented novel algorithms that vastly 
improve radiation sensor performance at screening portals. And 
under Army sponsorship we have developed a small UAV to provide 
our warfighters and law enforcement situational awareness. This 
capability is now deployed and contributing to national 
security.

    PSI is a founding member of the New England Innovation 
Alliance. NEIA meets regularly to share best practices and 
discuss topics of common interest and concern. Many of our 
fellow members are here today to share their SBIR technology 
success stories with you.

    The SBIR program is already one of the most successful in 
the government. It is America's seed capital. Today I have 
offered three suggestions to improve this already terrific 
program. I ask you to please move to reauthorize this program 
now, to increase its allocation and to encourage contracting 
methods that encourage new companies to participate in the 
program. SBIR's success is documented in the National Academy 
studies. I ask you to reauthorize it to keep technology 
innovation strong in America, and help America to remain the 
world leader in technology.




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