[Senate Hearing 116-85]
[From the U.S. Government Publishing Office]





                                                         S. Hrg. 116-85
 
            REAUTHORIZATION OF THE SBA'S INNOVATION PROGRAMS

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

                                HEARING

                               BEFORE THE

                      COMMITTEE ON SMALL BUSINESS
                          AND ENTREPRENEURSHIP
                          UNITED STATES SENATE

                     ONE HUNDRED SIXTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 15, 2019

                               __________

      Printed for the use of the Committee on Small Business and Entrepreneurship
      
      
      
      
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]      
                            


        Available via the World Wide Web: http://www.govinfo.gov
        
        
        
        
                               ______

               U.S. GOVERNMENT PUBLISHING OFFICE 
 37-797                  WASHINGTON : 2019       
        
        
        
            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                     ONE HUNDRED SIXTEENTH CONGRESS

                              ----------                              
                     MARCO RUBIO, Florida, Chairman
              BENJAMIN L. CARDIN, Maryland, Ranking Member
JAMES E. RISCH, Idaho                MARIA CANTWELL, Washington
RAND PAUL, Kentucky                  JEANNE SHAHEEN, New Hampshire
TIM SCOTT, South Carolina            EDWARD J. MARKEY, Massachusetts
JONI ERNST, Iowa                     CORY A. BOOKER, New Jersey
JAMES M. INHOFE, Oklahoma            CHRISTOPHER A. COONS, Delaware
TODD YOUNG, Indiana                  MAZIE K. HIRONO, Hawaii
JOHN KENNEDY, Louisiana              TAMMY DUCKWORTH, Illinois
MITT ROMNEY, Utah                    JACKY ROSEN, Nevada
JOSH HAWLEY, Missouri
             Michael A. Needham, Republican Staff Director
                 Sean Moore, Democratic Staff Director
                 
                            C O N T E N T S

                              ----------                              

                           Opening Statements

                                                                   Page

Rubio, Hon. Marco, Chairman, a U.S. Senator from Florida.........     1
Cardin, Hon. Benjamin L., Ranking Member, a U.S. Senator from 
  Maryland.......................................................     3

                               Witnesses
                                Panel 1

Shepard, Mr. Joseph, Associate Administrator, Office of 
  Investment and Innovation, U.S. Small Business Administration, 
  Washington, DC.................................................     5
Williams, Mr. John, Director of Innovation and Technology, Office 
  of Investment and Innovation, U.S. Small Business 
  Administration, Washington, DC.................................     7

                                Panel 2

Ezell, Mr. Stephen, Vice President, Global Innovation Policy, 
  Information Technology and Innovation Foundation, Washington, 
  DC.............................................................    27
Glover, Mr. Jere W., Executive Director, Small Business 
  Technology Council, Annapolis, MD..............................    45
Kota, Dr. Sridhar, Founder, FlexSys, Ann Arbor, MI...............    81
Hoffman, Dr. Stephen L., Founder, Sanaria Inc., Rockville, MD....    89

                          Alphabetical Listing

Berglund, Dan, State Science Technology Institute, SSTi
    Letter dated May 29, 2019....................................   136
Cardin, Hon. Benjamin L.
    Opening statement............................................     3
Cusker, Brett, Montana State University TechLink Center
    Letter dated May 20, 2019....................................   134
Ezell, Mr. Stephen
    Testimony....................................................    27
    Prepared statement...........................................    30
Glover, Mr. Jere W.
    Testimony....................................................    45
    Prepared statement...........................................    47
    Addendum.....................................................    76
    Responses to questions submitted by Chairman Rubio and 
      Senator Hirono.............................................   114
Hoffman, Dr. Stephen L.
    Testimony....................................................    89
    Prepared statement...........................................    91
    Responses to questions submitted by Chairman Rubio...........   130
Kota, Dr. Sridhar
    Testimony....................................................    81
    Prepared statement...........................................    84
    Responses to questions submitted by Chairman Rubio...........   124
Risch, Hon. James E.
    Prepared statement...........................................   131
Rubio, Hon. Marco
    Opening statement............................................     1
Shepard, Mr. Joseph
    Testimony....................................................     5
    Prepared statement...........................................     9
    Responses to questions submitted by Chairman Rubio and 
      Senator Hirono.............................................   108
Williams, Mr. John
    Testimony....................................................     7
    Prepared statement...........................................     9
    Responses to questions submitted by Chairman Rubio and 
      Senator Hirono.............................................   104


            REAUTHORIZATION OF THE SBA'S INNOVATION PROGRAMS

                              ----------                              


                        WEDNESDAY, MAY 15, 2019

                      United States Senate,
                        Committee on Small Business
                                      and Entrepreneurship,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:30 p.m., in 
Room 428A, Russell Senate Office Building, Hon. Marco Rubio, 
Chairman of the Committee, presiding.
    Present: Senators Rubio, Scott, Ernst, Kennedy, Hawley, 
Cardin, Cantwell, Shaheen, Markey, Coons, and Rosen.

OPENING STATEMENT OF HON. MARCO RUBIO, CHAIRMAN, A U.S. SENATOR 
                          FROM FLORIDA

    Chairman Rubio. The hearing of the Senate Committee on 
Small Business and Entrepreneurship will come to order.
    I want to thank you all for being here. I want to extend a 
welcome to our witnesses. The hearing today is titled 
``Reauthorization of SBA's Innovation Programs,'' to delve into 
the programs that provide needed investment in America's most 
innovative small businesses.
    Today we are going to continue our work to reauthorize the 
Small Business Act by focusing the discussion on the dynamic 
sector of those firms with high-growth potential participating 
in the Small Business Innovation Research and Small Business 
Technology Transfer programs at the SBA.
    To frame this discussion, I would like to first start by 
addressing the landscape that I believe we find ourselves in 
today when it comes to competitiveness. We are currently facing 
the most significant global competition this Nation has ever 
confronted. Other countries have taken note of our past 
investments and the resulting successes and are investing in 
research and development at far higher rates than the U.S. 
currently is.
    According to the Information Technology and Innovation 
Foundation, U.S. productivity growth over the last decade is 
the lowest since the government started recording this data in 
the 1940s.
    Meanwhile, our global competitors are investing in research 
and development and increasing their technological 
sophistication, pulling ahead in key areas such as life 
sciences, flexible electronics, advanced manufacturing.
    As a Nation, we must decide where our priorities lie. If we 
want to remain competitive leaders in the world, we have to 
make investments and prioritize programs that achieve those 
results.
    Today I released a report that explores the nature of 
investment in the United States and details what the decline of 
business investment in the private sector has wrought for our 
long-term productive capacity. The report finds that while 
investing in productive, long-life capital assets and 
industries may be more challenging than capturing quick profits 
from financial maneuvers, it is required for a successful 
economy that produces dignified work for our people and secures 
our national strength and prosperity.
    Investing in productive industrial capacity is in our vital 
national interest. In other words, we need to understand the 
need to invest in ourselves and what investing in ourselves 
requires. This includes investing in the technological 
innovation that will allow us to maintain our competitive edge 
across industries.
    There is a correlation between these national 
competitiveness concerns and the SBA programs we are discussing 
today.
    The SBIR and STTR programs are highly competitive programs 
that marry basic research and development with funding to meet 
a government need with the goal of moving basic research 
through developmental phases to commercialization.
    Authorized in 1982 and 1992, respectively, the basic tenets 
of the programs require any agency with $100 million in 
extramural research and development funding to use 3.2 percent 
of those funds for an SBIR program.
    If the agency has more than $1 billion budgeted for 
extramural research and development, they must use 45 percent 
of those funds for an STTR program.
    There are currently 11 agencies participating in the SBIR 
program and 5 agencies participating in the STTR program. Each 
program consists of three phases, moving from a Phase I award 
of up to $150,000 for basic research and development to a Phase 
II award that provides up to $1 million for further development 
of the technology and moving the small business toward 
commercialization. Phase III of the programs does not include 
funding from the SBIR and STTR programs but is intended to act 
as a facilitator for commercialization. Phase III funding is 
expected to be generated by the private sector or through 
working with agencies through additional contracts, including 
sole-source awards.
    These programs have proven to be impressive examples of 
what investment in research and development can achieve and how 
participating small businesses can grow and scale.
    Some examples of the recipients of SBIR that have had 
immense success scaling are names that sound familiar: 
Qualcomm, iRobot, Symantec, Amgen, 23andMe, and others. One of 
the companies NASA just funded could very well join these well-
known companies.
    The agency just announced it has selected 142 Phase II 
proposals from 28 States and awarded them $106 million to 
develop technologies ranging from managing pilotless aircraft 
to developing solar panels that can help humans live on the 
Moon and Mars, to sensor technology for autonomous entry, 
descent, and precision landing on planetary surfaces.
    These awards are exciting because they forecast both 
advancements for NASA, the country and are opportunities for 
businesses to become the next big SBIR success story and 
contribute to the overall national impact of the programs.
    The success of the SBIR and STTR programs has been studied 
by a number of different entities, and several agencies have 
commissioned studies on the commercialization and economic 
impact of the programs.
    The Navy commissioned a study of their programs for fiscal 
year 2000 to 2013 and found that of a $2.3 billion investment, 
the programs provided an economic output of $44.3 billion.
    The economic impact also included the creation of nearly 
200,000 jobs with an average wage of approximately $69,000, 
which is 42 percent higher than the average U.S. wage.
    The programs are not only successful at the Department of 
Defense. A 2018 National Cancer Institute study of its SBIR and 
STTR programs showed that NCI's investment of $787 million from 
fiscal year 1998 to 2010 resulted in $9.1 billion in sales of 
products and services, $8.1 billion in labor income, $13.4 
billion in value-added wealth to the economy, and $26 billion 
in total economic output.
    The programs also created more than 107,000 jobs with an 
average wage of approximately $75,000.
    The National Science Foundation, which focuses largely on 
basic research, also reports that they fund roughly 400 
companies per year, and since 2012, the agency has made nearly 
3,000 awards to startups and small businesses.
    Since 2014, the NSF's awardees have received $6.5 billion 
in private investment in a wide range of industries from 
advanced manufacturing to artificial intelligence, robotics, 
semiconductors, biomedical technologies and more. These proven 
programs are examples of the types of public investment our 
country should be making. In fact, it is the type of investment 
we should be making more of.
    My home State of Florida has had a very successful 
relationship with the programs, with more than 4,000 total 
awards since 2010. I would like every State to be successful in 
using the program, and the barriers to success in States across 
the country should be part of this conversation.
    I look forward to having a robust discussion and identify 
ways we can increase the number of firms with opportunities for 
SBIR and STTR awards.
    It is important to make these programs more efficient and 
better provide small businesses nationwide with the tools they 
need to commercialize and scale, including through additional 
private-sector venture capital investments.
    With that, I turn it over to the Ranking Member.

OPENING STATEMENT OF HON. BENJAMIN L. CARDIN, RANKING MEMBER, A 
                   U.S. SENATOR FROM MARYLAND

    Senator Cardin. Well, Chairman Rubio, thank you very much 
for calling this hearing. This is one in a series of hearings 
that our committee is holding on looking at the reauthorization 
of the programs under the Small Business Administration. This 
one is an extremely important hearing dealing with the SBIR and 
STTR program.
    I think the Chairman outlined rather effectively how these 
programs work and how critically important they are to our 
economy.
    We talk frequently about America's economy dependent upon 
small businesses. Small businesses is where the growth engine 
of America is for creation of jobs and innovation. When we talk 
about that, the statistics are very clear that we create more 
innovation through small companies, per employee for sure, than 
larger companies. So encouraging innovation in small businesses 
is critically important to success of our economy, and the SBIR 
program and STTR program do that. End result, a lot of high-
paying jobs are created here in America.
    In meeting the growing challenge from foreign competition, 
we had a hearing not too long ago on China, ``Made in China 
2025.'' Well, if we are looking at ways that we can globally 
compete against the competition we have today, let us invest in 
programs such as the SBIR and STTR programs. To me, it is more 
effective, quite frankly, than looking at tariffs. So I would 
hope that we will continue to invest in innovation and small 
companies.
    We have been successful. We can talk about some of the 
examples. The Chairman mentioned some of the fields from public 
health to national security, companies such as Sonicare 
Electric Toothbrush--this tool helped develop that--iRobot, 
LASIK eye surgery so we all can see better, Qualcomm. These are 
just some examples of where we have been able to use the small 
business tools to help new companies that have made a major 
impact on innovation in our economy as leaders and new ways of 
doing things that are now very much helping America's 
competitiveness.
    As we look at the reauthorization, I want to acknowledge 
the work of Senator Shaheen in extending these programs through 
September 30, 2022. That is a major step forward.
    Mr. Chairman, I would urge us all as we look at the 
reauthorizations. Yes, there are ways that we can improve both 
of these programs, and let us look at ways that we can improve 
both of these programs. But I hope we all would agree we should 
make them permanent.
    If you are an investor, you need certainty. Congress is 
notorious for missing deadlines, and it would be good if we 
could take this one off the table so we do not have to worry 
about the next deadline and our companies can look for partners 
and investors, knowing full well that these tools will be 
available to help them in the growth of their innovation.
    I want to welcome all of our witnesses that are here today, 
our governmental witnesses--thank you--on the first panel and 
our private-sector witnesses. I want to acknowledge Dr. Stephen 
Hoffman and the work that he is doing--to me, it is critically 
important--in Sanaria. It is a company developing a vaccine for 
malaria. The company has grown to 80 employees. That is quite 
an accomplishment. They are partnering with the National 
Institutes of Health. A vaccine for malaria will save hundreds 
of thousands of lives. It is certainly high risk to be able to 
develop this, but the rewards are great. And that is exactly 
why we have the partnerships with the Federal Government, and I 
look forward to hearing from Dr. Hoffman.
    I am very proud of the role that the State of Maryland has 
played in innovation.
    Senator Shaheen, I just mentioned your good work on the 
SBIR program, STTR program, and extending it through your 
service on the Armed Services Committee. We appreciate very 
much your work on that.
    Maryland is a national leader in research and development. 
We have the National Institutes of Health, the National 
Institute of Standards and Technology, Johns Hopkins 
University, University of Maryland. These are all partners that 
we have on research.
    Recently there was a tech transfer summit held at NIST 
sponsored by the State of Maryland. One of our witnesses, Jere 
Glover, was there, participated in that. He is the executive 
director of the Small Business Tech Council.
    We talked about commercialization because that is what this 
is about. It is about innovation being pursued but leading 
toward commercialization, and this summit helped us develop 
ways that we can work with our Federal and university labs to 
develop more commercialization with the help of the SBIR 
program and the STTR program.
    Shortly, the Maryland Department of Commerce will be 
releasing its actionable strategies to advance the 
commercialization of technology. So we are moving forward, 
thanks to the partnership with these SBA tools.
    I look forward to hearing from all of our witnesses today 
so that we can strengthen and make more predictable the role 
that we play in advancing innovation and small businesses.
    Chairman Rubio. All right. Let us get right to it.
    Joseph Shepard is the Associate Administrator of the Office 
of Investment and Innovation at the Small Business 
Administration. In his role, he manages the SBIC program, the 
SBIR program, and the STTR program.
    John Williams is the Director of Innovation and Technology 
for the Office of Investment and Innovation, where he oversees 
policy implementation and conducts programmatic oversight of 
the SBIR and STTR programs and their administration at 
participating agencies.
    So we will begin with you, Mr. Shepard.

STATEMENT OF JOSEPH SHEPARD, ASSOCIATE ADMINISTRATOR, OFFICE OF 
INVESTMENT AND INNOVATION, U.S. SMALL BUSINESS ADMINISTRATION, 
                         WASHINGTON, DC

    Mr. Shepard. Very good. Chairman, thank you. Thank you, 
Chairman Rubio and Ranking Member Cardin and members of the 
committee. Thank you. It is good to be here today and 
appreciate the invitation to come here and discuss the United 
States Small Business Administration, or SBA, Innovation 
Programs, which as we have been talking about include SBIR, the 
Small Business Innovation Research, created, Chairman, as you 
said, in 1982, also the Small Business Technology Transfer, 
STTR, program created in 1992.
    Since their beginning, these programs have encouraged 
innovation and entrepreneurial activity in our Nation. Today 
small businesses continue to be encouraged to develop and 
commercialize their innovative products through these programs.
    I also wanted to mention that as a father of a 13-year-old 
son with an interest and aptitude in science, technology, 
engineering, and math, I am keenly aware of the importance of 
these programs for the next generation of American 
entrepreneurs, small business owners, and university 
researchers who will seek to make meaningful contributions that 
will help our economy grow and strengthen in the future.
    SBA is responsible for the oversight of these programs in 
areas that involve policy, reporting to Congress, data 
collection, and data maintenance.
    In regards to policy, SBA's new SBIR/STTR Policy Directive 
has been published and became effective on May 2nd, 2019. The 
Policy Directive provides updated guidance to the 11 Federal 
agencies that participate in these programs and replaces the 
previous 5-year-old 2014 version.
    Additionally, the new Policy Directive increases the data 
protection period for small businesses from 4 years to a 
minimum of 20 years.
    SBA has improved its reporting frequency to Congress. 
During the past 21 months, SBA has delivered both the Fiscal 
Year 2014 and 2015 annual SBIR/STTR reports. The Fiscal Year 
2016 report was delivered last month, and the Fiscal Year 2017 
report will be delivered this summer.
    Concerning SBA data collection and maintenance, SBA's 
SBIR.gov Business Intelligence Platform currently contains 
award data for more than 170,000 awards and 26,000 companies. 
Each year, SBA collects and analyzes additional program data 
provided by the 11 participating Federal agencies to evaluate 
agency and SBIR/STTR program performance.
    A main goal at SBA has been to modernize and streamline all 
SBA programs using improved technology to create a better user 
experience.
    As SBA's Chief Information Officer Maria Roat discussed in 
her March 13, 2019, hearing before this committee, the SBA is 
engaged in numerous enterprise-wide modernization initiatives, 
including hardware, software, and application standardization, 
as well as infrastructure upgrades. Improving the SBIR.gov 
platform is an area where SBA continues to focus as we seek 
better ways to collect, maintain, analyze, and publish SBIR/
STTR data.
    During the past 2 years, we have worked to implement data 
quality control tools and modernize the platform. Last year, 
the platform was moved to the cloud to improve reliability and 
security.
    For the majority of the activities I have discussed, the 3 
percent administrative funding pilot introduced in 2011 and 
reauthorized through 2022 will continue to be beneficial to the 
SBA in regards to SBA's oversight responsibilities for these 
programs.
    The pilot provides authority for participating agencies to 
utilize 3 percent of the SBIR program for costs related to SBIR 
oversight. However, the SBA is dependent on the agencies to 
provide these funds to SBA. Once provided, funding associated 
with the pilot enables SBA to make improvements in oversight 
areas related to policy, reporting, and data, as well as 
outreach.
    In regards to all of these activities, SBA remains 
committed to improving the effectiveness, efficiency, and 
accountability of the SBIR/STTR programs.
    Again, I want to thank you for the invitation to be here 
today and also thank you for your support of SBA. We look 
forward to continuing our work to better assist America's small 
businesses.
    Director John Williams will now highlight a few areas SBA 
is focusing on as well as some other program areas.
    So thank you.
    Chairman Rubio. Thank you.
    Mr. Williams.

     STATEMENT OF JOHN WILLIAMS, DIRECTOR, INNOVATION AND 
  TECHNOLOGY, OFFICE OF INVESTMENT AND INNOVATION, U.S. SMALL 
            BUSINESS ADMINISTRATION, WASHINGTON, DC

    Mr. Williams. Thank you.
    Chairman Rubio, Ranking Member Cardin, and members of the 
committee, it is truly an honor to be here and specifically to 
discuss programs of SBA's Innovation Program and how they 
relate to SBIR and STTR.
    I have dedicated the last 25 years of my career focused on 
these programs, most of it at Navy and then 4 years ago here at 
SBA.
    Today you will hear from others that talk about the 
program, and we all know the program works. We believe there is 
no better Federal program when it comes to commercializing 
basic research and creating high-growth, high-generation, next-
generation companies.
    I want to start by highlighting a few areas that SBA has 
been focused on over the last couple years that is improving 
data quality that comes to us from the agencies and that we 
then report to Congress: increasing the participation from new 
applicants, especially those from underrepresented States, 
women, and minorities; reducing the barriers to entry and 
workload on all sides; and improving the tools and resources 
that increase commercialization success.
    SBA is focused on reducing geographic inequalities, and 
increased SBIR funding to rural States will help to establish 
high-growth companies in those areas which in turn will fuel 
economic growth in that region.
    SBA is leading efforts to increase proposals for woman- and 
minority-owned firms, groups that continue to receive too small 
a percent of the Federal R&D funding.
    Events like our SBIR road tour, which is now in its fifth 
year--and we will have hit all 50 years at the end of the year, 
including Puerto Rico--our 60 training modules that are on our 
SBIR.gov website, and our Train the Trainer Program have all 
helped to support the ecosystem partners and those that work 
directly with the entrepreneur.
    The Chairman's Made in China 2025 report discusses creating 
new ecosystems of innovators and how SBA is uniquely positioned 
to service new and small businesses. I could not agree more and 
believe that SBIR and STTR funding and our efforts to 
strengthen the innovation ecosystems are key pieces in helping 
the Federal Government's strategic long-term approach to 
address that challenge.
    The Office of Innovation and Technology is uniquely 
positioned to support the ecosystem of innovators, and through 
our established networks and our coordinated activities across 
SBA and the agencies, we are in a good position to support that 
goal.
    As Congress considers the next reauthorization, I think it 
is important to evaluate the duties and authorities for SBA and 
the participating agencies, build on best practices, and ensure 
statute provides resources for the agencies and tools for the 
businesses to commercialize.
    Other areas to be considered and looked at would be to 
continue to focus on Senator Cardin, what he started, with the 
recent legislation focused on reducing the burden for 
submitting proposals, getting between Phase I and Phase II of 
the GAO study, all those things that are part of the problem 
with the SBIR and make it not as attractive to new small 
companies coming in that have not been part of the program.
    Looking and evaluating ways to encourage new companies to 
participate; review the maximum size, which is currently 500 
people, and the number of Phase IIs any one company gets; 
assess our current commercialization programs and pilots. We 
have multiple programs geared toward commercialization, and we 
have really never assessed them and looked at how they work at 
different agencies. Ensure continued improvement of our data 
collection system while maintaining quality, transparency, and 
improve the ability to assess that data from the public and 
Congress, and keeping the program flexible so that it addresses 
the mission of each agency while allowing experimentation.
    With that, I want to thank you for the opportunity to be 
here, and I am looking forward to questions. Thank you.
    [The prepared statement of Mr. Shepard and Mr. Williams 
follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Chairman Rubio. I will defer my questions.
    Ranking Member.
    Senator Cardin. Well, let me thank both of you for that 
outline. Mr. Williams, I particularly appreciate the specific 
suggestions that you are making. I am going to make sure that 
our staff drills down on each one of those and see what we can 
do.
    So let me start on the one you mentioned on the challenges, 
on the time problems between Phase I and II grants.
    According to the Small Business Administration, the Defense 
Department took nearly 500 days in 2015 to enter into contracts 
with the SBIR/STTR firms between Phase I awards and Phase II 
awards. As a result of that, I worked on a provision that was 
included in the 2019 National Defense Authorization Act that 
sets up a pilot program to look at accelerating that time. Our 
goal was to get to 90 days. To do that, we need to streamline 
the process within DoD once these awards are made and to make 
it a little bit easier for companies to be able to figure out 
what needs to be followed in order to get these awards actually 
made.
    Can you share with us conversations you are having with DoD 
on implementing this pilot program?
    Mr. Williams. So we have monthly--every other month program 
manager meetings, and then I actually attended the Air Force's 
pilot programs that they are working, where they are doing 
Pitch Day competitions.
    The two groups that I think stand out are the Department of 
Navy, where they have really established contracting centers 
that are just focused on SBIR--one of the challenges has always 
been when SBIR is merged with other work for large companies 
and universities and it does not take precedent, and maybe they 
do not understand how to write those contracts. So a standalone 
contracting shop has seemed to work well for the Navy to reduce 
the time gap and actually accelerate and actually provide 
better contracts.
    I certainly think--and what I was most impressed with was 
the Air Force being able to come with literally a one-page 
contract that they awarded to companies, and I sat there and 
watched the individuals come out of a room, be selected for 
award, sit down at a table. They had three tables with 
different contracting shops, and between 3 and 15 minutes, they 
had a contract. And they had half the money on a credit card 
that they could then start to bill against.
    What was most impressive about that was that did not 
require any change to DFAR, any change to any policies. They 
used existing programs. It requires a program office and a 
contracting officer to take risk and to believe in small 
businesses, and that has always been the challenge. We have 
kind of sometimes moved toward we need more regulation and more 
protection in case there's fraud and waste, and we need to add 
more layers and cost accounting things.
    They moved away and they were willing to take risk because 
their belief was the risk of not getting technology quick to 
their warfighter is the big risk, and they need to get that 
technology. What they did not just in awarding Phase Is, but 
they also had this practice between Phase Is and Phase IIs. So 
I would like to see that modeled across the DoD.
    Senator Cardin. Do you think the policy document that we 
are supposed to be receiving, I think, in July from DoD will 
include those types of recommendations?
    Mr. Williams. I hope so, and the GAO studies should look 
into that.
    I am glad that the GAO study is multiple years because 
sometimes it takes a while to gather the data and start to dig 
in, and then the DoD is also supposed to report on those 
things.
    Senator Cardin. And I hope we can hit a 90-day threshold.
    Mr. Williams. That would be wonderful.
    Senator Cardin. It seems like they have been able to even 
do it faster. It would be great.
    You lived through the uncertainty of the extensions of 
these programs with DoD. They had 14 temporary extensions. Can 
you just explain to us how important it is to have the 
predictability of these programs? I mentioned in my opening 
statement I would like to see them made permanent. I really 
congratulate Senator Shaheen for her ability to get this 
extended through 2022, but to make these permanent so we do not 
miss extensions in the future. How important is that for the 
success of the program?
    Mr. Williams. From an agency standpoint, it certainly helps 
in planning.
    I think--and maybe this was misguided--that there is strong 
support for the program, and so many of us believed it would 
get extended. But we spent an awful lot of effort dealing 
with--as did Congress with those multiple extensions, where 
that work could have been in better places.
    Now, I think it is really the hardest on the small 
businesses because they do not know and should they propose to 
a program in a Phase I that may not be there and a Phase II 
when they are new to the program.
    So I think having structure and even in the pilot programs, 
not knowing how long those will continue is a challenge for 
both, but mainly the small businesses.
    Senator Cardin. I appreciate that.
    You mentioned in your opening statement your commitment to 
improve diversity in these programs----
    Mr. Williams. Yes, sir.
    Senator Cardin [continuing]. Particularly among minorities, 
women, and veterans. Can you give us a little more detail on 
how you tried to implement that?
    Mr. Williams. So one of the best examples I can give is 
currently we have programs that we use with FAST, where we 
actually give money to local States and then let them try 
things.
    So we do a road tour, and that is great because we get out 
there and we get the awareness. But the government individuals, 
we cannot help them with grants.gov. We cannot write their 
proposals for them. We cannot hand-hold them through a lot of 
these things.
    So what we found is paying for boots on the ground and 
working with local areas that already are helping high-tech 
companies but then focus them on training has been really 
successful, and a lot of these have done these kind of pilots 
where they will bring through 10 people that are from rural 
areas or they will bring through 10 minorities or 10 women.
    New Mexico has a great program. Maryland has a fantastic 
program out of University of Maryland where 90 percent of the 
women are the 22 companies that went through this kind of boot 
camp that runs for 10 weeks, and at the end of it, you submit a 
proposal. But 90 percent of those were women and minorities.
    So we are seeing programs like that where we are saying we 
are going to give you money to help SBIR, but we want to see 
you targeted toward either a rural area or a minority or woman 
and help them write proposals, because what we find is the 
winning percentage is the same, whether you are a woman, 
minority, or underrepresented State. The issue is getting 
proposals from those organizations.
    Senator Cardin. Thank you. I thank you for those answers.
    Thank you, Mr. Chairman.
    Chairman Rubio. All right. Thank you.
    Senator Hawley.
    Senator Hawley. Thank you, Mr. Chairman.
    Mr. Shepard, my question is for you. According to the 2016 
annual report of the SBA, there is a dramatic difference in the 
amount of funding being awarded between States. For example, 
Missouri received 40 awards last year that totaled $17.5 
million, if we have got our stats right, while California 
received a little more than 1,000 awards totaling $550 million. 
Now, that is more than 30 times the award amount, even though 
California's population is just six times larger.
    Can you tell me why the discrepancy exists?
    Mr. Shepard. Well, good question, Senator, and I think as 
you look at the data from year to year historical and as we go 
forward in your tenure as a Senator, you will see variability 
from State to State.
    The SBA, of course, oversees and reports that information. 
The 11 participating agencies are the ones that actually make 
the awards. They are the ones that are engaging with the small 
businesses, and so you are going to have years that are up and 
down, really depending on the applications that come in, the 
activity from those small businesses, and so that variability 
is there and will continue to be there. So, again, we are 
somewhat dependent on those small businesses to apply, and then 
the subsequent awards follow.
    Senator Hawley. That leads me to my second question. What 
is it that I need to do and we need to do to ensure that there 
is sufficient outreach to small business owners and 
entrepreneurs in rural States so that they have the knowledge 
of these programs and the opportunities to benefit from them?
    Mr. Shepard. Well, that really hits on the question. 
Certainly, if you look at that data for the 50 States and the 
Territories, you are going to have some areas.
    I was with Senator Risch in Idaho 2 weeks ago where you 
have some years where you might have two awards and that is it, 
and so continuous outreach, education, awareness, certainly in 
some of these geographic areas that we will speak about today 
and that we have already touched on in terms of rural, 
geographic areas where people may not know about the program, 
certainly the small businesses. So that is really key is 
awareness, outreach.
    I know John is going to speak more about some of those 
activities today specific to the SBIR Road Tour, which is 
intended to do that.
    From our view, it is really about education.
    Senator Hawley. Mr. Williams, let me just give you a chance 
to do that now, if you would like, to address some of these 
outreach efforts.
    Mr. Williams. Yeah. Again, I think the thing that we have 
seen works the best, we have growth accelerators in FAST, 
putting and building that innovation ecosystem.
    Typically right now, Austin, San Francisco, Boston have 
strong innovation ecosystems. They have the schools and things 
like that, but we still believe--and so that is where the money 
is, and those programs are established. And that has helped 
these individuals write proposals because they are around 
others that have won.
    I think we have to make an effort to increase that type of 
assistance, ecosystem building. We cannot train individual 
companies, but we can train people that will help SBIR awardees 
write proposals because it is a long process. It is not just 
coming there on a road tour and saying, ``Hey, are you aware of 
the program?'' and then going away. It is how do you build an 
ecosystem that really focuses on getting some of that $2.5 
billion to that area, and that is where I said I think that in 
turn helps other Main Street companies because you are getting 
high-growth, high-paying companies to come in using government 
dollars to get started, so that seeds them for 2 years with a 
couple million dollars. And then, hopefully, that helps.
    Senator Hawley. Very good. Thank you.
    In the brief time I have remaining, let me shift gears and 
ask a question, if I could, about China.
    The Chairman has released a very important report today--
thank you, Mr. Chairman, for your work on this--about 
investment, capital investment in China.
    But let me just ask you. The next panel is going to talk 
some about this. There is testimony that shows a dramatic 
decrease in America's share of global venture capital 
investment from almost 100 percent in 1992 to just 50 percent 
today, most of that difference going to China.
    There have been a number of recommendations for the SBIR 
program, including enacting strict guidelines on intellectual 
property generated from these projects to ensure that Federal 
investment that does exist is not subsidizing technology used 
and produced in other countries.
    Knowing that China is the world's worst perpetrator of IP 
theft, what can be done to leverage these investment programs 
to counteract China?
    I will pose that to either of you. Would either of you like 
to comment?
    Mr. Shepard. John, I know your team has gone somewhat deep 
on that report.
    Mr. Williams. Sure. And I think one of the challenges is 
private-sector investment is looking for short-term returns. 
SBIR and Federal investments are really geared--A, they must 
say in the U.S., and they must be for U.S. companies, and they 
are geared for that longer-term play. And so we are not looking 
at a return on investment, and I think just that mentality 
addresses some of what the Senator is talking about that we 
really do need to take that strategic longer term and maybe 
even pick certain technology areas where we want to put more 
emphasis, but then use SBIR to seed those companies and develop 
those ideas, but still then try to bring back some of that 
investment.
    Mr. Shepard. And emphasizing the wonderful thing about this 
program, that it is non-dilutive. So the government, the 
Federal participating agencies are not taking an equity 
positions at these early phases. That is a fantastic thing. The 
venture capital community obviously is going to. So emphasizing 
that in these investment structures is important for us to do.
    Senator Hawley. Very good. Thank you, Mr. Chairman.
    Chairman Rubio. Senator Rosen.
    Senator Rosen. Thank you, Chairman Rubio and Ranking Member 
Cardin, for holding this important hearing.
    Thank you to the witnesses for the work and investment that 
you have done.
    Nevada is home to more than 270,000 small businesses. We 
only have 3 million people in our State, so it is pretty good, 
including approximately 72,000 minority-owned businesses and 
83,000 woman-owned businesses. Additionally, Nevada is leading 
the way in the Nation for woman-owned businesses over the past 
decade. So these numbers, of course, they illustrate the large 
footprint that small businesses have in my State and why your 
departments, of course, as so important, and the key goals for 
you to provide the grants, contracting opportunities for 
minority, disadvantaged, small business owners.
    So from 2016 to 2018, Nevada small businesses won 31 grants 
totaling more than $15 million through your programs, and 
awareness of these programs is key. You talk about your Road 
Tour. Are you planning to make a stop in Nevada anytime soon or 
in some of the States with the smaller population as opposed to 
some of the big centers that you are talking about?
    Mr. Williams. Actually, we do concentrate on the smaller 
States.
    We did go to Nevada in 2017. Typically, we have been trying 
to get around every 3 years or so to the States. So we did want 
to get to every State, but we have probably been to the smaller 
or the lower-population States more often than the large 
States.
    Senator Rosen. So when you are doing the Road Tours and you 
are getting these key takeaways for our businesses, how are you 
dispersing that to either our offices perhaps, congressional 
offices, and so we can work with our stakeholders like Chamber 
of Commerce, Urban Chamber or Latin Chambers or community 
colleges, whatever they may be? How are we getting this 
information so we can be helpful?
    Mr. Williams. So every Road Tour--we start the next Road 
Tour next week. Probably 2 months earlier, we sent letters to 
all our congressional members, so both Senators and the 
congressional members, letting them know about it. We work with 
the State economic development groups, and we will usually have 
some type of group on the ground that usually has 
relationships. But we certainly will send letters directly to 
the congressional members two months prior to going on a Road 
Tour.
    Senator Rosen. And will those give some hands-on tips?
    Mr. Williams. Absolutely.
    Senator Rosen. Because the other thing that I hear most 
often from women, minority-owned businesses, or smaller 
companies who want to get started is that they just do not have 
the manpower, the talent to hire a grant writer, or they do not 
have this expertise in-house. They know that they can get it, 
but they just do not have the skills.
    So are you able to give--or where can we be sure that we 
are dispersing hands-on information for people on the ground so 
we can add more people to these roles?
    Mr. Williams. Right. So we do it a couple different ways. 
On our Road Tour events, the morning will be the Federal 
managers explaining what the program is. In the afternoon will 
be the local providers because, again, really you need someone 
that can stay with the company and work with them over months 
to identify.
    And as I have talked about, some of these pilots that work 
really well, they say, ``Okay. A defense solicitation is coming 
out. Let us have a group that starts 2 weeks before that and 
work through the solicitation and write proposals.''
    So there is information on our website on how to train and 
find the right agencies, how to write proposals, all the 
instructions. So on SBIR.gov, we have about 50 modules on 
training, and then again, we spend a lot of time training those 
in the State to know what SBIR is. And so they can provide them 
materials so that they can go out and train, and we would be 
glad to work with your State on that.
    Senator Rosen. Perfect.
    My last question really is, from our committee, what can we 
do? These are terrific programs. You see the number of small 
businesses in my State and, of course, across the country. What 
can we do here to help strengthen these programs? What would 
you need from us?
    Mr. Shepard. I did want to just make one quick comment, 
Senator Rosen. Utilizing the field offices with SBA, the small 
business development centers as well, that is always a resource 
for the small businesses in those communities, and we do have 
engagement, interaction so that they are not just having to 
always call into Washington, D.C., and headquarters. So that is 
all across the Nation, of course, 65 offices. So that is 
something that should not go overlooked.
    John, please speak to----
    Mr. Williams. And so I think it is always a balance. The 
SBIR is about $3.5 billion. That is for the agencies. So the 3 
percent admin was a big plus to give the agencies some 
resources to actually help run programs, develop websites, 
develop training materials and all those things that are 
outside, because the $3.5 billion has to go to the small 
businesses.
    SBA is a little challenged because we do not have an SBIR 
program, and so we have to get those fundings from the 
charities of others, those that might give us 3 percent.
    So resources are usually what limits our ability to do as 
much training, but I think we are pretty effective with what we 
have, and some of the programs that you have appropriated with 
FAST and growth accelerator and the 3 percent have helped us to 
do--provide that training.
    Senator Rosen. But being sure that we have a central--maybe 
whether it is on your website or field offices so all of our 
constituent services can have a central place to talk to people 
to help our businesses within our communities be sure we have a 
certain amount for admin is a good thing.
    Mr. Williams. Right. And if you have contacts, we will be 
glad--we have a call with 400 service providers once a month. 
So we try to get them to talk to each other. So we would be 
glad--any people you know would like to be part of that, we 
will add that.
    Senator Rosen. Perfect. Thank you so much.
    Mr. Shepard. And I think another thing to consider as well 
for the committee, to get to your question, is thinking about 
looking at the SBIR/STTR legislation and knowing what SBA's 
oversight role is and the fact that we do not provide the 
funding--and John mentioned what we can do if we get money from 
the 3 percent, which allows us to do more in terms of outreach.
    But what should our role be, and should our role expand? 
And can SBA do more than what is currently--and can currently 
do under the current statute? And so that is something to 
consider as well. As you ponder with reauthorization issues and 
we engage with the staff and we start to have some meetings 
after this committee, really having some healthy discussions 
about how our role might change. Again, SBIR has been around 
since 1982. So maybe it is time to look in this free enterprise 
system with technology and the advancements that have been 
made. Maybe it is time to look at that with different eyes and 
thoughts and maybe do some things differently and think about 
what SBA's role is. So we are up to having that conversation as 
well.
    Thank you.
    Senator Rosen. Thank you. My time is up.
    Chairman Rubio. Thank you.
    Senator Coons.
    Senator Coons. Thank you, Chairman Rubio, Ranking Member 
Cardin, for holding the hearing and to our witnesses, Mr. 
Shepard, Mr. Williams, for your great work.
    As you know, I am a big believer in SBIR and STTR programs. 
They are vital to transitioning compelling new technologies 
from lab bench to marketplace, which is at times a perilous and 
challenging journey, and if we are going to accelerate, 
commercialize, and manufacture in the United States the next 
generation of competitive technologies, we need to do 
everything we can to take advantage of cutting-edge research, 
particularly that that is federally funding and defense-
aligned.
    Delaware over the last 3 years has benefited from about $54 
million in SBIR funding, fully two-thirds of which was paired 
with coaching by our SBDC.
    One of my favorites is Phase Sensitive Innovations in 
Newark that grew out of DoD-funded SBIR funding and is now 
developing really compelling, both national security-related 
and commercially relevant imaging technology that would allow a 
helicopter landing in a cloud of dust to see exactly where it 
is going and other applications.
    I am glad your new Policy Directive for SBIR/STTR includes 
a focus on manufacturing. Chairman Rubio and I introduced, I 
think, last week, the Global Leadership and Advanced 
Manufacturing bill, which is bipartisan, which would 
reauthorize and expand the Manufacturing USA strategy.
    I am also interested in two other areas, if I could, that I 
would like to talk about briefly.
    Last year, my Support Startup Businesses Act became law 
through the NDAA. It fills what I think was a critical gap in 
terms of allowing startups to use up to $50,000 in funds for 
commercialization, IP protection, market research validation.
    What is the SBA doing or planning to do to make use of this 
and to encourage SBIR recipients to use this new opportunity to 
commercialize, if I could, Mr. Williams? And then I have got a 
question for you, Mr. Shepard.
    Mr. Williams. Sure. So I think we are going to look back, 
and that is going to be one of the strongest changes that has 
been made in the SBIR program. Always that challenge has been, 
well, you cannot use R&D dollars for that business side.
    Senator Coons. Right.
    Mr. Williams. And so it is adding--because, again, it was 
technical assistance which small businesses did need. They 
needed business assistance, protection on patenting, charges 
they were not allowed to bill.
    So the challenge we are having right now is we are 
establishing the guidelines, and actually, we probably need to 
sit down with some of your staff to really determine what was 
meant by some of the language because there was pushback by 
some of----
    Senator Coons. I am happy to answer your question.
    Mr. Williams. Do I have to dissolve--do all agencies 
actually have to allow a company to come in with a proposal? 
There are words of ``may'' in there. They are saying, ``Well, 
we do not have to have a program. We may,'' and so our 
interpretation was, yes, all agencies would have to allow a 
company to submit in their application or be able to submit in 
an application support and using business assistance.
    What is interesting also, it talks about all that money has 
to be spent and contracted out, so none of it can be spent in 
the small business, but they would have to find contractors. 
And I am not sure that was the original intent also.
    So we want to work, because we are in that early policy 
stage, developing those guidance. We have come out with it. We 
have gotten some----
    Senator Coons. Feedback.
    Mr. Williams [continuing]. Feedback from other agencies, 
and I think now is the perfect time for us to feel comfortable 
to say, ``No. This was the intent.''
    So that said, the challenge of the program that you gave us 
was you said implement it right away, and it is one of the more 
complex programs that I have dealt with.
    So the challenges going downstream are you are now allowing 
a company to build things that would not normally be billable 
on any other contract. So their DCA, auditor, or whatever are 
going to come in and say, ``No, no, no.'' How do you deal with 
that? So training to the contracting shots, training to the 
auditors----
    Senator Coons. Yep.
    Mr. Williams [continuing]. For a relatively small program. 
So we are going to have to work those issues out and then 
really defining its IP protection, is that what, what level and 
things like that.
    Companies have needed this. This was an area I was very 
focused on as important, and so kind of working that out and 
figuring out what those details are is where we are at. That is 
the stage we are at right now.
    But that said, some companies, some agencies are already 
allowing it.
    Senator Coons. To the extent my input would be in any way 
relevant or helpful, I would certainly be happy to offer it.
    Mr. Williams. Thank you, sir.
    Senator Coons. I am certain that other members of the 
committee who were cosponsors as well--I see a gentle head nod 
from the Chairman--would also be interested in offering some 
input on that.
    If I could, Mr. Shepard, your office manages the Small 
Business Investment Company, the sort of, if I might, venture 
capital arm of SBA. Over a quarter of all SBIC investment is in 
small manufacturers.
    I had a bill in the last Congress to strengthen access to 
7(a) loans for small manufacturers. I am retooling it to look 
at 7(a) and SBIC. I would be interested in your input on how to 
enable that particular program, SBIC, to reach more small 
manufacturers.
    Mr. Shepard. We would look forward to having continuing 
discussions in that area.
    Of course, the legislation was written to supplement the 
private equity capital, long-term loan funds to small business 
concerns. So the SBA does that through the formation, the 
conduit, if you will, of the small business investment 
companies.
    Those companies actually direct the funding and where the 
funding goes. So SBA does not participate in those funding 
decisions that are made by the SBICs.
    So what we would have to do is have discussions and look 
for ways if more direction should be given or could be given in 
the licensing process in terms of what types of SBICs are being 
licensed and then specific to manufacturing, but currently, 
that is not the way the program is set up.
    Senator Coons. Well, I would welcome any input on what you 
think would be welcome and appropriate in terms of scope----
    Mr. Shepard. Yes.
    Senator Coons [continuing]. And encouragement or 
incentives.
    Let me just last speak briefly to the SBIR Road Show. There 
was one in Delaware. You said you have been in every State. The 
one in Delaware, I thought, was spectacularly successful. There 
were long lines at each of the Federal agency tables, folks 
trying to understand how to commercialize, how to connect. It 
is clear to me that the appetite for outreach programs like the 
Road Show is large, and so I think it is a valuable thing for 
us to continue to support and invest in.
    And I could not agree more with the point made by the 
Ranking Member at the outset about permanency. I do not think 
there should be any question about the permanent value to the 
United States of SBIR and STTR.
    Thanks for the great work you do.
    Thanks for letting me go over, Mr. Chairman. This has been 
a great conversation so far. Thank you.
    Chairman Rubio. The Ranking Member had a follow-up.
    Senator Cardin. One question. Do you have any specific 
recommendations for statutory change in regards to the 3 
percent on administrative?
    Mr. Shepard. Other than making it permanent?
    Senator Cardin. Other than making it permanent.
    Mr. Shepard. We really have been, Senator, dependent on the 
committee to give SBA feedback in terms of what it would like 
to do, but I think we can all look at the benefits of 
permanency with that funding and----
    Senator Cardin. So you are satisfied to negotiate with the 
agencies as to how you can help finance some of these issues? 
Right now, they control the dollars, as I understand.
    Mr. Shepard. They do, indeed, yes, and we are dependent on 
them to provide to. So anything statutorily that we could talk 
about with the committee to improve SBA's ability to get 
funding for those oversight areas, those outreach areas would 
be very helpful. One of the ways to do that is----
    Senator Cardin. We are your friends. We are your advocates. 
So give us some ideas. We understand there may be a hurdle to 
try to get those done. We recognize there are other interests, 
but it would be nice to know if it is working well, let me be. 
But if you need help, let us know.
    Mr. Williams. So a thing to consider is the FLC program 
does an assessment tax that generates money that goes to NIST 
that is a tax on all the RDT&E money. It is rolled into a 
bucket and then provided to NIST to manage the FLC program. So 
those are ideas that could potentially--maybe my agency friends 
would not like that idea, but that is an idea. I have seen that 
work.
    Senator Cardin. Thank you.
    Senator Cantwell. Thank you, Mr. Chairman.
    Chairman Rubio. Senator Cantwell. She does not even put--
she is ready to go. Look at that.
    Senator Cardin. Right.
    Chairman Rubio. It would take me at least 5 minutes to 
realize I am not in foreign relations----
    Senator Cantwell. Well, thank you. I so appreciate you 
having this hearing and the reauthorization of the SBA's 
innovation program. Innovation is very important to the State 
of Washington and continuing to make the right decisions and 
helping to stop the decline of American startups.
    I have a question for you, Mr. Shepard. The rate of startup 
creation in the United States has been decreasing for several 
years, and while there are many reasons why you might say that 
is--and certainly, we have seen a rise in China's startup 
level, again, very different structure. But if we want to 
continue to build and maintain a 21st century economy, I have 
always believed that we live in an information age, and the 
amount that innovation that can happen because of the 
information age is just unlimited. But guess what you have to 
have to make that idea a reality? Access to capital.
    So the SBA's Growth Accelerator Fund provides early staged 
companies with vital mentorship and financing. In our State, 
the SBA supported accelerators like the Washington Innovation 
Network; Life Sciences Startup Accelerator Program in Seattle; 
Ignite Northwest, a technology-focused business accelerator in 
Spokane. And I am concerned about the President's budget trying 
to eliminate that.
    So what is the SBA doing to try to writ large reverse the 
trend that we are seeing stagnant on startups, and what can we 
do to get the Trump Administration to change its mind on trying 
to zero out this program?
    Mr. Shepard. Thank you, Senator, for your question.
    Certainly, in my opinion comments, not only historically 
has this program, SBIR/STTR, been beneficial to the businesses, 
small businesses have had an opportunity to take advantage of 
it from 1982 forward. In the case of SBIR, we can look at 
today's results, but then we have to think about our next 
generation of young people and certainly our competition 
against other global leaders, so certainly agree.
    When I came into the SBA 2 years ago, these programs with 
the Growth Accelerator Fund Competition have been unauthorized 
programs. So they have not been presented in SBA's budget 
proposal.
    We have received the funding, and obviously, we will 
support that funding when it is received. And if Congress 
authorizes that, then we are going to continue to implement 
those programs and work toward implementation of any of those 
activities that we are directed to do by Congress.
    Senator Cantwell. Do you question any of the methodology or 
the focus that they are being able to give to communities?
    Mr. Shepard. No. There have been varying reports on both 
sides. I think none of this question about startups and the 
importance to our economy and small businesses and the need to 
support them in the large mandate of SBA in terms of the free 
enterprise system and how it works with--does it do a good job 
with the accelerator community already? Is it necessary to be 
federally supported? Those are certainly questions that loom 
that we do not necessarily have the answers to.
    Senator Cantwell. To me, the phenomenal amount of 
innovation that is happening--I ran into some kids at the--
actually at Western University. So they had established in a 
consortium of just working together a technology to take a 
windowpane and generate electricity from that windowpane.
    But the fact that they could get some money, I think in 
this case, they had a small grant from EPA but then got backed 
by a smaller funding source in the community. But that research 
now is being put into a startup, and it is well on its way to 
commercialization.
    So that is the thousand flowers that we want to bloom, and 
I appreciate you taking a look at this program and giving us 
some more ammunition on how we can make sure we secure funding 
for it.
    Thank you, Mr. Chairman.
    Mr. Shepard. Very good. Thank you. Thank you very much.
    Chairman Rubio. Senator Markey, are you ready?
    Senator Markey. Yes. Thank you, Mr. Chairman.
    SBIR/STTR programs absolutely essential to the 
competitiveness of our country, the competitiveness of 
Massachusetts for sure. The numbers in Massachusetts are 
staggering.
    Since the programs were created, 22,500 of these grants 
went to Massachusetts, which is amazing. Think of that many 
companies in one State.
    And last year alone, Massachusetts businesses received 593 
awards valued at over $350 million worth of investment. That is 
like a job creation engine that is out there and working for 
the smallest companies that otherwise would have a harder time 
gaining access to capital which they need.
    We actually rank--even though we are only 2 percent of 
America's population, we rank second only to California in 
terms of total funding from these programs, and a lot of that 
success is because of this ecosystem of innovation that we have 
in the State.
    So I just want to echo what Senator Cardin said about 
permanent authorization for this program. I just think it 
should be out there, and small businesses should know that they 
are going to have a program 2, 3, 4, 5 years from now. If they 
start right now with their little idea, that there will be 
something there that they can gain access to.
    In Massachusetts, while our businesses are successful at 
receiving a large number of awards, it is important to remember 
that they receive these awards from a very diverse set of 
agencies. For example, Massachusetts small businesses receive 
$11 million from NIH, $48.5 million to work with the U.S. Navy. 
Those agencies have very different missions with very different 
needs.
    Mr. Williams, I imagine that your needs running the program 
at Navy to deliver for the warfighter were quite different from 
what NIH may be trying to accomplish. You probably had 
different criteria, requirements from other agencies.
    For example, the peer review process at NIH's SBIR program 
is critical to what they do but may not be applicable to the 
Navy. The USDA program has to follow crop cycles, so timeliness 
for other agencies probably does not always make sense for 
them.
    So, Mr. Williams, I would be very interested to hear how 
you think we should be balancing the issues of ensuring overall 
success for the program but at the same time making sure we 
allow for flexibility at each of the individual agencies to 
carry out their missions.
    Mr. Williams. I guess I would answer that I think we are 
doing a pretty good job with that, and so I think when we look 
at reauthorization, that is one of the beauties of the program 
is it does allow flexibility.
    There are certain programs that more recently have come on 
which require agencies to attempt, and some of the smaller 
agencies have a harder time adapting to some of these programs.
    So, at the same time, I still think that the gap and the 
time it takes to do a review process or the peer review process 
is a very long process, but DOE was able to figure out a way to 
get an early letter. And it actually reduced the typical peer 
review.
    I still think there are some things that we can do to 
improve without changing an agency's policies on how they 
manage programs but yet continue to leverage the program the 
way it is meant to be.
    Senator Markey. And I do think it is important for us to 
understand that SBIR is actually 11 different programs----
    Mr. Williams. Correct.
    Senator Markey [continuing]. Eleven different criteria.
    Mr. Williams. Yes.
    Senator Markey. There is not one size that fits all.
    When Congress created SBIR in 1982, we specifically 
exempted two groups of agencies from participation in the 
program--the intelligence community and the National Nuclear 
Security Administration at the Department of Energy. So while 
these agencies do not have a formal SBIR program, it seems 
obvious that small businesses would have a huge amount to 
contribute to their missions in fields like cybersecurity, 
sensors, nuclear security.
    For either of our witnesses, from your perspective at the 
SBA, what would you see as some of the potential upsides and 
downsides of including the intelligence community or NNSA in 
the SBIR program?
    Mr. Shepard. Senator, I will answer first and just say 
there is no question about the boundless opportunity that small 
businesses can provide to the economy in any industry sector, 
so you are spot on with the observation.
    I am not familiar with the exclusion as the legislation was 
first written in the 1982 time period or even subsequent in 
1992.
    John, do you have thoughts on that?
    Mr. Williams. Yeah, two quick thoughts.
    Absolutely, intelligence is a great place for SBIR 
companies. We would have to work security issues, but again, 
those are all workable.
    Exemptions do make it challenging for SBA to determine 
whether the right amount of money is set aside since we do not 
usually have insight into those classified lines. So if I look 
at a bottom line, then they say these things are removed, and I 
cannot validate that.
    But, also, I think you should be aware that other bills 
like the Department of Transportation has actually allowed FHA 
and the Highway to not have an SBIR program. So these are 
outside of the SBIR legislation, but yet other agencies and I 
would certainly think FAA could use SBIR technology. So it is a 
worthwhile question to ask.
    Senator Markey. Thank you. Thank you both for your great 
work.
    Thank you, Mr. Chairman.
    Chairman Rubio. Thank you.
    I just have a couple quick questions. So much has already 
been covered.
    Mr. Shepard, how many vacancies are there on the team 
managing SBIR and STTR programs?
    Mr. Shepard. Yes, Senator. We have six FTEs in the office. 
We have one vacancy that we are in the process of hiring, and 
we have another one that is detailed out to the White House, so 
one if you do not count the detail.
    Chairman Rubio. How long has that one been open?
    Mr. Shepard. It is a backfill. So it is a position that has 
been out, but it has been about 12 months on that position.
    Chairman Rubio. What are the efforts to fill the position?
    Mr. Shepard. We have filled it, filling it again. We are 
working on it right now, very important with the team and its 
size to get that taken care of, obviously.
    Chairman Rubio. Mr. Williams, one of the goals of these 
programs is to make sure the small businesses with these 
technologies are able to pursue commercialization of these 
innovative ideas.
    We hear all the time about what they call the ``valleys of 
death'' and the difficulties that entrepreneurs face in the 
process of moving from basic research to commercialization.
    What changes do you believe should be made to improve the 
commercialization metrics for small firms?
    Mr. Williams. So the challenge with metrics in an area like 
this, there is no one path to commercialization. There are 
variations in technology. Software is very quick; medicine is 
very slow. DoD goes to a private sector. So we have been 
challenged by defining a standard metric of you have a Phase I. 
We give you a million dollars at Phase II. We would except X 
amount of Phase III dollars by a certain time frame.
    So what we have done is we have created the databases and 
the tools to measure those things, but developing a metric on 
what is good and what is bad has been challenging.
    What we do and are impressed with--and you will hear about 
it later--some of these economic studies that have done deep 
dives like the NCI, the Navy study, to really understand there 
is an economic benefit.
    I think then, separately, as a company proposes, it would 
be up to the evaluator to evaluate whether they are 
commercializing at a good rate.
    Chairman Rubio. All right. Well, you have given us a good 
solid hour and many great questions, and I want to thank both 
of you for being here. We really appreciate your testimony. It 
is very helpful. I think the numbers on these--there are always 
ways to improve these programs, and you obviously heard the 
talk about making them permanent. However, I think just the 
numbers alone testify to the importance of this, especially at 
a time in which our Nation is already not from the private-
sector side investing enough in the long term and for our 
future. This sort of government role is essential.
    So thank you both for giving us that time.
    I am going to go ahead and call up the second panel, and 
while we transition over, I will introduce them. Stephen Ezell 
is the vice president of Global Innovation at the Information 
Technology and Innovation Foundation, where he focuses on 
science, technology, innovation policy, as well as 
international competitiveness, trade, and manufacturing policy 
issues.
    Jere Glover is the executive director of the Small Business 
Technology Council, the trade association representing SBIR 
firms.
    Dr. Sridhar Kota is a professor of engineering at the 
University of Michigan, the executive director of Alliance for 
Manufacturing Foresight, and founder of FlexSys, a company that 
has received SBIR awards from the Air Force, the Army, the 
National Science Foundation and NASA.
    Dr. Stephen Hoffman is the founder, CEO, and chief 
scientific officer--founder, CEO, and chief scientific officer, 
that is like three jobs--of Sanaria, Inc., which is located in 
Rockville, Maryland. It is a biotechnology company developing 
vaccines to protect against malaria. We heard about that a 
moment ago from the Ranking Member.
    We thank all four of you for being here. We will begin with 
you, Mr. Ezell. Or is it ``Ezell''? How do I pronounce? What is 
the perfect way to pronounce it?
    Mr. Ezell. Mr. Ezell.
    Chairman Rubio. Ezell. Got it.
    Mr. Ezell. Thank you.
    Chairman Rubio. Thank you for being here.

 STATEMENT OF STEPHEN EZELL, VICE PRESIDENT, GLOBAL INNOVATION 
   POLICY, INNOVATION TECHNOLOGY AND INNOVATION FOUNDATION, 
                         WASHINGTON, DC

    Mr. Ezell. Well, good afternoon, Senator Rubio, Ranking 
Member Cardin, and members of the committee. I am Stephen 
Ezell, vice president of Global Innovation Policy at the 
Information Technology and Innovation Foundation, ITIF. We are 
a nonprofit, nonpartisan science and technology policy think 
tank based in Washington, D.C.
    I appreciate the opportunity to testify before you today 
regarding the reauthorization of the SBA's principal innovation 
support programs.
    As my fellow panelists have attested, SBIR and STTR are 
truly some of the most effective programs in the Federal 
arsenal as stimulating private-sector commercialization of 
innovations derived from Federal R&D and helping promising 
young high-tech startups launch and scale.
    We have heard the stories about the launch companies like 
23andMe, Apple, Amgen, and Qualcomm. ITIF has found that SBIR-
nurtured firms consistently account for about one-quarter of 
all U.S. R&D 100 Innovation Award winners from R&A magazine, 
showing that they are producing some of the highest 
breakthrough innovations in the country.
    SBIR also leads to additionally, projects that would not 
have otherwise happened. For instance, a study of NSF SBIR 
Phase II awards finds that 75 percent of the development 
projects would likely not have advanced without SBIR funding.
    As we have heard, more recent agency-level studies from the 
Navy, Air Force, and the National Cancer Institute attest to 
the SBIR successful impact. For instance, the Air Force and 
Navy have found that each $1 of SBIR investment generates an 
ROI of $12 and $19.50, respectively.
    The SBIR program has been copied by 17 countries around the 
world; it is so successful.
    In short, the SBIR and STTR programs deserve Congress' 
continued and enthusiastic support; however, there remains 
opportunity to refine the structure and administration of the 
programs to further enhance their commercialization potential.
    The previous panel discussed the NDA from 2018 making 
$50,000 of Phase II awards available for commercialization-
oriented activities like market validation, IP protection, and 
market research. Congress should clarify, however, that all 
participating Federal agencies are expected to offer this 
option to awardees at amounts of up to $50,000 per award, 
include provisions that awardees can use these funds on 
internal personnel and expenditures instead of being required 
to use third-party services for the third-party service 
providers and also clarify that this includes customer 
discovery programs, including but not limited to I-Corps.
    SBIR is at its most successful when it is empowering early 
stage, high-potential entrepreneurs with resources supporting 
their development and commercialization. Such firms wish to 
leverage an SBIR award to scale a high-tech business, not as 
viewing SBIR awards as a component of their business model.
    Accordingly, Congress should encourage Federal agencies to 
implement a prioritization system in the award process that 
gives a degree of preference to applications who have received 
fewer grants over time. Here, Congress could also direct the 
SBA to explore streamlining and accelerating the application 
process, as sometimes the initial requirements may be 
sufficiently onerous to prevent promising potential candidates 
from applying.
    The SBIR program would certainly benefit from additional 
resources, but leaving the SBIR set-aside level issue aside, 
the best way for Congress to increase SBIR funding would be to 
restore a lagging investment in Federal R&D, which in 2017 fell 
to its lowest level as a share of GDP since 1995.
    In fact, to match the average level of Federal R&D 
investment over each year of the decade of the 1990s, Federal-
funding R&D levels in 2017 would have needed to be about 80 
percent higher than they were.
    To maintain America's international competitiveness, 
technical advantage, and securing the pipeline, enabling more 
entrepreneurs to leverage SBIR to launch breakthrough 
businesses, ITIF calls upon Congress to increase Federal R&D 
funding by at least $40 billion over the next 5 years. That is 
the best way to get more resources to SBIR.
    SBIR operates important programs like the Federal and State 
Technology Partnership program, which engages accelerators, 
incubators, and maker spaces, and the growth accelerator fund 
program. We think these programs, including FAST and the growth 
accelerator, should be made permanent.
    Further, to assist SBA and having greater predictability in 
managing its programs, Congress should make permanent the 
authorization of the 3 percent administrative funding that has 
made the SBIR, I-Corps, and other pilot programs possible.
    Lastly, despite SBIR's great success, America's broader 
system for funding research still pays too little attention to 
technology commercialization. SBIR and STTR are still 
fundamentally associated with the level of 11 Federal funding 
agencies. So ITIF has proposed that Congress allocate a modest 
share of .15 percent of agency research budgets or about $125 
million per year to create spurring commercialization of our 
Nation's research program that would enhance commercialization 
activities at universities and at the State level.
    In conclusion, SBIR and STTR programs demonstrate that 
public-private partnerships played an important role in driving 
America's innovation economy forward. The programs are working 
well. The question is only about how to refine and improve 
them.
    Thank you.
    [The prepared statement of Mr. Ezell follows:]
    
    
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    Chairman Rubio. Thank you.
    Mr. Glover.

STATEMENT OF JERE W. GLOVER, EXECUTIVE DIRECTOR, SMALL BUSINESS 
               TECHNOLOGY COUNCIL, ANNAPOLIS, MD

    Mr. Glover. Chairman Rubio, members of the committee, I am 
Jere Glover, executive director of the Small Business 
Technology Council.
    Thirty-seven years ago, I had the privilege of testifying 
in support of the original SBIR legislation. Then the United 
States was the undisputed worldwide leader in innovation. It 
dominated with virtually 100 percent of venture capital. We had 
the best education system in the world and the strongest patent 
protection in the world.
    America's small businesses were the most innovative sector 
of the economy and the wellspring of entrepreneurial energy but 
received only 5 percent of the R&D dollars.
    Today about half of the venture capital investments are 
outside the United States. Our patent system is severely 
weakened. We now publish patent applications shortly after they 
are filed telling the rest of the world what our technology is 
and how to make it.
    Small business still only receives about Federal 5 percent 
of the extramural R&D funding, but we are still the most 
innovative and productive sector of the U.S. economy.
    Just candidly, China has been eating our lunch, and when we 
look at things like the European Union spends four times more 
money on small business R&D than America does, they spend 20 
percent; we are basically at 5. Even France spends $13 billion 
to fund disruptive technologies.
    But the one thing that we have going for us in America is 
the SBIR program. Seventeen National Academy studies, four 
economic impact studies clearly show the program is the 
economic engine that drives innovation in America.
    The return on investment for the SBIR program at the 
National Cancer Institute is 33 percent. For every dollar 
invested in the economic impact results in $3 in Federal tax, 
local taxes, and State taxes coming back.
    If you look at the chart, the companies that were acquired, 
just those that were acquired in the National Cancer Institute, 
funding rose $21 billion, 27 times the SBIR total investment at 
the National Cancer Institute.
    The DoD industrywide study, which has been partially 
released, has similar results. I guarantee you that you are 
using SBIR technology on a daily basis. Two actual items, one 
is GPS on a chip, which allows you to know where you are on 
your phone and throughout your GPS, and CMOS, which is cameras 
making digital cameras work better on your phones right now--
are SBIR-funded technologies. You have a brief description 
there.
    Let me just say this. The market loves the SBIR program. As 
mentioned earlier, 17 countries have copied it. Ten percent of 
all venture capital investment goes to SBIR-related firms. 
Nineteen percent of In-Q-Tel's investments go to SBIR-related 
firms. Eight hundred twenty-nine SBIR firms have gone public. 
One thousand three hundred have been acquired, with an average 
purchase price of $42 million.
    One of the things that is surprising--and we need to 
understand--the only source of money for most small businesses 
in the innovation area is SBIR. When we look at venture 
capital, for example, we see that 80 percent of all venture 
capital is in three industries: software, telecom, and the 
internet. And for those in the Defense Department who think 
venture capital is going to help them out, what you see, 20 
percent of VC money is all we have to share in every industry 
except those three.
    In defense, what we see in the defense area is--next chart, 
please--on average, the entire venture capital investment 
portfolio at every stage funds six defense-related technologies 
a year, to the tune of $73 million. That is all they do.
    So when we see folks talking about that is going to save 
the defense industry, that is going to speed up things, it 
certainly has not to date.
    Now, what is working is the Air Force one-page contract and 
up-front payments, GSA doing Phase IIIs, and SBA's new Policy 
Directives.
    One of the questions that I ask for everybody involved in 
the innovation world is tell me what works better than SBIR, 
and if you can tell us that, fund it.
    What we need to do is increase Federal spending and make 
spending more productive, make sure we use SBIR, double it. The 
809 Panel report says separate funding for Phase III should be 
added to the SBIR program, and we want 30 percent of the 
administrative 3 percent money to be spent on the educating and 
outreach and contracting to make the process work faster.
    Thank you very much for your time.
    [The prepared statement of Mr. Glover follows:]
    
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    Chairman Rubio. Thank you.
    Mr. Kota--Dr. Kota.

STATEMENT OF SRIDHAR KOTA, Ph.D., FOUNDER, FLEXSYS, ANN ARBOR, 
                               MI

    Dr. Kota. Chairman Rubio, Ranking Member Cardin, 
distinguished committee members, thank you for the opportunity 
to appear before you today to discuss issues of critical 
importance to American competitiveness, this SBIR program.
    My name is Sridhar Kota. I am the founder and CEO of a 
small business, FlexSys, founded 18 years ago in Ann Arbor, 
Michigan, with an SBIR Phase II project. I am also a professor 
of engineering for the last 31 years. For the past 4 years, I 
have been serving as the founding executive director of a 
national think tank called MForesight: Alliance for 
Manufacturing Foresight, with a singular focus on driving U.S. 
manufacturing competitiveness.
    I have been enrolled in the technology policy at the 
national level for the past 10 years, including a 3-year tenure 
at the White House as the assistant director for Advanced 
Manufacturing.
    The SBIR program is one of the crown jewels of our Federal 
investments in science, engineering, and technology. My company 
received multiple Phase I, II, and III contracts from the Air 
Force, Army, NASA, and NSF. Through a Phase II and Phase III 
Air Force SBIR, we developed the technology to morph the shape 
of an aircraft wing in flight, eliminating drag-producing 
flaps, and successfully demonstrated significant fuel savings 
and noise reduction through 3 years of rigorous flight testing 
conducted in collaboration with the Air Force and NASA.
    The Air Force and NASA actually invested nearly $70 million 
on this project, and we received an SBIR Tibbetts Award.
    We are currently working with the Air Force to retrofit 
military transport vehicles with our technology to yield 
hundreds of millions of dollars' worth of fuel savings per year 
on a single fleet alone.
    The SBIR program is usually the first step for an informed 
entrepreneur to demonstrate a working prototype and attract 
private investment. It helps mature the technology readiness 
levels beyond TRL-3 and fuels entrepreneurship and growth.
    My company's technology would not have been possible 
without SBIR funding and sustained investment by the Air Force. 
Once proven through flight testing, the private sector invested 
nearly $5 million, and we made important strides in other 
commercial applications as well.
    Since the goals of this particular project are well aligned 
with the broader goals of the Air Force, the agency was able to 
provide sustained funding on a path from research to 
development to demonstration to deployment.
    Not all SBIR projects, even within my own company, benefit 
from such sustained investments like the Air Force project I 
just outlined.
    Although SBIR provides critical initial investment needed 
to demonstrate the technology to make a working prototype, the 
follow-on funding to scale manufacturing is usually very 
difficult to attract in the U.S. Making a one-off prototype is 
not the same as manufacturing at scale. Sustained investment is 
needed for process innovations to mature manufacturing 
readiness and sufficiently reduce the technical and market 
risk.
    So the vast majority of venture capital funding in the U.S. 
is devoted to software and biotech, with less than 4 percent 
invested in hardware startups. So now foreign investors at 
times, China more often than note, are ready to provide the 
capital needed for promising technologies demonstrated through 
SBIR programs and other programs and investing further 
development, but then the commercial-scale production happens 
overseas.
    So the motivation for Federal investment in taxpayer 
dollars for R&D is to benefit American taxpayers by creating 
jobs from new products manufactured from scale in the U.S. The 
return on investment could be realized in different form by 
creating national wealth or ensuring national security, 
enhancing--creating better health outcomes or energy 
production.
    But if you look at much of the $150 billion we spend 
annually on science and technology, that really goes for 
creating knowledge through basic research. The SBIR share of 
3.2 percent is one of the few investments the Federal 
Government makes to transition that knowledge into national 
wealth or security to get the real return. So increasing the 
share from 2.5 to 3.2 was a positive step, and the government 
has a critical role to play in investing in translational R&D 
to leverage promising results from basic research.
    This is especially true when societal benefits far exceed 
private-sector benefits. Market forces alone will not bridge 
this gap in our innovation cycle, and they have not in the last 
two decades. We really need a national strategy--probably, we 
are the only developed country without a national strategy--on 
how to nurture our best ideas domestically. We need to avoid 
giving away our best ideas and technology to foreign 
competitors.
    To do that, there are a number of things we could do and 
just a couple of things I will outline, how to bolster our SBIR 
program. One is the agency should target SBIR projects that are 
on their technology roadmap, so that there is a tangible 
outcome rather than a curious research project. So that is one 
and is sort of like the Air Force example I gave.
    The other one is we need a separate set of funds, something 
like a DoD Rapid Innovation Fund type of funds so that the 
successful SBIR projects, we can invest in those to mature 
manufacturing readiness because, at the end of the day, it is 
not just a startup. We have got to create a scale-up and create 
jobs here.
    Finally, the Federal Government should enact strict 
guidelines in intellectual property generated from SBIR 
projects to ensure that it is scaled only in the U.S. SBIR 
awardees should be allowed to license the technology to any 
form, domestic or foreign, as long as the technology is 
manufactured at scale only in the U.S. This would not be a 
burdensome or unreasonable regulation since the taxpayers who 
funded the research are entitled to a return. Our taxpayer-
funded R&D otherwise will continue to be an unintended subsidy 
for technology used and products produced in other countries.
    Our challenges are broad and deep. To put it in 
perspective, the entire SBIR $3.5-billion-per-year budget is 
approximately what we lose to China in a day. If you think 
about the trade deficits, IP theft--and no one is talking 
about. We are willingly giving away our technology every day 
through our research.
    So I outlined a few other suggestions in the written 
testimony. I want to thank you for giving me this opportunity, 
and I think SBIR is critical to our national competitiveness. 
And I hope it continues to flourish far into the future.
    Thank you, sir.
    [The prepared statement of Dr. Kota follows:]
    
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    Chairman Rubio. Thank you.
    Dr. Hoffman.

 STATEMENT OF STEPHEN L. HOFFMAN, MD, FOUNDER, SANARIA, INC., 
                         ROCKVILLE, MD

    Dr. Hoffman. Chairman Rubio, Ranking Member Cardin, members 
of the committee, thank you for the opportunity to discuss the 
importance of the SBIR and STTR programs in supporting 
scientific excellence and technological innovation in the 
United States.
    My company, Sanaria, Inc., was founded in 2003 to 
commercialize the first FDA-licensed vaccine to prevent 
malaria, a disease of unfathomable impact worldwide.
    The company started at my kitchen table with an idea and a 
vision and then transitioned, thanks to a Phase I SBIR grant 
from NIH, to a team of three personnel, including me, moving 
into an 800-square-foot facility described in a National 
Geographic article on malaria, as--I quote--``a dismal mini-
mall in Rockville, Maryland.''
    We were told at the outset by more than 95 percent of our 
colleagues that it would be impossible to develop the 
technology to manufacture the vaccine we envisioned in 
compliance with FDA regulations. We have proven them wrong.
    Thanks to continuous innovation, in large part supported by 
SBIR grants, our 80 personnel work today at a unique, state-of-
the-art facility, where we manufacture our malaria products in 
compliance with FDA regulations, products that have been 
assessed in clinical trials in seven African and five European 
countries and at five clinical sites in the United States.
    We are now initiating production of what is called Phase 
III and commercialization-compliant vaccine that will be 
assessed in clinical trials in the U.S., Africa, Indonesia, and 
Europe in the next year.
    These clinical trials are intended to provide data to 
support a Biologics License Application to the FDA by late 2021 
and commercialization in 2022.
    My company would not be here today without the support of 
the SBIR program. SBIR grants are peer-reviewed and awarded to 
those with the most cutting-edge science and innovation. 
Because of the credibility of the SBIR program throughout the 
R&D world, for every single dollar my company has been awarded 
by the SBIR program, we have been able to raise an additional 
$3.50 from other sources. This leveraging of SBIR funds has 
facilitated our raising approximately $300 million in direct 
and indirect funding to support our R&D, manufacturing, and 
clinical trials.
    In addition to the funds received from the SBIR program, 
funds have come from multiple sources. Three U.S. oil and gas 
companies and the country of Equatorial Guinea have committed 
approximately $85 million to the effort. The Bill and Melinda 
Gates Foundation and the U.S. DoD have committed approximately 
$40 million each to our program. Additional funds have come 
from governments or foundations in Tanzania, the Netherlands, 
Germany, and Switzerland.
    The U.S. Government is the largest contributor to the $4 
billion annual international investment in malaria control. The 
only way to halt this output of funds from our country to fight 
malaria is to eliminate the disease, and only vaccines have 
eliminated human infectious diseases.
    Because of the SBIR program, we are moving toward the first 
FDA licensure of a malaria vaccine, a vaccine to be used for 
elimination. We only manufacture the vaccine in the United 
States, and because of the technical and scientific expertise 
and infrastructure we have developed and will need, we are 
already planning to build the next manufacturing facility in 
the U.S. to produce approximately 20 times more vaccine than 
our current facility and create hundreds of new jobs.
    The SBIR program is the envy of biotech and 
biopharmaceutical companies in Europe and other parts of the 
world. It provides funds that would not ordinarily be there for 
innovators to launch the R&D needed to get their programs off 
the ground. Its excellence is maintained because it is a peer-
reviewed, merit-based program that rewards scientific and 
technical excellence and innovation and does not just spread 
funds to noncompetitive companies as a form of corporate 
welfare.
    In closing, I want to thank the committee for the continued 
support and renewal of the SBIR/STTR program and encourage you 
to make it permanent so companies like mine and fellow 
innovators have the confidence, assurance, and support to keep 
the United States at the absolute cutting edge of innovation 
and disease prevention in the world.
    Thank you.
    [The prepared statement of Dr. Hoffman follows:]
    
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    Chairman Rubio. Thank you.
    I am going to turn it over first to Senator Coons who has 
to be somewhere.
    Senator Coons. Thank you very much, Mr. Chairman and 
Ranking Member.
    Dr. Hoffman, Dr. Kota, those are remarkable stories, 
reminders of the power and significance of STTR and SBIR 
programs.
    I just have one question. I would be interested in hearing 
from you, from any member of the panel. What is the 
significance of a strong and robust patent system? We have 
talked about how significant it is to have SBIR investment, how 
significant it is that we continue to invest in robust Federal 
research. My concern is that, as two of you described in 
passing, there are ways in which our Federal patent system has 
been restructured, even weakened in recent decades. It is, in 
my view, equally important to have investment in research 
funding and the ability to show ``I have invested something, 
and I can defend it. I am going to be able to scale it, 
commercialize it, sell it.''
    Am I wrong? Are patents largely irrelevant, or is the 
weakening of our patent system not of significance in this 
exact field?
    Mr. Glover. On behalf of my membership, that is a 
critical--the weakening of the patent system has made it really 
challenging.
    What I wanted to point out was how little money there is to 
take technology. If you do not have a clear patent, you cannot 
get money, you cannot take it, no matter what you do. And the 
reexamination, opening things up has weakened the ability to 
get money to develop.
    Senator Coons. Post-grant review has ultimately weakened 
our patent system and not being constructive.
    Dr. Hoffman.
    Dr. Hoffman. Yes.
    Mr. Glover. But publishing the application which started 20 
years is the beginning of the decline of how important our 
growth of----
    Senator Coons. All I am trying to do is to prevent further 
weakening, which is currently being discussed in Judiciary, 
actively.
    Dr. Hoffman.
    Dr. Hoffman. I agree with the previous speaker that the 
publication of the information puts all your technology right 
out there for China.
    We have to have a strong patent system so that when we 
produce and sell in the United States and Europe, at least we 
can sell at a high margin.
    Senator Coons. Right.
    Dr. Hoffman. But if we are beaten by people who take it 
right from the bat and sell to other parts of the world where 
there are 3 billion people at risk for malaria, for example, we 
are going to lose in the end.
    There was one other aspect that I think in the SBIR program 
that I heard earlier that I was happy to hear is the issue of 
how long you can retain your IP without patenting it.
    For example, we keep knowhow and trade secrets, and in the 
past, we have had to, based on the program, it has been my 
understanding, either patent it or divulge it. And if we 
divulge unique features of our manufacturing that we intend to 
do here, others can take it.
    Senator Coons. Thank you all.
    Forgive me. I have another appointment.
    Dr. Hoffman, very interesting. I am the co-chair of the 
Malaria Prevention Caucus. I would love to hear more.
    You should be very proud. You have got a remarkable 
innovator in your State.
    Thank you for your patience, Mr. Chairman.
    Thank you for what all of you do for a very important 
program.
    Chairman Rubio. Thank you.
    Ranking Member.
    Senator Cardin. I also thank all of our panelists. There 
is, I think, agreement here that the amount of funds that we 
appropriate for research in this country is inadequate, and the 
government is a major player in research. Those funds on a 
relative basis have gotten weaker over time rather than 
stronger.
    I know in the last couple budget cycles, there has been a 
concerted effort by Democrats and Republicans to increase the 
research budget. So I hope that trend will continue, but we are 
playing catch-up now, and that is unfortunate.
    There was a pretty contentious authorization that got the 
percentage scaled up to 3.2 to small business from the SBIR 
program. The testimony here makes a very strong case that that 
number needs to be reevaluated, and that the amount of research 
dollars going to smaller companies needs to be increased. So 
that we should at least take a look at whether the percentages 
need to be adjusted.
    If I am correct, I think that was also part of the 
recommendation of the 809 Panel that Mr. Glover referred to 
that was created under the National Defense Authorization Act 
to take a look at how DoD could have better acquisition 
policies. Part of that was with small business.
    So is there general agreement that we should be taking a 
look at the statutory set-asides for small business in these 
programs?
    Dr. Hoffman. Yes.
    Senator Cardin. The second thing I----
    Mr. Ezell. One thing Congress could possibly consider would 
be to index the level of SBIR awards at the Phase I and Phase 
II level to inflation so that they can keep pace for the 
automatic--so that we can look at raising the levels to keep 
pace with inflation and giving those automatic adjustments 
every 5 years.
    Senator Cardin. You are talking about the size of the 
grant?
    Mr. Ezell. I am talking about the size of it.
    Senator Cardin. There was also some conversation that we 
should be looking at Phase III funding, which we do not today 
under the SBIR program. I think the previous panel had also 
mentioned those issues.
    Let me mention one other area, and that is I came back and 
asked the question to our government panel about the 
administrative funds. Mr. Glover, you mentioned, I think, 30 
percent you would like to see go for outreach, and I think the 
809 Panel suggested 20 percent for training contract officers. 
Are the agencies doing an adequate job today?
    Mr. Glover. No, sir. The agency officials do not even know 
what a Phase III--every time somebody wins a Phase III, they 
have to educate that contracting officer about it, what it is, 
and goes through that. So 30 percent of the money goes to 
streamlining, expediting the process, and educating the people 
who make the decisions. Put the money to directly save time on 
the process, and make sure the money gets through.
    Senator Cardin. So you would like to see 30 percent of the 
administrative funds go toward educating the contracting 
officers? Is that what you----
    Mr. Glover. PEOs, contracting officers, and streamlining 
the process. There is no reason we do not have a contract. When 
you win a Phase I, you get the award. They send you the 
contract right then. Air Force did it. They can do it for Phase 
I, Phase II, and Phase III. Just somebody needs to stay on DoD 
and the agencies and just make that happen.
    Senator Cardin. I do not know if we have exact dollars 
today on how the administrative funds are being spent. One of 
the things I would like to see is have better information from 
the agencies on how they are using the set-aside dollars. I 
think that would be helpful for our committee, and I will ask 
our staff to try to get that.
    But I take it, at least it is your assessment, that they 
are not making that type of investment today from the 
administrative side?
    Mr. Glover. They are not, and our people, every time 
somebody wins a contract, they have great technology. They have 
to go educating the contracting officer and the PEO that Phase 
III exists and that they can give them an award. And that takes 
a huge delay.
    Senator Cardin. Of the agencies, are you familiar with all 
11 as to some who perhaps are doing a better job than others 
that might be a model for us to look it?
    Dr. Kota. If I can speak to that. Yes. First of all, there 
are different ways. One is on the contracting side. I think 
what we really need is a simple, like a 1040-EZ type of thing 
for SBIR grants. It looks like Air Force, I just heard that 
they have one page.
    There is no reason why all of the agencies are not adapting 
that method. Just as an example, for example, NSF, there are a 
lot of good things they do at NSF on the SBIR program. I can 
talk about that later, but when it comes to contracting, it is 
very arduous. My operating officer tells me that it takes 
$50,000 of our money, of our effort, to get $150,000 contract 
at NSF. It is very painful, their contracting processes.
    Senator Cardin. You are saying you spend one-third of the 
grant money on the----
    Dr. Kota. Yes, yes. I can--just to get the contract from 
NSF.
    But there are other things that NSF does on the other hand 
that is also--we need to have a system where you are running 
best practices from all different agencies. NSF has a very good 
program in terms of not--usually, you have the program managers 
for your contract or your technical folks, which is a good 
thing, but NSF not only has folks who are very well versed 
technically, but also their entrepreneurial mindset, they 
actually guide the awardees through the various tasks of what 
it takes to build a business, which I have not seen in any 
other agencies we work with. So there is a great program at NSF 
that I wish other agencies would follow, follow their lead.
    So, again, there are good and bad in different agencies, 
treated differently. Some agencies have taken on these projects 
that are actually on their technology roadmap, so they can--if 
it is successful, they can nurture it, continue to invest, and 
then grow, where some other agencies and some other programs, 
they just treat it as tax and just do a curious research 
project. And that is not going to do any good for anybody, 
including the company that works on them. It wastes more of our 
time. Then it is more than $150,000 we are wasting.
    Senator Cardin. I would just encourage us to do exactly 
what you said. Let us take a look at what is working well and 
try to do that with other agencies. We have done that on some 
of the procurement issues generally on meeting not only the 
letter of the set-aside for small business, but the spirit of 
it. And some agencies have been much better than others. We 
have tried to encourage the SBA to use best practices to 
elevate the compliance of more agencies.
    I think we can do the same thing here with the 11 agencies 
that are under this program, learn from those that have done 
the right type of outreach, the right type of education of 
their contract officers, and try to share that information and 
hold the other agencies accountable to improve.
    Thank you, Mr. Chairman.
    Chairman Rubio. Thank you.
    I will just go down here with a question for each.
    Mr. Ezell, your testimony outlines the impact of the SBIR 
and STTR programs as a source of early stage capital for 
technology; in addition, you mentioned how States have 
instituted their own programs to further leverage this. What 
kind of further investment should Congress consider making in 
the SBIR and STTR programs?
    Mr. Ezell. Well, as I outlined in my testimony, I certainly 
think Congress should be thoughtful about how we can increase 
the overall level of funding that is getting down to SBIR so we 
can launch more businesses.
    I do think the most fundamental way to grow the SBIR 
program is to increase the overall level of Federal funding. 
The United States now has slipped to eighth among OECD 
countries in our level of national R&D intensity. We have 
fallen five places in the last 7 years. So this overall lagging 
Federal investment is affecting every facet of America's 
research and technology, commercialization enterprise, and I 
think that is the first place we should address the problem.
    Chairman Rubio. I am glad you mentioned that because 
obviously the capacity is there. The need, it would be filled. 
Moreover, you mentioned that because it dovetails right into 
the report that I released today, which is about the decline in 
investment in both the public and private sector. In the 
report, we are not as focused on the public-sector part, but we 
should be because it goes part and parcel with this.
    We have had this dramatic shift in our country over the 
last 30 or 40 years where even in the private side, this drive 
to maximize short-term returns to investors has come at the 
direct expense of innovation and development for the future. In 
a country such as ours with a free economy so reliant on the 
private sector to drive innovation, any decline, not to mention 
one as significant as this, and long-term investment in 
innovation is going to have not just an impact on those 
particular firms, but all the way down the chain of providers.
    So one of the sources where you do see innovation still is 
in those industries that have a big customer called the United 
States of America, primarily the Department of Defense, but 
also the space industry and alike. So I think for us, the 
ability to remain competitive is dependent on our willingness 
to think long-term in the decisions that we make. This includes 
the government because ultimately we have, I think, reached a 
point of complacency in some policy circles in this country 
where we think the stuff will just happen on its own through 
the magic of creative people out there that are working on 
this. However, you still need the startup funds to be able to 
work on the ideas, not to mention be able to commercialize 
them.
    Mr. Ezell. By the way, I am glad you issued that report 
today.
    Recently, the Business Roundtable did a study of U.S. 
Fortune 500 CEOs, and they found that 82 percent of them would 
cut their R&D in order to meet quarterly Wall Street earnings 
targets. So I think encouraging more of this longer-term view 
in investment is absolutely vital.
    And there are challenges that American companies have to 
increase their investments in workforce training by 30 percent 
over the past decade. So looking at mechanisms like a 
consolidated R&D tax credit, that includes not just investments 
in R&D, but also in new capital equipment, and workforce 
training could be a path that Congress could consider to tackle 
this long-term investment problem in the United States.
    Chairman Rubio. Absolutely. I think that requires us to 
reorient our priorities in public policy to understand how 
critical investment is for the future. It is not just going to 
happen on its own writ large, and some of these technologies 
are not just critical to economic growth. They are critical to 
our national interests.
    Our global leadership and the current technologies of today 
are critical to our long-term stability and standing in the 
world. Just think for a moment, had the U.S. not involved 
itself heavily in the semiconductor industry when it first 
started, where would we be right now? So many of the other 
products that have driven the economy would certainly not be 
headquartered here, not to mention innovated here. Therefore, I 
appreciate that mention because it is important, and it 
dovetails to why our public program should also reflect that.
    Mr. Glover, you mentioned several times the challenge that 
China presents to our innovators. Obviously, it is not well 
documented, the challenges to intellectual property and venture 
funding, although it strikes me if we do not start investing, 
they will not be interested in stealing our intellectual 
property in the future because it will not be ours to steal. It 
is important.
    Program participants in all of this, their milestone in the 
commercialization happens when they receive a patent. How could 
we utilize the program?
    I think you touched upon this a moment ago, but how could 
you utilize the program to help navigate awardees through the 
patent process so that they ultimately get credit for their 
ideas?
    Mr. Glover. Well, the first thing is the SBIR data rights 
that exist and would strengthen the policy directive are 
extremely important, and to our members, they often use those 
data rights to make trade secrets and keep their technology 
because once they file their patent, their information becomes 
public. And they find other countries copying it very quickly.
    Some way to keep the patent information application for 
SBIR firms not public would be helpful.
    I think there is some incentive for those people who choose 
to patent like maybe $10,000 up front when they file the patent 
and $10,000 when they get the patent, some kind of a bonus that 
would go to the process.
    But I think one thing you have to consider, given your 
focus on investment, the capital gains law has not really 
helped very--in anything at all. If you invest in--dividends 
are taxed at the same rate as capital gains, and if you want to 
encourage investment in high technology and risk, you need to 
reward them with the tax system. And that has not happened 
since late in the Clinton Administration.
    They put a capital gains tax in, and then a few years 
later, the ultimate minimum tax, and the lowering investment 
tax rates made there no advantage to--nobody invest in small 
business because of the low tax rate, nobody. So you need to 
throw that into your question on investment. Would that be 
incentive?
    But the patents, unless they are strengthened, the delay, 
the reexamination, the uncertainty of whether you have got a 
patent that will survive and hold up keeps people from 
investing in a technology for years, and quite frankly, 
technology happened so quickly, that year's delay minimizes the 
value of the technology when it finally gets through the patent 
process.
    Chairman Rubio. Dr. Kota, you started your small business, 
FlexSys, Inc., 18 years ago with a Phase II award. Do you think 
small business owners and entrepreneurs would be able to find 
more success if they were able to put initial award funds 
toward other expenses outside of research and development, such 
as, patent and marketing expenses?
    Dr. Kota. Absolutely. I think it is very critical for 
somebody starting out. The SBIR, that is usually the first 
step, and it is important that SBIR contracts allow patent 
expenses. They do not now.
    Last year alone, we spent close to $140,000 in patent 
expenses. We can afford to do that now, but starting out, that 
$10,000 patent expense is a lot of money.
    So I think SBIR contract should allow the patent expenses. 
That is one thing.
    And just one more comment I want to make about the patents 
is that, one thing, we should certainly strengthen our patent 
system, but also we should worry about there are other 
countries that do not necessarily respect any patents. It does 
not whether you have them or not. Let us keep that in mind.
    Also, the business generally should know what aspects you 
should patent and what trade secrets you should keep. You do 
not always tell everything out there because that is where you 
get the learning by doing, and we are losing a lot of that 
because only when you produce something at scale, the real 
innovations come about in process innovations. Those are your 
trade secrets.
    Once you do not--if you do not have that manufacturing 
knowhow, if you do not have the process knowhow, you can have a 
startup, you are not scaling up, you are not creating national 
wealth, you are not creating jobs. So that is the fundamental 
thing we should keep in mind.
    Also, when we talk about investing, it is not how much we 
invest. It is what we invest in. We have been investing $150 
billion annually on science and technology. At the end of the 
year, you have close to $900 billion trade deficit or $100 
billion deficit in advanced technology products. We have been 
doing this for 10, 20 years now, year after year. Somehow you 
are not doing the same thing. You are not getting a different 
result because we are not investing enough in translational 
research.
    Thanks to the Federal Government for investing in basic 
research. We are still the best in the world when it comes to 
science, and we hope it continues to be that way. But that 
alone is not enough to create jobs because you need to convert 
technology into something, into a product, into a process at 
scale that society needs, and that requires what is called 
engineering and manufacturing. And this is where we are losing 
because what used to be--we have lived in this world of invent 
here, manufacture there for 20 years, and now it has become 
invent there, manufacture there. That is actually a dangerous 
trend.
    So just broadly about patenting and IP, I think there is a 
real intellectual property is about the engineering skills and 
the manufacturing knowhow that is being----
    Chairman Rubio. To turn an idea into a tangible 
deliverable.
    Dr. Kota. Yes.
    Chairman Rubio. Yeah. Dr. Hoffman, in your testimony, you 
discussed the development of the malaria vaccine and the 
clinical trials that your vaccine has undergone to be FDA-
compliant and SBIR/STTR provides support to innovative 
businesses, often industries that by nature of the research, 
the development, all the steps you have to go through require, 
take much longer to commercialize. It is a little bit different 
from something that you do not put into your body as an 
example.
    So I was curious if you could speak just a little bit into 
the value that these programs provide and those industries that 
are research intensive and that take time to market because of 
the additional steps you have to go through before you can do 
so.
    Dr. Hoffman. Sure. Thank you for that very perceptive 
question, Senator.
    Let me digress a bit to give you an example of just how 
that works. Many of us will remember that in 2013 to 2015 in 
West Africa, there was an Ebola epidemic that created hysteria 
in the world. Billions of dollars were invested in the control 
of that epidemic that caused, during the 2 years of it, 11,000 
deaths.
    Last week, there were 11,000 deaths from malaria. Many U.S. 
pharmaceutical companies--Merck, J&J--venture capitalists, 
private equity banks have invested hundreds of millions of 
dollars in developing a vaccine for Ebola. One of the reasons 
why they are doing that is Ebola is caused by a virus. We have 
vaccines against viruses, smallpox, polio, measles, but there 
is no vaccine against a human parasitic infection of which 
malaria is the prototype, and they are afraid of it. They do 
not have the wherewithal, the stamina to try to go to do 
something that has never been done before.
    So without the SBIR program, we would never have gotten to 
where we are. It takes an average of 18 years to develop any 
new vaccine or drug at an average cost of $2.5 billion. We are 
going to be on target for 18 years at 20 percent of the cost, 
about $500 million.
    And there is just one past point I would like to make where 
I respectfully disagree with one of my colleagues at the other 
end, and that is that SBIR should be all about science, 
innovative science and technology, the most cutting-edge work 
we can do.
    We get most of our SBIRs from NIH. We have to go through 
peer review. Limiting the number of SBIRs that a company can 
get just because they are good seems to me to be cutting off 
your nose to spite your face. So there is no reason. It should 
all be driven by how good it is, how innovative it is, how 
excellent it is.
    Thank you.
    Chairman Rubio. Final questions?
    Senator Cardin. Well, I just really want to thank all of 
our witnesses.
    Dr. Hoffman, thank you for not being discouraged by 
conventional wisdom that you would never get the FDA to approve 
your trials because you were in a different field than people 
were used to.
    And thank you for drawing the timeline on these issues. 
Americans are impetuous by nature, and they like to see things 
done quickly. We are not going to get a vaccine for malaria 
quickly, but the benefits are going to be incredible to 
mankind.
    So I think it is important as we look at evaluations on 
whether a program is working or not, we have to recognize it is 
a difference between a small company using innovation to change 
health care globally that is going to take a long time than 
someone dealing with a type of product that does not require 
that type of review and trials, et cetera.
    So I think it is important that we understand the 
differences in evaluations as we look at the success of our 
innovative programs under the SBA, and I think your testimonies 
today have helped us understand that.
    Dr. Kota, I also want to thank you for your explanations 
and what you have gone through.
    I think all of you have pointed out that we need to 
streamline our process. We saw just the huge delays. There is 
no excuse for a small company to have to put up with that type 
of bureaucratic nightmare. We are all familiar with how the 
Pentagon operates can be pretty bureaucratic, and DoD and 
health are the two largest areas for these programs.
    We have got to cut through that bureaucracy, and I hope 
that as we look at reauthorization, we can figure out ways to 
make it easier for you. Spending one-third on the cost of an 
application is ridiculous. I mean, that is ridiculous. We have 
got to change that, and I am hoping that the recommendations 
that come out of the DoD efforts will be able to be used 
throughout all agencies to get to a much simpler process with 
small businesses to be able to get your funds particularly 
under the two programs that we have talked about today.
    So your testimonies, all of you, have been very helpful. I 
appreciate it very much.
    I thank you, Mr. Chairman.
    Chairman Rubio. Thank you.
    I want to thank all of you for being here today. I 
appreciate your willingness, your time and sharing your 
expertise to assist us and framing these issues to inform the 
reauthorization of SBIR and STTR.
    The hearing record will stay open for 2 weeks. Any 
statements or questions for the record should be submitted by 
Wednesday, May 29th, at 5:00 p.m., and with that, the hearing 
is adjourned. Thank you again.
    [Whereupon, at 4:21 p.m., the Committee was adjourned.]

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