[Senate Hearing 116-85]
[From the U.S. Government Publishing Office]
S. Hrg. 116-85
REAUTHORIZATION OF THE SBA'S INNOVATION PROGRAMS
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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
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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
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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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