[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

THE ROLE OF SMALL BUSINESS IN INNOVATION AND JOB CREATION:
THE SBIR AND STTR PROGRAMS

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

HEARING

BEFORE THE

SUBCOMMITTEE ON TECHNOLOGY AND INNOVATION

COMMITTEE ON SCIENCE, SPACE, AND TECHNOLOGY
HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION

__________

THURSDAY, MARCH 31, 2011

__________

Serial No. 112-10

__________

Printed for the use of the Committee on Science, Space, and Technology

Available via the World Wide Web: http://science.house.gov

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COMMITTEE ON SCIENCE, SPACE, AND TECHNOLOGY

HON. RALPH M. HALL, Texas, Chair
F. JAMES SENSENBRENNER, JR., EDDIE BERNICE JOHNSON, Texas
Wisconsin JERRY F. COSTELLO, Illinois
LAMAR S. SMITH, Texas LYNN C. WOOLSEY, California
DANA ROHRABACHER, California ZOE LOFGREN, California
ROSCOE G. BARTLETT, Maryland DAVID WU, Oregon
FRANK D. LUCAS, Oklahoma BRAD MILLER, North Carolina
JUDY BIGGERT, Illinois DANIEL LIPINSKI, Illinois
W. TODD AKIN, Missouri GABRIELLE GIFFORDS, Arizona
RANDY NEUGEBAUER, Texas DONNA F. EDWARDS, Maryland
MICHAEL T. McCAUL, Texas MARCIA L. FUDGE, Ohio
PAUL C. BROUN, Georgia BEN R. LUJAN, New Mexico
SANDY ADAMS, Florida PAUL D. TONKO, New York
BENJAMIN QUAYLE, Arizona JERRY McNERNEY, California
CHARLES J. ``CHUCK'' FLEISCHMANN, JOHN P. SARBANES, Maryland
Tennessee TERRI A. SEWELL, Alabama
E. SCOTT RIGELL, Virginia FREDERICA S. WILSON, Florida
STEVEN M. PALAZZO, Mississippi HANSEN CLARKE, Michigan
MO BROOKS, Alabama
ANDY HARRIS, Maryland
RANDY HULTGREN, Illinois
CHIP CRAVAACK, Minnesota
LARRY BUCSHON, Indiana
DAN BENISHEK, Michigan
VACANCY
------

Subcommittee on Technology and Innovation

HON. BENJAMIN QUAYLE, Arizona, Chair
LAMAR S. SMITH, Texas DAVID WU, Oregon
JUDY BIGGERT, Illinois JOHN P. SARBANES, Maryland
RANDY NEUGEBAUER, Texas FREDERICA S. WILSON, Florida
MICHAEL T. McCAUL, Texas DANIEL LIPINSKI, Illinois
CHARLES J. ``CHUCK'' FLEISCHMANN, GABRIELLE GIFFORDS, Arizona
Tennessee BEN R. LUJAN, New Mexico
E. SCOTT RIGELL, Virginia
RANDY HULTGREN, Illinois
CHIP CRAVAACK, Minnesota
RALPH M. HALL, Texas EDDIE BERNICE JOHNSON, Texas

C O N T E N T S

Hearing Date

Page
Witness List..................................................... 2

Hearing Charter.................................................. 3

Opening Statements

Statement by Representative Benjamin Quayle, Chairman,
Subcommittee on Technology and Innovation, Committee on
Science, Space, and Technology, U.S. House of Representatives.. 6
Written Statement............................................ 7

Statement by Representative David Wu, Ranking Minority Member,
Subcommittee on Technology and Innovation, Committee on
Science, Space, and Technology, U.S. House of Representatives.. 8
Written Statement............................................ 9

Witnesses:

Dr. Sally Rockey, Deputy Director for Extramural Research,
National Institutes of Health
Oral Statement............................................... 10
Written Statement............................................ 13

Dr. Donald Siegel, Dean and Professor, School of Business,
University at Albany, State University of New York
Oral Statement............................................... 16
Written Statement............................................ 18

Mr. Mark Crowell, Executive Director and Associate Vice
President, Innovation Partnerships and Commercialization,
University of Virginia
Oral Statement............................................... 24
Written Statement............................................ 26

Mr. Doug Limbaugh, Chief Executive Officer, Kutta Technologies
Oral Statement............................................... 30
Written Statement............................................ 31

Ms. Laura McKinney, President and Chief Executive Officer,
Galois, Inc.
Oral Statement............................................... 35
Written Statement............................................ 37

Appendix I: Answers to Post-Hearing Questions

Dr. Sally Rockey, Deputy Director for Extramural Research,
National Institutes of Health.................................. 60

Dr. Donald Siegel, Dean and Professor, School of Business,
University at Albany, State University of New York............. 68

Mr. Mark Crowell, Executive Director and Associate Vice
President, Innovation Partnerships and Commercialization,
University of Virginia......................................... 70

Mr. Doug Limbaugh, Chief Executive Officer, Kutta Technologies... 74

Ms. Laura McKinney, President and Chief Executive Officer,
Galois, Inc.................................................... 84

Appendix II: Additional Material for the Record

Material Submitted by Representative David Wu, Ranking Minority
Member, Subcommittee on Technology and Innovation, Committee on
Science, Space, and Technology, U.S. House of Representatives.. 92

Material Submitted by Representative John P. Sarbanes,
Subcommittee on Technology and Innovation, Committee on
Science, Space, and Technology, U.S. House of Representatives.. 96

THE ROLE OF SMALL BUSINESS IN INNOVATION
AND JOB CREATION: THE SBIR AND STTR PROGRAMS

----------

THURSDAY, MARCH 31, 2011

House of Representatives,
Subcommittee on Technology and Innovation,
Committee on Science, Space, and Technology,
Washington, DC.

The Subcommittee met, pursuant to call, at 2:03 p.m., in
Room 2318 of the Rayburn House Office Building, Hon. Benjamin
Quayle [Chairman of the Subcommittee] presiding.

HEARING CHARTER

COMMITTEE ON SCIENCE, SPACE, AND TECHNOLOGY
SUBCOMMITTEE ON TECHNOLOGY AND INNOVATION

U.S. HOUSE OF REPRESENTATIVES

The Role of Small Business in Innovation and Job Creation:

The SBIR and STTR Programs

thursday, march 31, 2011
2:00 p.m.-4:00 p.m.
2318 rayburn house office building

1. Purpose

On Thursday, March 31, the Subcommittee on Technology and
Innovation of the Committee on Science, Space, and Technology will hold
a hearing to examine the role of the Small Business Innovation Research
(SBIR) and the Small Business Technology Transfer (STTR) Programs in
promoting innovation. Witnesses will discuss their experience with the
SBIR and STTR Programs and will provide advice on areas of potential
improvement as the Committee considers reauthorization of these
programs.

2. Witnesses

Dr. Sally Rockey is the Deputy Director for Extramural Research at the
National Institutes of Health.

Dr. Donald Siegel is Dean and Professor at the School of Business,
University at Albany, State University of New York, and a Member of the
research team for the Committee for Capitalizing on Science,
Technology, and Innovation, National Research Council of the National
Academies.

Mr. Mark Crowell is the Executive Director and Associate Vice President
for Innovation Partnerships and Commercialization at the University of
Virginia.

Mr. Doug Limbaugh is the Chief Executive Officer of Kutta Technologies.

Ms. Laura McKinney is the President and Chief Executive Officer of
Galois, Inc.

3. Brief Overview

The hearing will examine the effectiveness of the SBIR and STTR
Programs in promoting small business innovation and job creation.
Witnesses will describe whether the programs are achieving their
defined objectives, whether the current structure and size of the
programs are appropriate, and whether eligibility requirements should
be adjusted.

4. Issues for Examination

The Committee will examine several aspects of the SBIR and STTR
programs including: whether the SBIR and STTR Programs are effectively
promoting innovation and job creation; whether firms that are majority-
owned by venture capital operating companies should be eligible to
apply for program funding; whether the current extramural research set
aside of 2.5 percent for SBIR programs is adequate; whether the current
guidelines on award sizes is appropriate and to what extent agencies
should have flexibility in determining award sizes; whether there is
significant geographic concentration among award recipients and, if so,
what accounts for this concentration; whether there is evidence to
suggest that a significant number of companies receive multiple SBIR
awards with unusually low commercialization rates; and whether the
management and coordination of the program across the federal
government needs to be improved.

5. GAO and NRC Reviews of the SBIR and STTR Programs

The GAO has conducted multiple studies of the SBIR and STTR
programs since their inception assessing: rates of commercialization;
effectiveness of SBIR and STTR activity in meeting agency R&D needs;
small business participation in government R&D; geographical
concentration of award funding; and ability of agencies to effectively
evaluate the SBIR and STTR programs.
In June 2005, the GAO submitted congressional testimony, which
found that the SBIR program has helped ``enhance the role of small
businesses in federal R&D.'' \1\ However, an October 2006 GAO study
found that ``agencies need to strengthen [their] efforts to improve the
completeness, consistency, and accuracy of awards data'' to better
assess the effectiveness of the program in achieving its defined
objectives. \2\
---------------------------------------------------------------------------
\1\ U.S. General Accountability Office, Observations on the Small
Business Innovation Research Program, GAO-05-861T, Washington, DC: U.S.
General Accountability Office, 2005.
\2\ U.S. General Accountability Office, Small Business Innovation
Research: Agencies Need to Strengthen Efforts to Improve the
Completeness, Consistency, and Accuracy of Awards Data, GAO-07-38,
Washington, DC: U.S. General Accountability Office, 2006.
---------------------------------------------------------------------------
As part of the 2000 reauthorization of the SBIR program, Congress
directed the National Research Council (NRC) of the National Academies
to conduct a comprehensive evaluation the SBIR program. The NRC report,
published in 2008, found the SBIR program to be ``sound in concept and
effective in practice'' while also recognizing areas of potential
improvement. The NRC found that the ``SBIR program is making
significant progress in achieving the congressional goals for the
program,'' though it also noted that more regular evaluations are
needed, since ``insufficient data collection, analytic capability and
reporting requirements, together with the decentralized character of
the program mean there is limited ability to make connections between
program outcomes and program management and practices.'' \3\
---------------------------------------------------------------------------
\3\ National Research Council of the National Academies An
Assessment of the SBIR Program, Washington, DC, The National Academies
Press, 2008.
---------------------------------------------------------------------------
As part of its assessment, the NRC conducted surveys of SBIR and
STTR award recipients. The Phase II Survey found that ``34 percent of
NIH projects surveyed generated at least one patent, and just over half
of NIH respondents published at least one peer-reviewed article.'' \4\
---------------------------------------------------------------------------
\4\ Ibid.
---------------------------------------------------------------------------
According to the NRC Firm Survey, over 20 percent of companies
indicated that they were founded entirely or partly because of an SBIR
award. On average, companies that responded to the survey reported
adding 29.9 full-time equivalent employees since receipt of their SBIR
award. Comprehensive data on commercialization rates is inconsistent
across federal agencies, but respondents to the survey ``indicate that
just under half of the projects do reach the marketplace.'' \5\
---------------------------------------------------------------------------
\5\ Ibid.
---------------------------------------------------------------------------

6. Background

SBIR
Congress passed the Small Business Innovation Development Act (P.L.
97-219) in 1982 to increase participation of small high-technology
businesses in federally funded research and development activity. The
Act established the SBIR program within the major federal research and
development (R&D) agencies. Research has suggested that small
businesses are both highly innovative and engines of significant job
creation. \6\
---------------------------------------------------------------------------
\6\ J. O. Flender and R. S. Morse, The Role of New Technical
Enterprise in the U.S. Economy, Cambridge, MA: MIT Development
Foundation, 1975, and David L. Birch, ``Who Creates Jobs?'' The Public
Interest, 65:3-14, 1981.
---------------------------------------------------------------------------
The original objectives of the SBIR program include:

Stimulation of technological innovation in the small
business sector;

Increased use of the small business sector to meet
the government's R&D needs;

Additional involvement of minority and disadvantaged
individuals in the process;

Expanded commercialization of the results of
federally funded R&D.

The 1992 SBIR reauthorization placed greater emphasis
on the objective of commercialization of SBIR projects.
Current law requires that every federal department with an
extramural R&D budget of $100 million or more establish and operate an
SBIR program. Eleven federal departments have SBIR programs, including
the Departments of Agriculture, Commerce, Defense, Education, Energy,
Health and Human Services, Homeland Security, and Transportation; the
Environmental Protection Agency, the National Aeronautics and Space
Administration; and the National Science Foundation. Under the program,
each qualifying federal department is mandated to set aside 2.5 percent
(doubled from 1.25 percent in the 1992 reauthorization) of its
applicable extramural R&D budget to support mission-related work
conducted by small companies.
Agency SBIR efforts are broken down into three phases. In the first
phase, awards up to $150,000 for six months (increased from $100,000 as
of March 30, 2010 under a Small Business Administration (SBA) Policy
Directive \7\) are provided to evaluate a concept's scientific or
technical merit and feasibility. The project must be of interest to and
coincide with the mission of the supporting organization. Projects that
demonstrate potential after the initial endeavor may compete for Phase
II awards of up to $1,000,000 lasting one to two years (increased from
$750,000 under a March 30, 2010 SBA Policy Directive \8\) to perform
the principal R&D. Phase III funding, directed at the commercialization
of the product or process, is expected to be generated in the private
sector. Federal dollars may be used if the government perceives that
the final technology or technique will meet public needs, though this
funding must come from outside the SBIR Program.
---------------------------------------------------------------------------
\7\ Federal Register, Vol. 75, No. 60, Tuesday, March 30, 2010,
15756
\8\ Federal Register, Vol. 75, No. 60, Tuesday, March 30, 2010,
15756
---------------------------------------------------------------------------
The SBA created broad policy and guidelines under which individual
departments operate SBIR programs. The agency monitors and reports to
Congress on the conduct of the separate departmental activities.
Criteria for eligibility in the SBIR program include companies that
are independently owned and operated; not dominant in the field of
research proposed; for profit; the employer of 500 or fewer people; the
primary employer of the principal investigator; and at least 51 percent
owned by one or more U.S. citizens or lawfully admitted permanent
resident aliens. Subsidiaries of SBIR-eligible companies are also
eligible to participate as long as the parent company meets all SBIR
requirements.
The SBIR program has been reauthorized several times since its
creation and was scheduled to terminate on September 30, 2008. While
the program has not been specifically reauthorized since then, it has
been extended by several bills, most recently by P.L. 112-1, which
extends the program through May 31, 2011.
STTR
The Small Business Technology Transfer Program (STTR), created by
P.L. 102-564 and reauthorized several times through fiscal year 2009,
is a small business program that provides federal R&D funding for
research proposals that are developed and executed cooperatively
between a small firm and a scientist in a nonprofit research
organization, and fall under the mission requirements of the federal
funding agency.
Up to $100,000 in Phase I financing is available for one year;
Phase II awards of up to $750,000 may be made for two years. Federal
departments with annual extramural research budgets over $1 billion
must set aside of 0.3 percent for STTR programs. Currently, the
Departments of Energy, Defense, and Health and Human Services, NASA,
and NSF participate in the STTR program.
STTR-eligible small business partners must be American-owned and
independently operated, be for-profit, and must have no more than 500
employees. Nonprofit research institution partners must be located in
the U.S., and must meet one of three definitions: a nonprofit college
or university; a domestic nonprofit research organization; or a
federally funded R&D center (FFRDC).
While the STTR Program has not been reauthorized since fiscal year
2009, it has been extended by several bills, most recently by P.L. 112-
1, which extends the program through May 31, 2011.

7. 110th and 111th Congressional Hearings

The House Committee on Science, Space, and Technology held two
hearings in the 110th Congress and one hearing in the 111th Congress to
examine SBIR and STTR programs and to analyze the success of the
programs in meeting their defined objectives.

8. SBIR/STTR Discussion Draft Reauthorization

For purposes of discussion, draft legislation to reauthorize the
SBIR and STTR programs has been supplied to witnesses and Members of
the Subcommittee prior to the hearing. Among other things, the draft
would reauthorize both programs for three years; increase Phase I and
Phase II award sizes for both programs; allow for greater participation
of venture-capital backed firms in the SBIR program; and enhance data
collection for the programs.
Chairman Quayle. The Subcommittee on Technology and
Innovation will come to order. Good afternoon, everybody.
Welcome to today's hearing entitled, ``The Role of Small
Business in Innovation and Job Creation: The SBIR and STTR
Programs.'' In front of you are packets containing the written
testimony, biographies, and truth-in-testimony disclosures for
today's witnesses. I would now like to recognize myself for
five minutes for an opening statement.
Good afternoon. I would like to welcome you again to
today's hearing where we will be examining the Small Business
Innovation Research and Small Business Technology Transfer
Programs.
The SBIR Program was signed into law by President Reagan in
1982, to help spur innovation and increase small business
participation on federal research and development activity.
Since its inception, this competitive grant program has awarded
over $23 billion in SBIR awards for more than 100,000 projects
across the Nation and has helped spawn familiar companies such
as Qualcomm, Sonicare, and Symantec.
SBIR and STTR award winners have also created equipment
critical to agencies such as parts for the Mars Rover for NASA
or a unique cockpit airbag system to protect Army helicopter
pilots at the Department of Defense. In Tempe, Arizona, Kinetic
Muscle has created innovative therapy robots for patients
suffering from stroke or traumatic brain injury.
These systems are being adapted for use at home, lowering
their cost, and allowing patients to receive the intensive,
repetitive therapy that is often needed for meaningful
recovery.
In my own district, Kutta Technologies has created a unique
subterranean communication device for the coalmining industry.
As this week marks the one-year anniversary of the Upper Big
Branch Mine disaster in West Virginia where we lost 29 miners,
we are cognizant of how such technologies can make a difference
to so many people.
Today 11 federal agencies provide funding to small
businesses through SBIR, and five agencies provide funding
through STTR. Grant recipients have contributed to the
country's scientific and technical knowledge, generating
thousands of patents and a wealth of peer-reviewed articles.
These small businesses have expanded innovation, helped
grow our economy by creating thousands of jobs, and are
assisting participating federal agencies to fulfill their
mission. SBIR and STTR are unique in that they are examples of
federal programs that have largely been successful and have
received bipartisan support since their creation.
The National Research Council's review of SBIR found the
program to be, ``sound in concept and effective in practice''
but also identified ways the program can be improved. For
instance, our ability to effectively evaluate the programs is
hampered by insufficient data collection and a lack of common
measurement criteria among participating federal agencies.
Improving these assessment tools is crucial to ensure the
Federal Government is getting the greatest return on its
investment. This is particularly necessary in today's budget
environment.
It is also important to examine if the current funding set-
asides for the programs are appropriate and whether the
eligibility criteria for these programs should be expanded to
allow majority-owned venture capital companies to compete for
awards.
Finally, I want to address the issue of how we measure
commercialization. It is vital for SBIR and SBIR-STTR awards to
result in commercial technologies, but we must be mindful that
some of these efforts are going to fail, and some companies
will have to go back to the drawing board. If all projects are
certain to succeed, then there is not sufficient justification
for strong government involvement.
While we look for ways to improve commercialization
success, these programs must continue to support the innovators
and entrepreneurs engaged in high-risk research and
development.
We have an excellent panel of witnesses before us who will
discuss their experience with SBIR and STTR--I did that twice
already--STTR Programs and provide advice on areas of potential
improvements as the committee considers their reauthorization.
We will hear perspectives from private small businesses, a
federal agency, a university representative, and from a member
of the National Research Council committee which conducted the
most comprehensive review of the SBIR Program to date.
I would like to extend my appreciation to each of our
witnesses for taking the time and effort to appear before us
today. Thanks again to our witnesses for their participation,
and we look forward to hearing from you.
[The prepared statement of Mr. Quayle follows:]

Prepared Statement of Chairman Benjamin Quayle

Good afternoon. I'd like to welcome everyone to today's hearing,
where we will be examining the Small Business Innovation Research
(SBIR) and the Small Business Technology Transfer (STTR) Programs.
The SBIR program was signed into law by President Reagan in 1982 to
help spur innovation and increase small business participation in
federal research and development activity. Since its inception, this
competitive grant program has awarded over $23 billion in SBIR awards
for more than 100,000 projects across the nation, and has helped spawn
familiar companies such as Qualcomm, Sonicare, and Symantec. SBIR and
STTR award winners have also created equipment critical to agency
missions, such as parts for the Mars Rover for NASA, or a unique
cockpit airbag system to protect Army helicopter pilots at the
Department of Defense.
In Tempe, Arizona, Kinetic Muscles has developed innovative therapy
robots for patients suffering from stroke, or traumatic brain injury.
These systems are being adapted for use at home, lowering their cost,
and allowing patients to receive the intensive repetitive therapy that
is often needed for meaningful recovery. In my own district, Kutta
Technologies has created a unique subterranean communication device for
the coal mining industry. As this week marks the one year anniversary
of the Upper Big Branch Mine disaster in West Virginia where we lost 29
miners, we are cognizant of how such technologies can make a difference
to so many people.
Today, 11 federal agencies provide funding to small businesses
through SBIR, and five agencies provide funding through STTR. Grant
recipients have contributed to the country's scientific and technical
knowledge, generating thousands of patents and a wealth of peer-
reviewed articles. These small businesses have expanded innovation,
helped grow our economy by creating thousands of jobs, and are
assisting participating federal agencies to fulfill their missions.
SBIR and STTR are unique in that they are examples of federal programs
that have largely been successful, and have received bipartisan support
since their creation.
The National Research Council's review of SBIR found the program to
be ``sound in concept and effective in practice,'' but also identified
ways it could be improved. For instance, our ability to effectively
evaluate the programs is hampered by insufficient data collection and a
lack of common measurement criteria among participating federal
agencies. Improving these assessment tools is crucial to ensure the
federal government is getting the greatest return for its investment.
This is particularly necessary in today's budget environment.
It is also important to examine if the current funding set asides
for the program are appropriate, and whether the eligibility criteria
for these programs should be expanded to allow majority-owned venture
capital companies to compete for awards.
Finally, I want to address the issue of how we measure
commercialization. It is vital for SBIR and STTR awards result in
commercial technologies, but we must be mindful that some of these
efforts are going to fail, and some companies will have to go back to
the drawing board. If all projects are certain to succeed, then there
is not sufficient justification for strong government involvement.
While we look for ways to improve commercialization success, these
programs must continue to support the innovators and entrepreneurs
engaged in high-risk research and development.
We have an excellent panel of witnesses before us who will discuss
their experience with the SBIR and STTR Programs, and provide advice on
areas of potential improvement as the Committee considers their
reauthorization. We will hear perspectives from private small
businesses, a federal agency, a university representative, and from a
member of a National Research Council committee, which conducted the
most comprehensive review of the SBIR program to date. I'd like to
extend my appreciation to each of our witnesses for taking the time and
effort to appear before us today.
Thanks again to our witnesses for their participation and we look
forward to hearing your testimony. With that, I now recognize the
gentleman from Oregon, Mr. Wu, for his opening statement.

Chairman Quayle. With that I now recognize the ranking
member, the gentleman from Oregon, Mr. Wu, for his opening
statement.
Mr. Wu. Thank you very much, Mr. Chairman, and I just want
to note that the alphabet soup of federal acronyms is something
that trips the tongue up frequently and does so to me also.
And thank you very much for calling this very, very
important hearing. I also want to thank the witnesses, some of
whom have traveled a long distance to contribute to our
discussion of this very important legislation, and I look
forward to your testimony.
As many of you know, a comprehensive reauthorization of the
SBIR program is and has been my top priority. We got very close
to getting it done in the last Congress. The Senate put
together a compromise bill that reflected agreement between key
players, which had eluded previous reauthorization efforts.
Unfortunately, while that bipartisan bill passed the Senate
by unanimous consent in the waning days of the last Congress,
we were unable to get it over the finish line. In fact, it came
down to the last day of the lame duck session.
Now, as ranking member of this subcommittee, I remain as
committed as ever to a long-term comprehensive reauthorization
of this very important legislation, and I look forward to
working with Chairman Quayle, who has taken the reins of this
very important subcommittee, and with our colleagues on the
Small Business Committee in the coming months to make that a
reality. And I do hope that we get this done quickly, because
this bill, I think, will be the first important jobs
legislation done by this Congress, and it is important to get
it done early in this Congress for the good of the American
people.
This is because our economy is continuing a long,
incremental- but slow-recovery, and I think that it is
absolutely vital to make this particular contribution. Small
businesses are on the innovation frontline, developing new
technologies that will lead to new products and services in the
market, and more importantly, create high-wage, private sector
jobs and spur economic growth.
I truly believe that small businesses are the key to
getting our economy back on track and maintaining the
technological leadership of the United States in the future.
The impact of a thriving small business sector cannot be
overstated and must not be overlooked, and that is why it is so
important that we find bipartisan consensus in this
reauthorization.
While the SBIR program is crucial to encouraging
technological innovation by small businesses, it also plays an
equally important role in meeting federal research and
development needs, particularly in the national security
sphere.
Small businesses, represented by the two before us today,
have been integral in driving research and development in areas
that federal agencies cannot or do not perform, and thus,
developing technologies that are directly responsive to
national needs.
We now have a public discussion draft of an SBIR
reauthorization bill which closely mirrors the bill we passed
in the last Congress, both the House and the Senate. It
represents the common ground that I believe exists on this
issue.
I am eager to work with you, Chairman Quayle, in a
bipartisan manner to get the bill ready for introduction,
through the Committees of jurisdiction, and to the Floor of the
House as quickly as possible.
It is no secret that our constituents are looking to us for
non-partisan jobs legislation. I think SBIR is our first and
best foot forward. We should do everything we can to ensure
that we don't find ourselves in the same avoidable stalemate
with the Senate we reached at the end of last year. I would
like to believe we learned a lesson that endless waiting and
jockeying benefits no one, least of all small business owners
across America, and those looking for work, and that we can get
our economy back on track to prosperity.
Thank you, again, Mr. Chairman, for holding this hearing,
and I look forward, again, to the witnesses' testimony. Thank
you.
[The prepared statement of Mr. Wu follows:]

Prepared Statement of Ranking Minority Member David Wu

Thank you, Chairman Quayle, for calling this hearing. And thank you
to our witnesses for being here today. I look forward to your testimony
and to what I hope will be a fruitful discussion about the role of the
SBIR and STTR programs in promoting innovation.
As many of you may know, a comprehensive reauthorization of the
SBIR program was one of my top priorities while I was chair of this
subcommittee. We got very close to getting it done at the end of last
year.
The Senate put together a compromise bill that reflected agreement
between key players that had eluded previous reauthorization efforts.
Unfortunately, while that bipartisan bill passed the Senate by
unanimous consent, we were unable to get it over the finish line here
in the House in the waning days of the 111th Congress.
As ranking member on this subcommittee, I remain as committed as
ever to a long-term, comprehensive reauthorization of this important
program. I look forward to working with Chairman Quayle-who has taken
the reins of this important subcommittee with skill and seriousness-and
our colleagues on the Small Business Committee in the coming months to
make that a reality.
As our economy continues its long and incremental road to recovery,
I believe it is vitally important that we do all that we can to support
small businesses throughout the United States.
Small businesses are on the innovation frontline - developing new
technologies that will lead to new products in the market, create high-
paying jobs, and spur economic growth. I truly believe that small
businesses are key to getting our economy back on track and maintaining
the technological leadership of the U.S. in the future. The impact of a
thriving small business sector cannot be overstated and must not be
overlooked, and that is why it is so important that we find bipartisan
consensus to reauthorize the SBIR program.
While the SBIR program is critical to encouraging technological
innovation by small businesses, it also plays an equally important role
in meeting federal research and development needs, particularly in the
national security sphere. Small businesses, represented by the two
before us today, have been integral in driving research and development
in areas that federal agencies cannot or do not, and thus developing
technologies that are directly responsive to agency needs.
Earlier this week, a discussion draft of a comprehensive
reauthorization bill was released. My initial impression is positive.
In many respects, it is very similar to the House bill we passed in the
last Congress, and it appears to represent the common ground that I
believe exists on this issue.
I am eager to work with you, Chairman Quayle, in a bipartisan
manner to get the bill ready for introduction, through the Committees
of jurisdiction, and to the floor of the House as quickly as possible.
It's no secret that our constituents are looking to us for
bipartisan jobs legislation. I think SBIR is our first and best foot
forward. We should do everything we can to ensure that we don't find
ourselves in the same avoidable stalemate with the Senate we reached
last year. I'd like to believe we learned a lesson that endless waiting
and jockeying benefits no one, least of small business owners across
America that can get our economy on track to prosperity.
Thank you again Mr. Chairman for holding this hearing. And thank
you again to the witnesses for being here. I look forward to your
testimony.
Mr. Wu. I yield back the balance of my time.

Chairman Quayle. Thank you, Mr. Wu. If there are members
who wish to submit additional opening statements, your
statements will be added to the record at this point.
At this time I would like to introduce our witnesses, and
then we will proceed to hear from each of them in order. Our
first witness is Dr. Sally Rockey. Dr. Rockey is the deputy
director of Extramural Research at the National Institutes of
Health. Next we will hear from Dr. Don Siegel. Dr. Siegel is
dean and professor at the School of Business at the University
of Albany, State University of New York. Dr. Siegel served as a
member of the research team for the National Research Council's
review of the SBIR Program and will be sharing the NRC's
perspective.
Then we will hear from Mr. Mark Crowell. Crowell.
Mr. Crowell. Crowell.
Chairman Quayle. Crowell. Sorry about that. Mr. Crowell
serves as executive director and associate vice president for
Innovation Partnerships and Commercialization at the University
of Virginia. We are also privileged to hear from two
businesses, two business leaders whose companies have benefited
from the SBIR Program. First we will hear from Mr. Doug
Limbaugh, who is the chief executive officer at Kutta
Technologies based in Phoenix, Arizona, my home town. Finally
we will hear from Ms. Laura McKinney, who is president and CEO
of Galois, Incorporated.
Thanks again to our witnesses for being here this morning.
Now, as our witnesses should know, spoken testimony is limited
to five minutes each. After all witnesses have spoken, members
of the committee will have five minutes each to ask questions.
I now recognize our first witness, Dr. Sally Rockey, deputy
director of--for Extramural Research at the National Institutes
of Health, to present her testimony.

STATEMENT OF DR. SALLY ROCKEY, DEPUTY DIRECTOR FOR EXTRAMURAL
RESEARCH, NATIONAL INSTITUTES OF HEALTH

Ms. Rockey. Good afternoon.
Chairman Quayle. Your mic, please.
Ms. Rockey. Good afternoon, and thank you for having me
today. It is really an opportunity for me to talk to you about
the National Institutes of Health's Small Business Innovation
Research and Small Business Technology Transfer Programs and
the role they play in stimulating innovation and our economy.
Among the 11 federal agencies that participate in the SBIR
Program, the NIH is one of the largest funders of this program,
and we, of course, as you know, are the largest Federal
supporter of biomedical research. And the SBIR/STTR Programs
play a very critical component that feeds the innovation
pipeline resulting in today's medical advances.
The NIH SBIR/STTR Programs are ideally suited for creating
research opportunities for U.S. small businesses to stimulate
technological innovation. Part of a complex innovation system,
these programs provide dedicated funding for small businesses
to conduct early stage research and development to explore the
feasibility of innovative ideas that may eventually result in
products or services that lead to better health for everyone.
Our program is one of the means by which the NIH Institutes
and Centers accomplish their research and development goals,
and a key feature of the SBIR/STTR Program is that it is
focused on commercialization of the research results, and that
is very key. Thus our program serves to supplement much of the
more basic and applied research that NIH also supports.
The NIH SBIR/STTR Program supports projects in areas such
as drug discovery, medical devices, which is a large component
of our program, biosensors, nanotechnologies, imaging,
bioengineering, behavior research, health services, and
technologies to reduce health disparities.
Investigator-initiated ideas are the cornerstone of how NIH
usually supports research in our research portfolio, and the
SBIR Program is also in this mix. So, thus, we solicit
applications on specific projects and topics, but we encourage
small businesses to propose their own innovative ideas where--
that are relevant to the mission of the NIH, so that those
closest to the technology highway can drive the innovation.
The NIH in accordance with the current statute must set
aside 2.5 percent of its extramural research and development
budget for SBIR and .3 percent for STTR. As you know, it is a
two-phase program. The first phase is a feasibility project,
and the second phase is a much longer continued research phase.
The overall set-aside for NIH activities in 2010 was $690
million, including $616 million for SBIR and $74 million for
STTR. It supported almost 700 phase one awards and 250 phase
two awards to small businesses. Applications go through a very
rigorous peer-review process, very much like all of our NIH
applications that--and our funding decisions are based on the
rating that it gets through the technical review, when it
aligns with areas of high program relevance, program desire to
balance among research areas, available funds, and of course,
in the case of SBIR, its commercial potential.
The number of applications and new firms participating in
the program was on a downward trend between 2004 and 2009,
however, the number of applications has increased dramatically
in 2010, as did applications to other NIH Programs. Thus, the
award phase, the award success rate of the SBIR Program in 2010
for the first time in almost six years was actually lower than
our other NIH Programs.
Since its inception in 1982, we have invested more than $5
billion at NIH over 19,000 projects to over 5,000 small
businesses. You are going to hear more from the NRC about their
study, but, of course, this is--the program is seen as a source
of economic vitality and is especially important as a source of
new employment.
In looking at job growth for SBIR awardees since the
receipt of their award, the NRC found that the employment gain
in the long term was about, almost 30 full-time equivalent
jobs. That was in the long term and for these businesses during
the project they were able to hire 2.7 full-time equivalents
and retain 2.2. That was just during the course of that
particular project, so that does have much of an impact on the
economy.
NIH is continually focusing on ways to address the needs of
a diverse small business community, different industry
sectors--because we deal with many--and diverse product
outcomes. NIH attributes the success where we have seen it
about 50 percent, we calculate about 50 percent of our awards
result in commercialization, and the effectiveness of this
program is attributed to a number of factors, one of which is
the very flexible approach that we have to the program, which
adapts, helps us adapt to changing science and research.
Some of the examples of this flexibility include the
ability to propose research projects as I mentioned from the
small businesses themselves that have the most potential, the
ability for the applicant to resubmit an unfunded application
so if they are not funded the first time, they can come back
in, the ability to fund phase one and phase two awards at
budgets that may exceed the established guidelines when the
science proposed warrants such a deviation to produce a
successful outcome. And I will point out that the SBIR median
award size for 2010 was $199,000 for phase one and $1.1 million
for phase two.
In addition, we have developed programs to help companies
address funding gaps between phase one and phase two and help
them negotiate the period between discovery and
commercialization. For example, we have what is called the
Phase One, Phase Two Fast Track and the Phase Two Competing
Renewal Award Program that accelerate research.
In particular, Phase Two B, Competing Renewal allows
existing SBIR phase two awardees to receive a second additional
increment of funding to continue the project while navigating
the regulatory process, which is highly complex and time
consuming.
Additionally, we manage a suite of technical assistance
programs, namely the Niche Assessment Program and the
Commercialization Assistance Program, and if we have time, I
can explain to you more about them.
For many------
Chairman Quayle. Dr. Rockey, if you could wrap it up in 30
seconds or less so we can get as many people done before we get
called to votes, that would be really appreciated. Thank you.
Ms. Rockey. Okay. I just want to mention about venture
capital. For many biomedical technology companies, while this
is an important source, it is impossible to really take product
to market with the amount of funds that are provided by the
SBIR Program. Therefore, venture capital can be very important,
and the NRC studies of SBIR noted that the synergies between
this funding and venture capital are useful, and therefore,
even small businesses benefiting from venture capital funding
may seek SBIR funding as a means to exploring this idea. So we
are interested in the idea that venture capital can be
included.
So I thank you very much, and I will be happy to answer any
questions.
[The prepared statement of Dr. Rockey follows:]

Prepared Statement of Dr. Sally Rockey, Deputy Director, Extramural
Research, National Institutes of Health, U.S. Department of Health and
Human Services

Good afternoon, Chairman Quayle and members of the Subcommittee. My
name is Dr. Sally Rockey. I am the Deputy Director for Extramural
Research at the National Institutes of Health (NIH), an agency of the
Department of Health and Human Services. Thank you for the opportunity
to discuss the NIH Small Business Innovation Research (SBIR) and Small
Business Technology Transfer (STTR) programs, and the role they play in
stimulating innovation and our economy. Among the 11 Federal agencies
that participate in the SBIR program, the NIH is one of the largest
funders of this program, and the largest Federal supporter of
biomedical research. The SBIR/STTR program is a critical component that
feeds the innovation pipeline resulting in today's medical advances.

Importance of the SBIR/STTR Program at NIH: Igniting Imaginations
and Spurring New Discoveries

The NIH SBIR/STTR programs are ideally suited for creating research
opportunities for U.S. small businesses to stimulate technological
innovation. Part of a complex innovation system, these programs provide
dedicated funding for U.S. small businesses to conduct early-stage
research and development (R&D) to explore the feasibility of innovative
ideas that may eventually result in products or services that will lead
to better health for everyone. The NIH SBIR/STTR programs are one means
by which NIH Institutes and Centers (ICs) accomplish their R&D
objectives. A key feature that sets SBIR/STTR apart from other NIH
programs is a focus on commercialization of the results of research.
Thus, the programs serve to supplement the more basic and applied
research programs of NIH.

Types of Research NIH Supports Under SBIR/STTR

Examples of the types of research that NIH supports through the
SBIR/STTR programs include, but are not limited to: drug discovery,
medical devices, biosensors, nanotechnologies, proteomics, imaging,
bioengineering, behavioral research, health services, and other
technologies that reduce health disparities. Investigator-initiated
ideas are the cornerstone of the NIH research portfolio, including
projects supported by the SBIR program. Thus, while we solicit projects
on specific topics, we primarily encourage small businesses to propose
their own innovative research ideas that are relevant to our mission as
a way to have those closest to the technology highway drive innovation.

NIH SBIR/STTR Program Overview

The NIH, in accordance with statute, must set aside 2.5 percent of
its extramural research and development budget for SBIR program and 0.3
percent for the STTR program. The overall set-aside for NIH SBIR and
STTR activities in FY 2010 was $690 million, including $616 million for
SBIR and $74 million for STTR that supported 681 new Phase I and 246
new Phase II SBIR projects to small businesses working in many
different technology areas across the country. Once all applications go
through a rigorous and competitive two-tiered peer review process,
funding decisions are based on several factors: 1) ratings from the
scientific and technical evaluation process; 2) areas of high program
relevance; 3) program balance among areas of research; 4) available
funds; and 5) the commercial potential.
The number of SBIR applications and new firms participating in the
program was on a downward trend between fiscal years 2004 through 2009.
However, the number of applications increased in FY 2010, as did
applications for most NIH grants, likely due to the resubmission of
applications that were submitted for the American Recovery and
Reinvestment Act funds but not initially funded. As a result, the award
success rate in FY 2010 for SBIR programs was lower than for the NIH
research line for the first time in five years. The FY 2010 combined
success rate-the percentage of reviewed grant applications that receive
funding-for the SBIR and STTR programs was at 17 percent, which was
below the success rate of 20.6 percent overall for NIH Research Project
Grants (RPGs).
Overall, the SBIR/STTR programs have complemented NIH's mission to
advance science while reducing the burden of illness on public health.

Employment Effects on NIH SBIR Awardees

Since the program's inception in 1982, the NIH has invested more
than $5 billion in more than 19,000 projects to over 5,000 small
businesses. Past studies of the SBIR program conducted by the NIH \1\
and the National Research Council (NRC) \2\ have shown that small
businesses are seen as sources of economic vitality and are especially
important as a source of new employment. In looking at job growth of
SBIR awardee firms since the receipt of their award, the NRC found the
mean employment gain was 29.9 full time employees (FTEs) from before
obtaining the SBIR grant. In addition, respondents estimated as a
result of their SBIR projects their companies were, on average, able to
hire 2.7 FTEs, and to retain 2.2 FTEs that might not otherwise have
been retained. Although the employee size limit for firms receiving an
SBIR award is 500, the median size of companies receiving NIH SBIR
awards is actually relatively small: 10 employees. Sixty percent were
found to have 15 or fewer employees at the time of the NRC survey. This
data suggest that the SBIR program is associated with positive
employment effects on small business job creation and growth.
---------------------------------------------------------------------------
\1\ National Institutes of Health, National Survey to Evaluate the
NIH SBIR Program: Final Report, July 2003
\2\ National Research Council Phase II Survey, An Assessment of the
SBIR Program At the National Institutes of Health, 2009

Program Flexibility Is Key: One Size Does Not Fit All

NIH is continually focused on ways to address the needs of a
diverse small business community, different industry sectors, and
diverse product outcomes. NIH attributes the success and effectiveness
of its program to several factors, the most significant of which is a
flexible and proactive approach that adapts to the changing nature of
biomedical and behavioral research while maintaining a highly
competitive and effective program.
Examples of program flexibility include the ability to propose
research projects in fields that have the most biological potential;
the ability for an applicant to resubmit an unfunded application; and
the ability to fund Phase I and Phase II awards at budgets that may
exceed the established guidelines when the science proposed warrants
such a deviation to produce successful outcomes. The SBIR median award
size in FY 2010 was $199,000 for Phase I and $1,120,000 for Phase II
projects. For STTR, the median award size was $178,000 for Phase I and
$1,112,000 for Phase II.
In addition, we have developed programs to help companies address
funding gaps between Phase I and Phase II and programs to help them
negotiate the period between discovery and commercialization. For
example, the Phase I/Phase II Fast-Track and Phase II B Competing
Renewal award programs are aimed at accelerating research projects with
great potential to produce products and launching them forward into the
next R&D stage of development. In particular, the Phase II B competing
renewal allows existing SBIR phase II awardees to receive additional
funds to continue the project while navigating the regulatory process
which often can be a complex and time-consuming process. Additionally,
we manage a suite of technical assistance programs, namely the Niche
Assessment Program and the Commercialization Assistance Program (CAP),
that provide a market opportunity analysis and tailored business
mentoring to address very specific needs of selected SBIR companies.
Thus we help companies grow into sustainable businesses. Additionally,
we have developed a Performance Outcomes Data and Systems (PODS) tool
for internal use by NIH program staff, which integrates all data about
SBIR and STTR awards, success stories, and tracking data of companies
that graduated from our CAP program all into one searchable platform.
For many biomedical technology companies, the SBIR program is an
important source of seed funding for unproven, early-stage ideas that
dilutes the risk other investors are not initially willing to bet on.
However, a venture capital, angel investor, foundation, or other
financing strategy is ultimately the only way that innovative products
will enter the marketplace. Research and development in public health
and biotechnology is characterized by high and intense capital needs to
turn an idea into a product (e.g., it takes an average of $1.2 billion
to bring a drug to the market). This usually requires long development
times (i.e., 5-12 years), compliance with strict regulations,
exceptionally high ``burn rates'' of capital, and a real need for
investment by venture capital companies, some of which are or are not
majority-owned by individuals. Often, the necessity for multiple rounds
of venture financing to fund the extensive and essential clinical
research is the only plausible way to commercialize a product.
Individual firms or the SBIR program, alone, are not available to
provide the average $8 million per deal currently characterizing
venture funding agreements as found by the NRC study of 2009 that
evaluated the NIH SBIR program. It is important to keep in mind that
while venture capital sources are extremely scarce following the
recession, it is nevertheless an option a company should be able to
pursue as it fits their business strategy without the fear of being
excluded from our programs.
The NRC's study of the SBIR program noted that the synergies
between SBIR funding and venture capital are useful, and their study
underscored the notion that the innovation process often does not
follow a linear path. So, even small businesses benefiting from venture
funding may well seek SBIR funding as a means of exploring a new idea,
or for example, a new drug candidate. Keeping the pipeline full of new
ideas is important, because in today's high-risk biomedical research
environment, especially in areas such as drug development, drug
discovery, and therapeutics, the reality is that fewer than one percent
of the innovative, promising projects reach the marketplace.
Simply stated, one size does not fit all.
Flexibility is critical at a time when science is changing rapidly,
becoming more complex, and more interdisciplinary.
Throughout the SBIR program's history, small businesses including
those companies with venture capital funding have applied for and
received SBIR funding in areas that help to advance our mission. The
NRC's study found no evidence that participation of companies with
multiple venture capital ownership was harmful to the program or that
other small businesses have ever been crowded out by the participation
of small businesses that are majority-owned by venture capital
companies.

Program Accomplishments: Bringing Ideas To Life

The SBIR program seeks to support the most scientifically promising
projects for which private funds are not traditionally available.
The examples noted below demonstrate that tangible scientific
benefits can result from a small investment in early-stage ideas with
viable, commercial potential.

Martek Global Services, a Maryland company that studied
the effects of DHA, an omega-3 fatty acid important for healthy eye,
brain, and heart development, grew into a global leader by developing
Life'sDHATM, a supplement contained in infant formulas,
products for pregnant and nursing women, and food and beverage products
sold worldwide. The company was recently acquired for $1.1 billion by a
Dutch company and this year was inducted into the Small Business
Administration's SBIR Hall of Fame.

The Sonicare Power Toothbrush is a widely used and
dentist recommended consumer home care oral hygiene device effective in
reversing gingivitis that has to date grossed over $1.5 billion in
sales. NIH funding allowed the company to create a $300 million
business and over 500 new jobs.

Examples such as these demonstrate the value of investing in early-
stage ideas and underscores why the NIH SBIR/STTR programs are
important to our mission and to the entire innovation process.

Conclusion

In conclusion, I want to reemphasize the NIH's commitment to
supporting small businesses, maintaining the integrity of SBIR/STTR
programs, and ensuring that technology development will help improve
the health and extend the lives of all people. We are looking to small
businesses, primarily through these programs, to stimulate
technological innovation, help us face new challenges, and to produce
not only new knowledge, but also tangible benefits that touch the lives
of every individual. We are hopeful that our continuing outreach
efforts and actions to modernize the SBIR/STTR programs will be helpful
in that regard. Finally, we continue to believe strongly that
flexibility within the SBIR program is essential to achieving greater
successes in these programs. We look forward to the reauthorization of
this critical program. This concludes my statement. I will be pleased
to answer any questions you may have.

Chairman Quayle. Great. Thanks, Dr. Rockey, and the chair
now recognizes Dr. Don Siegel, dean and professor at the School
of Business at Albany.

STATEMENT OF DR. DONALD SIEGEL, DEAN AND PROFESSOR, SCHOOL OF
BUSINESS, UNIVERSITY AT ALBANY, STATE UNIVERSITY OF NEW YORK

Mr. Siegel. Thank you. I am a professor, so I have to have
Power Point slides. I am also an academic economist, and Ronald
Reagan once said that an economist is someone who upon
observing that something works in practice wonders whether it
works in theory.
And like many economists I was inspired by the late Milton
Friedman, and I know that sounds a little strange to use his
name because I am going to be advocating government
intervention, but as you can see on the next slide Friedman
said there were four ways to spend money. He said you can spend
your own money on yourself, which you do very wisely, you can
spend your own money on others you know personally. Now, a
visit to the department store on the day after Christmas tells
you that that isn't always done wisely.
You can spend other people's money on yourself, which you
do quite lavishly when you are on an expense account, and then
he would laugh and say, well, then there is a fourth category,
and that is when you spend other people's money on people you
don't know, and he would laugh and say that is what government
does.
Now, the lesson that I learned from that adage is that it
is important to evaluate and assess government programs. We
need accountability, and I ask you to think about different
realms of public policy. Let's think about education, social
policy, technology, and now entrepreneurship programs.
In education and social programs we have rigorous
evaluation. Indeed, evaluation is built into the design of most
programs. Unfortunately, when it comes to science and
technology and now more recently entrepreneurship programs,
there is very limited evaluation, and I think that is
disappointing. Since we know that innovation and
entrepreneurship are key sources of economic growth, we need to
learn more about how these programs are impacting the economy.
Now, I am going to assume that you know, like an economist,
I am going to make some assumptions and assume that you know
about the program. What you may not know is that it took
Congress 20 years to actually ask the NRC to evaluate the
program, which NRC did.
Now, here is some important points about evaluating
programs. Let us say technology programs. It is very important
not just to collect statistical data but to have qualitative
work, field research, interviews, case studies. This is a very,
very complex program. You need to have multiple indicators of
success, research success, commercialization, job creation, and
so on.
The timeframe of analysis is critical. You have to be able
to analyze the program over time, not just at one point in time
but over time. You have to have multiple indicators, and those
indicators will vary depending on the unit of observation. From
an evaluation standpoint it is important to do a very rigorous
econometric analysis and also to have a control group, which we
do in science but is a little hard to do in this realm.
Now, I am very pleased to report that the NRC SBIR
evaluation has all of these elements and more. It was a very
rigorously-done study, consisting of basically surveys of
projects, of firms, surveys that were designed in consultation
with program managers, with users of the program, with even
people who were skeptical about the program.
And so this is what led to the study and the key findings
of the study are that the program is effective. It is meeting
its Congressional objectives, stimulating technological
innovation, encouraging participation by minorities and women.
We could do a better job on that. I will get back to that in a
few minutes. Providing support for small innovative companies
and resolving some of the research questions that agencies want
answered.
What does success mean? Job and new firm creation, enabling
federal agencies to advance their missions, creation of new
products, intellectual property that firms can commercialize to
make money, and limited success in financial markets. Forty-
seven percent of SBIR projects reach the marketplace, which is
a very remarkable stylized fact.
The committee found that SBIR's flexibility is a key
strength in meeting the missions of multiple diverse agencies.
The only area where significant improvement is required is
increasing the participation and success of women and
minorities.
So what does the committee recommend? That the program
should be continued, flexibility should be preserved,
innovation and experimentation across agencies should be
encouraged, award sizes should be increased. It is important to
reduce the cycle time between the application of a grant and
the award, to get the technologies out the door and in the
marketplace. Increasing, as I said before, the success of women
and minorities, and increasing management funding for SBIR,
which is a very important aspect of the program.
However, in my view the most important recommendation of
the committee is that it is important to conduct, as I said
before, rigorous, regular evaluations of the program. It is
vital that the program be analyzed over time, that we not just
have a snapshot of it but that we have a so-called longitudinal
or dynamic analysis of changes in the program over time.
That is why the committee is now doing a second study,
analyzing the important problem of helping companies get over
the so-called Valley of Death, to help them reach the
marketplace, how to increase participation by women and
minorities, how to leverage university-industry partnerships,
which are very important in this program, how to streamline the
application process, and more importantly learning from some of
the interesting state-level programs that have been designed to
stimulate both innovation and entrepreneurship.
I close on a personal note. Academic studies of SBIR, many
of which have been based on NRC data, clearly indicate that
involvement with universities enhances the probability of
successful commercialization. No matter how you measure that.
We need to understand that connection.
We also need to understand the connection between SBIR and
our national labs, which are huge players in science and
technology. The national labs, for example, in California are
bigger than the University of California.
We also need to know what the role is of property-based
institutions like incubators, accelerators, and science and
technology parks where there has been substantial public
investment, but, again, very little analysis or evaluation.
Again, I think the most important point is that I think it
is important to continue support for the NRC's efforts to
scrutinize this program. There is no one else that can do it,
and I thank you for your time.
[The prepared statement of Dr. Siegel follows:]

Prepared Statement of Dr. Donald S. Siegel, Dean and Professor, School
of Business, University at Albany, SUNY

My name is Donald Siegel and I am Dean of the School of Business at
the University at Albany, SUNY. I also serve as President of the
Technology Transfer Society, a non-profit organization dedicated to
identifying and disseminating best practices in technology
commercialization. The Society hosts an annual conference, linking
academics, practitioners, and policymakers, and also publishes the
Journal of Technology Transfer, the only academic journal devoted to
the public policy and managerial implications of technology
commercialization. I am a co-editor of this journal.
For the past 15 years, I have studied technology transfer to
existing firms and start-up companies, resulting from research activity
at universities, federal laboratories, incubators, and science/
technology parks. I was trained as academic economist, which means that
I am not very practical. President Reagan once said that an economist
is someone, who upon observing that something works in practice,
wonders whether it works in theory. Therefore, in the remainder of my
testimony, I will provide both theoretical and empirical support for
this worthy program.
In 2003, I was asked to join a team of researchers commissioned by
the National Research Council to conduct a Congressionally-mandated
evaluation of the Small Business Innovation Research Program
(henceforth, SBIR) across federal agencies. At first, I was quite
skeptical. Like many economists, I was greatly influenced by the late
Milton Friedman. I mention this because of Friedman's famous adage
regarding the four ways to spend money. First, you can spend your own
money on yourself, in which case, the funds are spent quite wisely.
Next, you can use your own money to purchase goods or services for
others whom you know, such as buying someone a Christmas gift. In this
instance, your ability to spend astutely is limited by your ability to
match the recipient's preferences. A quick visit to a department store
on the day after Christmas illustrates the difficulties of successfully
completing that mission. A third method of expenditure occurs when we
spend other people's money on ourselves, which transpires when we are
on an expense account. In this case, we have little incentive to
economize, since others are footing the bill. The final case is
spending other people's money on other people (people we do not know
personally). According to Friedman, this is exactly what politicians do
and thus, he was highly skeptical regarding the ability of government
to spend its funds wisely. The lesson I learned from this adage is that
government programs should be rigorously evaluated, since they may not
always be meeting their objectives (e.g., spending the taxpayers money
wisely).
Despite my inherent skepticism regarding the effectiveness of
government programs, I was buoyed by the fact that the NRC had convened
a group of scholars who could actually conduct the type of systematic
evaluation that was warranted for this particular government program.
This was quite a challenging assignment for us, but one that is
extremely vital for accountability to the taxpayers. Please note that a
fundamental rationale for government intervention in the marketplace is
the existence of a ``market failure.'' The SBIR Program, in theory,
addresses two types of market failures: (1) innovation market failure
(for early-stage technologies) and (2) market failure with respect to
the provision of financial capital for new enterprises seeking to
commercialize early-stage technologies. Based on comprehensive evidence
collected by the NRC team, I am convinced that SBIR is alleviating
these market failures and additional study will help us further
understand how to make this program even more effective.

SBIR and the Phase 1 NRC SBIR Study

First, let me provide some specific information about the program.
SBIR is designed to provide financial assistance to firms during the
initial stages of their development. It was established in 1982 as a
``set-aside'' program. In its current version, SBIR requires eleven
federal R&D funding agencies with extramural research programs to
allocate 2.5 percent of their extramural research budgets to fund
through a peer-review process R&D in small (less than 500 employees)
firms and organizations.
SBIR awards consist of three phases. Phase I awards fund the firm
to undertake proof of concept; that is, to research the feasibility and
technical merit of a proposed research project. A Phase I award lasts
for six months (maximum $150,000). Phase II awards extend the proof of
concept to a technological product/process that has a commercial
application (maximum $1,000,000). A Phase II Award is granted to only
the most promising of the Phase I projects based on scientific/
technical promise, the expected value to the funding agency, the firm's
research capability, and the commercial potential of the resulting
innovation. The duration of the award is a maximum of 24 months and
generally does not exceed $750,000. Approximately 40 percent of the
Phase I Awards continue on to Phase II. Phase III involves private
funding to the firm for the commercial application of a technology; no
financial award from SBIR is made in Phase III.
The first phase of the NRC study assessed the SBIR program at five
federal agencies, the Department of Defense (DoD), the National
Institutes of Health (NIH), the National Aeronautics and Space
Administration (NASA), the Department of Energy (DoE), and the National
Science Foundation (NSF). These five agencies constitute approximately
96 percent of SBIR program expenditures. Specifically, the NRC
committee was charged by Congress with evaluating whether the Program
was advancing four key societal objectives: (a) stimulating
technological innovation; (b) increasing commercialization of
innovation in the private sector; (c) using small business to meet
federal research and development needs; and (d) fostering and
encouraging participation by minority and disadvantaged persons in
technological innovation. The committee was also asked to assess the
effectiveness of managerial practices, with respect to agency SBIR
programs. That is, the committee attempted to determine whether there
are ``best practices'' in certain agency SBIR programs that could be
adopted by other agencies.
To accomplish these objectives, the committee employed
sophisticated quantitative/statistical and qualitative analyses. It is
important to note that the use of qualitative methods is highly
warranted, given the complex nature of the program and the inability to
capture all of its nuances with purely statistical data. A large and
diverse team of expert researchers conducted extensive NRC-commissioned
surveys and case studies. In addition, agencies were asked to provide
program data and documents. The committee also conducted extensive
interviews with program managers, program participants, agency
``users'' of the program, as well as program stakeholders. I am
confident that the NRC study is, by far, the most comprehensive
assessment of SBIR ever or more generally, of any technology-based
program designed to stimulate entrepreneurship.

Key Findings/Recommendations of the Phase 1 NRC SBIR Study

The NRC committee concluded that the program was indeed advancing
the goals of stimulating technological innovation, increasing
commercialization of innovation in the private sector, using small
business to meet federal agency R&D needs, and stimulating
participation by minority and disadvantaged persons in technological
innovation. Table 1 summarizes the goals, proxies for achieving those
goals, and key outcome indicators the committee used to assess whether
the SBIR was accomplishing these objectives.
As shown in Table 1, the evidence clearly indicates that the
program has been successful in achieving these goals. Success has
occurred along several dimensions: job and new firm creation, enabling
government agencies to advance their missions (e.g., the development of
simulation software for Navy Seals, which has saved lives and costly
equipment), creation of new products and various forms of intellectual
property, and success in financial markets. The only area where
significant improvement is needed is increasing participation by
minorities and disadvantaged people in the technological innovation.
This is especially true for minority participation, which has actually
decreased over time.
The NRC Committee issued a series of recommendations. First and
foremost, the SBIR program should be preserved because it is effective.
Given that program flexibility (across federal agencies) is a strength,
such flexibility should be preserved. The committee commended SBA,
which oversees the eleven SBIR programs, for its flexibility in
exercising its oversight responsibilities. There was also a strong
desire to encourage innovation and experimentation across agencies,
while preserving the basic program structure (i.e., the three phase
approach of the SBIR program). Another key recommendation was to
readjust (increase) award sizes, which have not been increased since
1995.
There were also several recommendations relating to improvements in
program processes (i.e., managing the program). The most important of
these recommendations is the need to shorten the cycle time from
application to award (which will ultimately, accelerate technology
commercialization). It is important to note that processing periods for
awards vary substantially by agency, which has a significant effect on
recipient companies. Agencies should closely monitor and report on
cycle times for each element of the SBIR program: topic development and
publication, solicitation, application review, contracting, Phase II
application and selection, and Phase III contracting. Agencies should
also specifically report on initiatives to shorten the decision cycle.
The committee also stressed to need to increase participation and
success by women and minorities in the SBIR program. They identified a
set of tactics to accomplish that strategic goal, in including improve
data collection and analysis of factors that may account for the lower
success rates of woman- and minority-owned firms, as compared with
other firms, in receiving Phase I awards. Finally, the NRC team also
stressed the importance of increasing management funding for SBIR,
e.g., by increasing the set-aside to provide for program management and
evaluation.
From my perspective (given my concern regarding accountability and
evaluation of government programs), by far the most important committee
recommendation was emphasizing the need to conduct regular, rigorous
systematic evaluations of the program. This will require direct annual
reports to Congress by program managers on the state of the SBIR
program at their agency. The program should be evaluated internally,
i.e., within each agency and agencies should be encouraged to develop
interoperable standards for data collection and dissemination. Most
importantly, there is also a strong need for comprehensive, periodic
external evaluations of the program by a non-partisan organization,
such as NRC.
Objectives of Current NRC SBIR Study
The NRC is currently engaged in a second phase of the SBIR study,
which is highly critical, given that it will enable us to generate a
second ``snapshot'' of the program (through extensive surveys and case
studies). Evaluation must always be an ongoing process and analyzing
changes in the SBIR program over time will allow the NRC team to
develop better recommendations for improving the program. In sum, a
second phase of the SBIR study provides will facilitate a
``longitudinal'' analysis, rather than a simple ``cross-sectional''
analysis, which is both more rigorous and more relevant.
Building on the previous study, the NRC committee is currently
assessing several important research questions: (1) how the program can
be modified to enhance the probability of successful commercialization
programs, including the use of ``gap funding mechanisms'' to address
the ``valley of death'' problem, (2) identifying strategies to
encourage participation by minorities and women-led firms in SBIR; (3)
how to use existing university-industry partnerships to leverage SBIR;
(4) new approaches to streamlining the application and grant/contract
awarding processes; and (5) what we can learn from innovative state-
level technology commercialization programs and how those can be
leveraged at the federal level.
Although these are all important research questions, my own
research underscores the importance of identifying best practices in
university-industry partnering and synergies with SBIR programs. As
noted in Siegel and Phan (2005), universities have recently devoted
more attention to the entrepreneurial dimension of technology transfer.
This has induced the creation of numerous university-based spinouts and
connections to local start-up companies founded by academic
entrepreneurs or their students. This is important since two recent
academic studies (Link and Ruhm (2009); Siegel and Wessner (2011)),
based on data collected during the Phase I NRC study clearly
demonstrate that a university connection to an SBIR project
substantially increases the likelihood of successful commercialization.
Note that in this context (see Siegel and Wessner (2011), ``success''
in the marketplace resulting from SBIR projects includes numerous
performance/commercialization indicators, such as:

Sales to date of products, processes, and services from
the project

Expected future sales

New employees hired as a result of the SBIR project

Patents

Copyrights

Trademarks

Domestic/international licensing agreements

Need for Additional NRC Studies of SBIR

Innovation and entrepreneurship are important determinants of
economic growth. The SBIR Program was established because there was a
strong bi-partisan consensus that, in the absence of government
intervention, there is under-investment in early-stage research with
commercial promise in a free market economy. The NRC study clearly
demonstrates that the SBIR Program is effectively addressing this
problem and significantly improving the performance of small,
technology-based firms.
The quality of the analysis and usefulness of the recommendations
provided by the NRC team raises an important issue relating to
government accountability. Let's consider three types of government
programs: social programs, educational initiatives, and technology
programs. Typically, educational and social programs are rigorously
evaluated. Indeed, it is quite common for evaluation to be built into
the design of an educational or social program. Analysis of these
programs has yielded important insights for policymakers, resulting in
such important changes as welfare reform, which had broad bi-partisan
support.
However, despite wide-spread agreement that innovation and
entrepreneurship constitute sources of our global competitive
advantage, technology programs are almost never carefully evaluated. I
have always found that rather strange. Given the connection inherent in
SBIR between innovation and entrepreneurship, it is the most important
government program in this realm. Thus, I believe that SBIR needs to be
carefully scrutinized on an on-going basis, under the auspices of the
NRC. If we are serious about evaluation and accountability, we will
continue to support the NRC's efforts to scrutinize this important
program.

References

Audretsch, David, Albert Link, and John T. Scott (2002).
Public/Private Technology Partnerships: Evaluating SBIR-Supported
Research, Research Policy, 31, 145-158.

Link, Albert N. and Christopher J. Ruhm (2009). Bringing
Science to Market: Commercializing From NIH SBIR Awards, Economics of
Innovation and New Technology, 18, 381-402.

Link, Albert N. and John T. Scott. (2010). Government as
entrepreneur: Evaluating the commercialization success of SBIR
projects. Research Policy 39, 589-601.

Shrader, Rod and Donald S. Siegel (2007). Assessing the
Relationship Between Human Capital and Firm Performance: Evidence From
Technology-based New Ventures,'' Entrepreneurship Theory and Practice,
31(6), 893-907.

Siegel, Donald S. and Charles Wessner (2011).
``Universities and the Success of Entrepreneurial Ventures: Evidence
from the Small Business Innovation Research Program,'' Journal of
Technology Transfer, forthcoming.

Siegel, Donald S. and Philip Phan (2005). Analyzing the
Effectiveness of University Technology Transfer: Implications for
Entrepreneurship Education, in Advances in the Study of
Entrepreneurship, Innovation, and Economic Growth, edited by Gary
Liebcap, Amsterdam: Elsevier Science/JAI Press, 16: 1-38.

Siegel, Donald S., Charles Wessner, Martin Binks, and
Andy Lockett (2003). Policies Promoting Innovation in Small Firms:
Evidence From the U.S. and U.K. Small Business Economics, 20(2): 121-
127.

Chairman Quayle. Thank you, Dr. Siegel, and as you heard
from all the bells and whistles we have been called to vote, so
I hope that you guys will have the patience to stick around,
but this subcommittee will recess until 10 minutes after the
last vote.
[Recess.]
Chairman Quayle. The chair now recognizes--but first thanks
for your patience. Sorry about that interruption, but the chair
now recognizes Mr. Mark Crowell, Executive Director and
Associate Vice President for Innovation Partnerships and
Commercialization at University of Virginia for five minutes.

STATEMENT OF MR. MARK CROWELL, EXECUTIVE DIRECTOR AND ASSOCIATE
VICE PRESIDENT FOR INNOVATION PARTNERSHIPS AND
COMMERCIALIZATION, UNIVERSITY OF VIRGINIA

Mr. Crowell. Thank you very much, Chairman Quayle and
Ranking Member Wu. Thank you for the opportunity to testify
before the subcommittee on this very important topic. My
written testimony contains many hopefully useful details about
the research environment at the University of Virginia and
about our engagement with SBIR and STTR-funded projects. In the
interest of time, however, I want to immediately launch into
answering the questions that you posed to me in your letter
inviting me to testify today.
The first question you asked me to address was to provide
my views on the role of the university in the SBIR and STTR
Programs and how it relates to university technology transfer.
As a 24-year veteran directing technology transfer offices,
including, Mr. Chairman, at Duke and at UNC, I would say that--
I know you are a Duke alum. I would say that our friends in the
venture capital industry remain important partners in our
innovation and commercialization efforts.
But at the same time I recognize that their reality
involves shorter return horizons, higher levels of risk
avoidance, and the need to invest higher dollar amounts to
accelerate innovations toward the market, therefore, placing
most venture capitalists much further downstream than where
university deals tend to be.
The availability of SBIR and STTR funding to help de-risk
such start-up companies in preparation for downstream venture
capital investment is more important than ever to those of us
who are charged with creating start-up companies around
university inventions.
I would like to for a second provide a quick example of how
SBIR and STTR funding has helped to accelerate the amazing
growth, opportunity, and potential societal benefit around
research developed at UVA. Adenosine Therapeutics was founded
in 1999, based on research in UVA's School of Medicine. The
company's development pipeline including--included promising
compounds for treating cancer, diabetes, CNS diseases, and
other afflictions.
In less than nine years--rocket speed in the drug
development world--Adenosine was acquired by a larger company,
Clinical Data. Its battle-tested CEO remained in
Charlottesville and is now a serial entrepreneur, being the CEO
of a new UVA start-up that just landed $4.1 million in venture
capital. The company maintains a significant presence in
Charlottesville, even as this growth has occurred, and several
of their promising compounds are nearing market approval.
We are serious at UVA about starting more companies like
Adenosine to commercialize our research, and we need tools like
SBIR and STTR to continue to be successful.
The second question you asked me to address focuses on my
views of the current percentage of funding allocated to the
SBIR and STTR Programs and whether venture capital-backed small
companies should be eligible to participate in the programs. At
the University of Virginia we strongly support current funding
for the SBIR and STTR Programs.
That being said, we also believe that there is no
compelling justification or need to increase the percentage of
the set-aside amounts. A closed review of success rates within
phase one SBIR and STTR grants will reveal that the funding
success for these grants is equal to and in many cases higher
than success rates for equally--for other equally important
grants for basic research.
Any increase in the current SBIR and STTR set-aside would
come at the expense of other peer-reviewed basic and applied
research, the seed corn for the innovation pipeline. So we
would caution against increasing the set-aside percentages.
We also support the eligibility of companies backed with
significant venture capital investments to apply for funding
under the SBIR and STTR Programs. Companies which have secured
substantial venture backing by definition would have undergone
significant due diligence evaluation by investors and could be
assumed to be on a more certain path to success. Depriving such
promising companies an opportunity to compete for sources of
co-investment of de-risking capital seems contrary to public--
to commonsense and public policy. So we recommend removing any
restrictions on the ability of such companies to apply.
The final question I was asked to address concerns what
recommendations I would make to improve these programs. The
maximum per award funding amounts allowed under phase one and
phase two awards should be increased to reflect renewed
importance of this initiative, as well as to reflect the
effects of inflation over the years.
In our view, phase one awards should be at least $150,000.
Phase two should be $a million. We also would recommend
incorporating sufficient flexibility in determining the precise
award amount so that SBIR and STTR Program officers would have
the freedom to increase each award up to 20 percent of the
published cap on exceptional circumstances and high-impact
opportunity are deemed to be represented in a particular
funding award.
In another area, restrictions related to conflict of
interest should be examined, and where feasible, flexibility
should be added to make it easier for researchers with
disclosed and manageable conflicts of interest to participate
in SBIR and STTR-backed companies.
Further, we would encourage that additional flexibility
would be built into the SBIR and STTR Programs by developing a
way to enable agencies to use a portion of these funds to
directly support additional proof of concept work. Europe has
recently launched just such a program, and I think it is
important that we here in the U.S. find a way to fill this
existing funding gap in the innovation pipeline relating to a
lack of proof of concept funds.
UVA is one university which has recently demonstrated
tremendous success and impact in doing so through the Coulter
Translational Partnership with audited results indicating
tremendous success and return on investment of these very
proven concept funds that I am advocating.
Before closing I would like to point out that my written
testimony contains other suggestions for improvements in these
programs, including a modest suggestion for setting aside some
funds for more rigorous and consistent evaluation and
assessment of the type that Dr. Siegel has just recommended.
I would like to thank the subcommittee, especially the
chair and the ranking member, for your support of these
programs, particularly during these tough budgetary times. We
understand that funding is greatly constrained, and I hope you
will agree that innovation and commercialization of university
research serve the public good while promoting the creation of
new products, new companies, and new jobs.
SBIR and STTR funding has proven to be tremendously
effective in fueling these activities, and we at the University
of Virginia and throughout the university community are highly
indebted for your support. Thank you.
[The prepared statement of Mr. Crowell follows:]

Prepared Statement of W. Mark Crowell, Executive Director and Associate
Vice President, Innovation Partnerships and Commercialization,
University of Virginia, Charlottesville

Chairman Quayle and Ranking Member Wu, thank you for the
opportunity to testify before the House Science, Space and Technology
Committee's Subcommittee on Technology and Innovation on the important
topic of the SBIR and STTR programs--and their role in facilitating the
formation and growth of small businesses which, in turn, create jobs
and help grow the innovation economy.
My name is Mark Crowell, and I am the Executive Director and
Associate Vice President for Innovation Partnerships and
Commercialization at the University of Virginia. Founded by Thomas
Jefferson in 1819, the University of Virginia is committed to its
founder's ideal of developing leaders who are well-prepared to help
shape the future of the nation through our initiatives in education,
discovery and innovation advancement. In fiscal year 2010 the
University received research awards totaling over $375.34 million from
all sources (federal and state agencies, industry and private
foundations). Of this amount, $276.47 million, or 73 percent, came from
federal grants and contracts. I should also point out that the
University of Virginia has been a partner on approximately 32 SBIR or
STTR awards since the program's inception; over the last five years, we
have partnered on about eighteen (18) awards for a total of more than
$5.7 million. The program is becoming increasingly important to us in
our efforts to translate innovations and discoveries developed at our
institution into new businesses and products.
The first question you asked me to address was to provide my views
on the role of the university in the SBIR and STTR programs--and how it
relates to technology transfer. I have been a director of technology
transfer since 1987--at Duke University, at North Carolina State
University, at the University of North Carolina at Chapel Hill, at the
Scripps Research Institute, and now at U.Va. In the decade prior to
September 11, 2001, it seemed that if the university had a patent
application on file, a preliminary business plan, and an interested
faculty inventor, it was possible to land a reasonable Series A round
of venture funding. Today, our friends in the venture capital industry
remain important partners in our innovation and commercialization
efforts, but anyone involved in innovation-based business development
knows that shorter term return horizons, higher levels of risk-
avoidance, and the need to invest at higher levels to accelerate
innovations toward the market have moved most venture capitalists much
further downstream than where most university deals tend to be. The
availability of SBIR and STTR funding to help launch and grow
companies, to facilitate important collaborations between such start-
ups and universities, and to de-risk such start-up companies in
preparation for the downstream venture capital investors is more
important than ever in universities' efforts to launch, grow and
sustain new ventures to commercialize their research discoveries and to
connect their innovation pipeline in ways which help to create wealth
and generate new jobs.
Perhaps a brief word about how universities benefit from SBIR and
STTR funding would be helpful before proceeding. It is important to
note that universities may not apply for SBIR or STTR funding;
applicants must be companies. SBIR applicants may partner or
subcontract less than one-third of the work to a university or other
entity; STTR requires applicant companies to team with a not-for-profit
research institution, and partnering and commercialization arrangements
must be worked out in advance. Up to 60% of the work can be
subcontracted, and the principal investigator can be from the
partnering research institution. Under both programs, and especially
under STTR, universities are able to participate in a very meaningful
and strategic way as the small company develops its research and
development strategy for commercializing their technology.
I'd like to provide examples of how SBIR and STTR funding has
helped to accelerate amazing growth, opportunity, and potential
societal benefit around research developed at U.Va. Adenosine
Therapeutics was founded in 1999 based on research emanating from
U.Va.'s School of Medicine. The company's development pipeline included
promising compounds for treating cancer, diabetes, CNS diseases,
arthritis, and COPD. In less than nine years--rocket speed in the drug
development world--Adenosine was acquired by a larger, public company,
Clinical Data, Inc. The Company maintains a significant presence in
Charlottesville even as this growth has occurred. Several of
Adenosine's promising compounds are now in various stages of FDA
testing and pre-market approval, including a potential best-in-class
coronary vasodilator for cardiac stress testing. Adenosine was the
recipient of numerous SBIR/STTR awards beginning in 2000 through 2007.
We have no doubt that this funding significantly accelerated the
development of the technologies, the growth of the company, the value
to the company's investors, and the pace of introducing to the market
potential life-saving and life-enhancing treatments.
Another example is Directed Vapor Technologies International, Inc.
(DVTI). The company was formed in 2000 to capitalize on U.Va. patents
associated with the creation of a new coating method, Directed Vapor
Deposition (DVD), a novel physical vapor deposition tool for applying
coatings to high performance materials (such as turbine engines,
batteries, and liquid crystal displays) which allow them to be made
faster, cheaper, and with less waste. This new small business operates
a 6,000 sq. ft. manufacturing facility in Albemarle County, VA, and
maintains its relationship with the University and the region, often
hiring interns, recent graduates and alumni. Development of the
technologies behind DVTI was supported by grants from the National
Science Foundation and the Department of Defense, including numerous
SBIR/STTR awards.
For Adenosine, DVTI, and other high growth potential companies we
are prepared to launch, support, and nurture, SBIR and STTR funding is
extremely important to U.Va.'s efforts to help launch start-up
companies. Like many universities across the country, the University of
Virginia takes seriously its role in translating research results into
products, companies, and jobs. The SBIR and STTR programs are key
weapons in our arsenal. And as venture capital moves further down-
field, and as companies large and small increasingly look to
universities to be their source of innovation, it is more important
than ever that we continue to have access to tools like SBIR and STTR
funding. The President referred to the innovation imperative as our
Sputnik moment; the Congress and our governors are focusing more and
more on innovation-based economic development and job creation; and
universities like U.Va. are ready to answer the call. But, we need help
to bridge the valley of death, and SBIR and STTR funding has been and
remains a critical resource for us.
A second question you asked me to address focuses on my views of
the current percentage of funding allocated to the SBIR and STTR
programs; and whether venture-capital backed small companies should be
eligible to participate in the programs. At the University of Virginia,
we strongly support funding for the current SBIR and STTR programs.
That being said, we also believe there is no compelling justification
or need for increasing the percentage set aside amounts. A close review
of success rates within the Phase 1 SBIR and STTR grants will reveal
that the funding success rates for these grants is equal to, and in
many cases--such as with NIH funding--higher than the success rates for
other equally important grants for basic research. Any increase in the
current SBIR and STTR set-aside would come at the expense of other
peer-reviewed basic and applied research--the seed corn for the
innovation pipeline.
We are particularly concerned about shifting funding away from
basic research and into the SBIR and STTR programs at a time when we
are likely to see flat, if not declining funding for basic scientific
research programs as the Congress looks to address the growing budget
deficit. While basic research is an essential piece of the innovation
process, the long-term horizon of most scientific research performed at
universities is viewed by industry as too risky for significant private
sector investment. This is why the continued federal support for basic
scientific research is vital. As the Congressional Joint Economic
Committee has stated, ``Despite its value to society as a whole, basic
research is underfunded by private firms precisely because it is
performed with no specific commercial applications in mind.''
We also support the eligibility of companies backed with
significant venture capital investments to apply for funding under the
SBIR and STTR programs. Companies which have secured substantial
venture backing, by definition, will have undergone significant due
diligence evaluation by investors and could be assumed to be on a more
certain path to success. In today's financial climate, sharing risk and
leveraging investments are a market reality for even the most promising
start-up companies. Depriving promising companies an opportunity to
compete for sources of co-investment or de-risking capital seems
contrary to common sense and public policy, and we recommend removing
any restrictions on the ability of such companies to apply. Further,
companies which traditionally have the need for much greater amounts of
funding--such as biopharmaceutical companies--are particularly
disadvantaged if there is a disconnect between SBIR/STTR-backed
companies and venture capital backed companies.
In fact, a publication by BIO, the Biotechnology Industry
Association, states that almost 33% of companies that brought
biotherapies to market between 1982 and 2005 had SBIR funding. In this
era of intense focus on innovation-based economic development, it would
be wise to remove or revise this restriction so that more fast-growth,
job-creating companies can benefit from SBIR and STTR funding.
The final question I was asked to address concerns what
recommendation I would make to improve the SBIR and STTR programs. We
note that the Association of American Universities (AAU), which
represents 61 leading U.S. research universities including U.Va., along
with other organizations, has recommended more rigorous evaluations of
the SBIR and STTR programs. We support this recommendation and
therefore support the recommendation made by the National Research
Council to increase the amount of the current set aside percentage by
.03 to .05 percent of total program funding, with the increase to be
directed for program assessment and management. This could be a
critical component in continuing to improve and to fine tune the
program for future growth and impact given the renewed emphasis on
innovation and economic development in the national discussion.
Maximum per award funding amounts allowed under SBIR/STTR Phase I
and Phase II awards should be increased as well to reflect renewed
importance on this initiative, as well as to reflect the effects of
inflation over the years. Phase I awards should be at least $150,000,
and Phase II should be $1 million. We also would recommend
incorporating sufficient flexibility in determining the precise award
amounts so that SBIR/STTR program officers would have the freedom to
increase each award up to 20% of the published cap when exceptional
circumstances and high impact opportunity are deemed to be represented
in a particular funding award.
Restrictions related to conflict of interest should be examined
and, where feasible, flexibility should be added that make it easier
for researchers with disclosed and manageable conflict of interest to
participate in SBIR/STTR-backed start-up companies. Consistent with
efforts to encourage, recognize and reward faculty interest in research
commercialization, onerous conflict of interest policies which
discourage faculty from working with industry or developing innovative
technologies should be examined. U.Va. and other universities have
policies which focus on identifying and avoiding completely
unacceptable and unmanageable conflicts, but which allow other
conflicts to exist under appropriate management and monitoring
committees and related mechanisms, especially where the potential
benefit to society or to the institution from the proposed activity is
deemed to be significant and consistent with other institutional
priorities. Many institutions have in fact published policies and
manuals for managing conflict of interest in the application and
performance of SBIR and STTR projects; federal agencies administering
SBIR and STTR initiatives should identify, incorporate and disseminate
what they consider to be best practices in managing conflicts of
interest in SBIR/STTR-based projects.
Finally, we would encourage that additional flexibility be built
into the SBIR and STTR programs. In particular, I would like to
recommend that the STTR program be modified in a way that would enable
agencies to use a certain proportion of these funds to directly support
additional proof-of-concept work at universities. Specifically, we
would encourage the Committee to consider allowing agencies to use a
portion of STTR funds to support new demonstration projects that would
support proof-of-concept grants to universities and their faculty
members. Europe has recently launched just such a program, and I think
it is important that we here in the U.S. also find a way to fill this
existing funding gap in the innovation pipeline relating to a lack of
proof-of-concept funds. Using a proportion of the STTR set aside as the
mechanism by which to address this matter seems totally appropriate,
especially if there were a decision made to increase the percentage
STTR set aside.
It is important to note that the flexibility we are seeking is
aimed mainly at allowing agencies such as the NIH and NSF to devote a
proportion of their STTR funds for even earlier stage proof-of-concept
research or prototype development research, the type of research that
is best conducted in the settings where discoveries and innovations
perceived to have commercial application are first developed, as
opposed to later stage product development or for more applied pre-
commercial research. Such funding should be allocated only after
rigorous evaluation by carefully assembled panels of local experts in
translational and proof-of-concept research--this is key to scaling
success to the national level. Among the criteria for awards under this
initiative should be the demonstrated willingness and capability of a
university in engaging project management boards comprised of industry,
start-up, venture capital, technical, financial, and business/market
experts. Additionally, successful applicants for this funding should be
required to prove their willingness and agility in managing
translational projects stressing market-relevant milestones, in
conducting rigorous oversight and management of such projects, and in
their willingness to withdraw funding from projects failing to reach
essential milestones so that funding can be re-allocated to projects
with more potential. U.Va. is one university which has recently
demonstrated tremendous success and impact in undertaking such proof-
of-concept research, with audited results indicating tremendous success
in return on investment of such funds.
We attribute U.Va.'s success in proof-of-concept research to the
now nationally well-known Coulter process, involving a very diverse
review board, in-person final review sessions, milestone-driven
projects, quarterly reporting that is simple yet effective in re-
directing projects, the ``will to kill'' projects or re-direct funds if
insurmountable obstacles occur, and excellent networking to the venture
capital and private sector. The Coulter program projects have generated
a 5-1 overall return on investment (ROI) in new follow-on funding, and
42-1 ROI for the top ten percent of portfolio projects. The key
differentiators of this process as we employ it at U.Va. versus most
prior proof-of-concept funding mechanisms is the in person diligence on
the involved people and ideas, dedicated project manager, the diverse
composition of the board, the urgency of quarterly reviews and re-
direction of projects, and will to re-direct funds as results emerge.
In closing, I would like to make a brief point about the patent
reform legislation recently passed by the Senate (S. 23) and currently
under consideration in the House. While not directly related to SBIR
and STTR funding, patent reform is also critically important to
universities seeking to translate their inventions into new products,
new businesses, and new jobs. We strongly support the recently passed
S. 23, but we are concerned about two provisions of the draft bill
under consideration by the House Judiciary Committee: (1) greatly
expanded prior user rights and (2) a lowered threshold for the
initiation of inter partes review. Just as we believe that the SBIR and
STTR programs are essential programs for helping universities
facilitate the launch and growth of small companies, we also strongly
believe that a predictable patent system which minimizes uncertainty
for companies and investors is critical. The expanded prior user rights
in the proposed House legislation would disadvantage universities, even
with its university carve-out, and would create unpredictable, uneven,
and anti-innovation impacts. As just one example--university
researchers often publish their research results before filing for
patents. While the grace period in S. 23 and prior House patent reform
bills would protect inventors from others patenting their inventions,
expanded prior user rights would have the opposite effect--i.e.,
competitors might be incentivized to perfect a competing trade secret
product that would then be immune from infringement of the eventual
valid university patent. We therefore respectfully urge this
Subcommittee to work with the House Judiciary Committee on this
currently pending patent reform legislation--and especially on the
prior user rights provision it contains--as a way of continuing to
improve federal policy promoting the successful launch and growth of
innovation-based start-up companies.
I would like to thank the Subcommittee, and especially the Chair
and the Ranking Member, for your support of the SBIR and STTR programs
in these tough budgetary times. While we understand that funding is
greatly constrained, I hope that you agree that innovation and
commercialization serve the public good while promoting the creation of
new products, new companies, and new jobs. SBIR and STTR funding have
proven to be tremendously effective in fueling these activities, and we
at the University of Virginia, and throughout the university community,
are highly indebted for your continued support of these programs.
Thank you again for the invitation to testify.

Chairman Quayle. Thank you, Mr. Crowell.
The chair now recognizes Mr. Doug Limbaugh, CEO of Kutta
Technologies, for 5 minutes.

STATEMENT OF MR. DOUG LIMBAUGH, CHIEF EXECUTIVE OFFICER, KUTTA
TECHNOLOGIES

Mr. Limbaugh. Thank you, Chairman Quayle, Ranking--
Congressman Wu, and all other committee members for having me
here to testify in regards to the SBIR reauthorization. I am
the CEO and co-owner of Kutta Technologies. We have been in
business since 2001. My business partner and I, Matthew Savoca,
started in a 10 by 10 corner of my house back in 2001. We
rapidly grew to about 12 employees, so imagine 12 employees in
your house. Imagine customers calling and wanting to come to
town and visit you at the same time that didn't know you were
that small, and imagine your parents deciding they wanted to
pay you a visit also.
We turned that into a positive with my mom cooking food for
everybody and talking to them and telling them--and your
parents like to brag about you, telling them all about me and
some stories that I didn't want them to hear.
But I digress, but I want to get back on track, because we
have been in business--we didn't start doing SBIRs until 2003.
Since then we have won 13 phase one grants, 11 phase two
grants, for a total of $8.5 million in funding.
Additionally, we have received over--just about $20 million
in DOD sales and commercialization. That will also continue
to--that number will continue to grow as some of our products
become inserted into DOD program records in the future.
One also thing that I want to emphasize, we employ over 24
engineers and scientists within our company. Not a big number
but all those engineers and scientists when you look at the
average wage is over $100,000 a year. We provide full
healthcare benefits, 401K, and profit sharing, and we never
have a shortage of people knocking on our doors wanting to come
to work for our small business because we do such cool things.
And that is as a result of our SBIR-based technology.
Also, we achieved one of our strategic goals this year of
winning a Tibbetts Award for excellence in the SBIR Program.
That gave me an opportunity to talk to a lot of other small
businesses in the community and also will be part of my
recommendations to the panel what I learned from those meetings
and also from firsthand experience.
I also just want to talk briefly about some of the game-
changing technologies that we have created at Kutta. Mainly we
have invented a new, revolutionary new way to control UAVs, and
our technology will be inserted into a DOD program of record at
the end of this year or the beginning of next year, and it will
totally change the way the Army and the Armed Forces use UAVs
on the battlefield. It will revolutionize it, it will also
provide better, more accurate, and timely information to
soldiers on the battlefield and also reduce, we believe, a
number of deaths and wounded in action due to improvised
explosive devices.
We also as Chairman Quayle expressed in his opening
testimony, we also have invented a revolutionary new way for
coalmining communications. After the Sago incident happened in
2006, the MSHA, Mine Safety Health Administration, did a
demonstration and looked at ten different technologies. By far
we had the best technology that was created out of a $70,000
phase one grant.
At that time they didn't realize the communications that we
could provide in the mining industry were even possible. Now
today we are getting over 6 miles of non-line-of-sight
communication in a coalmine with our technologies. It is being
sold to the biggest U.S. coal companies here in the United
States, and we are exporting that to India, China, and around
the world.
My main recommendations for the SBIR panel are obviously
shortening the time to award. Everybody has that. Everybody
suffers from the fact that it takes so long to get notified and
then also get the contract for the phase one. I would say that
it is more important to shorten the time of award for a phase
two because you already have the work, and sometimes just
waiting a long time to get that phase two award can be very
detrimental to a small business just starting out that doesn't
have cash flow, doesn't have the expertise or the assets in
order to acquire short-term loans or lines of credit from the
business.
Other main recommendation is within the DOD a more-
centralized contracting process. There is a lot of folks in the
DOD and the contracting departments that don't understand
SBIRs, see them as a tax on their organization, and would just
like to get rid of them altogether.
The other big thing that I want to emphasize before my time
is up is be very careful about allowing venture capitalism, and
this may be where I differ from other panel members. I think
that venture capitalism could also be very detrimental to the
small business and intent of the SBIR Program as it started in
the sense that what would--the way I look at it and the way
many of my colleagues in the business look at it, especially
within the DOD, is, what would prevent a large prime contractor
from setting up a VC shell company and basically gobbling up
all the SBIRs, just loading them up and then transition to the
technology?
I also think that you will end up spending more money, the
DOD especially will end up spending more money on technology
created out of the SBIR than if it wasn't funded by VCs.
Thank you.
[The prepared statement of Mr. Limbaugh follows:]
Prepared Statement of Mr. Doug Limbaugh, Chief Executive Officer, Kutta
Technologies, Inc.

Thank you for selecting me to provide a written statement on behalf
of Kutta Technologies, Inc. regarding the SBIR Program. The following
written statement provides a summary of Kutta's history and how the
SBIR program significantly changed our small business for the better.
The second part of this testimony summarizes how Kutta's SBIR
innovations have contributed to the nation, our warfighters, coal
miners, and first responders. The last part of the statement identifies
several items in particular that can make a great program even better.
In June of 2001, my business partner Matthew Savoca and I quit our
engineering jobs at Honeywell to start Kutta--an aviation engineering
consulting business. We both put $5,000 into the company to buy used
computers, monitors, printers, chairs, etc., and two very cheap four-
legged plastic desks--the kind that barely have enough strength to hold
the old desktop monitors of that day. We did not start in the garage.
Instead we moved into a small 10 foot by 10 foot bedroom in my house. I
did not charge the company rent because we could not afford it. Within
a couple of weeks we landed our first consulting job. Things were going
well, but we all know what happened on September 11, 2001. Needless to
say our nation went through a rough patch and so did the aviation
business. Also, outsourcing engineering services overseas by large
American companies started to become a fad and slow the rapid growth of
our consulting company. As many small entrepreneurs do in the United
States every day, we learned from these tough lessons, adapted and
overcame adversity. We determined that we needed more diversification
in our company. We decided to become a product-based business. We
wanted to control our own destiny and we wanted to create innovative
technology that would make an impact in America and around the world--
we turned to the SBIR program. Since 2001, we grew our two person
company to nearly 45 employees. Because of the success we were having
in the SBIR program, we decided to sell the consulting business to
focus on our SBIR products. Since 2003, Kutta has won 13 Phase I grants
and 11 Phase II grants for a total of $8.5M in funding. Additionally,
we have received $19.4M in DoD sales and product commercialization of
these SBIRs. We currently provide direct employment to 24 engineers and
scientists with an average yearly salary in excess of $100K a year,
with full health-care benefits, 401(k), and profit sharing. In 2011 we
achieved one of our strategic goals of winning a prestigious Small
Business Association (SBA) Achievement award, the SBIR Tibbetts Award,
for excellence in achieving the mission and goals of the SBIR program.
However, achieving this level of success was not without its
challenges. After several unsuccessful attempts at writing a winning
SBIR proposal, we became aware of a state program from the Arizona
Department of Commerce called the AZ FAST program. The program allowed
us to hire a grant writing specialist who helped us write better
proposals and win SBIRs. In June of 2003, we won our first SBIR Phase I
grant from the U.S. Army. The SBIR started as a Phase I in 2003,
subsequently transitioned to Phase II, and is now in Phase III. This
one SBIR alone has generated over $4 million dollars in commercial
sales and over $8 million in Department of Defense (DoD) sales. It will
have even more of an economic impact when it becomes inserted into a
DoD Program of Record (POR) in the near future.
Besides the significant economic impact, the technology will
revolutionize the way the U.S. Army utilizes unmanned aerial drones.
With our new Bi-Directional Remote Viewing Terminal (BDRVT) technology,
front-line warfighters will be able to safely take control of an
unmanned aerial system (UAS) and task the UAS to survey roads and
borders for potential ambushes and Improvised Explosive Devices (IEDs),
track enemy combatants while they flee a scene, and provide over watch
capabilities to ground troops--all with a few simple inputs on a
touchscreen panel. All of this will be demonstrated in the Army's
manned unmanned system integration concept (MUSIC) demonstration in
September of this year. It is not hard to envision this simple and
easy-to-use device being used not only by our nation, but also by
allied nations and along our borders--another commercialization avenue
that we are exploring.
This technology would not have become a reality if the U.S. Army's
Aviation Applied Technology (AATD) did not have the vision for the
product. With a Phase I and Phase II SBIR from AATD, we worked
diligently to shape the vision and build a prototype to show that it
was possible. It then took the Program Management Unmanned Aerial
Systems (PM UAS) division of the Army to recognize the innovation and
provide the funding to insert it into the UAS war fighting machines.
This SBIR did not fall into the ``valley of death'' (the struggle to
bring a product to market after a SBIR Phase II)--the new, highly-
competitive, Commercialization Pilot Program (CPP) prevented that.
MILCOM Venture Partners and the PM SBIR office within the DoD provided
the bridge funding to move the product from a Phase II prototype into a
mainstream product and reduce the risk of further procurement by PM
UAS. That is, the CPP provided the infusion of funding to refine the
product and reduce the risk for acquisition into the Army's supply
chain. This was a winning program for everyone. The Warfighter receives
a new innovation, the taxpayers save money by selecting Kutta instead
of a large prime contractor, Kutta employs engineers, and our employees
thrive on creating the innovation--not to mention the fact that it
allows the Army to break the stove-piped and proprietary nature of many
military systems. This is a success that we share with our nation, the
taxpayers, and our Army sponsors; for without them we would not be here
today.
Furthermore, our enemy's tactics and creativity are unencumbered by
the fair and formal procurement found in America, and our enemy's
tactics can be very disruptive. Our enemies are becoming more adept at
utilizing commercial off the shelf (COTS) technologies (e.g. cell
phones to explode IEDs) and our defense budgets are shrinking. It is a
known fact that small, entrepreneurial companies can innovate much
faster than the large business. The DoD budgets may shrink, but our
nation will still need ways to quickly adapt to our enemy's ever
changing tactics. Therefore, to counter the fast-moving and evolving
tactics of our enemies, I believe the DoD needs the SBIR program more
than ever to out-innovate our enemies in a cost efficient manner.
I am also compelled to discuss another success story that has even
much more far ranging impacts throughout the world than Kutta's UAS
controller technology. As many of you may recall on January 2, 2006, an
underground coal blast occurred in Sago, West Virginia. After the
blast, 13 miners survived for nearly two days. Eventually, all of the
miners except one survivor, Randal McCloy, were overcome by poisonous
methane gas. The outcome of the MSHA investigation showed that those
miners could have survived if they had a two-way communication device
and if rescuers had known where the miners were located. The U.S.
queried the DoD for technology that could fill this capability gap in
the mining industry. To our knowledge, we were the only company in the
United States working to solve a similar subterranean communication
problem for the Army. We had also just completed a successful SBIR
Phase I grant and were patiently waiting to receive our Phase II
award--a wait of about 6 months. We were between the Phase I and Phase
II contract stages, and we had no funding. However, the Mine Safety
Health Administration (MSHA) wanted to conduct an independent survey of
underground communication technology. They selected Kutta and nearly 10
other technologies for their evaluation. We were confident that our
technology would work, and luckily we had enough of our own funds to
refine our Phase I prototype three weeks prior to the scheduled MSHA
evaluation. The results of MSHA's independent test showed that our
$70,000 SBIR Phase I prototype exceeded everyone's expectations. We
demonstrated wireless two-way, non line-of-sight (i.e. around corners),
voice communication over two-miles in the underground mine. This was
over six times further than any other wireless communication technology
tested and the signal could have traveled further. In fact, our
production quality radios today can provide wireless, non-line of
sight, two-way communication in a mine at over six miles. After these
tests, MSHA realized that post-accident communication and tracking was
possible. These results prompted a call from the late Congressman
George Norwood. Congressman Norwood was acting as the Chairman of the
House and Education Labor Committee at the time and was excited about
our technology. Subsequently, Congress passed the MINER Act and
President Bush signed it into law. The MINER Act appropriated $10
million dollars to the National Institute of Occupational Safety and
Health (NIOSH) to foster research into underground mine post-accident
technologies (e.g. communications, tracking, rescue chambers, etc.).
Kutta worked with NIOSH to receive $2.1 Million in funding to
transition the SBIR Phase I prototype into a prototype for coal mines.
The Army provided SBIR Phase II Plus funding of $500K for a total of
$2.6 Million in funding. Although the NIOSH and Army collaboration was
successful, it still only produced a prototype system for the miners.
Kutta, using its own funds, spent nearly $2 Million additional dollars
to bring the product to market. To this day, we are the only MSHA
approved post-accident communication device available to the mining
industry. Furthermore, it is the most economical two-way wireless
communication device available to the mining industry. We have received
orders from the largest underground coal companies in the U.S. and are
currently exporting our technology worldwide.
Moreover, last year we discovered that this technology could be
used by first responders to solve challenging situations where
communications is not available in high-rise buildings and subterranean
environments--a large problem experienced by first responders in the 9/
11 disaster. We demonstrated wireless interoperable communications to
the Fire Department of New York in a subway tunnel and in a high-rise
building. FDNY was astonished by the capabilities of the system.
However, neither FDNY nor Kutta have enough funds to modify the mining
product for the first responders, although we are both trying to find a
way. Furthermore, we demonstrated the capability to Border Patrol to
communicate within border tunnels and to map the tunnels on the
surface. The Border Patrol agents liked the technology, but they too do
not have the budget to purchase the system. Lastly, the U.S. Army's
911th Technical Rescue crew received two demonstrations of our
technology and they were amazed with its ease of use and its
capabilities. They have been working for nearly six months through
their procurement process to purchase two of our systems. I mention
these struggles to illustrate how difficult it is to bring a new
product to market. Marketing and selling products takes just as much
time and money as does building the prototype (Phase II Objective).
I believe it in the best interest of all SBIR-based companies, as
well as those in Congress and the President, to review Mr. Glover's
report on the SBIR program as recorded in his February 11th testimony.
This report not only provides the quantitative justification for the
SBIR program, it makes a strong case for increasing the funding for the
program. When you listen to the President's State of the Union address
about small business innovators, when you look at the state of
unemployment in our nation, and you consider the fact that small
business in the biggest employer and the largest catalyst for new
innovations, the SBIR program is the program that is too valuable to
fail. Why wouldn't taxpayers want a Government program that has a
positive Return on Investment (ROI) and not a negative?
Obviously the SBIR program, as fathered by Roland Tibbetts, is a
resounding success for our country. I firmly believe that without the
SBIR program, innovation in this country would be stifled, fewer jobs
would be created, and our taxpayers would be paying much more to
acquire state-of-the-art military capabilities. However, just as it is
good business to continuously improve a product, so to should our
government look to improve the SBIR program. The following are specific
suggestions for consideration that I offer from first-hand experience
within the program.
Recommendation 1: Reduce the time for award notification (win or
lose) to less than 60 days for a Phase I and a Phase II SBIR.
Rationale: A company can make better business decisions regarding
resource allocation if they know if they won or lost as opposed to
waiting for months on end to find out the result. Waiting puts a
financial toll on the company and an emotional toll on those employees
that put their hearts and souls into writing the proposals. Giving the
companies a ``yes'' or ``no'' as soon as possible allows them to make
more informed decisions sooner rather than later.
Recommendation 2: Allow the Phase I to be recognized as a grant.
Rationale: Allowing the Phase I to be recognized as a grant would
simplify contracting and prevent lengthy negotiations regarding IP and
Statements of Work. It will reduce the overhead of the contracting
agency and speed the flow of money to a small business.
Recommendation 3: Reduce the time for contract negotiation and
award to 45 days from receiving award notification of a Phase II.
Rationale: Funding for a small startup company working under an
SBIR grant is vital. Small startups have a harder time acquiring a
short term line of credit or a loan from a bank. Furthermore, a Phase I
grant might be the only source of income to the startup company. If the
company has to wait 4 to 6 months to receive funding for the next
phase, it could be highly detrimental to them. From a business
perspective, time to market can be critical. Allowing the small company
to build a prototype and start its marketing efforts earlier could also
increase commercialization success.
Recommendation 4: Within the DoD, create a more centralized
contracting process that allows funding to be provided to the small
companies in a more expedited manner.
Rationale: Although the SBIR program has been around since 1982,
the program does not garner much affinity to those in DoD contracting
departments. Many times the SBIR program is seen as a tax to them and
requires them to administer a contract that they know little about or
have had little training on how to handle. Having a centralized
contracting team at PM SBIR to administer contracts or provide guidance
to contracting officers would streamline the award process.
Recommendation 5: Educate contract representatives and encourage
other government organizations to utilize the sole source SBIR Phase
III processes to provide contract vehicles for small business.
Rationale: Establishing a contract with an acquisition authority in
the DoD is very difficult. Therefore, commercialization with the
acquisition arm of the DoD is stifled. This problem is compounded by
the fact that the contracting officers in the acquisition offices are
not familiar with SBIR contracts since SBIRs are mostly administered by
the Research and Development of the DoD. Contract officers in
acquisition inherently shy away from SBIRs because of lack of
understanding and they sometimes wrongly question that a SBIR Phase III
satisfies the Federal Acquisition Regulations (FARs) for competition.
That leaves the contracting officers with few options: one, to not
acquire the technology; two, to rebid or open the technology for other
offers', which cost the government time and money; and three, find an
existing contract mechanism to role the technology into. When option
number three is invoked, the small business has to typically deal with
a large prime contractor. Typically, these prime contractors already
have an established relationship with the acquisition authorities and
an existing contract vehicle is in place and the technology can be
acquired. On the surface that may sound good and in some cases it works
out great. However, this places a small company in a very precarious
situation. That is, negotiating intellectual property, payable terms,
and complex DoD contracts with multi-billion dollar companies with
terms that are always more favorable to the large firms than the small
one. It also introduces mark ups and overhead which cost the government
more money.
Recommendation 6: Consider establishing a competitive SBIR Phase
III program for SBIR Phase II winners that focuses on marketing only
(not technical development).
Rationale: Most SBIR funding and the newly added Commercialization
Pilot Program are still focused on technology enhancements and
technology maturation. It would be useful if a competitive SBIR process
was started by the Department of Commerce. The program should be open
to all SBIR Phase II winners across the SBIR landscape. However, the
proposal should be structured more like a sales and marketing proposal
for the product--not a technically oriented proposal. Providing funds
to market and advertise a SBIR-generated product would increase
commercialization.
Recommendation 7: Within the DoD, be very careful in allowing
Venture Capital based companies into the system.
Rationale: VC funding for primarily DoD-based SBIR companies would
encourage small business to concentrate more on commercial benefits and
may not be in direct alignment with DoD goals. Furthermore, large
conglomerate VC firms are entrenched with the government and may work
the system to have SBIR's written to focus on their company's strength
rather than the innovation needed for the warfighter. It also makes it
very difficult for small, startup companies to compete with VC-funded
companies, and appears to defeat the intent of the SBIR program.
Recommendation 8: Raise the total allocation to SBIR R & D budget
Rationale: The SBIR program creates jobs and does so more
efficiently than universities. It also creates new products--products
that can be sold nationally and internationally. New products create
new jobs across the workforce spectrum (e.g. accounting, shipping,
manufacturing, marketing, engineering, travel, etc.). It's a no-
brainer. If you want new jobs, the SBIR program will deliver. It always
has and it always will because it is aligned with America's core
economic principles of fair competition and free markets.
Based on our experience and based on the quantitative statistics
related to the SBIR program, the program is a tremendous government
success and it returns more tax revenue than is used to fund it. It
also creates sustainable, high-paying jobs in critical areas of
technology that make America more competitive throughout the world. A
reauthorization of the SBIR program is absolutely vital for our nation
to remain competitive, to provide jobs for highly-educated engineers
and scientists, to invent new technologies rapidly and efficiently, and
to reduce our trade deficit. I firmly support the SBIR program for all
its benefits. And, if you really want to prime a job creation engine, I
implore you to find a way to re-authorize the SBIR and to re-authorize
it with additional funding.

Chairman Quayle. Thank you, Mr. Limbaugh.
The chair now recognizes our final witness, Ms. McKinney,
who is the president and CEO of Galois, Incorporated. I will
recognize you for 5 minutes.

STATEMENT OF MS. LAURA MCKINNEY, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, GALOIS, INC.

Ms. McKinney. Good afternoon, Chairman Quayle, Ranking
Member Wu, and Members of the Committee. It is an honor to
appear to you today to testify about the role that the SBIR
Program has played in Galois' business and its effectiveness in
promoting innovation.
Let me begin by thanking the Members of the Committee for
promoting policies that assist the growth and innovative
contributions of small businesses in this country. You are to
be commended for your support to programs such as SBIR.
My testimony is based solely on what Galois knows directly.
Our experiences may be unique or may generalize. We acknowledge
the excellent work of the National Research Council and others
who bring a broader viewpoint about what might best apply in
the larger context and community.
Galois is a 10-year-old small business located in Portland,
Oregon. Our mission is creating trustworthiness in critical
systems. We transform computer science research into practice
to address urgent problems with safety and security software.
You can think of Galois as a vital part of the supply chain
that takes relatively new research technology up the hill
through feasibility proof and operational demonstration stages.
Galois' roots were in a 1990s Air Force research project
undertaken by the Oregon Graduate Institute, a technical
research-focused graduate school. This project and the
visionary leadership of the Air Force program managers provided
a model for many of the elements necessary to achieve
technology transition.
However, despite the emphasis on transition, superior
technology, and a viable implementation, the results failed to
reach deployment and bring operational value. There was one
critical link missing that prevented the ultimate deployment of
this system; a commercially-motivated entity to bring the
mature prototype into use. Despite significant interest and
commitment, the effort was simply outside the mission of OGI as
an educational research institute. It was a source of
significant frustration to many team members that this valuable
technology was essentially abandoned.
When an opportunity arose several years later with a
similarly-structured research effort with the intelligence
community, Dr. John Launchbury, the founder and CEO, used the
lessons learned under the project with Galois, and we founded
the company based on a mission with technology transition as a
focus. The results of that intelligence community project are
in operational use today.
Galois' revenues are generated through collaborative
research projects, transition support, and licensing of
technologies to product companies. Approximately 17 percent of
current Galois revenues are from SBIR, making the SBIR Program
a modest but highly-leveraged part of our business.
For Oregon with its geographic challenges, the SBIR Program
enhances access to U.S. government agencies with operational
needs, leading to results and further funding both within and
outside of the SBIR Program. The frequent release of new SBIR
topics from government agencies enables Galois to survey areas
of work that would serve critical emerging needs.
The SBIR Program enables research transition across
government agencies. Results generated under the sponsorship of
one government agency are applied to problems elsewhere. The
SBIR Program encourages quality operational research which is
distinct in pace and focus from the kind of research done
within labs and at universities.
There is a dynamic ebb and flow of small companies which
have to respond rapidly to emerging needs and emerging
techniques. To compete a company has to excel on the quality
and relevance of its ideas. In areas such as cyber security,
Galois brings global research leverage to national problems.
Galois has grown transition and commercialization skills
through interactions with the Navy TAP, the National Research
Council, and the DHS Commercialization Office.
Galois is recommending the following improvements with the
view to making an excellent program stronger. We believe in the
current approach to success metrics, particularly that failure
is one expected outcome. This makes it possible to try riskier
approaches that bring more significant value.
Second, that phase three is measured by a monetary
investment which helps ensure that SBIRs overall are yielding
value. However, there is an alternative way to bring
substantial value to the Nation; through open-source technology
as exemplified by goggled android mobile phone platform.
Consequently, Galois recommends an augmentation of the phase
three success metrics to include evaluation of open source
transition.
In addition, Galois endorses and supports increasing the
phase one award size in tandem with the economy, providing
approaches for accelerating the pace and transition between the
phases, increasing support for the technical points of contact,
linking programs of record more closely with the SBIR Program,
and providing incentives for prime contractors to evaluate and
use SBIR-developed technologies.
Galois believes the SBIR Program is successful both for
fostering the innovation and jobs engine of small businesses
and for nurturing breakthrough technologies to the benefit of
the government and wider economy.
Thank you, again, for the opportunity to appear before this
committee, and I look forward to answering your questions.
[The prepared statement of Ms. McKinney follows:]
Prepared Statement of Ms. Laura McKinney, President and CEO, Galois,
Inc.
Good afternoon Chairman Quayle, Ranking Member Wu, and Members of
the Committee. It is an honor to appear before you today to testify
about the role that the Small Business Innovation Research (SBIR)
program has played in Galois' business, and its effectiveness in
promoting innovation.
My name is Laura McKinney, and I serve as CEO of Galois, Inc., and
as a member of Galois' Board of Directors.
Let me begin by thanking the Members of this Committee for your
work in promoting policies that assist the growth of small businesses
in this country. Small businesses are known to be a significant engine
of innovation, and your role in promoting policies that have fostered
innovation and created jobs in the U.S. is to be commended. The SBIR
program is one such example.
For this testimony, the subcommittee requested the following
information:

1) Description of Galois' awards and experience with the SBIR
program.
2) Discussion of how Galois' SBIR-funded work has impacted our
community and/or the nation.
3) Recommendations for improvements to the program.

We have addressed all three of the questions in the following
testimony. I am able to speak from the perspective of Galois' specific
experiences with the SBIR and STTR programs. It is my desire to share
our story with as much depth and fidelity as possible, recognizing that
it will naturally have its parochial limits. When we give
recommendations, we do so based solely on what we know directly, and in
recognition that our experiences may either be unique or may
generalize. We acknowledge the excellent work of the National Research
Council and others who bring a broader viewpoint to sort out what might
best apply in the larger context and community.

Overview

Galois is a 10-year-old small business located in Portland, Oregon.
Galois' mission is creating trustworthiness in critical systems. Our
approach is to transform computer science research into practice to
address urgent problems with safety and security software. Think of
Galois as a vital part of the supply chain that takes relatively new
research technology up the hill through feasibility proof and
operational demonstration stages.
Galois employs over 30 people, most as employees and some under
contract. We are a mix of researchers with world-recognized expertise
paired with highly-skilled engineers whose practical experience
converts research ideas into viable implementations. Among the 24
permanent technical staff, almost 60% hold a Ph.D., another 25% hold an
MS, and five are former university professors. All are specialists in
computer science, with emphasis on formal methods and high assurance
techniques in software. Galois draws its expertise from a global
community, with degrees represented from many first rank U.S.
universities as well as overseas schools such as Oxford, Cambridge, and
UNSW in Sydney.
The primary problem domains we address include those motivated by
needs in cybersecurity, such as high assurance architectures, cross-
domain information exchange, cryptography, and secure embedded devices.
Galois' customers include the intelligence community, Navy, NASA, Army,
Air Force, DARPA, DOE, Raytheon, and General Dynamics, plus other
companies in the industrial and commercial sectors. Some of Galois'
partnerships and relationships include Rogue River Research (Ashland
Oregon), Portland State University, Oregon State University, defense
contractors such as DRS, commercial entities in the cybersecurity
domain such as OK Labs, and small businesses such as Dornerworks.
Galois' revenues are generated through collaborative research
projects, transition support, and licensing of technologies to product
companies. Approximately 17% of current Galois revenues are through
SBIR Phase-I and Phase-II contracts and grants, making the SBIR program
a modest but highly leveraged part of our business.
In particular, the SBIR program is a critical enabler that allows
Galois to bring maturing research results developed under long-term
initiatives to bear on immediate needs. We combine emerging software
techniques and tools with inventions to meet specific operational
requirements. Often we partner with both academia and solution
providers to make this possible. Thus a primary contribution for Galois
is magnifying the investment in research results funded under one
government agency to a broader government and commercial community.

The technology transition gap between universities and industry

Galois, Inc., had its roots in an Air Force research project
undertaken in the 90s by the Oregon Graduate Institute. This project,
and the visionary leadership of the Air Force management in guiding its
progress, provided a model for many of the elements necessary to
achieve technology transition. However, despite all the emphasis on
transition, superior technology, and a viable implementation, the
results failed to reach deployment and bring operational value.
Ultimately Galois was founded in response to the technology transition
lessons learned under this effort.
This background is worth examining in some detail, as it
demonstrates the critical role that companies like Galois can play, as
they inhabit the R&D space between Universities and large industrial
and commercial concerns.
As background, the Oregon Graduate Institute was a research-
focused, graduate school that flourished due to the excellence of the
researchers and their ability to provide compelling research results.
The Oregon Legislature chartered OGI in 1963 to provide graduate-level
training and expertise to the state's rapidly expanding high-tech
industry. ``During the 1990s the school awarded over one thousand
graduate degrees, offered hundreds of continuing education seminars and
workshops, and secured more than $100 million in largely federally-
funded research. In 2001, OGI merged with Oregon Health Sciences
University.'' (Quoted from the OGI web site).
One of the projects in the 90s was a multi-year, multi-million
dollar grant to improve the production and reliability of message
passing systems within the U.S. Air Force. The Air Force sponsors were
committed to seeing that the research resulted in tangible and direct
benefits. To enable the academic group to better meet the expectations
of an operationally-focused customer, they assigned an advisor in
addition to the program management oversight.
The project ultimately delivered a mature prototype message-passing
system. In a controlled software engineering experiment against an
existing operational solution, the system was proven to significantly
improve both the productivity of the engineers that code the messages
and reduce the number of errors encountered. Potential value to the Air
Force included increased capability to produce new message formats,
with lower failures, in response to changing mission needs.
The researchers and the Air Force advisor worked together to add
rigorous project management, to complement researchers with highly-
skilled engineers, to educate the team about the Air Force mission and
current solutions, and to structure the project with a tangible
demonstration of value as its goal. This research community learned new
approaches in terms of scope, rigor and perspective.
However, there was one critical link that was missing that
prevented the ultimate deployment of this system, and that was a
commercially-motivated entity to take this mature prototype and bring
it into use. Despite significant interest and commitment to do so, the
effort was simply outside of the mission of OGI as an educational
research institute. It was a source of significant frustration to many
team members that this valuable technology was essentially abandoned.

Galois' inception

In 1999, Dr. John Launchbury, an OGI professor, was approached by a
research group within the intelligence community to address a critical
problem in the specification of cryptographic algorithms. Some of the
elements of this work drew on the research results from the prior Air
Force project and elsewhere.
Significantly, both the OGI professor and the government realized
that in order for this initiative to be successful, the research and
development needed to be done within an entity that could nurture the
system through to actual use. John Launchbury took the lessons learned
from OGI and founded Galois, which has since grown steadily and
strongly, winning multiple Oregon business awards and honors, including
John Launchbury's selection as finalist for Entrepreneur of the Year in
2002 by the Portland Business Journal.
Cryptographic specification became the first project for Galois as
well the inspiration for Galois' name, which is in honor of Evariste
Galois, a 17th century French mathematician who invented the theory
underlying cryptography before dying in a politically-motivated duel at
the age of 21. The result of the ensuing ten-year Galois partnership
with the intelligence community is the Cryptol language and tools,
which are in operational and commercial use today.
For Cryptol, Galois was able to complete the transition by itself
from research through to operational deployment and support because its
target user group was small and sophisticated. However, Galois
leadership understood early on that larger operational deployments of
emerging technology would need to be done by partners who had both the
operational expertise, scope of capability and mission knowledge to
make it happen. Galois believes that its mission imperative, unlike
academia, is to locate, assess and work with such partners until the
technology has been fully transitioned.
In the early to mid 2000s, building on its base of technical
skills, Galois grew by extending its research initiatives to problem
areas outside of cryptography. Galois was leveraging the excellence of
its researchers and its independence from the academic mission to bring
a new technology transition offering to research agencies in the
government.
Galois participated in a research project under the Navy PMW 160
office to improve cross-domain information exchange. This project
produced specific technologies that could be used in a significant
number of different devices in both safety and security domains.
However, challenges exist to deployment within these areas, chief of
which is the amount of up-front investment required to bring a solution
into use. Deployment of such devices is gated by various government
certification processes such as TSABI and SABI, which can take from 12-
24 months to complete. As a consequence, the existing solutions are
aging and require substantial government investment to remain viable,
even as they fall behind in meeting mission need.
Galois recognized that any deployment partner would need to see a
large market potential prior to engaging in such an effort. As a
result, Galois started nurturing partnerships in earnest at this point,
readying the field for deployment opportunities.

Galois' history with SBIR

While working with the Navy, Galois became aware of the SBIR
program, and had submitted and won an early Phase-I grant with the Air
Force. During the period between the win and receiving the contract,
the technical point of contact changed. Galois was naive about the
structure of the SBIR program, and failed to respond to this shift in
technical leadership with a change in the research initiative. As a
consequence, we were not responsive to the new needs of the program
office and were not awarded the Phase-II. This was an education to
Galois about the differences between interacting with research agencies
on long-term contracts and the pace and intent of the SBIR program.
However, Galois saw the potential for the SBIR program to motivate
the investment necessary to bring capabilities to market by linking the
technology to specific operational needs. Galois had also written
several SBIR Phase-I proposals that augmented the Trusted Services
Engine (TSE), a cross-domain information sharing device, which had been
previously developed with Navy funding. One of these, Cross-Domain
Document-Based Collaboration in a Multi-Level Secure Environment,
resulted in Phase-II funding through the Navy, Phase-III funding
through the intelligence community, transition of technology to a
venture-backed startup and multiple operational deployment
opportunities that are still in motion.
Because Galois is so aligned with the structure and intent of the
SBIR program, we have increased our participation and written and won
an increasing number of Phase-I grants and contracts, and have been
moving some of those into Phase-II efforts. All of these involve taking
research results from our longer-term initiatives, combining them with
specific innovations that are responsive to operational needs, and
producing new capabilities that are mature enough to see deployment in
the short term.

Galois perspective on technology transition

Galois defines successful technology transition as the realization
of significant new capability within existing problem domains through
the application of revolutionary techniques that change the state of
the practice. Technology transition is hard. It can take many, many
years for a revolutionary technology to move from research into
successful deployment. Based on our experience, Galois believes the
following:

Expect the unexpected in technology transition. It is extremely
difficult to predict when and where the ultimate value of
technology invention will be realized. Technologies may require
long-term nurturing until the conditions are ripe.

Relevance and value comes from being strongly connected with
the mission and needs of operational entities. Innovation
happens where technology evolution meets operational challenge.

Technology transition comes incrementally, and is built through
a series of contributions by an entire eco-system of
collaborators. It is exactly the breadth and diversity of the
customers and the funding mechanisms that enable a healthy
system. The missions of academia, technology transition agents
such as Galois, and operational solution providers are
different, complementary and essential to ultimate success. The
variety of government funding approaches are also essential and
valuable: funding from fundamental research through university
grants, through bespoke applied research including SBIR
initiatives, together with maturation and readiness investment,
all contribute to eventual success.

Impact of the SBIR Program

The SBIR program has had a significant impact on many dimensions of
Galois' business. The following describes these, with evidence drawn
from some of our SBIR contracts. We also draw general lessons from
other relevant engagements that we are not at liberty to discuss in
this forum.

Impact: SBIRs at Galois have enabled Oregon access to
broader U.S. government business

One major benefit of the SBIR program to Portland and to Oregon is
the enhanced access to relationships with U.S. government agencies,
particularly those with operational needs. These relationships lead
both to valuable results and further funding opportunities within and
outside of the SBIR program.
It has been our experience that building a good government-focused
research program requires ready access to people within relevant
agencies. These relationships provide deep insights into the emerging
problems as well as experience about how to navigate the government bid
and procurement process. Despite valuable potential, without these
government relationships, businesses will stumble by failing to be
truly responsive to needs or by missteps in bids and procurement. Most
often, they are just `late to the table' and miss opportunities.
Oregon is challenged geographically, both in distance and time
zone, in identifying and cultivating close connections with agencies.
Oregon does not have a rich community of former government workers from
which to draw knowledge and experience.
The Congressional Record of the Senate, vol. 148, no. 120, from
Sept 20, 2002, records Senator Wyden as alluding to the same challenge:

``Technology workers and managers from my home State of Oregon have
inspired me with their technical skills and their passion to put their
talents to work serving America. The Portland area is home to one of
the Nation's largest concentration of cybersecurity vendors in the
country. Portland now boasts a remarkable cluster of small and large
companies actively working to make America's portion of cyber- space a
safer place.''

He then went on to mention Galois (called Galois Connections in
2002) directly:

``Galois Connections designs and develops high confidence software
for critical and demanding applications. Its clientele includes the
National Security Agency.''

And then indirectly:

``It is essential to eliminate the road-blocks American innovators
face. A 20-person company in Beaverton, OR shouldn't have to devote
precious resources to hiring lobbyists, making multiple trips to see
different people in different agencies, and pursuing expensive and,
frankly, frequently obsolete certifications.''

The SBIR program is very helpful in this regard. It offers a level
playing field. Successful Phase-I work can be the springboard for
relationships that lead to future work outside of the SBIR umbrella.
Further, the contracting process is straightforward and cognizant of
the limitations of small business. Galois has been able to increase its
breadth and diversity through SBIR participation.
For example, in November of 2009 Galois was awarded a Phase-I SBIR
to provide Active Defense against Code Injection Attacks by Air Force
Research Laboratory (AFRL), as part of their Software Protection
Initiative (SPI). That single Phase-I award gave us the opportunity to
build relationships with the broader cyber defense community, and a
better understanding of the pressing problems they face in trying to
secure cyberspace. This exposure has been instrumental in our success
in building solutions that speak to the needs of both government and
private industry. As a result, our initial Phase-I engagement has
turned into multiple opportunities to develop, and eventually field,
critical national security capabilities, such as run*time monitoring
solutions that make UAVs more reliable and robust against software-
based attacks. And we are particularly excited about the fact that
these opportunities have a strong commercial component to them; we're
actively involved with adoption partners to make the technology
transition for these solutions a success, with benefits to both
government agencies and private firms.

Impact: Galois SBIRs have provided technology and market
opportunities for new ventures

In 2005, Galois won the aforementioned SBIR Phase-I award, Cross-
Domain Document-Based Collaboration in a Multi-Level Secure
Environment. The Navy had recognized the need for online collaboration,
including with the multiplicity of coalition partners, and called for
research on the topic. Inspired by the success of Wikipedia (which was
only a few years old at the time), Galois saw the potential for wiki
technology to act as a vehicle for collaborative data sharing. The
insight was notable. Fully a year later, in April 2006, the Office of
the Director of National Intelligence (ODNI) Intelligence Community
Enterprise Services (ICES) announced Intellipedia, which is an online
system for collaborative data sharing within the intelligence community
(IC). Intellipedia consists of three wikis running on JWICS, SIPRNet,
and Intelink-U, containing data at classification levels from Top
Secret (TS) to Sensitive But Unclassified (SBU).
Galois' approach was to layer wiki technology on top of the Trusted
Services Engine (TSE). Through successful Phase-I and Phase-II efforts,
the cross-domain wiki technology was developed and demonstrated to
multiple audiences within the DoD and IC, receiving Phase-III
development funding from sources outside the SBIR program.
Additionally, multiple conversations took place between Galois and
Intellipedia staff, where each side shared ideas and insights.
In 2007, Galois connected with a Boston startup, KnowledgeBanking
Systems (KSys). KSys were developing an enterprise information solution
based on shared wikis, and were challenged by how to control when and
when not to allow information to be shared. In a supply chain,
companies need to have access to information about where their products
or components will be used, and also need information from their
suppliers, but they should not have access to information from their
competing companies, not even to know who they are. KSys licensed the
wiki technology from Galois, and worked with both government and
industry to ensure that the solution they were building would be
appropriate for their needs. KSys was about to close a major round of
funding when the capital markets closed down with the banking crisis of
2008.

Impact: SBIR projects expose companies like Galois
to real and current needs

One benefit of the frequent release of new SBIR topics from
government agencies is that we as a private corporation are able to see
what areas of work would serve critical, timely needs. The constant
input that we receive through the SBIR program allows us to guide our
research direction in order to not only answer the needs that we hear
via SBIR solicitations in the present, but anticipate the needs that
will arise in the near future.
Our current set of SBIR projects reflects this. For example,
recent trends in mobile phone technology have pushed commercial
products such as Android-based phones into security-critical
environments. One of our DARPA-funded SBIR Phase-I projects (FUSE:
Inter-Application Security for Android) leverages our existing research
capabilities in program security analysis, and targets it specifically
towards the Android mobile platform. Another example is the rise of
scientific collaboration over large distances that heavily utilize
Internet-based tools to share data and computing resources. We have
successfully executed a Phase-I project and started a Phase-II project
with the Department of Energy (Grid 2.0: Collaboration and Sharing on
the Grid) to apply our expertise in building high assurance
authentication and identity management software to this specific
problem in computational science.
In both cases, the SBIR program has allowed us to take our broad
research capabilities and apply them to specific application areas that
answer timely, critical national needs.

Impact: SBIR support programs have built Galois
commercialization capability

Galois has benefited from participation in several SBIR support
resources, and especially from those that focus on transition and
commercialization.
Prime among these is the Navy's Transition Assistance Program, or
TAP, which gave Galois substantial new and useful understanding and
capability in commercialization. The program is voluntary for Navy
Phase-II winners, and requires a commitment in time and money from the
company to participate. Over a year's time and under advisor guidance,
Galois learned or improved capabilities in how to evaluate a particular
market, assess a venture partner, write a business plan, produce
marketing collateral that is informative to defense industry primes,
and present at an industry-focused conference. Each of these skills has
been reused and deepened since that experience. Of particular note, the
Dawnbreaker advisor provided baseline criteria for examining venture
opportunities, which Galois applied immediately to the KSys
opportunity. This information facilitated the development of that
commercialization effort.
Beyond the Navy TAP, there are several other national SBIR
conferences held annually. These provide coaching on proposal writing,
on the SBIR process itself, on building a good commercialization plan,
among other things. These conferences also provide the opportunity to
meet with prime contractors, and learn from fellow SBIR entrepreneurs.
Galois discovered a couple years ago, during web trawling, the
excellent National Research Council in-depth studies of the SBIR
program. The NRC findings and recommendations have transformed our
understanding of the SBIR program, how the various agencies differ in
their approaches to it, how to improve our chances of success of
winning Phase-Is and IIs (particularly with regards to
commercialization).
Another great example is the DHS' Commercialization Office, led by
the nation's first Chief Commercialization Officer, Thomas Celluci.
That office augments DHS' SBIR program by helping DHS SBIR TPOCs
provide detailed operational requirements and a conservative market
potential (across all DHS procurement), supporting the
commercialization process, actively courting the private sector, and
establishing public-private partnerships. Small businesses gain
insights into how commercialization plans are assessed, which
milestones and metrics will apply during execution, and into the needs
of large government programs e.g., through CONOPS (Concept of
Operations).
We have found, time and again, however, that there is no substitute
for an engaged TPOC who is able to help the small business navigate the
challenges of the SBIR program itself, and of the potential for
application within the government.

Impact: SBIRs have enabled research developed for one agency
to spread in impact to other agencies

One of the primary benefits of the SBIR program is its unique
ability to promote research transition across government agencies.
Through participants such as Galois, emerging research results
generated under the sponsorship of one government agency have the
potential to have immediate application across the government.
For example, the Cross-Domain RSS Processor and Router SBIR Phase-I
from the Navy led to technology discussions and demonstrations with the
intelligence community. Furthermore, the key ideas developed in the
project became the core of the SBIR Phase-IGrid 2.0: Collaboration and
Sharing on the Grid project with the Department of Energy and the Open
Science Grid. Grid 2.0, now in Phase-II, is an effort to increase
secure collaboration capabilities for scientists who require a lot of
computational and storage resources. Its goal is to remove technical
barriers to secure collaboration, including developing means of
trusting digital identities among a global set of scientists from
different institutions.

Impact: Galois SBIR work has brought global cybersecurity research
capabilities to bear on national needs

The SBIR program fosters a dynamic ebb and flow of small companies,
which have to respond rapidly to emerging needs, and even more, to
emerging techniques. Phase-I SBIR proposals often have 30-50
competitors.
To compete, a company like Galois has to excel on the quality and
relevance of its ideas. Unsurprisingly, therefore, within its technical
domain, Galois has been motivated to draw together researchers with an
international reputation.
The Association for Computing Machinery, the world's largest
educational and scientific computing society, confers the designation
``ACM Fellow'' to a select number of ACM members whose accomplishments
have distinguished themselves by outstanding technical and professional
achievements in information technology. This year, Dr. John Launchbury,
the founder and chief scientist of Galois, received this very high
technical honor.
Beyond Dr. Launchbury, we have internationally recognized leaders
in the fields of formal methods and their application to security
issues (Dr. John Matthews, Dr. Joe Hurd, Dr. Joe Hendrix, Dr. Levent
Erk''), in safety critical embedded systems (Dr. Lee Pike), in
scientific computing and high performance computing (Dr. Matthew
Sottile), and in all aspects of functional programming language design
and implementation (Dr. Don Stewart, Isaac Potoczny-Jones, Dr. Iavor
Diatchki, Dr. Andy Adams-Moran). Our researchers serve on editorial
boards, program committees, academic steering committees, and give
several invited talks per year.
This is just a small selection of the Galois researchers. The
quality and international reputation of the staff make it possible for
Galois researchers to bring the world's expertise to bear on research
problems that influence SBIR work directly benefiting the U.S.
government and, more broadly, other entities within the U.S. economy.
Additionally, the strength of our reputation within our technical
domain allows us to attract notable speakers to our weekly public
seminar series. These seminars draw participants from the many other
companies in the Portland software community, as well as having a
strong online following.

Recommendations

Galois has benefited substantially from its participation in the
SBIR program, which we believe is valuable, structurally sound and
strong. That said, we do have some thoughts about possible adjustments
to meet emerging challenges. Most of these recommendations are targeted
at incremental changes that we believe are in response to changing
external conditions.

Recommendation: Augment success metrics for Phase-III
to include open source

Galois recommends that Phase-III success metrics should be
augmented to include evaluation for open source release of
capabilities.
Galois strongly believes in the current SBIR approach to success
metrics. We deeply appreciate that the SBIR success metrics are applied
with failure as one expected outcome. This makes it possible for Galois
and others to try riskier approaches that may bring more significant
value, rather than focusing on ``sure bets.'' Galois also strongly
endorses the Phase-III monetary metric as critical and sound for
ensuring that SBIR investments overall are yielding value.
However, since the advent of the SBIR program in the 80s, there has
been a new vector introduced that brings substantial value to the
nation: open source software.
Open source software has made tangible changes in the way computer
vendors do business over the last decade. In previous decades, major
computer vendors commonly used proprietary system software on their
products. While many of these proprietary systems still exist, many
vendors have moved to offering open source, Linux-based solutions as
either the preferred option or as an officially supported one. This is
true of high performance computing platforms, for example, which are in
use in many areas of the government for scientific and defense
applications.
The move to open source is driven by the economic benefits that
vendors gain from open platforms: contributions by the community at
large can have tangible impacts on their specific products and user
community with minimal investment as a consumer of these technologies.
Open source has also had a strong impact on the security of software
systems for users everywhere. The open source Firefox web browser is a
clear example of this, where the transparency, open design, and rapid
response to security flaws has made it a strong alternative to
proprietary web browsers that have historically been less secure or
less transparent about the quality of their security. Similarly, the
Android mobile platform is a very visible example of an open source
technology changing the business world. The smart phone market has been
revolutionized by the presence of an open platform upon which vendors
can build products that integrate with a broad third-party application
developer community.
Open source challenges traditional paths towards commercialization
of software, but the trends as accepted by both consumers and large
computing businesses are clearly turned in a direction that favors open
source development. For some of our SBIR customers, the most cost-
effective and sensible method for providing a capability is not through
transition to a commercial venture, but rather through an open source
release that then indirectly enables business growth in providing
additional functionality. This is particularly true of infrastructure
improvements, that are best leveraged when widely available.
While Galois has been writing commercialization cases for Phase-I
and Phase-II SBIRs that outline this strategy, we do so at odds with
the SBIR metrics. This puts both our customers and ourselves at some
evaluation risk, despite the fact that this is the most viable
strategy. We'd like to see alignment of the metrics in support of the
open source release, while ensuring that the metrics stay credible
through an independent valuation of the open source release to ensure
it is ``for real.''

Recommendation: Incrementally increase Phase-I award size to enable
better assessment of results in consideration of Phase-II

Galois recommends increasing the Phase-I award size in tandem with
inflation or other economic measures to ensure that it remains
sufficient for proposers to accomplish tangible results sufficient to
make assessments about Phase-II.
At the 2010 Phase-I levels, Galois was often faced with a difficult
choice. Should we submit a proposal that had a riskier profile, knowing
that we might not have sufficient runway to test some ideas? Or should
we wait, losing this chance to bring results? Upon selection, we also
faced hard choices about how to allocate the activities between testing
and maturing the technology versus communicating those results to the
client.
Since the relative value of the Phase-I award level has dropped
significantly since the inception of the SBIR program, we'd like to see
it restored to its original intended level. Increasing the Phase-I
award in this way will enable better evaluation and decisions for
investment of Phase-II dollars.

Recommendation: Accelerate Phase-I to Phase-II to meet
the pace of software technology change

The pace of software technology change has increased tremendously
since the SBIR program began. Consequently, Galois would like to see
new approaches for accelerating the transition between the phases,
including optionally shortening Phase-I performance periods and setting
more aggressive evaluation timelines for Phase-II awards, at least
within our problem domain areas.
In our experience, there is a gap from three to six months between
Phase-I and Phase-II. During this period, non-research technologies can
become obsolete, requiring rework just to achieve baseline capabilities
again. Needs have remained unmet during the gaps, exacerbating
operational difficulties. Additionally, commercial market opportunities
expire without the potential influence from SBIR results that may have
yielded substantially better value.

Recommendation: Provide more support to Technical Points of Contact
in the administration and guidance in SBIRs

The Technical Point of Contact (TPOC) plays a critical role in
whether SBIR research is able to realize value to the government. They
interpret and assess the government needs to the SBIR performers, guide
the performers during the execution of the SBIR in administrative
mechanics, set priorities and standards for delivery, and build the
relationship with the small company.
Galois has had widely varying experience with TPOCs. Some have been
extraordinary in their commitment to the SBIR results and to enabling
Galois to produce relevant results. Others have been earnest but have
lacked experience in one or more important dimensions of execution.
Some TPOCs have a wealth of specific experience to share and can
directly convey the needs of their agency. Others are more indirect,
and take a more administrative stance in management. A rare few are
openly unhappy about this accountability. And all of the TPOCs seem to
be trying to fit in the SBIR work amongst multiple other priorities.
Prospects for success have been best for Galois when the investment
of time and the level of commitment are high. In fact, these are often
the same relationships that continue beyond the initial introduction
through SBIR to enable Galois to extend and expand its contribution to
larger agency needs.

Recommendation: Encourage TPOCs to provide connections with
interested acquisition programs

In recent SBIR rounds, some SBIR agencies have listed Programs of
Record along with some of the topic description, indicating where the
need comes from or where a successful SBIR project might transition.
This has been very helpful in identifying real customer need. We
recommend linking Programs of Record more closely with the SBIR
program, to greatly improve chances of a successful transition.
We recommend that TPOCs should be encouraged to introduce SBIR
companies to Program Managers early in Phase-I, so that a SBIR project
can be guided by the Acquisition Programs' needs. This will also foster
a closer working relationship between TPOCs and Programs.
We recommend that Acquisition Programs should be incentivized to
work with the SBIR companies working on topics that are relevant to the
program. This may require a modification to how Programs of Record are
assessed during execution. Programs are by nature very conservative as
a response to their very strict success criteria, so have a strong
incentive not to include the risky outcomes of SBIR projects within the
Program, yet a successful innovation could dramatically increase the
impact and effectiveness of the Program.

Recommendation: Provide incentives to prime contractors
to incorporate useful SBIR advances into their offerings

Understanding advanced technology requires a prime contractor's
better people to serve as ?technology acceptors'. Very typically those
people are tied up on major procurements or ongoing projects, and may
not be accessible or available to consider potentially valuable new
technologies. Providing appropriate incentives for prime contractors to
assess and utilize emerging SBIR results, particularly those deemed of
interest by Programs, might accelerate the uptake of new technologies.

In conclusion

Let me underline a point I made earlier: each of these suggested
improvements are offered with a view to making an excellent program
stronger. In my view the SBIR program is immensely successful, both for
fostering the innovation and jobs engine of small businesses, and for
nurturing breakthrough technologies to the benefit of the government
and wider economy.
Thank you again for the opportunity to appear before this
Committee. I look forward to answering your questions.

Chairman Quayle. Thank you, Ms. McKinney, and thanks to all
the witnesses for your testimony today, and thanks again for
your patience.
I want to remind the members that the committee rules limit
questioning to five minutes, and at this point I will now open
the round of questioning and recognize myself for five minutes.
And my first question is to Dr. Siegel. I really like the
fact that you mentioned Milton Friedman in your testimony
today. I enjoy his work, and that kind of gets me to one of my
big questions is we talk about expanding where VC-controlled
companies can be available for SBIR grants. Now, as you stated,
you know, we want the Federal Government only to be in the
marketplace to distort the marketplace only when there has been
a market failure.
Now, is it accurate to say that there is no market failure
for certain companies when they do have VC funding because they
have been able to go to the private marketplace for that rather
than some smaller businesses who haven't been able to get that
VC funding?
Mr. Siegel. I would say that Friedman would say that the
ability of a firm to attract venture capital funding is an
indicator that it is an efficient company. You know, there is
an equity aspect to this program, and there is an efficiency
aspect to it, and what venture capitalists do very effectively
is help sort capital investment and target those capital
investments that will generate the highest returns to them.
Okay.
But in this context we are talking about technology-based
programs. These also generate--I don't care about the returns
to venture capitalists. I care about the returns to society. So
there is--it is efficient, and in fact, I teach
entrepreneurship, and when I teach the students, I tell them
that your ability to attract venture capital funding is a major
indicator of success, number one. Number two, in certain
sectors it is required to reach the marketplace. You really
need that additional investment.
And it is a very, very small pool of investment. I think
there is a myth that this is a large, broad market. It is a
very small, narrow sectorally-focused in many ways market, and
I think it is a very, very efficient institution, and we
shouldn't try to--and it is private. So you like that. Right?
Chairman Quayle. Exactly. That is what I was saying is----
Mr. Siegel. Yeah.
Chairman Quayle. ----if they have been able to in the early
rounds of financing been able to get VC backing, do we then
allow and expand? I understand the arguments for the fact that
VC-backed or owned companies probably will have greater
commercialization in effect because, you know, like you said,
the VCs already have gone through the companies.
But don't shake your head. I haven't finished yet. So but
then do we allow the Federal Government then to provide those
fundings in the later phases that you are talking about, or is
that actually distorting the market when the Federal Government
shouldn't be involved in that?
Mr. Siegel. I don't think it is distorting the market, and
I think these are going to be the homeruns frankly. These are
going to be the companies that are going to have the largest
impact on the economy, and that is why--that is what we need to
look at in the long run is what is the economic impact in terms
of job creation and that--you want to be leveraging the public
investment by involving them and, you know, again, then they
reach the private capital market. You know, they go public.
Chairman Quayle. Uh-huh.
Mr. Siegel. I mean, that is an indicator of success. That
is what we want.
Chairman Quayle. Okay.
Mr. Siegel. From a societal standpoint. Not from greed. You
know, I am all in favor of greed, believe me, but from thinking
about it from a societal standpoint.
Chairman Quayle. Okay. Okay. Thank you. Then Dr. Rockey, I
want to talk to you about there has been a lot of talk within
your testimony as well is that we need to have improved
communication between, you know, program officers, venture
capitalists, outside sources so that people can get the outside
sources of funding for commercialization success.
Now, the PODS Program that you guys have at NIH, integrates
all the data from SBIR and STTR, awards the success stories,
and basically it is one searchable platform basically. Right?
I was just wondering could PODS be a tool that is used to
improve outreach and networking opportunities for small
businesses and outside funding sources?
Ms. Rockey. Well, thanks for that question.
Chairman Quayle. Could you push your mike again?
Ms. Rockey. No one has ever accused me of not being able to
talk, but that doesn't work too well here. The PODS Program
right now is in a--it is in its beta form. So it is really
designed to be an internal process to do exactly the things
that you had suggested to help us among--at the NIH to have the
program officers and others involved with the SBIR Program
really understand what is happening with these businesses,
where they have commercialized, what has worked for success, et
cetera.
So we do feel, and we are working with SBA on this
particular system because we think this is a way to have
accountability for the program and also to set up as you say,
these networks to be able for us to understand the networks and
where there is areas of opportunities for these businesses to
help them along.
And it also helps us for best practices to understand which
companies have worked, which companies have found success, how
have they found success, et cetera. So we have great
expectations that the POD Program will help us in managing the
SBIR Program overall.
Chairman Quayle. Okay. Thank you, and Mr. Limbaugh, along
those lines with that PODS Program, I know you have dealt with
the DOD----
Mr. Limbaugh. Uh-huh.
Chairman Quayle. ----in some contact. Have you seen similar
programs at DOD or other agencies that you have dealt with?
Mr. Limbaugh. Yes, we have. We have seen similar things
within the Air Force and the Army where you can go onto a web
portal and search for technologies that you have been working
for. I don't know how successful that has been in helping
commercialized technologies. I think it is still of onus of
running a small business to really go out and find a customer
or your current program managers that you are dealing with.
Chairman Quayle. Do you think those types of programs would
be able to help you and businesses like you to go out and have
commercialization success?
Mr. Limbaugh. We do use that tool. I just would say that we
haven't had a lot of success with it, but that is--I think the
tool is useful.
Chairman Quayle. Okay. Thank you very much.
The chair now recognizes the ranking member, Mr. Wu.
Mr. Wu. Thank you very much, Mr. Chairman. Before I make a
unanimous consent request, I just want to say that I am going
to enjoy working with you, Mr. Chairman, on this subcommittee
very, very much. After all this time I am finally not the most
theoretical person here, and you know, perhaps you will take it
back, in addition to that economist, Adam Smith and John
Maynard Keynes and, you know, we are going to have fun here.
Mr. Chairman, I ask unanimous consent to include in the
hearing record a written statement from Puralytics, a small
business from Oregon that is pioneering an innovative new water
purification technology, and is a recipient of SBIR grants from
the U.S. Army and the National Science Foundation.
Chairman Quayle. Without objection.
[The information appears in Appendix II:]
Mr. Wu. Thank you very much. Let me start by asking of all
the witnesses and this is aimed at my Congressional colleagues,
the answer I hope to be useful vis-a-vis my Congressional
colleagues. How important is it that we enact a long-term
comprehensive reauthorization of the SBIR and the STTR
programs?
And the question is how important is speed because we came
this close in December, and it is either now or six months from
now or maybe the next Congress. How important is speed?
Ms. Rockey. So I will be point out during this course of
uncertainty over the past couple of years with the
reauthorization, it has had an impact on our--the SBIR
community because of this uncertainty, and I had mentioned to
Mr. Quayle earlier that--to Chairman Quayle that during the
time of reauthorization there is a lot of questions on whether
or not the program would still exist.
In some ways that generated more applications because there
were individuals who were afraid that the program would go
away, and so they quickly submitted applications. But the
program for NIH is extraordinarily vital as it does provide
that later piece of the pipeline to get things to
commercialization.
So for us having a program where it is stable, where we
have a long-term reauthorization that has some--provided some
flexibility for us is of utmost importance.
Mr. Siegel. Yeah. I would just echo that and say it is
vital.
Mr. Crowell. I would say it is vital that we do it and that
we do it fast. As the universities are looked to, for example,
more and more to help stimulate local economic development and
job growth, this is a tool that is extremely effective in
helping us achieve that goal.
Mr. Limbaugh. We are waiting on a couple phase two awards
that probably would benefit from a quick reauthorization.
Ms. McKinney. Likewise.
Mr. Wu. Terrific. Thank you very much.
Dr. Rockey, and this is really for the benefit of Chairman
Quayle's colleague from Arizona, who commendably is consistent
in his opposition to earmarks, and his concern is that there
are earmarks in the SBIR program, and I have defended this
program on the Floor in floor debate, maintained to him that
these are all peer reviewed based on merit, et cetera.
Dr. Rockey, you first. Anyone else who wants to follow on,
if the chairman permits a little additional time, could you
further address the peer review, merit review process and
whether this is in any way a Congressionally-directed award
program or not?
Ms. Rockey. So I would say that NIH as a whole has been
free of earmarks. The SBIR Program along with other programs
within NIH all go through a very extraordinarily vigorous peer
review process. The small businesses as well as the regular
research programs with our academic partners. It is a two-phase
program, excuse me. A two-phase peer review that looks at
technical merits as well as aligning the applications with the
priorities of the institutes and centers.
In the case of small business, on top of that there is an
assessment of the potential for commercialization, and
virtually all our applications go through this rigorous
process. So the outcome of the application is based on its
quality, its technical quality, its alignment with strategic
goals, and as well with potential for commercialization.
Mr. Siegel. To the best of my knowledge there are no
earmarks in the SBIR Program.
Mr. Crowell. I will just say very quickly that the peer
review in my view is one of the strengths in terms of
leveraging not just VCs but quite a number of states to put up
matching funds where they have no additional peer review
process of their own. They trust this process so much.
Mr. Limbaugh. I think it is true that the SBIR and STTR is
not earmarked per se, but there are a lot of small businesses
within the DOD community that get earmarks for their
technology, and if you are competing with a company . . .
Mr. Wu. That is post-SBIR.
Mr. Limbaugh. Post-SBIR.
Mr. Wu. Thank you.
Mr. Limbaugh. Yes. Post-SBIR.
Mr. Wu. Important to be clear.
Mr. Limbaugh. Okay. Post-SBIR that really upsets, can upset
the competitive balance when you are competing against another
company that just got a $1, $2 million earmark.
Ms. McKinney. We have not in our experience ever seen any
kind of pre-selection or earmark in any of the evaluations that
we have been party to or observed, and I have actually been
quite impressed with the rigor and dispassion that happens in
the course of the evaluating.
Mr. Wu. Thank you very much, and thank you very much, Mr.
Chairman.
Chairman Quayle. Thank you, and now the chair recognizes
the gentlelady from Illinois, Mrs. Biggert.
Mrs. Biggert. Thank you, Mr. Chairman, and thank you for
holding this excellent subcommittee hearing. I think that the
witnesses have been really good, and I think it is something
that we all need to address if we are going to be able to find
the innovation and the creativity to create the jobs that are
so important to the private sector. You are going to create
them, not us.
But as a member representing a national lab and dozens of
healthcare and energy spin-off companies, I know how valuable
the SBIR and STTR Programs are to local job creation, and as we
work to reauthorize and reform SBIR, I don't want us to take
our eye off the ball in terms of positive economic affects the
SBIR and STTR Programs have on our economy, and so I have a
couple of questions.
In your opinion is the current 2.5 and the .3 percent set-
aside from a federal agency's extramural research and
development budget an appropriate amount for SBIR and STTR
Programs respectively? And what would be the effect of either
an increase or a decrease in the set-aside amounts?
Dr. Rockey.
Ms. Rockey. So currently the Administration is reviewing
the issue of the--regarding any increase to the program, and
one of the nice things, though, about the SBIR, STTR Program is
because it is a set-aside, as the size of the agency increases,
so does the amount available for the SBIR Program.
As an example, the NIH went through a doubling from 1998,
to 2003, and during that time the small businesses programs
doubled as well. So, however, NIH is expected to have flat
budgets for the future, and the current set-aside will compete
with the scarce resources needed for all of the NIH Programs in
effect.
So we have to take them into consideration. I think Mr. Wu
will remember that in 2009, I testified before this same
committee and answered the question by saying that the current
levels are appropriate to meet the mission of the NIH and to
support innovation in the small business community.
Mrs. Biggert. Okay. Thank you. Dr. Siegel.
Mr. Siegel. I would say the NRC does not have an official
position on this, but some universities----
Mrs. Biggert. I think this is just your opinion.
Mr. Siegel. Yeah. Some universities might oppose that
because they would view it as a zero sum gain. They would say
that some--if a higher percentage of the research budget at the
agency is going to this program, it would be taking away from
initiatives and programs that they would be using the money
for. So that would be one concern that some universities would
have.
Mrs. Biggert. Thank you. Mr. Crowell.
Mr. Crowell. I am glad that Dr. Siegel listened to my
testimony. I think officially we do believe the overall amount
of the set-aside in both programs is probably appropriate and
would have a concern not just in deluding our research funding
but from an innovation management point of view. The basic
science is funded by the rest of the budget. This is what
provides the seed corn for the innovation work later on. So
that is a very real concern that we have.
That being said, to try to be a little more responsive and
a little more granular, I personally--I can't say this is UVA's
position, I personally would be interested at looking at the
STTR percentage to see if the flexibility or the wall between
the two programs might be made a little more--the barrier maybe
lowered and made it earlier for--the STTR Program makes it so
much easier for a university to participate in developing early
stage technology with commercial potential. So if there was
some way to add flexibility to change the relative balance of
the set-asides to make more STTR-like procedures apply to the
whole pool or a larger piece of the pool, we would be very
supportive of that.
Mrs. Biggert. Mr. Limbaugh.
Mr. Limbaugh. I think increasing the amounts to SBIR
companies would actually be of benefit, not only from an
innovation and product development standpoint, you get more
innovations, I think you will see a better increase in jobs
from that funding. I think the free market is better at taking
money and actually creating jobs and creating products,
creating patents and exporting technology.
So I would be in favor of increasing the award amounts or
the set-aside to small business.
Ms. McKinney. I think if you look at the performance within
the small business community in terms of innovation and its
impact and use that as a guiding point. If you really want to
increase the level of innovation looking to the community that
is doing that I think is the best place to go.
Mrs. Biggert. Just following up on that, Mr. Limbaugh, you,
in your testimony you said that venture capital was not such a
great idea, and would that create--it doesn't--it limits the
innovation and creativity. Correct?
Mr. Limbaugh. It can, could possibly do that in the sense
that if VCs, at least we, our company plays mostly in the
Department of Defense world, and I have talked to a lot of
small businesses that kind of play in that community, and we
are just fearful of like the large primes setting up a shell
company, shell VC company, and then basically gobbling up all
the SBIRs and basically being as a conduit to get that--those
research dollars into their hands as opposed to into the small
business hands.
Mrs. Biggert. Okay. I guess my time has expired.
Mr. Wu. Would the gentlelady yield for just one second
based on that point?
Is the gentleman, Mr. Limbaugh, are you aware whether that
has ever happened historically?
Mr. Limbaugh. I don't think that has ever--I don't know if
it has happened historically ever. I guess what I am also
thinking is that from a small business standpoint there is
nothing that prevents a company nowadays that has a phase two
technology and starting another company and getting VC funding
to back that other company if it is such a great idea. Why not
wait until, you know, the phase two or whatever for VCs,
after--before they can kind of step--you spin it off or
whatever to create that new technology and have venture capital
play at that level.
Mrs. Biggert. If I might reclaim my time, which I don't
have, I think that this happens more or just in a small
business that creates something, and the venture capital comes
in and then they decide that they can better run the company,
and it has taken over and pretty soon the people that have been
the creators are no longer there.
I don't--but that doesn't happen in this situation.
I yield back.
Chairman Quayle. The chair now recognizes the gentleman
from New Mexico, Mr. Lujan, for five minutes.
Mr. Lujan. Mr. Chairman, thank you very much, and I very
much appreciate the conversation and the hearing, and again,
thank you as well. Like Ms. Biggert, I also share a passion for
our national labs, New Mexico having two of them, one in my
district.
And as we engage in this conversation, please don't
misunderstand my wanting to concentrate on the STTR program as
not supporting SBIR. I think that they are good programs, and
they are strong programs, but with that, I am very interested
in technology transfer, and myself and a few colleagues are
having a conversation. Mr. Wolfe has been willing to work
together to develop a tech transfer caucus, and we are quickly
understanding through the conversations that we have with our
colleagues, with our constituents, with experts, small business
owners, entrepreneurs, and venture capitalists, and everyone
that is part of that process, that you have to include the
aspect of commercialization and maturation.
You have to look to see what needs to be done from a seed
perspective and understand where these ideas come from and
often times how disappointing it is when we have these great
ideas that can't make it out the door from behind the wall of
some of our institutions to get into the hands of
entrepreneurs. And to see what we can do when our entrepreneurs
have these fabulous ideas to get behind that wall and use that
computing capacity, that modeling capacity, to have that
breakthrough of whatever it may be, which is why I am so very
passionate about CRADAs, Cooperative Research and Development
Agreements, which we saw as a success in the 1990s, but saw it
deteriorate over years as funding disappeared.
We are looking to see what we can do to encourage that kind
of relationship. We were encouraged with the announcement just
last week by Secretary Chu for the Start Up America Initiative
where the idea is to make it easier to license technologies
through DOE's national labs through reducing fees as well as
reducing paperwork.
We need to do more. That is a good step, but we want to
hear from you on what that more is.
So with that being said, as, you know, we talk about STTR
and I am glad that the last question was asked pertaining to
the level of funding because when we look at .3 percent
associated with funding with STTR and I would be glad if
someone could show me a recent study associated with the
program, all that I was able to find was a 2001 GAO report
which was used for the 2001 reauthorization of the program. But
that report was based off of phase two projects from '95, to
'97, the first three years that such awards were made.
So we haven't had a good look to see if this program is
working. Same reason why I think that CRDA's have disappeared.
There wasn't a good look to see the success associated with
them, truly evaluating that program to take out what was bad
and truly accelerate and reward what was good, respecting very
much and agreeing that the best thing we can do with these
dollars is see what we can do to get these ideas in the hands
of small businesses, of the smartest people we have in America,
and what I like to think as ingenuity as part of the human soul
in this great Nation of ours.
What can we do to make that happen? And so I apologize for
using so much of my time with describing that and talking about
this with the passion that we all have for it, and quite
honestly, Mr. Chairman, I am saddened that this hearing is not
full of people. When we talk about getting the economy back on
track in this great Nation of ours, unleashing the capacity in
our universities and in our national labs and combining that
with the ingenuity of our small businesses, we should be able
to quickly accelerate what we are able to do to get the economy
turning again.
And, Mr. Chairman, rather than I think engaging in
questions now, I will see if there is a second round of
questions and I will wait to ask a few questions then, but I
will simply add this. Not understanding the constraints of
requesting unanimous consent to submit a book to the record but
with that being said, I will do my best to see what approvals
we need to be able to do that or at least maybe get some
excerpts out of it.
I was recently engaged in a conversation with a few people
around manufacturing and tech transfer, and someone that works
with Dow Chemical gave me a book that their CEO, Andrew
Liveris, wrote, and it is called, ``Make it in America: The
Case for Re-Inventing the Economy.'' And it also lays out the
foundation that we have to reestablish our manufacturing base
in this great Nation of ours which will help spur innovation as
well, because I certainly believe we need to be doing more to
invent things here in this country.
But we also have to do more to be able to manufacture them,
so that when you have those manufacturers, people that are
building it on that assembly line, and you are looking to see
how you can make that product stronger and smarter, that is
what we should be doing.
And although people may not think of this as high tech or
tech transfer, but all these smart phones that we walk around
with today, in 2008, if my numbers are correct, 1.2 billion
phones were sold worldwide. Not a one was built in the United
States. We see what has happened to smart phones from 2008 to
2011, and to make sure that we are pushing that ingenuity here
at home is why you are so important to this debate.
So, Mr. Chairman, thank you for indulging me for going over
the time, but I look forward to this questioning and developing
the policy around this because this is going to be one of the
key drivers of what makes this economy strong and makes America
stronger than what it is today.
Chairman Quayle. Thank you, Mr. Lujan.
The chair now recognizes the gentleman from Maryland, Mr.
Sarbanes, for 5 minutes.
Mr. Sarbanes. Thank you, Mr. Chairman. This is a very
important hearing. I want to echo the comments of my colleague
in terms of how critical is it that we have these kinds of
programs and resources and the opportunity for partnerships to
support American manufacturing and not to view that as some
afterthought in terms of our economic strength but really as
the main event. I think you all probably appreciate that
implicitly.
Before I forget, I do have a letter. I talked to your
staff, Mr. Chairman, about entering this in the record, and so
I would ask unanimous consent. This is a letter from executives
of the U.S. Small Biotech Medical Device Association, and they
have a number of members in Maryland. Maryland was actually a
driving force in establishing this particular coalition of
small biotech business coalition. They have a letter they would
like to enter into the record. Without objection I would like
to do that.
Chairman Quayle. Without objection.
[The information appears in Appendix II:]
Mr. Sarbanes. Appreciate it.
I wanted to ask the panelists, both the businesses that are
here and the other experts, to speak if you would to the--well,
first of all, to the businesses, have you ever utilized any of
the federal labs through SBIR from opportunities that you have
pursued? If so, why and how? If not, were there any reasons you
didn't pursue that kind of partnership?
And then from others on the panel, maybe you could just
speak to the opportunities through SBIR for small businesses to
do that kind of partnering and what the, you know, what the
process involved in that is.
And start here.
Mr. Limbaugh. We have not used any national labs in our
research and development at Kutta. However, maybe there is a
general feel within the small business community working with
the national labs could be expensive, and small businesses
don't have a lot of capital to work with them.
And a lot of times if you are working under a SBIR, you
know, you have to disclose that you are working with a
government entity. I don't know how well that would work, and I
don't--I would like to see the statistics on how many small
businesses team with the national labs because I know--I don't
think there is probably that many.
But that is my own personal opinion.
Mr. Sarbanes. Ms. McKinney, do you have a perspective on
it?
Ms. McKinney. So we collaborate with folks at the national
labs and research initiatives. I don't think we have ever
officially done it under the auspices of the SBIR Program.
However, lots of the applications that we have are of
interest to that community, so we target deployments into the
research in the DOE. So I would just have an experience
directly under the SBIR Program with partnering with them.
Mr. Sarbanes. Do any of the others on the panel have a
perspective in terms of partnering with the federal labs or
pursuing that as part of an SBIR initiative?
Mr. Crowell. I will just say very quickly that as a person
who has spent his career in universities, I can't think of an
example where we have collaborated on SBIR project.
I will also tell you, however, that I sit on the
Commercialization Advisory Board at Los Alamos and was just on
a telephone call this morning with the federal laboratory
consortium talking about this very issue, and we were talking
about getting a group of people together to begin to develop a
mechanism to expose Los Alamos and potentially other labs more
aggressively to this mechanism.
Mr. Siegel. Yes. In my written testimony I noted that the
NRC needs to study the relationship between SBIR and the
federal labs because the federal labs are the last frontier of
technology transfer. The universities have been studied to
death, but the labs are actually in many ways bigger and more
important potentially for the economy.
So I--my sense is that the labs currently do not have
enough incentives to work through this program, and I think
that is a major problem that maybe can be addressed through
some legislation, but we certainly need to study this, and I
think the NRC can do that.
Mr. Sarbanes. Dr. Rockey.
Ms. Rockey. I would just like to mention that at NIH we had
through our office of technology transfer we have what is
called the Pipeline to Partnership. This is a website that
allows small businesses as well as NIH-licensed technologies to
marry up, and obviously people can peruse this website and try
to find places where they have, could have relationships.
NIH, of course, our intramural program is a beneficiary
oftentimes of the products and services that are provided by
the small businesses. We also have, and some of our institutes
have targeted SBIR Programs where for the--in order to meet the
mission of the particular institute such as the National Cancer
Institute, they will target particular priority areas in the
SBIR Program to fund small businesses to provide technologies
and services that we in our NIH--and the federal labs can use
as well.
Mr. Sarbanes. Well, I appreciate that. I am out of time,
but I just would observe it is interesting to hear you speak of
it as kind of the last frontier, and I assume you all would be
supportive of efforts through the reauthorization to try to
enhance the partnerships that occur there between the federal
labs and these SBIR business initiatives.
Thank you. Yield back.
Chairman Quayle. The chair now recognizes the gentleman
from Illinois, Mr. Lipinski, for five minutes.
Mr. Lipinski. Thank you, Mr. Chairman. I thank you and
Ranking Member Wu for holding this hearing today, and I also
want to congratulate you on being chair of this subcommittee.
We were both at Duke together, although I was a graduate
student, you were an undergrad at the time, but we both shared
some time there together, and I don't know if I should admit I
got there before you did, and I left there after you left. But
I was in grad school.
SBIR and STTR are critical programs because they are an
essential link between our country's tremendous advances in
basic research and creating jobs that we need, as we have
heard, the last two members have asked important questions on--
about that.
But generally speaking the concern that I have is that
American research innovations are turning into products that
are manufactured in Japan and China. So I would like to talk
about how SBIR and STTR can help to solve this problem.
And I want to start with Dr. Rockey. Last year you
testified that the NIH SBIR projects achieved an impressive 50
percent success rate for commercialization. And in your
testimony you discussed several factors that NIH considers in
reviewing SBIR applications and selecting its awardees. And
commercial potential is one of those.
So I have two questions on this. First, can you just expand
on how you define commercial potential and what factors you use
to assess the commercial potential of a project? And second, do
you look at the potential of a project to create jobs,
especially manufacturing jobs here in America?
Ms. Rockey. Thank you very much for that question. So we do
assess commercial, the potential commercialization. We look at
such things as the value of the project. We look at the company
itself, the markets that are potential--available for this
particular idea or project, intellectual property, and what is
potentially there for protection, financial plans, et cetera.
Because this is oftentimes early stage, we don't
necessarily look at what the economic impact as far as jobs
will be, but our desire is that with commercial and because we
are a knowledge-based society here at NIH and the biomedical
research, the biomedical market is so dependent on this
knowledge base, that it is an economic driver, and thus, by
supporting projects that will eventually lead to
commercialization, we will result in helping the economy
thrive.
Now, again, one thing I would remind you that, of course,
these are U.S. companies, and the SBIR program, it is a
requirement that they be U.S. companies. But the issue about
manufacturing is a different issue, and as often more long-term
issues for all of us here.
Mr. Lipinski. Is there any way to look, to try to make any
determinations about the potential future for whether this is
going to be an American-made manufactured project? Is there any
way to do that?
Ms. Rockey. I think for the--yeah. So we have a cap
program. Our CAP Program is the Commercial Assistance Program.
This is a program that we provide a number of companies with up
to $4,000 of technical assistance to look at markets, and in
that they are encouraged to seek manufacturing opportunities in
the U.S.
So we do at least try to drive them towards that. Whether
or not we are ultimately successful, again, we will have to see
the outcome of what the product is that they are producing, but
we do try to drive them towards U.S. manufacturing.
Mr. Lipinski. In the remaining time I have I want to turn
to Dr. Crowell. I know that top research universities in the
U.S., including several in Illinois, have spun off numerous
start-ups, and many of them are increasingly looking at
economic development as part of their core mission.
I just want to ask, what does the University of Virginia do
to create jobs locally and regionally, and how do SBIR and STTR
programs help this?
Mr. Crowell. Thank you for the question, and good to see
you again after we made our UNC, Duke connection last summer,
so I thought I would just keep the rivalry going here.
The University of Virginia, like many universities, is
undertaking an effort to identify technology or innovation
assets that have the potential for building a small company to
begin to commercialize that asset base. I would say that the
processes we have in place for understanding technologies that
are more ready to license to an existing company are rather
set. We know how to do that very well. What we have been doing
is investing in our business development capacity, our ability
to understand markets, to undertake some of the same types of
evaluation that Dr. Rockey just mentioned. And when we think we
have a platform technology capable of attracting investment and
building a company, we really devote an awful lot of resources
and time to help do that.
We network effectively and aggressively with local
investors, with local commercial real estate providers, with
state agencies, with not-for-profit foundations. We are looking
to piece together through SBIR, STTR, venture capital, private
foundations, state funds, sometimes local economic development
funds, everything we can do to create an entrepreneurial
ecosystem in which we can plant the seed for this new company
and watch it grow and help sustain that growth over time.
We realize that some may get acquired and move away. An
example I gave in my testimony was one where it was acquired,
it did maintain the significant presence in Charlottesville,
but one of the things I would argue is that one of the most
lasting effects of that was it maintained the CEO who built
that company in Charlottesville, who has just become the CEO of
a new company that just landed $4.5 million in venture funding.
So we are creating serial entrepreneurs within the culture
where we believe the benefit from this investment, whether the
companies end up moving to other states or not, but there is an
awful lot of return to the region from this activity and this
investment.
Mr. Siegel. I would like to chime in and say that
entrepreneurship is flowering at universities. There are more
courses and programs in entrepreneurship, and there is more
student-based ventures that are emerging at universities. And
even we have now alumni commercialization funds.
So I think one reason why universities have been very
receptive to this is they tried the large licensing deals with
pharmaceutical companies, and they are moving as somebody who
studies tech transfer at universities, they are moving more in
the direction of promoting entrepreneurship. That is why this
program is very attractive to them, but frankly, they are also
viewing it from an opportunistic standpoint. In my current job
I am basically an extortionist in the sense that--don't put
that in the record. But I deal with donors, and I can tell you
that the donors that I deal with and the stakeholders in the
community want to support entrepreneurial activity at the
university, including faculty and student-based start-up
companies.
So I think--and there is an economic spillover associated
with that activity, and they see that benefit, but they also
see the monetary benefit as I do.
Mr. Lipinski. Thank you. Thank you, Mr. Chairman.
Chairman Quayle. The chair now recognizes Mr. Lujan for one
very short, very succinct, and very clear question.
Mr. Lujan. Mr. Chairman, we have quickly learned how to ask
compound questions in Congress. What I would ask is this, and
Mr. Chairman, I will be submitting a question to Mr. Crowell as
well to respond to the record.
Thank you very much for what you do at Los Alamos National
Lab in encouraging the opening of those doors.
Specifically to those of you that have experience with
engaging our national labs, do you believe that there is some
positive aspect of tying tech transfer, maturation,
commercialization, and job creation to the metrics for full
contracted payment for those that are engaged with our national
labs, both DOE and DOD, which will not add one penny to the
deficit.
Mr. Crowell. I would like to jump in and say absolutely. It
gives me an opportunity, however, to say, and this was also the
subject this morning with my federal lab consortium colleagues
on the phone call, I would at the same time require those labs
to take a close look at their policies which inhibit, dis-
incentivise, or create roadblocks. I have helped Los Alamos
spin a company out within the last 9 months in the plant
biotechnology area. I would say to you that if we had to go
through that every time at the University of Virginia or other
universities where I have worked, our success rate would be
about half of what it is.
So I think there are some--there is some culture building
to do, there is definitely some policies, some incentives to
look at to create a road forward where they could be major
players. The talent and the seed corn is there. They have too
many obstacles in front of them that some--the rest of us don't
have to deal with.
Mr. Siegel. I would say that what we also need to do is
collect more data from the federal labs. One of the most
interesting organizations is the one that Mark ran for a while
called the Association of University Technology Managers, and
they started collecting data from universities on various
metrics like patenting, licensing, start-ups, and all those
kinds of measures of--that lead to economic growth and
development.
And we are not doing that currently. The FLC is not doing
that, and I think we should, you know, try to find some
institution that would, maybe NRC, that would collect those
data so that we could evaluate, and once you evaluate people,
once you start collecting those metrics, there is competition,
and people want to, you know, do better along those dimensions.
It is natural.
Mr. Lujan. Mr. Chairman, if anyone else has a response,
please submit it in writing. I want to be respectful of the
time, and I yield back my time. Thank you.
Chairman Quayle. Without objection.
I want to thank the witnesses for their very valuable
testimony and for their patience today.
The members of the subcommittee may have additional
questions for the witnesses, and we will ask you to respond to
those in writing. The record will remain open for two weeks for
additional comments and statements from members. The witnesses
are excused. Thank you all for coming, and this hearing is
adjourned.
[Whereupon, at 3:58 p.m., the Subcommittee was adjourned.]
Appendix I

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Answers to Post-Hearing Questions

Answers to Post-Hearing Questions
Responses of Dr. Sally Rockey, Deputy Director for Extramural Research,
National Institutes of Health

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Responses by Dr. Donald Seigel, Dean and Professor, School of Business,
University at Albany, State University of New York

Questions from the Honorable Benjamin Quayle

Q1. In your testimony you mention the National Research Council's
recommendation regarding the importance of conducting regular, rigorous
systematic evaluations of the SBIR program, and you call for the
development of interoperable standards for data collection and
dissemination. What do you think is the best way to develop these
standards?

A1. The best way to develop these standards is to convene a group
of ``users'' of the program, program managers at the federal agencies,
and academic experts of the SBIR program. It is important to note that
perspectives on the use and importance of the data will vary across
these groups. For example, program managers will want to collect data
that allows them to determine whether the program is advancing agency
goals. ``Users'' will be concerned about response burden. Policy-makers
and academics will use the data to address braoder issues, such as how
to make the program more effective. I am confident that the NRC can
provide guidance to agencies on how to develop these standards

Q2. The NRC recommends a number of different practices that agencies
can employ to shorten award cycles. Are there any recommendations that
can be implemented immediately to shorten these cycles now?

A2. One recommendation is to expand the National Cancer Institute's
SBIR Phase II Bridge Award pilot program. This is a three-year,
milestone driven grant (up to $1 million per year for three years),
which requires matching funding from angel or venture capital investors
or larger firms. Another attractive aspect of the Bridge program is
that many reviewers are employed at venture capital firms,
pharmaceutical companies, and successful small firms.
It would also be useful if agencies (e.g.) adopted the SBIR review
practices of the NSF. NSF Program Officers disaggregate grant
applications by technical subject matter, choose reviewers with
technical and business expertise as reviewers, and then include
themselves on the review committee, to manage the review process.
Permitting Program Officers to participate in the review process would
accelerate the review process and also make it more predictable. It
would also generate more useful interaction between the applicant and
the SBIR program staff.

Question from the Honorable David Wu

Q1. As you are currently aware, last year, the Small Business
Administration increased the standard limit for awards to $150,000 for
Phase I and $1,000,000 for Phase II. Do you believe these standard
limits are appropriate, or would you recommend that they be increased
further?

A1. I believe that these standard limits are appropriate ($150,000
for Phase I and $1,000,000 for Phase II).

Questions from the Honorable Randy Neugebauer

Q1. What effects do you believe would result from allowing majority-
owned venture capital businesses to compete for SBIR funding? Will it
result in a decrease in competitive Phase I applicants?

A1. I support allowing majority-owned venture capital businesses to
compete for SBIR funding. That is because I am convinced it will
enhance the overall effectiveness of the SBIR program, in terms of job
creation and economic impact. It will result in only a small decrease
in competitive Phase I applicants and the efficiency gains more than
make up for the loss of ``equity.''

Q2. How heavily do small businesses rely on the SBIR and STTR award
programs for research and development funding? What overlap exists, if
any, with any federal programs with similar goals and objectives?

A2. Small businesses are highly reliant on these programs for R&D
funding. This program is somewhat unique, so there is only a slight
overlap with other federal programs with similar goals and objectives.

Questions from the Honorable Chip Cravaack

Q1. There has been a great deal of discussion about the role of venture
capital in both the SBIR and STTR programs. What do you think will be
the impact of changing the current venture capital requirements on the
program? Do you believe this will lead to an increase in rhe quality of
applicants into the program?

A1. I am opposed to any restriction, pertaining to the program, on
firms in which venture capital firms have a controlling interest (i.e.,
the 2002 Small Business Administration policy directive). The proposed
compromise (which I presume you are referring to), which eases the
restrictions on the involvement of venture-backed firms is a step in
the right direction and will certainly lead to an increase in the
quality of applicants.

Q2. I like the concept of allowing small businesses to compete for
federal research dollars. After all, small business is the backbone of
our economy. Can you discuss the economic impact of this program and if
you feel Congress should allow a greater share of R&D funds to be
targeted at small firms?

A2. The NRC committee I served on clearly documented that the SBIR
program has a strong impact on the American economy. Having said that,
I do believe the current ``set-aside'' for SBIR is optimal. Allocating
a higher share of federal R&D (from federal agencies) to small firms
would penalize universities and large firms. Although it is clear that
small firms create most of the new jobs, it is less clear that small
firms are more efficient in R&D than large firms (the empirical
evidence on the question of whether there are ``economies of scale'' I
R&D is inconclusive).

Q3. As Members of Congress, we all have a responsibility to ensure that
tax dollars are being spent wisely. Do you believe that Congress should
demand more accountability from the SBIR program in terms of its
reporting data collection requirements? If so, in what ways?

A3. As stated in my testimony, I strongly advocate accountability
for the SBIR programs (and all government programs). The best way to
ensure this is to allow the NRC to evaluate the program on a systematic
basis and ensure that sufficient data are collected to allow for a
rigorous evaluation.

Q4. There have been several suggestions to shorten the award cycles in
the program. Do you have any administrative concerns about this type of
change? If so, what are these concerns?

A4. I have no concerns about shortening award cycles. We need to
accelerate the time lag between research/discovery and
commercialization. We have to stay ahead of our foreign competitors.

Questions from the Honorable Ben R. Lujan

Q1. Do you believe that there is some positive aspect to tying a
national laboratory's performance on technology transfer, technology
maturation, commercialization, and job creation to the payments given
to the operating contractor of each national laboratory for good
performance? What metrics for technology transfer, technology
maturation, commercialization, and job creation would you recommend?

A1. I applaud your suggestion. The national laboratories are the
``last frontier,'' with respect to technology transfer. Most academic
studies of technology transfer focus on universities, yet the national
labs are even more important for certain types of early-stage research.
For example, there has been considerable study of the effects of the
Bayh-Dole Act, with little analysis of the impact of the Stevenson-
Wydler Act and the Federal Technology Transfer Act of 1986 (my recent
paper is a notable exception).
The first step is to collect better data on commercialization
activies at federal labs. While there is an extensive AUTM survey of
university technology transfer offices, there is no corresponding
survey for technology transfer offices at federal labs. The metrics I
would use are those in the AUTM survey, patents, licenses, sponsored
research, and start-ups. I would try to construct broader measures of
economic impanct, such as job creation. NRC would be an ideal
institution for spearheading the collection and analysis of such data,
under the auspices of FLC.
Responses of Mr. Mark Crowell, Executive Director and Associate Vice
President for Innovation Partnerships and Commercialization at
the University of Virginia

Questions from the Honorable Benjamin Quayle

Q1. In your testimony, you recommended that the programs provide
flexibility to allow researchers with "manageable" conflict of
interests to participate. Can you provide an example of a manageable
conflict of interest? To what extent do you see university conflict of
interest policies as inhibiting active academic involvement in SBIR or
STTR projects? How might dissemination of best practices in managing
conflicts of interest improve this problem?

A1. An example of a manageable conflict of interest would be a
scenario where a university inventor who co-founded a start-up company
(and who thus would have founder's equity in that company) would be
able to be the PI on an SBIR or STTR subcontract from the applicant
company back into this university laboratory. While this is a per se
conflict, I see such a scenario as exceedingly healthy and, in fact, as
one of many reasons that start-up companies represent an excellent path
to market for university discoveries. Many universities would allow
this; some would not; and most have some degree of angst and ongoing
concern about whether a scenario of this sort would represent a
manageable conflict.
Another more challenging--but still manageable--conflict of
interest might be a scenario where a start-up company would like to
lease available space in a university facility to establish ``company
facilities'' in order to qualify as an SBIR or STTR applicant. In some
cases, the conflict of interest inherent in such a situation could
inhibit the university from leasing space to such a company. Tax
regulations could also inhibit the ability of universities to allow
start-up companies an opportunity to lease university facilities which
otherwise are available.
I believe that best practices in conflict of interest management
exist for managing scenarios of the types outlined above, and that
these "case studies" of manageable conflict of interest should be made
available to universities participating in SBIR or STTR programs. Many
conflict of interest policy statements at universities are predicated
on guidelines or policy issues promulgated at by federal agencies such
as NIH. A proactive statement by Congress, or issued as policy guidance
by NIH or other federal agencies funding SBIR and STTR programs,
indicating support for entrepreneurially focused (but still robust)
conflict of interest guidelines could be a tremendous boost for
institutions to more aggressively seek to manage properly disclosed
conflicts of interest.

Questions from the Honorable David Wu

Q1. As you are certainly aware, last year, the Small Business
Administration increased the standard limit for awards to $150,000 for
Phase I and $1,000,000 for Phase II. Do you believe these standard
limits are appropriate, or would you recommend they be increased
further?

A1. I believe these amounts are generally appropriate but as stated
in my testimony, I believe that program officers should have the
freedom to increase any award up to 20% beyond the published cap when
exceptional circumstances and high impact opportunity are deemed to be
represented in a particular funding project.

Q2. In your testimony, you recommend that the STTR program be modified
in a way that would enable agencies to use a certain proportion of
these funds to directly support additional proof-of-concept work at
universities, including demonstration projects that would support
proof-of-concept grants to universities and their faculty members. Can
you tell us more about your proposal and how it might be implemented?

A2. I highly recommend that $10 to 20 million be identified within
one or more federal agencies' existing set aside amount for SBIR/STTR
and made available to fund a three-to-five year pilot ``proof-of-
concept'' initiative at multiple universities--at $1 million per year
per university. Among the criteria for these awards should be the
demonstrated willingness and capability of a university in engaging
project management boards comprised of industry, start-up, venture
capital, technical, financial, and business/market experts. The review
process for such funding should be high-touch and market focused, with
corporate partner input and development milestones being key components
for initial and ongoing funding. Such funding should be allocated after
rigorous evaluation by carefully assembled panels of experts in
translational and proof-of-concept research. Among the criteria for
awards under such an initiative should be the demonstrated willingness
and capability of a university in engaging project management boards
comprised of industry, start-up, venture capital, technical, financial,
and business/market experts. Additionally, successful applicants for
this funding should be required to prove their willingness and agility
in managing translational projects stressing market-relevant
milestones, in conducting rigorous oversight and management of such
projects, and in their willingness to withdraw funding from projects
failing to reach essential milestones so that funding can be re-
allocated to projects with more potential.

Questions from the Honorable Randy Neugebauer

Q1. What effects do you believe would result from allowing majority-
owned venture capital businesses to compete for SBIR funding? Will it
result in a decrease in competitive Phase 1 applicants?

A1. I believe that allowing majority-owned venture capital-backed
businesses to compete for SBIR funding will increase the quality of
applications--and the impact and return on investment of such funding.
As I stated in my written testimony, venture capital-backed companies
have undergone extensive due diligence and a market-based valuation; I
see no reason why the federal government would not want to support such
companies and to speed their ability to grow and accelerate the
development of their product(s). I also see no reason or evidence to
suggest that there would be a decrease in competitive Phase 1
applications; in fact, I would predict that this change would result in
an increase in quality Phase 1 applicants.

Q2. How heavily do small businesses rely on the SBIR and STTR award
programs for research and development funding? What overlap exists, if
any, with any other federal programs with similar goals and objectives?

A2. From my perspective as a university business development
officer, I would suggest that SBIR and STTR award programs are
extremely important to many university start-up companies. I don't have
statistics on how many of our start-ups pursue such funding, but I
would suggest that it is at least 35-50% of such companies--and growing
fast. It is often perfectly-placed funding for a start-up company--
initial capital desperately needed to advance the innovation toward
initial commercially relevant proof-of-concept milestones, enabling
many companies to launch with critically important momentum rather than
languishing while investment capital is raised. It also offers many
small companies an opportunity to leverage the investment provided by
initial investors, again, accelerating the pace of proof-of-concept
work and innovation. There really isn't any overlap that I see or know
of with other federal programs with similar goals or objectives.

Questions from the Honorable Chip Cravaak

A1. I fully support revising the guidelines for SBIR and STTR to
allow venture capital-based companies to compete for funding--and
believe this will lead to an increase in the number and quality of
applicants. Please see my answer to Congressman Neugebauer's question
on this subject.

A2. I believe that SBIR and STTR have been tremendously successful
and should be continued. I also strongly support revising the programs
to allow a portion of the set aside funds to support commercially
relevant proof-of concept research which is essential to conduct before
deciding whether to form a start-up company. I would be pleased to see
increased funding to support these programs, but NOT at the expense of
cutting current federal funding available for basic research. As noted
in my written testimony, the success rates for Phase 1 SBIR and STTR
grants is equal to, and in many cases, higher than the success rates
for other equally important grants for basic research. Any increase in
the current SBIR and STTR set-aside would come at the expense of other
peer-reviewed basic and applied research--the seed corn for the
innovation pipeline--so I recommend against increasing the set aside
percentages.

A3. I do not recommend that Congress demand more accountability
than currently exists in terms of reporting and related compliance
requirements. This would seem counter-intuitive, in fact, and would
divert attention of both funding officers and grant recipients.
However, I believe that increased accountability and quality could and
should be made part of the program by incorporating more private sector
expertise on review panels, and by adhering to newly refined review and
monitoring criteria which ensure that market-relevant and commercially-
oriented milestone selection and monitoring are a requirement of SBIR
and STTR awards.

Q4. There have been several suggestions to shorten the award cycles in
the program. Do you have any administrative concerns about this type of
change? If so, what are these concerns?

A4. I am not familiar with such suggestions and the rationale for
them--so don't have an opinion that allows me to provide a direct
answer to this question. But since I am recommending for a more
rigorous review process, for certain changes in review criteria, and
advocating for a new demonstration ``proof-of-concept'' activity with
SBIR/STTR, I am disinclined to recommend shorter award cycles. Such a
change would seem to require more administrative oversight and
bureaucratic activity--and thus it's hard to see how this change would
increase the quality, quantity, and impact of SBIR and STTR projects.

Questions from the Honorable Ben R. Lujan

Q1. Do you believe that there is some positive aspect of tying a
national laboratory's performance on technology transfer, technology
maturation, commercialization, and job creation to the payments given
the operating contractor for each national laboratory for good
performance? What metrics for technology transfer, technology
maturation, commercialization, and job creation would you recommend?

A1. I do believe such criteria would be extremely useful and
impactful--provided, however, that attention is paid to enhancing the
technology transfer capacity, resources, and environment within federal
laboratories. Federal labs are treasure troves of outstanding science--
and I have no doubt that much potential exists to leverage far more
innovation impact from the great science and tremendous investment
which is made in the research at such facilities.
From my experience, however, I believe that federal labs have far
more hurdles to overcome in seeking to identify, protect, and translate
importance discoveries into new products, services and businesses.
Their technology transfer staffs are often small and inexperienced.
Their policy environment and tolerance for conflicts of interest and
commitment is established in a way which makes it extremely difficult
for entrepreneurial scientists and technology transfer personnel to
spin off start-up companies. In fact, in some cases, it seems that
entrepreneurial scientists who wish to pursue such a path with their
discoveries are almost required to leave the lab because of the way in
which the conflict of interest is perceived. Other practices also exist
which slow transaction time and creates obstacles, real and imagined,
and which disincentivize investors, entrepreneurs and business
development officers from doing deals with labs or from doing multiple
deals with labs.
Notwithstanding the above, there are examples of remarkable
entrepreneurial activity in federal labs. I am most familiar with the
technology transfer division at Los Alamos National Laboratory, which
has an entrepreneur-in-residence program; an entrepreneurial leave
initiative; a relationship with a venture group through from which the
lab obtains start-up counseling and early stage investment
possibilities; an external commercialization advisory board (on which I
sit as a member); and a long history of partnering with existing
companies through licensing, CRADAs and related activities. And yet
even Los Alamos, with its strong initiatives and success stories,
struggles with more bureaucracy and related obstacles than a typical
university would have to face.
I strongly support establishing incentives and metrics tying in
performance in technology transfer to laboratory evaluation and
performance payments, but believe this should include a robust effort
to assess policies which make success for labs in carrying out these
activities much more challenging than most universities have to face.
Possible metrics could include: number of invention reports; number
of transactions with business and industry; companies launched and
successful in raising early institutional, SBIR, or other peer-reviewed
or market-based investment, including amount of investment capital
raised; patent strength indices (measuring citations of a labs patents
in patent applications from other applicants); success by the lab or
its commercial partners in hitting market-relevant regulatory or
commercial development milestones related to product(s) based on lab
research; potentially, jobs created in start-up companies; new
commercial or investment partners signing confidentiality agreements,
CRADAs, options, or related agreements; and others.

Q2. In your testimony, you specifically recommend that conflict of
interest restrictions be examined and steps be taken to make it easier
for researchers with disclosed and manageable conflicts of interest to
participate in the SBIR and STTR start-up companies. Can you talk about
this further and make specific suggestions about what should be done to
improve the situation for both universities and national laboratories?

A2. Conflict of interest restrictions can interfere with the
ability of entrepreneurial scientists and their institutions to move
aggressively toward a commercialization opportunity for a given
technology--especially in the case of start-up companies. In the case
of universities, scientists with a significant financial interest in a
start-up company (which they likely all will have because they
typically receive founder's equity) sometimes are prevented from
accepting research funding from the company, from consulting with the
company, or from licensing further discoveries to the company. An
additional layer of obstacles often exists at federal labs, where these
conflicts may be more sensitive, tolerance thresholds lower, and
absolute prohibitions of certain conflicts more numerous. Institutions
themselves are also often seen as having conflicts--the institution may
hold equity in the company via the license agreement and may stand to
receive substantial royalties if the company is successful, and thus
may encounter rules or barriers which prevent it from offering space,
providing initial access to critical equipment (on terms other outside
parties could obtain), conducting further research, and related company
support activities.
I am very sensitive to conflict of interest and have certainly
witnessed behaviors which provide clear examples of why conflict of
interest policies are needed. But I've also witnessed far more examples
of breakthrough products, new start-up companies, and academic-industry
partnerships which had the potential to change the world and to create
enormous economic impact as well. Conflict of interest policies should
not stand in the way of such opportunities unless there is a compelling
public interest requiring such a policy--an example, in my opinion,
would be a policy (which most universities with medical schools have)
preventing a professor with a significant financial interest in a
company development a new drug or device from conducting clinical
trials of that product.
Instead, conflict policies should be predicated on a regular and
full disclosure within the institution; on a disclosure outside the
institution (such as in publications) when the conflict is of a certain
level or type; and on the creation of conflict of interest management
plans for the vast majority of such conflicts where regular oversight
and monitoring can allow the activity to take place in an open and
reasonably objective way. Management mechanisms which can mitigate
against conflicts (real and perceived) could include a regular
interview by a conflict of interest management committee to make sure
that normal academic milestones are being achieved (grants,
publications, student progress toward degrees, etc.); full disclosure
of conflicts on an institution website and on publications; independent
documentation of scientific and technical reasons for supporting a
start-up company's initial need to use a university lab or specialize
core facility; an independent management or pre-determined formula for
holding and liquidating institutional equity in start-up companies; and
others.
Finally, at many institutions, and perhaps including federal labs
most of all, conflict of interest may be more of a perception than a
reality. Such conflicts still require full disclosure and proper
management--but they also require a robust and strategic communication
strategy on the part of the institution's management. If creating spin-
off companies, commercializing products, and partnering with industry
on their research challenges are indeed a key component of the missions
of research institutions in today's economy--and I believe they are--
then acknowledging that engagement in these activities is likely to
create conflicts of interest is a message which institutional
leadership should address on a regular basis. Acknowledging the reality
of conflicts, the success of management mechanisms, and the importance
of innovation and commercialization should mitigate many problems and
encourage more scientists and outside partners to interact and partner
with more confidence and success.
Responses of Mr. Doug Limbaugh, Chief Executive Officer of Kutta
Technologies
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Responses of Ms. Laura McKinney, President and Chief Executive Officer
of Galois, Inc.

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Appendix II

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Additional Submitted Statements for the Record

Material Submitted by Representative David Wu, Ranking Minority Member,
Subcommittee on Technology and Innovation, Committee on Science, Space,
and Technology, U.S. House of Representatives

Material Submitted by Representative John P. Sarbanes, Subcommittee on
Technology and Innovation, Committee on Science, Space, and Technology,
U.S. House of Representatives