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

CREATING AND GROWING NEW BUSINESSES:
FOSTERING U.S. INNOVATION

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

HEARING

BEFORE THE

SUBCOMMITTEE ON TECHNOLOGY AND INNOVATION

COMMITTEE ON SCIENCE, SPACE, AND TECHNOLOGY
HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION

__________

WEDNESDAY, NOVEMBER 2, 2011

__________

Serial No. 112-48

__________

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 BRAD MILLER, North Carolina
FRANK D. LUCAS, Oklahoma DANIEL LIPINSKI, Illinois
JUDY BIGGERT, Illinois GABRIELLE GIFFORDS, Arizona
W. TODD AKIN, Missouri DONNA F. EDWARDS, Maryland
RANDY NEUGEBAUER, Texas MARCIA L. FUDGE, Ohio
MICHAEL T. McCAUL, Texas BEN R. LUJAN, New Mexico
PAUL C. BROUN, Georgia PAUL D. TONKO, New York
SANDY ADAMS, Florida JERRY McNERNEY, California
BENJAMIN QUAYLE, Arizona JOHN P. SARBANES, Maryland
CHARLES J. ``CHUCK'' FLEISCHMANN, TERRI A. SEWELL, Alabama
Tennessee FREDERICA S. WILSON, Florida
E. SCOTT RIGELL, Virginia HANSEN CLARKE, Michigan
STEVEN M. PALAZZO, Mississippi
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
JUDY BIGGERT, Illinois DONNA F. EDWARDS, Maryland
RANDY NEUGEBAUER, Texas JOHN P. SARBANES, Maryland
MICHAEL T. McCAUL, Texas FREDERICA S. WILSON, Florida
CHARLES J. ``CHUCK'' FLEISCHMANN, DANIEL LIPINSKI, Illinois
Tennessee GABRIELLE GIFFORDS, Arizona
E. SCOTT RIGELL, Virginia BEN R. LUJAN, New Mexico
RANDY HULTGREN, Illinois
CHIP CRAVAACK, Minnesota
RALPH M. HALL, Texas
EDDIE BERNICE JOHNSON, Texas

C O N T E N T S

Wednesday, November 2, 2011

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.. 5
Written Statement............................................ 6

Statement by Representative Donna Edwards, Ranking Minority
Member, Subcommittee on Technology and Innovation, Committee on
Science, Space, and Technology, U.S. House of Representatives.. 7
Written Statement............................................ 9

Witnesses:

Brink Lindsey, Senior Scholar in Research and Policy, Ewing
Marion Kauffman Foundation
Oral Statement............................................... 11
Written Statement............................................ 12

Julian Mann, Co-Founder and Vice President, Product Development
and Research, Skybox Imaging
Oral Statement............................................... 16
Written Statement............................................ 18

Ray Rothrock, Partner, Venrock
Oral Statement............................................... 20
Written Statement............................................ 23

Steve Dubin, Former CEO, Martek Biosciences, and Senior Advisor
to DSM Nutritional Products
Oral Statement............................................... 28
Written Statement............................................ 30

Discussion
............................................................... 33

Appendix 1: Answers to Post-Hearing Questions

Brink Lindsey, Senior Scholar in Research and Policy, Ewing
Marion Kauffman Foundation..................................... 50

Julian Mann, Co-Founder and Vice President, Product Development
and Research, Skybox Imaging................................... 54

Ray Rothrock, Partner, Venrock................................... 59

Steve Dubin, Former CEO, Martek Biosciences, and Senior Advisor
to DSM Nutritional Products.................................... 65

Appendix 2: Additional Material for the Record

Rebuilding the IPO On-Ramp: Putting Emerging Companies and the
Job Market Back on the Road to Growth.......................... 70

CREATING AND GROWING NEW BUSINESSES:
FOSTERING U.S. INNOVATION

----------

WEDNESDAY, NOVEMBER 2, 2011

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

The Subcommittee met, pursuant to call, at 10:06 a.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

Creating and Growing New Businesses:

Fostering U.S. Innovation

wednesday, november 2, 2011
10:00 a.m.--12:00 p.m.
2318 rayburn house office building

Purpose

On Wednesday, November 2, 2011, the Subcommittee on Technology and
Innovation will convene a hearing to examine the current state of
small, innovative startup companies, which are engines of both
transformative innovations and job creation. The Subcommittee will seek
testimony on obstacles limiting those with the ideas and desire to
either start a new company, or take a fledgling company to a place of
rapid growth.

Witnesses

Mr. Brink Lindsey, Senior Scholar in Research and Policy,
Ewing Marion Kauffman Foundation.

Mr. Julian Mann, Co-Founder and Vice President, Product
Development and Research, Skybox Imaging.

Mr. Ray Rothrock, Partner, Venrock.

Mr. Steve Dubin, Former CEO, Martek Biosciences; Senior
Advisor to DSM Nutritional Products.

Background

New businesses have historically played a major role in advancing
both job creation and innovation in the U.S. economy. According to
research conducted by the Kauffman Foundation and the U.S. Census
Bureau's Business Dynamics Statistics, startup companies (those in
their first year of existence) added an average of three million jobs
per year between 1977 and 2005, whereas existing companies (those aged
one year and older) experienced net job losses over the same period.
\1\ By their very nature, new businesses advance innovation because
entrepreneurs identify market opportunities that current businesses are
not addressing and create companies to satisfy these market
opportunities. Through the last decade, many business efforts that
started with an individual or small group have grown and transformed
the way we live our lives. For example, social media startups such as
Facebook and Twitter have introduced new ways to communicate both
personally and professionally.
---------------------------------------------------------------------------
\1\ T. Kane, ``The Importance of Startups in Job Creation and Job
Destruction,'' Ewing Marion Kauffman Foundation, July 2010; http://
www.ces.census.gov/index.php/bds/bds-home.

---------------------------------------------------------------------------
Innovation and High-Growth Industry Startups

The Organization for Economic Co-operation and Development (OECD)
defines innovation as the introduction of a new or significantly
improved product (good or service), process, or method. \2\
---------------------------------------------------------------------------
\2\ ``The OECD Innovation Strategy: Getting a Head Start on
Tomorrow,'' OECD 2010.
---------------------------------------------------------------------------
Examples of innovation include the development of new products
which have the capacity to fundamentally change the market, such as the
personal computer or the semiconductor. Alternatively, innovation can
lead to improvements of existing products and services, such as
improving the speed of microprocessors, or the functionality of
software. An example of process innovation is the implementation of
lean manufacturing.
Innovative companies have played a central role in the growth of
the U.S. economy by providing mid-term and long-term employment and
income growth. \3\ Indeed, innovation has been responsible for
approximately 80 percent of the growth in the U.S. economy since World
War II \4\ and new businesses in high-growth sectors have contributed
significantly to the country's innovative capacity.
---------------------------------------------------------------------------
\3\ R. Atkinson, D. Castro, S. Andes, S. Ezell, D. Hackler, and R.
Bennett, ``Innovation Policy on a Budget: Driving Innovation in a Time
of Fiscal Constraint,'' Information Technology and Innovation
Foundation, September 2010.
\4\ Information Technology Industry Council, www.itic.org.
---------------------------------------------------------------------------
Over the past decade, the high-growth sectors of the U.S. economy
have centered on information technology, health care, energy, defense,
and advanced manufacturing. These sectors are dependent on the output
of scientific and engineering-related research and development, and
many small companies are also started based on intellectual property
derived from basic research conducted at universities and other
research organizations.

Job Creation

According to the Kauffman Foundation, job creation from startup
companies remained relatively consistent between 1977 and 2005, even
during periods of recession. 1A\5\ However, in recent years, startup
companies have witnessed a significant decline in job creation. 1A\6\
While companies are still being created, they are starting up with
smaller numbers of employees, and not adding employees at a rate that
has been historically characteristic of small business growth. 1A\7\
This trend is troubling for the long-term outlook of job growth from
small businesses. While the current economic environment may have
exacerbated the situation, this data suggests the pattern predates the
recent recession, leading to questions about whether a systemic change
in the relationship between new company formation and job creation may
be occurring. \8\
---------------------------------------------------------------------------
\5\ T. Kane, ``The Importance of Startups in Job Creation and Job
Destruction,'' Ewing Marion Kauffman Foundation, July 2010; http://
www.ces.census.gov/index.php/bds/bds-home.
\6\ J. Haltiwanger, R. Jarmin, and J. Miranda, ``Business Dynamics
Statistics Briefing: Historically Large Decline in Job Creation from
Startup and Existing Firms in the 2008-2009 Recession,'' Ewing Marion
Kauffman Foundation, March 2011.
\7\ E.J. Reedy and Robert E. Litan, ``Firm Foundation and Economic
Growth, Starting Smaller, Staying Smaller: America's Slow Leak in Job
Creation,'' Kauffman Foundation Research Series, July 2011, http://
www.kauffman.org/uploadedFiles/
job-leaks-starting-smaller-s
tudy.pdf.
\8\ Ibid.

---------------------------------------------------------------------------
Issues for Examination

Many factors influence those with innovative ideas who want to
start companies. The Committee is interested in understanding how
local, State, regional, and federal policies influence the environment
for new company creation or growth. Issues for examination within this
hearing include:

New Business Formation, Job Growth, and Innovation

What is the historical relationship between new business
formation and job creation in the country?

What is the role of new businesses in driving the
nation's innovative capacity and competitiveness?

Do existing policies adequately address recent trends in
job growth affiliated with new businesses?

What challenges are unique to entrepreneurs in the
technology and innovation sector?

Policy Obstacles and Opportunities

Local, State and federal stakeholders are all interested
in both making targeted investments and removing barriers to companies
starting and growing. What are the most significant policy levers?

How do federal policies influence potential research
partnerships between startups and research institutions, or larger
companies?

Should federal policies have a greater focus on new
business formation, or on promoting business growth?

Are there any federal policies that discourage potential
entrepreneurs who are considering starting or expanding a company?

Access to Capital

How important is access to capital in today's
environment? How have investment trends changed the types of
innovations in the pipeline, and potential for companies to go public?

What opportunities exist for raising capital for startup
companies that are located in areas without great concentrations of
venture capital companies? What steps do venture capital companies take
to identify investment opportunities outside their immediate
geographical area?

Chairman Quayle. The Subcommittee on Technology and
Innovation will come to order. Good morning. Welcome to today's
hearing entitled ``Creating and Growing New Businesses:
Fostering U.S. Innovation.'' In front of you are packets
containing the written testimony, biographies, and truth-in-
testimony disclosures for today's witnesses. I will now
recognize myself for five minutes for an opening statement.
Before we get started, even though Ms. Edwards is not here,
I would like to welcome her when she gets here because she is
the new Ranking Member of this Subcommittee, and I am very
eager to be working with her in the next coming year and a
half. So we are very excited to have her as the new Ranking
Member.
But the goal of today's hearing is to learn more about U.S.
startup companies, which are engines of both transformative
innovations and job creation. We will be hearing testimony on
the obstacles impeding entrepreneurs from starting a new
company from scratch or from expanding a fledgling company to a
place of rapid growth. As this Subcommittee sits at the
intersection of technology and innovation, we are uniquely
positioned to address topics affecting competitiveness of
emerging high-growth industries. Today's discussion is the
second in a series focused on advanced U.S. innovation in a
constrained budget environment.
Earlier this fall, we held a hearing on the opportunities
and challenges of cloud computing. In the coming months, it is
my intention to address a range of topics including the role of
standards in international trade, the importance of
collaborative research partnerships in the innovation
ecosystem, and new developments in wireless communications. In
these difficult times, it is important that we continue to
empower our Nation's innovators to maintain our economic
competitiveness.
Entrepreneurs and new businesses have played a vital role
in advancing both job creation and innovation in our country.
Over the last three decades, new businesses have created nearly
40 million jobs and have been responsible for nearly all net
new job creation. New businesses also facilitate the spread and
adoption of innovation because they are more likely to seize
new developments in order to create market niches for
themselves.
From our founding, the United States has always cultivated
the entrepreneurial spirit of its citizens, recognizing the
vitality new businesses bring to commerce. Economist Robert
Solow was awarded the Nobel Prize for his work demonstrating
how economic innovation was the most powerful factor driving
our country's growth and productivity in the 20th century. The
public and private sectors have worked to support
entrepreneurship by facilitating new business formation, access
to capital, and financial rewards for success. In turn, these
new businesses have added significantly to the growth and
dynamism of our economy.
Unfortunately, recent studies have found that the
environment for new businesses has grown increasingly
unfavorable. In the past three years, the number of new
businesses launched has fallen 23 percent. Recently, the World
Bank's ``Doing Business'' report showed that the United States
has dropped in the ease of starting a business category from
third to 13th since 2007. Capital investment in startup
companies has decreased, and far fewer small companies are
holding initial public offerings.
But, as some of our witnesses may testify today, a number
of these challenges predate the economic downturn of the last
few years. The continued decline in new business formation and
growth puts our Nation's job creation and innovative capacity
at risk. Recognizing this link between startup businesses,
innovation, and job creation, the Subcommittee is interested in
hearing from today's witnesses about the environment for new
business formation, and obstacles preventing entrepreneurs from
forming new companies and accelerating their growth. This is a
difficult question to answer given our current budgetary
challenges, so I especially hope to hear from our witnesses
examples of what the Federal Government can do to eliminate
barriers to entrepreneurship, in addition to any other creative
ideas they may have.
I would like to extend my appreciation to each of our
witnesses for taking the time and effort to appear with us
today and we look forward to your testimony.
I now recognize the gentlelady from Maryland, the new
Ranking Member of this Subcommittee, Ms. Edwards, for her
opening statement and welcome to the Subcommittee as the
Ranking Member.
[The prepared statement of Mr. Quayle follows:]

Prepared Statement of Chairman Ben Quayle,
Subcommittee on Technology and Innovation,
Committee on Science, Space, and Technology, U.S. House of
Representatives

Good morning. Before we get started, I would like to take a moment
to welcome Congresswoman Donna Edwards of Maryland to her new role as
Ranking Member of this Subcommittee. I look forward to working with you
and your staff in the 112th Congress.
The goal of today's hearing is to learn more about U.S. startup
companies, which are engines of both transformative innovations and job
creation. We will be hearing testimony on the obstacles impeding
entrepreneurs from starting a new company from scratch or from
expanding a fledgling company to a place of rapid growth.
As this Subcommittee sits at the intersection of technology and
innovation, we are uniquely positioned to address topics affecting
competitiveness of emerging high-growth industries. Today's discussion
is the second in a series focused on advancing U.S. innovation in a
constrained budget environment. Earlier this fall, we held a hearing on
the opportunities and challenges of cloud computing. In the coming
months, it is my intention to address a range of topics including the
role of standards in international trade, the importance of
collaborative research partnerships in the innovation ecosystem, and
new developments in wireless communications. In these difficult times,
it is important that we continue to empower our Nation's innovators to
maintain our economic competitiveness.
Entrepreneurs and new businesses have played a vital role in
advancing both job creation and innovation in our country. Over the
last three decades, new businesses have created nearly 40 million jobs
and have been responsible for nearly all net new job creation. New
businesses also facilitate the spread and adoption of innovation
because they are more likely to seize new developments in order to
create market niches for themselves.
From our founding, the United States has always cultivated the
entrepreneurial spirit of its citizens, recognizing the vitality new
businesses bring to commerce. Economist Robert Solow was awarded the
Nobel Prize for his work demonstrating how economic innovation was the
most powerful factor driving our country's growth and productivity in
the 20th century. The public and private sectors have worked to support
entrepreneurship by facilitating new business formation, access to
capital, and financial rewards for success. In turn, these new
businesses have added significantly to the growth and dynamism of our
economy.
Unfortunately, recent studies have found that the environment for
new businesses has grown increasingly unfavorable. In the past three
years, the number of new businesses launched has fallen 23 percent.
Recently, the World Bank's ``Doing Business'' report showed that the
U.S. has dropped in the ease of starting a business category from third
to 13th since 2007. Capital investment in startup companies has
decreased, and far fewer small companies are holding initial public
offerings. But, as some of our witnesses may testify today, a number of
these challenges predate the economic downturn of the last few years.
The continued decline in new business formation and growth puts our
Nation's job creation and innovative capacity at risk.
Recognizing this link between startup businesses, innovation, and
job creation, the Subcommittee is interested in hearing from today's
witnesses about the environment for new business formation, and
obstacles preventing entrepreneurs from forming new companies and
accelerating their growth. This is a difficult question to answer,
given our current budgetary challenges, so I especially hope to hear
from our witnesses examples of what the Federal Government can do to
eliminate barriers to entrepreneurship, in addition to any other
creative ideas they may have.
I'd like to extend my appreciation to each of our witnesses for
taking the time and effort to appear before us today. We look forward
to your testimony.

Ms. Edwards. Thank you, Mr. Chairman, and I apologize if I
am late. Usually, my military dad would have reminded me that I
should be on time, which I usually am, and so I apologize. And
thanks for welcoming me to the Committee and for calling this
hearing on small business creation and the way to spur
innovation. I want to thank our witnesses for joining us here
today to discuss the obstacles and the challenges that face
small businesses and what this Subcommittee can do to help.
Mr. Chairman, I am also honored to join you on this
Subcommittee as Ranking Member, and I look forward to working
with you on the many issues that come under our jurisdiction
and ways in which we can actually work together in a
collaborative and bipartisan way.
I am certain there isn't a person in this hearing room
today that doesn't recognize how important small businesses are
to our economy. We say it all the time, particularly new small
businesses that spur innovation and create jobs. According to
the Small Business Administration, small businesses generated
65 percent of net new jobs over the past 17 years. And as we
continue our efforts to put our economy back on track, we
should be committed to fostering the creation of small
businesses and give them the support and resources they need to
succeed.
And I am also certain that many of us here today would also
agree that there is much that can be done to reduce the
regulatory burden on emerging small businesses by reviewing
duplicative or outdated regulations, as well as reducing
bureaucracies that slow progress and add cost to business. I
expect that many of us will also be united in our desire to
create an environment for small business creation, and we can
support policies that provide additional tax incentives to
foster growth. I have long championed providing incentives to
companies that co-locate research and development activities
with domestic manufacturing. I think this is good public
policy; it is good tax policy, and these federal policies can
incentivize good behavior and spur homegrown innovation,
progress, and manufacturing--21st century manufacturing.
We should also ensure that our communities have the proper
infrastructure and support to help businesses thrive. For that
reason, I appreciate the shout-out from Mr. Rothrock to the I-
270 Corridor in your prepared remarks. The critical investments
that our State in Maryland has made to support and grow
businesses has been recognized by Bloomberg News in its naming
of the region as one of the top 10 places for startups. And
that is not by accident; it is by policy.
There are additional ways to support small business
creation, including amending our intellectual property laws to
spur greater innovation and updating our immigration laws so
that small businesses will have access to the most skilled
workforce possible and enable entrepreneurs from throughout the
world to set up shop here in the United States.
And while there may be a shared interest in tackling these
sort of matters, they unfortunately do not fall within this
Subcommittee's jurisdiction and are not the items on which we
have the authority to legislate. So we should do what we can.
We have to do a better job of transferring new ideas and
technologies out of federal or university labs and into the
hands of startup companies in this country. I believe there are
many opportunities for us to strengthen and improve federal
technology transfer, build on the lab-to-market efforts that
are already underway within the Administration. And Mr.
Chairman, I hope that this is an issue that we can explore
together in the months to come.
I think that we have to recognize that there is a role for
the Federal Government as well. There are countless
technologies that we use every day that can trace their origin
back to federal research and development investments. I hope
that our witnesses will testify about that today. The
indisputable truth is that without new discoveries, we won't
have new game-changing technologies or the small businesses to
make and sell them. The reality, though, is that those early
risks are sometimes things that government needs to do and can
do and then allow the commercial sector to take over.
If we want a vibrant small business community that spurs
innovation and creates new jobs, we have to provide sufficient
funding to our federal research agencies. They are key. And if
we turn our back on federal research and development, the
medium- and long-term impacts on small business creation will
be devastating.
Finally, we should be building on the foundation this
Committee laid last year in the America COMPETES
Reauthorization Act to enhance and expand federal support for
the commercialization of new technologies by small businesses.
Over the last year, the Administration has made significant
strides through its Startup America Initiative to ensure that
the Federal Government does not turn its back on struggling
small businesses. These efforts are helping to provide small
businesses with the tools and resources they need to innovate
and transform promising technologies into marketable products.
This Subcommittee ought to be doing what it can to build
upon the Administration's efforts, and we should be taking our
cue from international competitors who are developing and
investing in groundbreaking programs that help small businesses
innovate and commercialize new products.
For example, this year, Germany is investing $545 million
in cooperative research and development projects conducted
collaboratively by a number of small manufacturers or by small
manufacturers in collaboration with public research
institutions.
Again, Mr. Chairman, I want to thank you for holding this
important hearing, and I look forward to hearing from our
witnesses today on this topic.
[The prepared statement of Ms. Edwards follows:]

Prepared Statement of Ranking Member Donna Edwards,
Subcommittee on Technology and Innovation,
Committee on Science, Space, and Technology, U.S. House of
Representatives

Mr. Chairman, thank you for calling this hearing on small business
creation and ways to spur innovation. And thank you to our witnesses
for joining us here today to discuss the obstacles and challenges
facing small businesses and what this Subcommittee can do to help.
Mr. Chairman, I am also honored to join you on this Subcommittee as
Ranking Member. I am certainly looking forward to working with you on
the important issues that come before this Subcommittee. I believe that
there is a lot of common ground on these matters, and I fully expect
that we will be able to work together in a collaborative and bipartisan
way to address them.
I am certain that there isn't a person in this hearing room today
that does not recognize how important small businesses are to our
economy. Small businesses, particularly new small businesses, spur
innovation and create new jobs. According to the Small Business
Administration, small businesses generated 65 percent of net new jobs
over the past 17 years. As we continue our efforts to put our economy
back on track, we should be committed to fostering the creation of
small businesses and give them the support and resources they need to
succeed.
I am also certain that many of us here today would agree that there
is much that can be done to reduce the regulatory burden on emerging
small businesses by reviewing duplicative or outdated regulations, as
well as, reducing bureaucracies that slow progress and add costs to
businesses.
I expect that many of us will also be united in our desire to
create an environment for small business creation. We can support
policies that provide additional tax incentives to foster growth. I
have long championed providing incentives to companies that co-locate
research and development with domestic manufacturing. These federal
policies incentivize good behavior and spur home-grown innovation and
progress.
We must also ensure that our communities have the proper
infrastructure and support to help businesses thrive. For that reason,
I appreciate the shout-out from Mr. Rothrock to the I-270 corridor in
his prepared remarks. The efforts and the critical investments the
State has made to support and grow businesses have been recognized by
Bloomberg News in its naming of the region as one of the top 10 places
for startups.
There are additional ways to support small business creation,
including amending our intellectual property laws to spur greater
innovation and updating our immigration laws so that small businesses
will have access to the most skilled workforce possible and enable
entrepreneurs from throughout the world to set up shop here in the
United States. While there may well be a shared interest in tackling
these sorts of matters, they unfortunately do not fall within this
Subcommittee's jurisdiction and are not items upon which we have the
authority to legislate.
Fortunately, there is a lot within this Subcommittee's jurisdiction
that can be done to support and foster the creation of new small
businesses, and it is my hope that we will be able to focus today's
discussion on these issues.
There are countless technologies that we use every day that can
trace their origin back to federal research and development
investments. The indisputable truth is that without new discoveries, we
won't have new game-changing technologies or the small businesses to
make and sell them. If we want a vibrant small business community that
spurs innovation and creates new jobs, we simply must provide
sufficient funding to our federal research agencies. If we turn our
back on federal research and development, the medium- and long-term
impacts on small business creation will be devastating.
We must also do a better job of transferring new ideas and
technologies out of federal or university labs and into the hands of
startup companies in this country. I believe there are many
opportunities for us to strengthen and improve federal technology
transfer and build upon the lab-to-market efforts that are already
underway within the Administration. Mr. Chairman, I hope that this is
an issue that we can explore together in the months to come.
Finally, we should be building upon the foundation this Committee
laid last year in the America COMPETES Reauthorization Act to enhance
and expand federal support for the commercialization of new
technologies by small businesses. Over the last year, the
Administration has made significant strides through its Startup America
initiative to ensure that the Federal Government does not turn its back
on struggling small businesses. These efforts are helping to provide
small businesses with the tools and resources they need to innovate and
transform promising technologies into marketable products.
This Subcommittee ought to be doing what it can to build upon the
Administration's efforts. We should be taking our cue from our
international competitors who are developing and investing in ground-
breaking programs that help small businesses innovate and commercialize
new products. For example, this year, Germany is investing $545 million
in cooperative research and development projects conducted
collaboratively by a number of small manufacturers or by small
manufacturers in collaboration with public research institutions.
The truth is that when our Federal Government has stepped up to the
plate and taken an active role in private sector innovation--whether
through the widely popular Small Business Innovation Research program
or the Advanced Technology Program at NIST--we've witnessed great
success. I am hopeful that we can begin to move past historical debates
about industrial policy and picking winners and losers, and acknowledge
that this is instead about ensuring that our country and our small
businesses win in the global market.
Mr. Chairman, thank you again for holding this important hearing. I
look forward to hearing from our witnesses today on this important
topic.

Chairman Quayle. Thank you, Ms. Edwards.
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 Mr. Brink Lindsey, Senior Scholar in
Research and Policy at the Ewing Marion Kauffman Foundation.
Mr. Lindsey has conducted research and has written on the
structural reforms needed to revive entrepreneurial innovation
from formation and job creation.
Next, we will hear from Mr. Julian Mann, Cofounder and Vice
President of Product Development and Research at Skybox
Imaging. Mr. Mann is an aerospace engineer who balances near-
term product development and long-term technology strategy for
his company.
Our third witness is Mr. Ray Rothrock, a Partner at the
venture capital firm Venrock. Mr. Rothrock is a nuclear
engineer who has spent much of his career growing companies.
Our final witness is Mr. Steve Dubin, former CEO of Martek
Biosciences and Senior Advisor to DSM Nutritional Products.
Early this year, Martek was inducted into the Small Business
Innovation Research Hall of Fame in recognition of its success
in research, innovation, and commercialization within the SBIR
program.
Thanks again to our witnesses for being here this morning.
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, Mr. Brink Lindsey, for
five minutes.

STATEMENT OF MR. BRINK LINDSEY,

SENIOR SCHOLAR IN RESEARCH AND POLICY,

EWING MARION KAUFFMAN FOUNDATION

Mr. Lindsey. Chairman Quayle, Members of the Committee,
thank you very much for the opportunity to appear here today.
Today's hearing is premised on a connection between
encouraging new businesses and fostering innovation, and that
premise is very well supported by the evidence. It turns out
that a significant fraction of U.S. productivity growth comes
from the entry and exit of firms, what the economist Joseph
Schumpeter called ``creative destruction.'' Generally speaking,
exiting firms are less productive than existing firms, which in
turn are less productive than surviving new firms. According to
a recent paper by the economist John Haltiwanger at the
University of Maryland and research supported by the Kauffman
Foundation, net entry of firms has contributed about 30 percent
of recent total productivity growth in the manufacturing sector
and virtually all productivity growth in the retail sector. New
firms are thus the lifeblood of rising productivity, and,
consequently, rising living standards.
And when it comes to promoting prosperity through job
creation, the role of new enterprises can hardly be overstated.
According again to research from the Kauffman Foundation, there
were only seven years between 1977 to 2005 in which existing
firms created more jobs than they destroyed. So the bottom line
is simple--without startups there would be no net job creation
in the United States.
Unfortunately for both the short-term prospects for a
rebound in employment and the long-term prospects for
productivity and growth, the creation of new businesses in
America is in a slump, and that slump predates the Great
Recession that began in 2008. According to that paper by John
Haltiwanger I just mentioned, average annual gross job creation
by startups has fallen from 3.5 percent of total employment in
the 1980s to three percent in the 1990s to 2.6 percent since
2000, a 25 percent cumulative drop. With this slump has come a
drop in overall gross and net job creation for the U.S.
economy.
The timing of this deterioration suggests that the problem
is structural, not merely cyclical. That is, it is not merely
linked to the current downturn. And structural problems call
for structural solutions. Specifically, the ultimate answer to
restoring both innovation and vigorous job growth lies in
policy reforms that create a more favorable environment for the
creation and growth of new businesses. Barriers to
entrepreneurship need to be identified and systematically
dismantled.
This conclusion is further supported by my own research
into the growth challenges confronting not only the United
States but all advanced countries operating at the
technological frontier. My findings can be summarized as
follows: The available sources of growth--and the policy
requirements of growth--change over time with a country's
advancing economic development. In particular, as countries get
richer, they become ever more heavily dependent on homegrown
innovation, as opposed to simply expanding existing activities
or borrowing good ideas from abroad in order to keep the growth
machine humming. And since new firms play an absolutely vital
role in the innovation process, that means that removing
barriers to entrepreneurship becomes increasingly important to
maintaining economic dynamism and prosperity.
In an effort to identify the kinds of policy reforms needed
to reduce the structural barriers to entrepreneurship,
innovation, and job creation, the Kauffman Foundation unveiled
in July of this year a series of legislative proposals called
the Startup Act of 2011. Let me review now the major elements
of this plan: an entrepreneur visa along the lines of the
revised Kerry-Lugar Startup Visa Act; green cards for foreign
students when they receive so-called STEM degrees from U.S.
universities; exemption from capital gains taxation for
investments in startups held for at least five years; a 100
percent exclusion from corporate income tax for qualified small
businesses on their first year of taxable profit followed by a
50 percent exclusion in the subsequent two years; allowing
shareholders of companies with market valuations under $1
billion to opt out of Sarbanes-Oxley requirements; higher fees
for better, faster service at the Patent and Trademark Office
to clear the backlog there--happily, I can say that this
proposal was included in the recently enacted patent reform
legislation; mandating that all federal research grants to
universities be conditioned on universities affording their
faculty members the ability to choose their own licensing
agents rather than having to rely, as they do at present, on
the monopoly of their own university's technology licensing
office; instituting a requirement that all major regulatory
rules sunset automatically after 10 years; subjecting all
proposed and existing major regulatory rules to a uniformed
cost-benefit analysis; and finally, instituting monitoring of
business climate in states and localities along the lines of
what the World Bank's ``Doing Business'' report does for
different countries.
The proposals contained in the Startup Act represent a kind
of greatest hits collection produced--picked from a far broader
set of promising reform ideas. Some of these other ideas can be
found in a book published this year by the Kaufmann Foundation
entitled ``Rules for Growth.''
A great deal of additional work needs to be done on
fleshing out what we can do to change the legal and regulatory
environment, but in the current crisis, first steps are
urgently needed. We believe that the proposals put forward in
the Startup Act would make excellent first steps towards a
better climate for firm formation, innovation, and prosperity.
Thank you very much.
[The prepared statement of Mr. Lindsey follows:]

Prepared Statement of Mr. Brink Lindsey,
Senior Scholar in Research and Policy,
Ewing Marion Kauffman Foundation

Chairman Quayle, Ranking Member Edwards and distinguished Members
of the Subcommittee, my name is Brink Lindsey, and I am a senior
scholar in research and policy at the Ewing Marion Kauffman Foundation.
I thank you for the invitation to appear at today's hearing and share
some perspectives on the crucial challenge of reviving new firm
formation and restoring dynamism and prosperity to the U.S. economy.
Today's hearing is premised on a connection between encouraging new
businesses and fostering innovation, and that premise is well supported
by the evidence. Existing firms contribute much to innovation as well,
but such innovation tends to be incremental: improvements in existing
products or production processes or introduction of new products
through pursuit of well-established R&D agendas. But when it comes to
so-called discontinuous or disruptive innovation--the kinds of
breakthroughs that topple the status quo and give rise to whole new
industries--the agents of change tend to be new firms. Think FedEx,
WalMart, Microsoft, Google, all of which were upstarts without any
stake in the existing way of doing things. In this regard, the
remarkable career of Steve Jobs at Apple is the exception that proves
the rule. The reason he was so exceptional was precisely that he
launched multiple business revolutions from the same company. That is a
rarity.
Economic research bears out the importance of new firms to
America's economic dynamism. It turns out that a significant fraction
of U.S. productivity growth comes from the entry and exit of firms--
what Joseph Schumpeter called creative destruction. Generally speaking,
exiting firms are less productive than existing firms, which in turn
are less productive than surviving new firms. According to a recent
paper written by economist John Haltiwanger and supported by the
Kauffman Foundation, net entry of firms has contributed about 30
percent of total productivity growth in the manufacturing sector and
virtually all productivity growth in the retail sector. \1\ New firms
are thus the lifeblood of rising productivity, and, consequently,
rising living standards.
---------------------------------------------------------------------------
\1\ John Haltiwanger, ``Job Creation and Firm Dynamics in the
U.S.,'' National Bureau of Economic Research, May 2011, http://
www.nber.org/chapters/c12451.pdf.
---------------------------------------------------------------------------
And when it comes to promoting prosperity through job creation, the
role of new enterprises can hardly be overstated. According to research
from the Kauffman Foundation, there were only seven years from 1977 to
2005 in which existing firms created more jobs than they destroyed. The
bottom line is simple: Without startups, there would be no net job
creation in the United States. \2\
---------------------------------------------------------------------------
\2\ See Tim Kane, ``The Importance of Startups in Job Creation and
Job Destruction,'' Kauffman Foundation Research Series: Firm Formation
and Economic Growth, July 2010, http://www.kauffman.org/uploadedFiles/
firm-formation-importance-of-
startups.pdf.
---------------------------------------------------------------------------
Unfortunately for both the short-term prospects for a rebound in
employment and the long-term prospects for productivity and growth, the
creation of new businesses in America is in a deep slump. And what is
more, additional research from the Kauffman Foundation reveals that
slump predates the Great Recession that began in 2008. Census data show
that the number of new employer businesses created annually began
falling after 2006, dropping 27 percent by 2009. Meanwhile, the average
number of employees per new firm has been trending gradually downward
since 1998. And the pace of job growth at new firms during their first
five years has been slowing since 1994. \3\
---------------------------------------------------------------------------
\3\ E.J. Reedy and Robert E. Litan, ``Starting Smaller, Staying
Smaller: America's Slow Leak in Job Creation,'' Kauffman Foundation
Research Series: Firm Formation and Economic Growth, July 2011, http://
www.kauffman.org/uploadedFiles/
job-leaks-starting-smaller-study.pdf.
---------------------------------------------------------------------------
A picture of even longer-term decline is revealed by the recent
paper from John Haltiwanger mentioned above. Average annual gross job
creation by startups has fallen from 3.5 percent of total employment in
the 1980s to three percent in the 1990s to 2.6 percent since 2000--25
percent cumulative drop. With this slump has come a drop in overall
gross and net job creation for the U.S. economy.
The timing of this deterioration suggests that the problem is
structural, not merely cyclical. And structural problems call for
structural solutions. Specifically, the ultimate answer to restoring
both innovation and vigorous job growth lies in policy reforms that
create a more favorable environment for the creation and growth of new
businesses. Barriers to entrepreneurship need to be identified and
systematically dismantled.
This conclusion is further supported by my own research into the
growth challenges confronting not only the United States but all
advanced economies operating at the technological frontier. My findings
can be summarized as follows: The available sources of growth, and the
policy requirements of growth, change over time with a country's
advancing economic development. In particular, as countries get richer,
they become ever more heavily dependent on home-grown innovation--as
opposed to simply expanding existing activities or borrowing good ideas
from abroad--to keep the growth machine humming. And since new firms
play an absolutely vital role in the innovation process, that means
that removing barriers to entrepreneurship becomes increasingly
important to maintaining economic dynamism and prosperity. \4\
---------------------------------------------------------------------------
\4\ Brink Lindsey, ``Frontier Economics: Why Entrepreneurial
Capitalism Is Needed Now More Than Ever,'' Kauffman Foundation Research
Series on Dynamics of Economic Growth, April 2011, http://
www.kauffman.org/uploadedFiles/
frontier-economics-4-06.pdf.
---------------------------------------------------------------------------
To get more specific, our long-term growth prospects are dimmed
today by shifting demographics. Over the course of the 20th century,
U.S. growth rates got a steady and considerable boost from the ongoing
rise of women in the workforce. As a result, the American labor force
climbed from 56 percent of the adult population in 1900 to 67 percent
in 2000. This is a classic form of non-innovative growth: boosting
inputs into the production process, as opposed to figuring out how to
get more output from a given quantity of inputs. But now this source of
growth is all but exhausted. The female labor force participation rate
peaked in the 1990s and then began dipping well before the Great
Recession. Meanwhile, male participation has been falling gradually for
decades because of later entry into the workforce, longer retirements,
and the aging of the population. Consequently, according to a study by
the McKinsey Global Institute, growth in the workforce will add only
0.5 percentage points to the overall growth rate between 2010 and
2020--as compared to 2.0 percentage points in the 1970s. Because of
these unfavorable demographics, McKinsey estimates that productivity
growth will have to increase by almost 25 percent to keep real per
capita growth going at its long-term historic rate of 1.7 percent a
year. \5\
---------------------------------------------------------------------------
\5\ McKinsey Global Institute, ``Growth and Renewal in the United
States: Retooling America's Economic Engine,'' February 2011. http://
www.mckinsey.com/mgi/publications/
growth-and-renewal-in-the-
us/pdfs/.
MGI-growth-and-renewal-in-
the-us-full-report.pdf.
---------------------------------------------------------------------------
In an effort to identify the kinds of policy reforms needed to
reduce structural barriers to entrepreneurship, innovation and job
creation, the Kauffman Foundation unveiled in July of this year a
series of legislative proposals called the Startup Act of 2011. \6\ Let
me review now the major elements of this plan:
---------------------------------------------------------------------------
\6\ Kauffman Foundation, ``The Startup Act: A proposal for new
legislation aimed at jump-starting the U.S. economy through successful
startups,'' http://www.kauffman.org/uploadedFiles/
startup-act.pdf.

Welcoming job creators to the United States. First, we
propose an entrepreneur visa along the lines of the revised Kerry-Lugar
Start-Up Visa Act. Initially, entrants would be screened for temporary
visas based on either the outside capital they had attracted or
revenues from U.S. sales they already had recorded. Permanent work
visas (green cards) would be granted once these entrepreneurs had hired
a minimum number of U.S. workers. Although the Kerry-Lugar bill imposes
a limit on the number of visas granted, we believe a strong case can be
made for a visa without any caps. A second, mutually reinforcing idea
would grant green cards to foreign students when they receive their so-
called STEM degrees--degrees in science, technology, engineering and
mathematics--from U.S. universities. Admittedly, most STEM graduates
who are given visas will compete with U.S. workers for jobs. In the
long run, however, given the greater propensity of immigrants to found
businesses, it is likely many of the STEM graduates permitted entry now
eventually will go on to form scale businesses that hire American
---------------------------------------------------------------------------
workers.

Facilitating early-stage financing for new firms. The
first proposal here is for a capital gains tax exemption for long-held
investments in startups. The Small Business Jobs Act of 2010 currently
provides such an exemption for investments in ``qualified small
businesses'' (those with less than a $50 million valuation at the time
of investment) held for at least five years. The exemption is currently
due to expire at the beginning of 2012, but the National Advisory
Council on Innovation and Entrepreneurship (NACIE), created by the
Department of Commerce, has recommended a permanent exemption for these
critical initial investments in startups. It is appropriate for this
idea to be included in any comprehensive startup legislation. NACIE
also has suggested a 100 percent exclusion on corporate taxable income
earned by qualified small businesses (again, using the same test as for
the proposed capital tax exemption) on the first year of taxable
profit, followed by a 50 percent exclusion in the subsequent two years.
We believe additional incentives along these lines are worthy of
support.

Facilitating access to public capital markets. The
provisions of the Sarbanes-Oxley Act, especially the verification of
internal controls embodied in Section 404 of the Act, impose a
disproportionate burden on new, small companies and thus act as a
barrier to going public. In 2010, Congress implicitly recognized this
problem when granting a permanent exemption from the Section 404 audit
requirements for public companies with market capitalizations of less
than $75 million. Any comprehensive startup legislation should go
further, for a very simple reason: The best judges of whether the
benefits of the SOX requirements outweigh their costs are the
shareholders of the companies for whose benefit the law was enacted in
the first place. Accordingly, rather than simply raising the market cap
threshold for exempting smaller public companies from SOX's
requirements, the most logical SOX reform is to allow shareholders of
public companies with market valuations below $1 billion to opt in to
at least Section 404 compliance, if not to all of the SOX requirements.
Companies whose shareholders do not elect to comply with SOX should
have special designations in their exchange listings to denote this
fact so that all shareholders, current and potential, are put on
notice.

Accelerating the formation and commercialization of new
ideas. Recently enacted patent reform legislation contains various
provisions whose likely impacts on innovation and startups are not
clear. We believe that at least one provision of the legislation--
namely, higher fees for faster or better service--is very likely to be
positive in its effects. To obtain patent protection for new ideas,
inventors first must receive a patent from the U.S. Patent and
Trademark Office (USPTO). In recent years, however, USPTO examiners
have been unable to keep up with the pace of new applications, to the
point where there is now a backlog of more than 700,000 patent
applications at the office. There is an old saying that ``justice
delayed is justice denied,'' and the same certainly applies to a patent
regime that is too slow to process incoming patents.

More than 30 years ago, Congress enacted the Bayh-Dole Act,
granting recipients of federal research monies intellectual
property rights in innovations discovered with the use of those
funds. Since Bayh-Dole was enacted, faculty members typically
have been required under their university contracts to use the
university's own technology licensing office (TLO) as the
exclusive agent for licensing the rights to faculty-developed
innovations either to the inventors themselves or third
parties. In effect, university TLOs have become monopoly
licensing agents and gatekeepers, preventing innovative faculty
from using their own attorneys or other third parties, or even
other university TLOs, to license and commercialize their
innovations. The Federal Government can and should remedy this
odd situation. One simple way to do so is to mandate that all
federal research grants to universities be conditioned on
universities' affording their faculty members the ability to
choose their own licensing agents. A university's own TLO could
compete in this new environment or, at minimum, provide
informational services and mentoring to university faculty
members. Licensing freedom for faculty inventors and true
competition in innovation licensing would speed up the
commercialization of faculty innovations, benefiting the
innovators, their universities and our society.

Removing regulatory barriers to entrepreneurship. Because
of their size, small and new businesses bear an especially heavy burden
when complying with the multitude of local, State and federal rules
that govern business behavior. To help alleviate this burden, the
Startup Act contains two proposals for systemic reform of the federal
regulatory process. The first is a simple requirement that all major
rules (those with estimated costs of at least $100 million) sunset
automatically after 10 years. Rules then would be allowed to lapse
unless and until re-proposed and implemented (under new standards
outlined next). This would regularly cleanse the books of inefficient
and costly rules and, thus, barriers to business formation and growth
for all businesses, including startups. The second proposal is for all
major rules to be subject to a uniform regulatory review process. Under
this screening procedure, no major rules would be implemented or
maintained (after a sunset review) unless agencies can determine that
the rules' benefits outweigh their costs. Furthermore, the form of
these rules should be such that the option chosen is the most cost-
effective of the alternatives available.

In addition, the Startup Act offers a new mechanism for monitoring
and thereby potentially curbing regulatory abuses and excessive costs
at the State and local levels. Although the Federal Government should
not step on the toes of local and State governments, it can facilitate
healthy competition among these jurisdictions for favorable startup
environments. Just as the World Bank has assessed the favorability of
the legal environment toward business in different countries through
its annual Doing Business reports, there should be some recognized
entity that does the same (with a special emphasis on policies and
practices affecting the formation and growth of new businesses) for
each of the 50 States and all cities above a certain size. The Doing
Business rankings have proven to be an important spur to regulatory
reform around the world. A similar Doing Business project for
jurisdictions inside the United States could have the same result. Both
the government and private sector have roles in this effort. Because
the underlying data are likely to be costly and difficult to gather, it
could be useful and important to charge and fund one government agency
with collecting the raw data that could be made available to the
public, which would permit either nonprofit or for-profit rating
systems to develop.
The proposals contained in the Startup Act represent a kind of
``greatest hits'' collection picked from a far broader set of promising
reform ideas. Some of these other ideas can be found in a book
published this year by the Kauffman Foundation entitled Rules for
Growth: Promoting Innovation and Growth through Legal Reform. That book
was the product of an ongoing Kauffman Foundation initiative--the
Project on Law, Innovation and Growth--that we hope will make further
major contributions to our understanding of how to improve our legal
and regulatory system to make it more conducive to entrepreneurial
dynamism.
Much work remains to be done, but in the current crisis, first
steps are urgently needed. We believe the proposals put forward in the
Startup Act would make excellent first steps toward reviving firm
formation, innovation and prosperity.
Thank you.

Chairman Quayle. Thank you, Mr. Lindsey.
I now recognize Mr. Julian Mann to present his testimony.

STATEMENT OF MR. JULIAN MANN,

CO-FOUNDER AND VICE PRESIDENT, PRODUCT DEVELOPMENT

AND RESEARCH, SKYBOX IMAGING

Mr. Mann. Mr. Chairman and Committee, thank you very much
for the opportunity to be here this morning.
In 2007, I was working as a student intern with NASA and
realized that the billions of dollars we were spending building
satellites as a Nation was largely driven by the antiquated set
of technologies on which these satellites were based. But I had
an epiphany. The technology that we were using to build
academic satellites in our Stanford University research lab
could have real impact on the way in which our Nation conducts
business in space if only we could bring the necessary
investment from the private sector to accelerate the
development and commercialization of the technology. This idea
became Skybox.
I co-founded Skybox Imaging in January 2009 to
revolutionize the use of satellite imagery in characterizing
daily activity across the surface of our planet. At Skybox, we
combine our own low-cost microsatellite design with the Silicon
Valley approach to storing, processing, and disseminating
massive quantities of imagery and derived data. We have raised
$21 million in venture capital to date, have quadrupled in size
over the last nine months and now directly and indirectly
employ over 75 engineers across the United States.
People talk about the decline in American competitiveness,
but there is a real opportunity to make up that lost ground. We
need more companies like Skybox, and I have three ways in which
we can facilitate that growth: improve the transfer of
commercially viable IP out of research institutions and into
the private sector, create mechanisms that assist startup
companies in alleviating governmental regulations that are
restricting innovation, and reforming acquisition practices to
make the government a better customer to emerging ventures.
As we started seriously investigating making Skybox a
reality, Stanford provided a number of resources that were
essential to our commercial growth. We were also encouraged to
take the idea outside the university if we were serious about
such commercialization. There was sound reason for this.
Graduate students conducting steadily progressing, multiyear
projects produce the majority of university research. The pace
within new ventures is much faster. New ventures are successful
due to their ability to rapidly change course in order to
ensure convergence between product and market opportunity. This
inherent lack of synchronicity between the two groups makes
productive collaboration restrictively difficult to pursue.
Instead, by transitioning the work from academia to industry
when the focus shifts from fundamental research to
commercialization, Stanford ensures alignment between the
current stage of development and the environment in which said
development is taking place.
Stanford is particularly effective in providing programs
that assist in facilitating this transition from courses
designed to help entrepreneurial-minded researchers understand
the business plan creation and venture capital financing
processes to investor and advisor introductions provided
through the extended Stanford network; a distinct pipeline
exists to help educate and foster entrepreneurship within the
university.
There are numerous examples of this technology transition
approach working extremely effectively--Google, Cisco, Hewlett
Packard, Yahoo, Sun Microsystems, and VMware were all founded
in this way. Skybox follows a long tradition in progressing
from research to commercialization by leaving academia.
Navigating burdensome federal regulations while
simultaneously trying to build and grow a business can kill a
new venture. As a commercial satellite imaging company, Skybox
has felt this pain since the day of our founding. One set of
regulations has been particularly restrictive: the
International Traffic in Arms Regulations (ITAR). Beyond
driving up our engineering costs by up to a factor of 10, of
greater concern is how ITAR has reduced American
competitiveness. Because the majority of the global market for
small satellite technology is international, domestic suppliers
restricted by the ITAR have fallen behind their foreign
competitors.
When we have approached these foreign suppliers with the
idea of a deeper collaboration or co-development, they have
largely declined. They are concerned that they will not be able
to provide the resultant technology to their existing customer
base if they partner with American companies. This is a real
problem. Rather than having the government attempt to create
what amounts to public venture capital, the government needs to
consider how it can be a better customer to innovative and
growing companies.
Ultimately, the private sector is very efficient at
identifying technologies that have real commercial viability
and providing the capital necessary to grow these technologies.
Existing government acquisition models have not kept up with
the pace of technological innovation and failed to express the
market need in a way that is addressable by commercial product
companies. Consequently, many innovative technology companies
do not even consider doing business with the Federal Government
because it is simply too costly to do so. Entrepreneurs are
successful in the private sector because they find ways of
delivering capabilities that do more with less. This is the
same challenge that we face as a Nation today.
Working with new ventures is dissimilar from working with
other types of organizations. It requires alternate
communication and outreach strategies, new acquisition
methodologies, and differing types of governmental support. It
also yields novel solutions, engages our Nation's best and
brightest innovators, and ensures that we remain the
technological powerhouse that has been our enduring strength.
We must find new ways of tapping the incredible resource that
is our entrepreneurial base to solve the challenges that face
our Nation. This change will not be immediate, nor does it
require astronomical capital to support. With concentrated
effort, advocacy, and partnership we can bring government and
the technology innovation sector together for our mutual and
enduring benefit.
Thank you.
[The prepared statement of Mr. Mann follows:]

Prepared Statement of Mr. Julian Mann,
Co-Founder and Vice President, Product Development
and Research, Skybox Imaging

I co-founded Skybox Imaging Inc. to revolutionize the use of
commercial satellite imagery in characterizing daily activity on the
surface of our planet. At Skybox we combine our own low-cost
microsatellite design with a Silicon Valley approach to storing,
processing and disseminating massive quantities of imagery and derived
data. Skybox was incorporated in January 2009, after a year of
incubating the concept while conducting graduate research in
Aeronautics & Astronautics at Stanford University. We received our
initial venture investment led by Khosla Ventures in the summer of
2009, with a second financing round a year later, in which Bessemer
Venture Partners joined our initial investors. To date Skybox has
received 21 million dollars in venture capital financing. Throughout
the process of conceptualizing, funding, and growing a high-tech
venture, we have been the beneficiaries of several opportunities
without which our progress to date would not have been possible; we
have also faced numerous challenges along the way.
As graduate students at Stanford, my co-founders and I were
presented with a number of resources that were instrumental in the
creation of the company. From courses designed to help innovators
understand business plan creation and the venture capital financing
process to numerous investor introductions provided through the
extended Stanford network, there existed a distinct pipeline to help
educate and foster entrepreneurship from within the University. That
being said, the University was also very clear through its practices
and actions that, should one be truly interested in pursuing an
entrepreneurial venture, the proper venue for such activity was outside
the University.
Even with these incredible resources at our disposal, we still
found substantial barriers preventing us from getting our company off
the ground. The primary hurdle, and the one faced by all entrepreneurs,
was gaining access to capital. Venture investors are experts at pattern
recognition, they observe opportunity trends that have been successful
in the past, and look for new investments that exhibit the potential to
follow the same trend. As a result, it is incumbent upon the
entrepreneur to find a way of demonstrating how his or her venture has
the potential to follow one of these valued trends. For some companies
this is easy, but we were attempting to convince investors surrounded
by opportunities vying to be the next Facebook or Twitter to invest in
a company building, launching and operating satellites. Even with the
myriad of introductions to venture capitalists that we received, it
took months of restructuring the opportunity, and hundreds of meetings
that ended in eloquent variations of ``no,'' to finally find a way of
positioning our company as a good fit for venture capital.
Although built upon a foundation of experience fostered within a
university research setting, Skybox does not maintain any active
research partnerships with universities. In general, it is very
difficult for new ventures and universities to find productive
methodologies for co-development of new technologies. Both entities are
typically capital constrained, and often have competing goals with
respect to commercialization of technology and publication of research.
New companies are myopically focused on customer adoption and creating
competitive barriers; universities are interested in maintaining a
sustainable base of novel research.
Beyond a difference in objectives and commonality in resource
scarcity, direct collaboration between universities and new ventures is
often challenged by a fundamental mismatch in operational tempo between
the two types of organizations. Graduate students, conducting multi-
year projects, produce the majority of university research. Conversely,
the pace within new ventures is much faster. For example, our
organization has grown almost 400% over the last nine months. This
inherent lack of synchronicity between the two groups makes productive
collaboration restrictively difficult to pursue. Based upon these
challenges, and the manner in which Stanford made it clear to us that
it was time to take our idea outside the University if we were going to
pursue it further, it is my strong opinion that the proper time for
separation from universities is when a new venture moves beyond the
realm of fundamental research and into the world of commercialization.
Numerous universities have programs, Stanford University's Office
of Technology Licensing, for example, that assist in fostering
relationships between university researchers and organizations
interested in the commercialization of their intellectual property. The
difference between such programs and the aforementioned difficulties in
collaboration is that these licensing programs are typically designed
to facilitate the transfer of existing IP to external entities for
commercialization rather than collaboration in research. There are
numerous instances in which this type of intellectual property transfer
has worked extremely effectively; Google and Yahoo were both founded
through this mechanism, for example. Although Skybox is not based upon
direct transfer of IP from the university, we exhibit the same
transition from untargeted research to focused commercialization as we
departed from academia into the world of entrepreneurship.
It is similarly challenging for new ventures to engage and
collaborate with larger, more entrenched companies. Large organizations
often operate on similar time scales to universities, creating the same
set of challenges addressed previously. Most start-up companies tend to
be very flat organizations, lacking traditional organizational
bureaucracies, and are characterized by their decisiveness and ability
to change directions quickly. This nimbleness is one of the key reasons
why startup companies are able to innovate. Larger, more established,
organizations are often much more hierarchical and resistant to change.
In fact, the type of rapid iteration and course-correction that is
essential to new venture success is often characterized as high-risk
activity when observed within large organizations. Consequently, this
operational incompatibility makes it very difficult for startup
companies to successfully collaborate with large organizations.
A common thread found among most entrepreneurs in the technology
sector is that they are working on technologies that are fundamentally
transformative within their respective markets. Many, if not most, of
these companies eventually come into conflict with existing regulatory
environments. This stems from the fact that when the particular
regulations were originally developed, the type of technology creating
conflict was not even in the realm of consideration. As a member of the
aerospace industry, Skybox has felt this pain since the day of its
founding.
As a commercial Earth observation satellite company, we must
operate under NOAA, FCC and ITAR regulation. Each one of these has
presented its own set of challenges in our growth. For example, in
obtaining a license from the FCC to operate an Earth observation
satellite, a company must post a five million dollar surety bond. While
this may not be overly burdensome for a traditional imaging satellite
program, which costs over 500 million dollars, our satellites are over
an order of magnitude less expensive, resulting in greater than 10
percent of the overall program cost being consumed by a federal
licensing bond. This is a very difficult challenge for a new venture
being funded with equity dollars to weather.
The second major example of burdensome federal regulation is ITAR.
As a satellite manufacturing company, virtually everything done by our
engineering organization is governed under the ITAR. Even the most
benign mechanical bracket can only be manufactured by an ITAR certified
machine shop. The vast majority of local machine shops are not ITAR
certified, and have no interest in becoming certified due to the high
cost, burdensome documentation requirements, and increased liability.
As a result we have an artificially reduced supply market, which has
resulted in our manufacturing costs being increased by a factor of 10.
Furthermore, these machine shops are typically very busy, which means
we have a lead-time that is two to three times longer than if we were
operating in a less regulated industry.
Perhaps even more concerning is the fact that the ITAR regulations
have had the unintended consequence of actually decreasing domestic
competitiveness in the aerospace industry. As a relative newcomer to
the industry, I have not seen the progression of the regulations over
the years. What I have seen, however, is that when it comes to low-
cost, transformative, satellite technologies, international developers
have significantly surpassed the state of domestically developed
technologies. A number of our high-performance specialty components are
obtained from international suppliers. Additionally, when we have
approached these suppliers about the possibility of co-development or
manufacturing support, they have declined due to the fact that their
primary customer base is outside the United States. International
developers are rejecting the idea of deeper collaboration with American
companies due to the concern that they will not be able to export the
resulting technology to their existing customers due to ITAR; this is a
real problem for American innovation.
While I have highlighted a few specific regulations that have
impeded growth at Skybox, it is important to remember is that there is
no ``one-size-fits-all'' solution when it comes to reducing regulatory
burden for entrepreneurs. What are needed, however, are mechanisms to
help entrepreneurs recast these issues as blockers to innovation, with
the ultimate goal of alleviating the regulatory burden. No one wants to
inhibit innovation within our nation, yet it is incredibly expensive
and difficult for entrepreneurs to interact with the Federal
Government. At Skybox we have spent thousands of man-hours and hundreds
of thousands of dollars solely trying to better understand the
regulations that are relevant to us, and educate regulators about what
we are doing and how we are doing things differently. We are the lucky
ones; we are well financed and have comparatively strong ties to the
Federal Government. Many other entrepreneurs are not so lucky.
I was asked to recommend ways in which the Federal Government can
promote new business creation and growth in technology innovation.
Ultimately, the private sector is very efficient at identifying
technologies that have real commercial viability and providing the
capital necessary to grow these technologies. The best way that the
government can assist in this process is become a better customer to
innovative companies. Existing government acquisition models have not
kept up with the pace of technological innovation. Traditionally, the
government has explicitly defined the technologies that it is
interested in obtaining, and the contractors build systems that meet
exactly those requirements. This is not how the private technology
sector does business. I am not advocating government acquisition of
technology merely to support private research and development. I am
intimating that entrepreneurs in the technology sector have made
numerous capabilities for the private sector, which may also be
applicable to the public sector. Many innovative technology companies
do not even consider doing business with the Federal Government because
it is simply too costly to do so. Entrepreneurs are successful in the
private sector because they find ways of delivering capabilities that
do more with less; this is the same challenge that we face as a Nation
today.
Working with new ventures is dissimilar from working with other
types of organizations. It requires alternate communication and
outreach strategies, new acquisition methodologies, and differing types
of governmental support. It also yields novel solutions, engages our
Nation's best and brightest, and ensures that we remain the
technological powerhouse that has been our enduring strength. We must
find new ways of tapping the incredible resource that is our
entrepreneurial base to solve the challenges that face our Nation. This
change will not be immediate, nor does it require significant capital
to support. With concentrated effort, advocacy, and partnership we can
bring government and the technology innovation sector together for our
mutual and enduring benefit.

Chairman Quayle. Thank you, Mr. Mann.
I now recognize Mr. Rothrock for five minutes for his
testimony.

STATEMENT OF MR. RAY ROTHROCK, PARTNER, VENROCK

Mr. Rothrock. Chairman Quayle, Ranking Member Edwards, and
the Committee, my name is Ray Rothrock and I am a General
Partner of the venture firm Venrock, one of the oldest ventures
capital firms in the United States. Venture capitalists like
myself are always committed to funding America's most
innovative entrepreneurs. I am also a member of the Board of
Directors of the National Venture Capital Association. As the
voice of the U.S. venture capital community, the NVCA advocates
policies that support entrepreneurship, encourage innovation,
and reward long-term investment.
I am grateful for the opportunity to be here today and to
answer your questions regarding the obstacles that
entrepreneurs face in turning innovative ideas into successful
companies and about what role public policy plays in that
process.
Venture capitalists work closely with entrepreneurs to
transform breakthrough ideas and innovations into emerging
growth companies that drive U.S. job creation, economic growth,
and general well-being. The results of venture-backed companies
is quite meaningful. Over 12 percent of all the private sector
jobs in the United States today were originally venture-backed
companies representing 22 percent of America's GDP. This
ecosystem is well established and works very well. Congress and
the American public should continue to support it and embrace
it if we want to keep America competitive.
Regrettably, in recent years, certain obstacles have
impeded company formation and the building process.
Fortunately, we have the opportunity to address many of those
obstacles immediately and inexpensively by making some specific
and limited adjustments to existing policies. These obstacles
and how we can remove them are described in detail in my
written testimony.
I would like to use my time now to discuss the challenges
that entrepreneurs face within the context of basic R&D, the
role that it plays in fostering and commercializing innovation.
I will also touch on the role of technology transfer.
Further to this point, it should be known that no great
company, not one, was ever created overnight. It was started by
one or two people working very hard for a very long time. It
started with an idea, an invention, a new process, but always a
small group of people. This story has been repeated over and
over and over for decades if not for hundreds of years in this
country. You get a great, successful country by first
supporting the creation of companies and making the road to
success as smooth as possible. If successful, that first R&D
dollar will be leveraged by thousands, even millions of dollars
of investment and possibly billions of dollars of economic
activity. It does take time and it works. It works very well
for the benefit of all Americans.
There are many steps from innovation to the market. Let me
speak first of R&D. Maintaining America's global innovation
advantage requires continued federal funding for basic research
and development at every venue--national labs, universities,
and all the agencies. Basic R&D is the lifeblood of innovation.
It pays for the scientific breakthroughs from which innovative
products, companies, and even whole industries are created.
Without basic R&D, America's innovation pipeline would dry up.
That is why we must maintain funding for basic R&D and keep the
barriers that entrepreneurs face in bringing those innovations
out to the marketplace as low as possible. Here are four
suggestions:

LFirst, we need to continue to support programs of
R&D, programs such as the Advanced Research Projects Agency at
Energy, or ARPA-E, is paramount. ARPA-E exists today because of
good work of this committee. I realize there is some skepticism
by Members of the Subcommittee about the program, but at a time
when every program is at risk for reduction or elimination,
Congress should weigh the immense benefit of ARPA-E-like
innovations against the relatively small financial cost and
understand how those successful investments result in further
investment by the private sector, which leads to great
companies and results in what we all know as the economic
multiplier effect.

Our global competitors, for example, are putting
billions of dollars into basic research to innovate in
the clean energy area. These innovations ultimately
generate economic growth in those geographies. We need
that innovation here in America, and I can tell you
with certainty that these investments will yield
tremendous results in the coming years and decades
ahead and they will help keep America competitive.
Without R&D, great companies are simply not born.

LSecond, Congress should restore the eligibility
for Small Business Innovative Research--or SBIR--grants to
venture-backed companies. This exclusion, a recent innovation,
works against the program's objectives because it has prompted
many companies to end promising research projects. This
jeopardizes future scientific advances and job growth. By
explicitly restoring that eligibility for venture-backed
companies, Congress and the SBA can ensure the pool of SBIR
grant seekers comprises the very best companies. This will
maximize the impact of every SBIR dollar--again, a leverage.
This catapults ideas to reality in launching potentially great
companies.

LThird, Congress can encourage the Department of
Energy to award more DOE grants to innovators. Venture-backed
companies are not excluded by law from earning DOE grants, but
most of them get passed over in favor of large, multinational
energy conglomerates. Rather than continuing and reinforcing
the status quo, the DOE should redirect at least a portion of
those pools of grants and loans to clean-tech innovators with
the potential to create entire new industries here in the
United States. These grants should focus on the future, not the
past.

LFourth, we must ensure that all of our research
institutions, all of them, have clear, transparent, and
predictable processes for the transfer of innovation technology
from the lab to the entrepreneur. Entrepreneurs face many
burdens in starting a company. They have to raise the capital,
they have to attract employees, they have to ultimately find
customers who want to buy their products. Making it hard is
just one more difficulty in that process.

Every time those entrepreneurs go elsewhere to start their
companies, even if the invention was developed here in the
United States, this country loses a very special opportunity to
start the process of creating jobs and possibly a whole
industry. If we seize these opportunities to reduce uncertainty
and obstacles facing entrepreneurs, we can ensure that
innovation and the economic growth that continues will continue
to thrive in the United States.
Furthermore, the unique public-private partnership between
government-funded research institutions, entrepreneurs, and
venture capitalists may be America's greatest export.
Therefore, we must do all we can to foster innovation in R&D.
In closing, I want to personally thank you for the
opportunity to discuss these important issues with you today
and I am happy to answer your questions. I also wish to thank
you for your service to our country in your capacity as Members
of Congress. Thank you.
[The prepared statement of Mr. Rothrock follows:]
Prepared Statement of Mr. Ray Rothrock, Partner, Venrock

Chairman Quayle, Ranking Member Edwards, my name is Ray Rothrock,
and I am a General Partner of Venrock--one of the oldest venture
capital firms in the United States. Venture capitalists are committed
to funding America's most innovative entrepreneurs, working closely
with them to transform breakthrough ideas into emerging growth
companies that drive U.S. job creation, economic growth, and general
well-being. Venture capital in the United States has been supporting
entrepreneurs for over 70 years. Beginning in the 1960s, venture
capital was professionalized, leading to an industry today of 500 firms
and $180 billion of invested capital. During this time the industry has
mastered, if not perfected, the process of allocating scarce capital
and human resources towards the most promising new opportunities for
companies. Today, the results of the industry reach across the country
and the globe, and they touch every aspect of our lives. Venture
capital is now a global activity with every developing nation pursuing
it at some level. Putting the impact of U.S. venture capital in
quantitative terms: Venture-backed companies accounted for 12 million
private sector jobs and $3.1 trillion in revenue in the United States
in 2010, according to a 2011 study by IHS Global Insight. That equals
approximately 22 percent of the Nation's GDP. The U.S. venture capital
industry has created this level of impact just in the last 50 years
alone.
I am also a member of the Board of Directors of the National
Venture Capital Association. As the voice of the U.S. venture capital
community, NVCA advocates for policies that encourage innovation and
reward long-term investment. It shares industry-wide best practices
with all its members, and participates in a number of forums, including
testifying before Congress, to keep all beneficiaries of venture
capital investment--including the public--apprised of the U.S. venture
community's efforts impact.
I am grateful for the opportunity to be here today and to answer
your questions regarding the obstacles that entrepreneurs face in
turning innovative ideas into successful companies and what role public
policy plays in this process. I will address those issues within the
context of the role of basic research and development and technology
transfer in fostering and commercializing innovation. I'd like to
begin, however, with a broad overview of some factors driving
uncertainty for entrepreneurs today.

Overview: Entrepreneurs

Being an entrepreneur and starting a company are very difficult.
Within reason, the United States should do everything it can to foster
entrepreneurial activity and to reduce the friction to success. Every
company ever created began its life as the idea of a single person or a
small team of people. This is true of Henry Ford, Thomas Edison, Thomas
Watson, Fred Smith, Steve Jobs and Steve Wozniak, and on and on. These
innovators were able to grow their ideas into some of America's most
successful companies over time. Following these models, entrepreneurs
have created entire new industries, including computers, electronics,
pharmaceuticals, and telecommunications. These industries advanced the
United States in every way.
Building a business around an innovative product spurred by a novel
scientific discovery involves an enormous amount of risk--for the
entrepreneur and for investors. This risk persists through every stage
of the company's development, but is particularly acute at the earliest
stages. Failure is more common than success. For this reason,
innovators crave any certainty and stability they can find when
deciding if, when, and how to build a company out of a scientific
breakthrough. In colloquial terms, the fewer number of moving parts,
the better chance of success. Presently, a number of factors are
working against entrepreneurs in this regard.
One of the most significant sources of uncertainty for
entrepreneurs and investors remains the current volatility in the U.S.
economy and capital markets, and the sluggishness of their recovery in
the wake of the Great Recession. As someone who speaks with
entrepreneurs on a daily basis, I can tell you that the prospect of
building a business from scratch--especially one based on a novel and
unproven innovation--seems especially daunting under current
conditions. I recognize that opinions may differ among the Committee
Members regarding the extent to which public policy can mitigate these
conditions, but as long as the adverse conditions persist, or the lack
of action to remedy those adverse conditions persists, so too will the
level of uncertainty facing entrepreneurs. This will result in fewer
new companies being started. If such companies are not started, they
will never have the chance to be great.
In addition to the challenges created by current economic
conditions, a number of policy issues are also generating obstacles for
entrepreneurs looking to build innovative, emerging growth companies.
In these cases, we have the opportunity to help reduce uncertainty for
entrepreneurs and encourage the innovation they generate. Fortunately,
none of them require increased government spending, but they do involve
a closer look by government and more understanding on the part of those
people making the laws and enforcing them.

Capital Markets

We have an opportunity to reconnect privately held emerging growth
companies with capital from the public markets, which they need in
order to continue to grow to be great. In the early 2000s and even
recently, well-intended and appropriate regulations have been enacted
with the goal of policing large public companies and protecting
investors. In the wake of Enron and WorldCom, these were important acts
that have benefited many. Unfortunately, these regulations have had an
unintended negative impact by increasing the friction for small
emerging growth private companies seeking access to public capital. In
short, it now costs more and takes twice as long for young companies to
go public. This has produced negative impacts on U.S. job creation--
given that 92 percent of a company's job growth occurs after its
initial public offering--and on the health of our entire capital
markets system. Rather than explore this issue in depth with the
committee today, I'll recommend to you a recently released report
entitled Rebuilding the IPO On-Ramp, which was produced by my
colleagues across the emerging growth company ecosystem at the request
of Secretary Geithner and others. The report provides a comprehensive
analysis of the U.S. IPO crisis and provides policymakers with a clear
roadmap for reconnecting emerging growth companies with the public
capital they need to create jobs and grow their businesses. The report
is included with my submitted written testimony.
[The report may be found in Appendix 2.]

Regulatory Review

We have opportunities to reduce uncertainty for entrepreneurs who
must seek regulatory approval for their innovative new products. Here,
the specific situation at the U.S. Food and Drug Administration
provides an illustrative example. For decades, the FDA provided a well-
organized method for evaluating new drugs and devices intended for the
American market. During this time, entrepreneurs and venture
capitalists worked with FDA to bring amazing health care benefits to
our citizens and ultimately the world. The FDA function was
understandable, predictable and allowed for the proper vetting of risk
by the entrepreneur and investors going forward. This is a critical
point, because it enabled entrepreneurs to judge--in a timely fashion--
whether to continue to raise private capital for more development in
the event that the proposed drug or device had merit, or avoid wasting
further time and money if the product idea was not suitable. Today, for
most entrepreneurs and investors, the FDA review process has grown too
cumbersome and unpredictable--with the later being the most critical
concern. The result has been fewer groundbreaking treatments and
technologies available to patients, and an exodus of innovators and
investment to foreign shores, where the regulatory path to market is
more predictable. That's why my colleagues at the NVCA and I support
reforms to the FDA review and approval process that clarify the path to
market, increase transparency at every stage, and restore the balance
between the benefits and the risks of new therapies and technologies
for seriously ill patients. If the situation is left unaddressed,
critical therapies and technologies will not be funded and therefore
will not reach the patients that need them; those that are funded may
not be brought to market in the United States, which will cost American
jobs and our global competitiveness in an industry we have led for more
than 40 years. It would be a tragedy not to address this problem
quickly and effectively. We must restore an otherwise well-established
and effective FDA for the benefit of entrepreneurs and patients alike.

Immigration

We have an opportunity to reduce uncertainty for entrepreneurs
through legal immigration reform. Over the last decade, it has become
increasingly difficult for foreign-born entrepreneurs and highly
skilled workers to enter the United States and remain here, despite
their enormous contributions to American innovation and economic growth
throughout our history. This uncertainty with regard to their
immigration status is compelling many of the foreign-born students who
earn their degrees and who have conducted their breakthrough research
at U.S. institutions, often with U.S. research dollars, to return to
their native countries to work and found new companies, as opposed to
doing so here. We can reverse this trend by streamlining the pathway to
Green Cards for foreign-born graduate students who wish to remain in
the United States upon completion of their studies. The proposed Start-
Up Visa Act would also help support foreign-born entrepreneurs who wish
to innovate and build their companies here in the U.S. It would provide
a temporary Green Card to entrepreneurs who raise venture capital
investment to start a business. After a period of time, the Green Card
will become permanent if they can show that they have created jobs in
the U.S. or that they are continuing to grow their company by raising
additional capital. This small program would be a breath of fresh air
to budding foreign-born entrepreneurs and a great first step in keeping
these innovations and the talent which created them in the U. S.

Basic Research

Finally, we have an opportunity to encourage entrepreneurs and
foster innovation by maintaining our national commitment to funding
basic research and development activities at government-funded labs and
universities. These institutions remain the germination points for the
breakthrough ideas that can be commercialized by entrepreneurs and
venture investors. I believe that how we get from point to point--from
research to breakthrough to the transfer of that breakthrough from the
lab to the entrepreneur--merits closer examination today. That's where
I will now focus my remarks.

Fostering Innovation Through Basic Research and Development

Maintaining America's global innovation advantage requires
continued federal funding for basic research and development. Basic R&D
is the lifeblood of innovation because it produces the scientific
breakthroughs from which innovative new products can be developed and
around which new companies can be built. Without basic R&D, America's
innovation pipeline would dry up.
For decades, the public sector of the U.S. has conducted such R&D
through federal institutions and agencies such as the National
Institutes of Health, the National Academies of Sciences and the
Defense Advanced Research Projects Agency, or DARPA. The Federal
Government has also funded research at universities across the U.S.
through grants, scholarships and the like. This unique public-private
partnership has delivered countless innovations to the American public.
For example, the Internet grew from DARPA research on a ``best-
efforts'' communication infrastructure. Google was the result of
government-funded Ph.D. research on search and taxonomy of language at
Stanford. Sun Microsystems was government funded Ph.D. research on
computer architectures at Stanford and computer operating systems at
U.C. Berkeley. Genetech was formed from the invention and understanding
of recombinant DNA, which was originally developed at U.C. San
Francisco. These and many many more are just a few of the examples of
successes have generated a decisive competitive advantage to the U.S.
economy.
To preserve this advantage, the U.S. must maintain its commitment
to funding basic research at its labs and universities. That means
keeping current funding levels where they are--even in the face of
deficit reduction. In difficult economic times, budgets for basic R&D
may look like easy targets, but future costs in lost innovation and
economic growth are nearly impossible to estimate. But the costs in
jobs, economic benefits, and societal well-being are easily imagined
when you consider if Sun, Google, and Genetech were never created. R&D
dollars are the highest multiplier dollars in terms of their ability to
attract additional financing over the long term, once inventions are
proven out.
In addition to maintaining current general funding levels, we have
the opportunity to provide certainty for entrepreneurs and foster
innovation through three specific initiatives:

First, thanks to the good work of this Committee, the
Advanced Research Projects Agency-Energy, (ARPA-E) program is finally
enacted. Congress established ARPA-E in 2007 under two broad rubrics.
First, America's dependence on foreign fossil fuels cannot continue at
its current rate. Second, the nation that grows its economy with clean
energy will lead the global economy of the 21st century. Those two
constructs remain true today. Presently, our global competitors are
putting billions of dollars into basic research to develop innovative
clean technologies. Those innovations will generate economic growth. We
need that innovation and that growth to occur here in America. If
Congress fails to commit to fully funding ARPA-E over the long term,
the United States risks ceding its technology leadership position to
foreign countries and potentially operating at a competitive
disadvantage for decades. I want to thank this Committee for its
leadership and commitment to supporting ARPA-E. At a time when every
program is at risk for reduction or elimination, ARPA-E survived floor
votes to cut funding and was able to increase its appropriation. I am
very familiar with the work that ARPA-E does under the leadership of
Director Majumdar, and I can tell you with certainty that this
investment will yield tremendous results in the coming years and help
to keep America competitive.

Second, Congress should restore eligibility for Small
Business Innovative Research, or SBIR, grants to venture-backed
companies. Congress created the Small Business Innovation Research
(SBIR) program in 1982 to stimulate technological innovation and to
encourage small businesses to meet federal research and development
needs. Today, however, the Small Business Administration's
interpretation of the SBIR eligibility requirements excludes companies
with majority venture funding--a complete reversal from the program's
original intention and practice, which had worked well for decades.
This exclusion works against the program's objectives, as it has
prompted many such companies to discontinue promising basic research
projects--jeopardizing future scientific advances and job growth. By
explicitly restoring eligibility for venture-backed companies, Congress
and the SBA can ensure that the pool of SBIR grant seekers comprises
the very best U.S. companies, which in turn will maximize the impact of
every SBIR dollar.

Third, Congress can encourage the Department of Energy to
award more DOE grants to innovators. Venture-backed companies aren't
excluded by law from earning DOE grants and loans, but most get passed
over in favor of large, multinational energy conglomerates. Rather than
reinforcing the status quo, the DOE should redirect existing pools of
grants and loans to clean-tech innovators with the potential to create
entire new industries here in the U.S. These grants should focus on the
future--not the past.

Again, I want to point out that these initiatives do not require
additional government spending. Rather, these programs should be
reexamined or reprioritized so that they help enhance the innovation
pipeline and sources of ideas and companies. This requires careful
analysis and rethinking of many government sponsored activities.

Technology Transfer: From Lab to Market

One of the first critical steps on the path from scientific
breakthrough to marketplace is the transfer of an innovative technology
from the laboratory where it was developed to the entrepreneur who will
develop a commercial product from it and build a new company to market
it.
Here again, the entrepreneur seeks a clear, transparent, and
predictable process to help minimize uncertainty and mitigate risk.
Most research institutions have a technology transfer apparatus in
place and an office dedicated to managing it. Typically, this apparatus
comprises three functions: record-keeping and compliance, patenting and
licensing, and commercialization support. The first function is fairly
self-explanatory. The second, patenting and licensing, involves
managing the institution's patent portfolio and prosecuting to
completion its patents and license agreements. The third,
commercialization support, aims to spin off innovative technologies
into startup companies that can apply the technology to develop new
commercial products and bring them to the marketplace. My firm has
participated in scores of these transfers from universities from all
over the United States.
The essence of a successful transfer from lab to market is about
the entrepreneur who will commercialize the innovation. Some university
transfers involve the graduate student or professor who made the
research breakthrough, but this is rare. Much more often, the
technology transfers to an entrepreneur with some business experience.
This entrepreneur, like all the others described in this testimony,
faces all the burdens and risks of starting a company, raising capital,
attracting employees, and ultimately finding customers. Every time
those entrepreneurs go elsewhere to start their companies, even if the
invention was developed within the U.S., then this country loses a very
special opportunity.

Growing New Venture Ecosystems

Throughout my testimony, I have described the crucial role that
research institutions play in fostering innovation. They are also the
key catalysts in building venture capital ecosystems like the ones in
Silicon Valley, Boston's Route 128 Corridor, and the Research Triangle
in North Carolina. That's because most successful venture capital hubs
begin as communities of innovators.
These innovators are usually drawn together by a top-flight
research university, government laboratory or academic community. An
innovative company with venture-capital roots--like Dell, in Austin,
Texas, or Medtronic, in Southeastern Minnesota, for example--can often
draw talent to the community, too. These companies regularly spin out
new ideas and companies from existing operations. They also provide a
pool of management talent.
Often, these communities coalesce around a certain niche--like
semiconductors at the birth of the Silicon Valley. Other examples
include Tennessee with health care services and Orange County,
California, with ophthalmology, as well as the biotech industry that
thrives in the I-270 corridor in Congresswoman Edward's state of
Maryland, and the energy and high-tech innovations that are coming from
Congresswoman Biggert's home state of Illinois as a result of the
partnership between Argonne National Lab, the university, and the local
business community. Concentrating on these niches creates a virtuous
circle that spurs research and innovation, draws more talent to the
startup companies and the local universities, and attracts more capital
to the area. All of this generates economic growth in the region.
These innovators become entrepreneurs when they try to build their
ideas into successful businesses. This can only happen consistently
within a region if certain conditions are present. As explained
earlier, there must be a sound mechanism for transferring technological
innovations from the research institutions to the entrepreneur who will
guide them to market. An educated workforce with the skills to fill
high-tech jobs is also important, as is a robust network of lawyers,
accountants, and other business professionals to help with networking,
intellectual property protection, securities and IPO registration
compliance, and hiring issues. In addition, the region must have an
infrastructure that can support growing companies. That means efficient
local and regional transportation systems, affordable housing, quality
schools, and vibrant cultural and social scenes.
Government and civic support is also essential. This starts with
favorable tax policies, common-sense regulatory structures and
encouragement of basic research. State and local initiatives that
reward emerging growth companies through tax incentives also make a
significant difference.
These are the ingredients that make for successful venture capital
hubs like Silicon Valley. I want to emphasize that venture capital is
just one participant in such ecosystems. We do not create them from
scratch. States should understand that growing such an environment is a
long-term endeavor that requires local leadership. However, I'm sure
that those States that have succeeded will tell you that the economic
benefits are worth the effort.

Conclusion

Entrepreneurs face many difficult hurdles in starting and building
their companies. It is hard enough to identify an invention with
product potential, then attract capital from a venture capitalist in
order to build the invention into a great product, and then ultimately
sell that product to a customer who will actually pay for it.
Uncertainty regarding regulatory outcomes or a lack of transparency,
along with sweeping financial regulation created from good intentions
but adversely effecting the startup company ecosystem, have prevented
more than one good company from growing into a large, industry-leading
company. The legal obstacles for foreign-born entrepreneurs to remain
in America after being educated here have also hindered our economic
growth. These are extra--and in some cases, costly--burdens that either
reduce the probability of success for well-meaning entrepreneurs or
drive them away entirely. While some of these issues fall beyond our
control, others present immediate opportunities for action on the part
of Congress and local communities. The policy measures outlined above
are not extensive. On the contrary, they are inexpensive to implement
and would have an enormous multiplier effect on economic activity.
Thus, if we seize these opportunities to reduce uncertainty for
entrepreneurs, we can ensure that innovation and the economic growth it
generates will continue to thrive in the U.S. Working with
entrepreneurs, I, as a venture capitalist, have ``engineered'' more
than 50 companies in the last 23 years. There is no shortage of
enthusiasm for entrepreneurship or invention in America. As I said,
venture capital was professionalized here 50 years ago; it may
ultimately be America's greatest export. Therefore, we must do all we
can to foster innovation with R&D support and keep the barriers to
commercializing and investing in that innovation low. Most of all, we
must ensure that America continues to be the destination of choice for
anyone around the world with a great idea. I am confident that we can
do so.
In closing, I want to personally thank you for the opportunity to
discuss these important issues with you today. I am happy to answer any
questions you may have about venture capital or the business of
building companies from scratch. And, I wish to thank you for your
service to our country in your capacity as Members of Congress.

Chairman Quayle. Thank you, Mr. Rothrock.
I now recognize our final witness, Mr. Dubin, for his
testimony.

STATEMENT OF MR. STEVE DUBIN,

FORMER CEO, MARTEK BIOSCIENCES,

AND SENIOR ADVISOR TO DSM NUTRITIONAL PRODUCTS

Mr. Dubin. Thank you, Chairman Quayle and Members of the
Committee, for allowing me to talk about the Martek Biosciences
appropriations story, and I also want to thank Congresswoman
Edwards, who was kind enough to visit our facility some months
ago in Columbia, Maryland, and learn more about us.
I have been affiliated with Martek since its founding in
1985, first as a venture capitalist that helped arrange
Martek's first round of financing and then as an employee for
the last 19 years, ultimately serving as CEO from 2006 until
last month.
Martek is headquartered in Columbia, Maryland, and our R&D
facilities are there. We have a research office in Boulder,
Colorado, manufacturing facilities in Winchester, Kentucky, and
Kingstree, South Carolina, and a consumer products business in
Hartford, Connecticut. We were founded by five visionary
scientists in 1985, and from those first five employees grew to
become the world's leading producer of sustainably produced
microbially sourced omega-3 and omega-6 fatty acids for human
and animal health. Martek's nutrients, which are important for
infant development and brain and eye and heart health for
adults, can be found in infant formula products, prenatal
vitamins, supplements, and food and beverage products by some
of the leading consumer products companies around the world.
So what started out as a five-person R&D company 26 years
ago looking at algae and other microbes as potential sources of
valuable products today has annual revenues of almost 500
million, employs over 600 people and also an additional 100
people at BSM's nutritional production plant in Belvedere, New
Jersey. DSM is one of the leading materials and life sciences
companies in the world. They have been our supplier of our
omega-6 fatty acids and ultimately purchased Martek this past
February.
In addition to our nutritional product portfolio, our
technology platform has expanded over the years to include a
partnership with BP for the development of new biofuels from
microbial sources. We have a partnership with Dow AgroSciences
to develop BHA out of seed oils, and also we are in the process
of developing new vaccine technologies that hopefully will
result in faster production of vaccines when needed at much
lower costs.
It all sounds great, but it took a lot of factors and a
combination of factors and great patience to enable Martek to
become commercially successful. It took the combination of
talented, hardworking people; outstanding technology;
university, Federal, State Government support; and access to
capital, over $400 million over the years. That kind of support
is needed even more today than what we got because capital is
less patient than it was in 1985.
I remember when Martek started the company was just five
scientists, great technology, and a dream. Martek took nine
years to introduce its first significant product and 17 years
to become profitable. It took early research contracts from
NASA to help prove out some of our enabling technology and
acceptance in the University of Maryland's Business Incubator
to get the company's technology enough credibility to enable us
to raise our first 1.5 million in venture capital. It took over
30 SBIR grants totaling over $5 million to fund the early
research that investors would not fund, and that validation of
our technology enabled us to raise three additional rounds of
venture capital.
I am 100 percent certain that if any one of those factors
was missing--the NASA support, the acceptance by the University
of Maryland to their Incubator, the SBIR grants, a long-term
patient capital from our investors, and the founders and
employees that worked so hard for so many years when oftentimes
we were a paycheck or two away from shutting our doors--we
wouldn't have survived. And those over 700 high-paying jobs
would not exist; our health-promoting products would not exist
to be benefitting society.
So government and university support of early-stage
research is needed, I think, even more today than when we
started. Investors are more short-term oriented, and I doubt we
could have raised the first run of venture financing if we had
to start over right now. In any case, early-stage research is
rarely funded by venture or angel investors, and many early-
stage life sciences companies' existence depends on government-
and university-supported research. This is especially true now
when the current economic dynamics of venture funds creates
larger and larger funds that are less and less able to provide
early-stage funding. Large funds cannot efficiently put small
amounts of money to work and use it to return the money to
investors within a 10-year lifecycle of a typical venture
capital limited partnership. This is not good for early-stage
companies that are seeking smaller initial rounds of financing,
and that especially impacts life sciences companies that just
take so many years to create an exit for investors.
So I believe more life sciences companies are in danger of
running out of money today than I have seen in my 26 years in
the business. The lack of early-stage funding will not only
hurt employment in an important industry but will hurt us all
down the road because important new discoveries will not be
made, diseases will not be cured, jobs will not be created, and
the financial spillover from these companies will not happen.
Therefore, government support for early-stage research is
now more vital than ever so that many more Marteks can be
created in the future. Thank you.
[The prepared statement of Mr. Dubin follows:]

Prepared Statement of Mr. Steve Dubin, Former CEO,
Martek Biosciences, and Senior Advisor to DSM Nutritional Products

I would like to thank Honorable Ben Quayle, Chairman of the
Subcommittee on Technology and Innovation, House Committee on Science,
Space and Technology, Ranking Member Donna Edwards, and Members of the
Committee, for holding this hearing today and for allowing me to share
my perspective on promoting new business creation and growth in
innovative sectors.

Introduction

My name is Steve Dubin, and I served as the CEO of Martek
Biosciences, a biotech company based in Columbia, Maryland, from July
2006 until a few weeks ago. My involvement with Martek began in 1985
while I was serving as Vice President of Suburban Capital Corporation,
the venture capital subsidiary of Suburban Bank (now part of Bank of
America). It was in that capacity that I helped lead Martek's initial
round of institutional venture financing in 1986. I joined Martek as an
employee in 1992, initially as CFO and General Counsel, and went on to
fill a variety of additional roles there, including Treasurer,
Secretary, and Senior Vice President of Business Development. In 2003,
I was appointed President of Martek, and in 2006 I assumed the role of
CEO.
When I was first introduced to Martek, Martek was, by every
definition, a startup. It consisted of five talented founding Ph.D.s
with a fantastic idea, and a foundation of technology to drive that
idea forward--and a long, difficult road ahead. Today, Martek
Biosciences Corporation (now DSM Nutritional Lipids) is a leader in the
innovation, development, production, and sale of high-value products
from microbial sources that promote health and wellness through
nutrition. The company's technology platform consists of its core
expertise, broad experience, and proprietary technology in areas such
as microbial biology, algal genomics, fermentation, and downstream
processing. This technology platform has resulted in Martek's
development of a number of products, including the company's flagship
product, life'sDHA, a sustainable and vegetarian source of omega-3 DHA
(docosahexaenoic acid) important for brain, heart and eye health
throughout life for use in infant formula, pregnancy and nursing
products, foods and beverages, dietary supplements and animal feeds.
The company also produces life'sARA (arachidonic acid), an omega-6
fatty acid, for use in infant formula and growing-up milks. Martek's
life'sDHA, along with life'sARA, is found in 99 percent of U.S.
infant formulas. Both fatty acids are also added to infant formulas
sold in over 80 countries and, subsequently, have been consumed by more
than 64 million babies worldwide. In addition, a range of supplements
and functional foods containing life'sDHA for older children and
adults continues to hit the market both in the U.S. and abroad.
Martek's subsidiary, Amerifit Brands, develops, markets and distributes
branded consumer health and wellness products and holds leading brand
positions in each of its three key product categories. Martek's
technology platform has also made it a sought-after partner on a range
of groundbreaking projects in process, including the development of
microbially-derived biofuels, new, faster, and less expensive ways to
make vaccines and the development of DHA-containing oilseeds.

Factors in Martek's Success

Finding private financing for early stage research was extremely
difficult in Martek's early days, and is even more difficult today, but
since Martek's inception, a range of government supported and funded
programs--both at the state and federal level--have played a critical
role in Martek's survival and growth. This support was leveraged to
raise over $400 million from the capital markets to enable Martek to
reach its current state. Without programs like the Small Business
Innovation Research Grants, the University of Maryland Technology
Advancement Program, and even NASA, I would not be standing here today
to share our story of success.

NASA

Martek had its start in a NASA program of the early 1980s known as
CELSS (Closed Environment Life Support System). Under NASA funding,
Martin Marietta Laboratories, Inc., in Baltimore, Maryland,
experimented with the use of microalgae as a food supply, a source of
oxygen, and a catalyst for waste disposal on future human-crewed
planetary missions. When Martin Marietta decided to divest its life
sciences businesses, the scientists involved in this project negotiated
with Martin Marietta to take what they had learned with them and start
their own company. The result was Martek Biosciences, founded in 1985.
Soon after, Martek identified a strain of algae, Crypthecodinium
cohnii, that is a naturally high producer of docosahexaenoic acid
(DHA), an omega-3 fatty acid that plays a key role in infant brain and
eye development as well as in maintaining brain, eye, and heart health
throughout life. Martek then developed and patented a sustainable
method of deriving DHA-rich oil from the algae. Continuing its
exploration of infant nutrition, Martek also developed a patented
process for developing arachidonic acid, ARA, another fatty acid
important to infant health, from Mortierella alpina, a fungus. These
innovations led to Martek's first license agreement in 1992 for the use
of Martek's proprietary blend of DHA and ARA in infant formula. In
1993, Martek went public after entering into similar license agreements
with two additional leading infant formula companies. Today, nearly
every infant formula product sold in the U.S. contains these
ingredients, as well as infant nutrition products found in over 80
countries around the world, and millions of infants benefit from these
products each year.
In 2009, Martek was inducted into the Space Foundation's Hall of
Fame. The Space Foundation, in cooperation with NASA, honors
organizations and individuals who transform technology originally
developed for space exploration into products that help to improve the
quality of life here on Earth. Martek is one of just a few dozen
technology companies that have been inducted since the Hall of Fame was
founded 20 years ago, and Martek's evolution from a NASA funded-project
to a successful, independent company providing important, beneficial
products to consumers worldwide is often heralded as the ideal example
of practical innovation born from the Space Program.

Small Business Innovation Research Funding

In many ways, Martek is also an ideal example of how SBIR funding
can be the foundation of success for early-stage companies. For the
first eight years of our existence, SBIR grants were our lifeblood--
Martek received more than 30 SBIR awards from DOD, DOE, HHS, USDA, and
NSF totaling more than $5 million.
This funding allowed us to more fully develop our platform of
technology and, perhaps more importantly, provided a measure of
validation of our technologies, allowing us to demonstrate our
capabilities and secure additional venture capital funding and
strategic partners. SBIR funding not only helped us to keep our doors
open in the early years, it also provided the foundation of credibility
necessary to convince investors that our company was a sound
investment.Earlier this year, Martek was inducted into the inaugural
Small Business Innovation Research (SBIR) Hall of Fame in recognition
of its success in research, innovation and commercialization within the
SBIR program.

Technology Advancement Program (TAP) and Maryland Industrial
Partnerships (MIPs)

Martek is a graduate of a business incubator, the Technology
Advancement Program at the University of Maryland at College Park, a
program of the Maryland Technology Enterprise Institute (Mtech.)
Incubators typically offer office space at market or lower rates,
along with shared conference and lab facilities, and offer business
development and management programs to accelerate their startups'
growth.
Martek came to the program with a number of notable
characteristics, including a talented scientific team with demonstrated
skills, a unique niche market, and the technology to drive forward
within that niche.
Through the incubator, Martek accessed specialized facilities and
equipment that Martek otherwise would not have been able to afford that
served as a pilot development lab for its early products. Those
facilities became a scale-up lab for much of Martek's early work, where
company researchers could determine whether a number of individual
cells they had grown in the lab were scalable to a larger market.
Indeed, they were.
TAP provided much more than access and support. In fact, a primary
reason Martek was funded in 1986 was because we had been accepted into
TAP, which provided a notable third-party validation of the feasibility
of our technology to be commercialized.
In addition to TAP, Martek leveraged Maryland Industrial
Partnerships (MIPS) funding during the company's early stages to figure
out how to scale-up its microbial processes through Mtech's Bioprocess
Scale-Up Facility (BSF), which helps companies take bench-top or lab-
produced products and prepare them for mass production.
Maryland's programs have served as best-practice models around the
country. TAP was the first incubator in Maryland; there are more than
20 now. Many universities have replicated the programs within
Maryland's portfolio; two other State research funding programs were
based on MIPS.
This support for entrepreneurs has translated into concrete
economic benefits for Maryland. In addition to the success of Martek,
other TAP graduates such as Digene have continued to expand and add
jobs in Maryland. The latest data from the Maryland Technology
Development Corp indicates that Maryland's incubators have supported
more than 14,000 jobs and generated more than $104 million in State and
local taxes.
Martek was an inaugural inductee to the Maryland Incubator Company
``Hall of Fame,'' and we are often held up as a powerful example of the
success that business incubators can produce through work with
startups. It is very hard for early-stage companies to get off the
ground. Martek certainly went through many struggles and near-death
experiences over the years. Every day is a struggle when you are trying
to get started. To have a support system like an incubator gives you a
better chance for success. It is my hope that companies like Martek can
serve as a positive example of success so that programs like TAP will
continue to have support. If the resources that were available to
Martek during our early years were available to entrepreneurs on a
national level, I believe there would be many more success stories like
ours.

NIH

In 2006, Martek's flagship product, DHA, was the subject of a
research project funded by a $10.5 million research grant from NIH.
Sponsored by the National Institute on Aging (NIA), one of the 27
Institutes and Centers of NIH, the study explored whether DHA
supplementation slows the progression of cognitive and functional
decline in patients with mild to moderate Alzheimer's disease. This
study was funded by a NIA/NIH grant to the Alzheimer's Disease
Cooperative Study (ADCS), a cooperative agreement between the NIA and
the University of California San Diego that was founded to advance
research in the development of drugs that might be useful for treating
Alzheimer's, particularly those therapies that might be overlooked by
industry. Approximately $10.5 million of the ADCS grant was earmarked
to fund the DHA study.
This funding was another important marker of credibility for
Martek, and the study also provided important insights into the use of
DHA to treat memory loss that may provide the foundation for future
research and products.

Barriers to Success

For the past 27 years, I have been involved in the financing or
management of early-stage companies, as a co-manager of two small
early-stage venture capital (VC) funds, as a member of the management
teams of two companies while they were raising VC (including Martek
Biosciences), and as an individual angel investor. Unfortunately, the
economic dynamics of today's venture funds have resulted in larger and
larger funds that are less and less able to provide early-stage
funding.
Large funds cannot efficiently put small amounts of money to work
and usually need to return money to their investors within the 10-year
life cycle typical of most VC limited partnerships. This process will
not work for early-stage technology companies seeking smaller initial
rounds of financing and is especially bad for life-science based
companies that often take many years to create an exit event for their
investors. At Martek Biosciences, we raised four rounds of venture
capital between our founding in 1986 and 1992. We did not have an exit
event until after we went public in late 1993. Because of our long
product development life cycle, which is typical for life sciences
firms, we did not become profitable until 2002--16 years after our
first venture round.
In today's economic environment, it is not likely that a company
could go public so long before profits are anticipated, so early-stage
investing in most life-sciences companies is outside the exit
timeframes of most VC firms. Right now, many science firms are in
danger of running out of money more so than at any time in my years
working in the industry. The lack of early-stage funding not negatively
impacts employment and growth in an important industry sector, but also
has other long-term negative effects--new discoveries will not be made,
diseases will not be cured, jobs will not be created, and the financial
spillover from these companies will not occur.
In my opinion, in today's environment, a company like Martek would
have a much slimmer chance of survival. But if government can develop
ways to help promote early-stage, long-term venture investing that
would help fill the funding gap for early-stage research, particularly
for science and non-IT companies that are in critical need of this kind
of support, then we will see many more success stories like Martek in
the future.

In Conclusion

Martek is a great example of how government-supported programs and
funding can be a critical differentiator between the success and
failure of early-stage companies. I, along with the entire Martek team,
am personally aware of the ways in which programs that I have discussed
in my testimony today can serve as lifeblood during critical times of a
startup company's evolution. In 1985, Martek had a fantastic idea, an
amazingly talented team, and the energy and drive to take the seed of
an idea from inception to commercialization, resulting in the thriving
business that Martek is today. Our made-in-the-USA products benefit
millions of consumers every year and meet an important demand for
healthy, sustainable nutritional ingredients. In addition, our
technology has provided the foundation for other important projects
including improved vaccine development and microbial biofuels. Our
business today produces revenue in excess of $470 million per year and
supports more than 600 employees in Maryland, South Carolina, Colorado,
Kentucky, and Connecticut, and more than 100 additional employees at
DSM's Belvidere, New Jersey, manufacturing facility. Without the above-
mentioned programs that were available to Martek, I am certain that the
company and the jobs that support many families today would not exist.
We are now entering yet another phase of our evolution. Earlier
this year, Martek announced that it had been acquired by DSM, a leading
global life sciences and materials sciences company. The sale price was
more than $1 billion. In partnership with DSM, we expect to continue
our significant growth, significantly increasing U.S. jobs and
revenues.

Chairman Quayle. Thank you, Mr. Dubin. And I would like to
thank all the witnesses for their testimony.
I want to remind Members of the Committee rules limit
questioning to five minutes.
I will now at this point trade times with the gentleman
from Texas because he has to leave, Mr. Smith for five minutes.
Mr. Smith. Thank you, Mr. Chairman. And I do appreciate
being recognized out of order. I have an obligation in now four
minutes, so thank you for the time.
Mr. Lindsey, let me address my first question to you. In
your testimony you mentioned the Patent and Trademark Office,
the PTO, and referenced the need to alleviate their backlog. As
I am sure you are aware, now if you apply for a patent, you
have to wait an average of over three years. Recently, we
passed and the President signed the Patent and--America Invents
Act for the Patent and Trademark Office. I was wondering if you
felt that the bill addressed some of your concerns or if there
are other things that we needed to do to reduce that backlog?
Mr. Lindsey. Yeah, I think on the particular issue of the
backlog, our favored approach was one that was adopted in the
legislation, which is using market incentives to clear the
backlog but to be able to get faster expedited service through
paying of higher fees. That has been balanced with a lower fee
schedule for individual inventors, and I think that is
creditable as well. So I--there is a lot in that legislation. I
think it is a mixed bag as far as overall impact on
entrepreneurs, but on this particular point of clearing the
backlog, it looks like the legislation is moving in the right
direction.
Mr. Smith. And obviously the PTO keeping the fees as well I
am sure you support.
Mr. Lindsey. Yes.
Mr. Smith. Okay. Thank you, Mr. Lindsey.
Mr. Rothrock, let me go to you and reference your testimony
where you talk about the unintended consequences of legislation
and regulations and their adverse effect on the formation of
capital going to innovative companies. Now, could you be more
specific as to what, let us say, regulations create the
hardships that you had mentioned and also what remedies you
might propose?
Mr. Rothrock. In particular, Mr. Smith, Sarbanes-Oxley is a
good example of that whereby the unintended consequences of
that regulation making more transparent the financial reporting
in large companies, that burden is all the way down to the
smallest company trying to go public. So going public for a
small private company is a very important event for a lot of
reasons, but mostly it provides the capital which the company
can grow to become very big. Most of the jobs created by
venture-backed companies result after the IPO. So putting that
burden on them on day one of being an IPO company slows down
that process. And in fact many--we have survey data in the MBCA
from many CEOs; they avoid going public and in fact it delays
the whole process. And many good companies remain good and
never become great.
Mr. Smith. And the solution, therefore, is to lift some of
those limitations.
Mr. Rothrock. Lift that. We actually have sort of a ramp--
an onramp to becoming a larger company, yes.
Mr. Smith. Okay. Thank you, Mr. Rothrock.
And Mr. Mann, in your testimony you talked about the
existing government acquisition processes and procedures that
have not kept up with technological innovation. Why do you
think we have the problem and, again, what do you think the
remedy should be?
Mr. Mann. Well, in my experience, traditionally, the
acquisition model is one around developing custom solutions for
the government and what that results in is a multiyear cycle
just to get to the point of even letting an initial contract
for that development to take place. At this point in time,
technological innovation within the private sector is happening
on an 18- to 12-month timescale, so by the time that initial
contract goes out, you are already beginning the procurement
process for an antiquated technology.
Mr. Smith. Good answer. Thank you, Mr. Mann, very much.
Thank you, Mr. Chairman, again for the time. I yield back.
Chairman Quayle. Thank you, Mr. Smith.
I now recognize Ms. Edwards for five minutes.
Ms. Edwards. Thank you, Mr. Chairman.
And thank you to all of our witnesses. I want to start with
Mr. Mann. I enjoyed your testimony and learning about your
company and really congratulate you on your instincts and your
success. And while your testimony seems to attribute the advent
of your game-changing microsatellite technology to
nongovernmental consumer requirements, isn't it fair to say
that the prior government investments in satellite technology
laid the groundwork for the technical and economic feasibility
of Skybox's microsatellites? And I would note that NASA in
particular had been investing heavily in satellite research and
technology since about 1960, long before the--you had--your
company had this great idea, and so I wonder if you could
actually speak to the role that investments--prior investments
that NASA made, played in your ability to make a successful
commercial venture.
Mr. Mann. Yes, certainly. So I don't actually have specific
examples of investments that NASA made, but to Mr. Rothrock's
point in his testimony, we absolutely relied on the foundation
of fundamental research investment that accelerated the
technology just to the point of people recognizing that this is
even feasible. But then, when we actually wanted to, you know,
hit the gas pedal and accelerate the pace of development, that
is when it was time to turn to the private sector and focus on
commercialization rather than sort of pie-in-the-sky
feasibility.
Ms. Edwards. I guess I just want to point out that since
1960, over the course of the last half-century, NASA has made
significant investments in imagery satellite technology that,
you know, has enabled lots of folks to transfer that into the
private sector. And so the point is that you just can't--I mean
clearly you need that fundamental research.
But I think, Mr. Rothrock, if we could turn to you, I
wonder if you could explain, then, how venture capitalists
actually make investment decisions? Because I am guessing that
venture capitalists wouldn't have just come up in 1960 and said
oh, I think we need to invest in imaging technology for
satellites. It really did take the government kind of doing
that initially because venture capitalists wouldn't have been--
I am just curious about the steps that you would go through
before you made a decision to make that kind of investment.
Mr. Rothrock. Yes, the process of venture capital--there
are two sides to it. We identify market opportunities where
then we have sort of in the back of our minds from research
and--reading and talking to entrepreneurs, lots of
information--about technology. And then we would identify a
business opportunity to take that technology from the
laboratory and apply it to a particular market problem. That
would be where we are the active creator of that company. More
likely the case is that the entrepreneurs, whether they are a
graduate student such as Andy Bechtolsheim who was a founder of
Sun Microsystems who was a real hot hardware inventor, teamed
up with Bill Joy at Berkley and put together a computer that
was quite remarkable. And then they found Vinod Khosla and
found some venture capital and off they went to make a great
story.
So it sort of is on both sides, but really at the end of
the day it is about building technology on top of scientific
endeavors and innovations. You don't know where that is going
to go and you keep building up. I daresay that Mr. Mann's
company, Skybox, he has built that on the shoulders of great
giants and great thinking that was this broad, and his company,
like most venture capitalists like their companies to be very
focused. Lack of focus is failure typically, so we tend to
focus. That is what the private capital does. It focuses the
attention of the entrepreneur on success.
Ms. Edwards. Thank you. And so if I could just turn to Mr.
Dubin, and thank you so much for your testimony. And I was just
blown away visiting Martek and learning about all that you do.
I wonder if you--you talked about--in your testimony about
leveraging the Maryland Industrial Partnerships funding during
the company's early stage, and as I understand it, MIPs
provided funding that was matched by private company for
university-based research that helps companies develop new
products. Can you tell us more about your experience and
whether you believe that that is something that actually could
be replicated?
Mr. Dubin. In our early stages I mean we had no money and
again we were very--doing pretty early-stage research again
that venture capitalists didn't really totally want to fund all
by themselves, so we were able to leverage all of these
programs, I think, in a very effective way.
And the early MIPs grants, what that was for was to kind of
help us learn how to grow these microorganisms in a controlled
way to get the products we wanted to and University of
Maryland, all of the equipment and a lot of expertise and
together working with our scientists, you know, we figured out
some of the basic early-stage ways of moving forward. And we
used that technology to kind of leapfrog to some of the
commercial applications.
So I think, you know, for the right circumstances where
university infrastructure is in place and you can leverage the
knowledge inside the university with some of the ideas from the
company's side, it really--it worked great for us.
Ms. Edwards. Thank you, Mr. Chairman.
Chairman Quayle. Thank you, Ms. Edwards.
I now recognize myself for five minutes.
Mr. Lindsey, you talked about various tax incentives to
allow startups to continue to innovate. There has been a lot of
talk up here on Capitol Hill about fundamental tax reform which
will get rid of many of the deductions while also lowering the
rates. How do you feel about that in the context of it might be
eliminating a lot of those deductions or incentives but
allowing for a lower overall corporate tax rate?
Mr. Lindsey. I think in the long term, the proper goal is
fundamental tax reform with a wide base and low rates and as
few exemptions as possible. Given the reality of our current
byzantine tax structure and the formidable obstacles to getting
to that truly clean kind of tax code, if we are going to have a
dirty, messy tax code, then we should have some little, dirty,
messy exclusions that benefit new businesses. But the long-term
goal ought to be fundamental tax reform.
Chairman Quayle. Thank you.
And Mr. Rothrock, I want to talk--I want to ask about--in
Arizona we have a thriving high-tech industry but we don't have
a lot of VC funding that is going into Arizona, and this
happens all across the country is that VCs seem to be mainly in
certain geographic areas. How do VC firms plan or how do they
go about getting outside of their geographic areas where they
are located in finding the new companies in Arizona or
elsewhere?
Mr. Rothrock. I think that largely sort of relies on the
philosophy of the firm. My firm, Venrock, starting in New York
City, that was not exactly the hotbed of a lot of technology in
the early days or even presently, but we have always--my firm
always has had the DNA to go out and look for deals and people
wherever they are. And we have invested in many States from
Florida to South Carolina, Kansas, Texas, Arizona, and other
places. So we actually seek out those entrepreneurs in those
regions. There are a lot of local venture capital--I don't want
to say clubs but associations that host and invite people in
from afar, but I think it really goes to the DNA of the firm.
Some firms just simply don't want to climb on airplanes.
Chairman Quayle. In your testimony you were talking about
VC-backed firms being involved in SBIR programs, and one of the
things that we had testimony on that when we were going through
the reauthorization of SBIR and one of the witnesses stated
that, you know, VC firms act as a very good gatekeeper because
they can actually see whether the technology will be able to be
viable rather than a government agency trying to pick which
ones. Do you think that is a correct assessment?
Mr. Rothrock. It is largely correct. I think venture
capital--the process of venture capital is about the most
efficient way to find the best ideas with scarce capital and
scarce people. I think the SBIR program is very important
because it is a leverage effect. It always takes longer and
costs more money to build a company, and just like Mr. Dubin
was talking here, that was a tremendous example of how an SBIR
led to venture capital so the two worked together to build his
company. So I think that is really essential. It is the
program, not one or the other. It is mutual.
Chairman Quayle. Right. Okay, thank you.
And Mr. Mann, you talked about ITAR and kind of the
unintended consequences that have come out of that, especially
for your company. Mr. Lindsey had talked about a 10-year sunset
for regulations. There are also various pieces of legislation
that--one that I am working on also is that after 10 years you
actually have to go back, reevaluate, do a cost-benefit
analysis to make sure that it is actually doing what it is
supposed to be doing and if it can be done in a way that is,
you know, less burdensome on the private sector. How would
something--like the sunset provisions that Mr. Lindsey was
talking or other types of legislation so that we reevaluate
various regulations after a 10-year cycle--how would that help
you? Would it help you in terms of getting rid of some of that
overly burdensome and also unintended consequences from
legislation passed that nobody thought was going to happen?
Mr. Mann. I think the answer there is absolutely. You know,
given the age of the ITAR, when it was initially conceived,
international competitors were not in the same place when it
comes to space technology. For example, obviously the ITAR
covers much larger than space-based technologies. But I
absolutely think with some kind of sunsetter or revisit on
those regulations, we would have seen, at this point,
international competition catching up and now eclipsing our own
progress and hopefully made necessary change to the regulation
to try to alleviate that problem.
Chairman Quayle. Okay. Thank you very much.
I now recognize Mr. Lujan for five minutes.
Mr. Lujan. Mr. Mann, federally funded scientists could be a
tremendous resource for small and startup businesses. I come
from a State that has two of the three NNSA national
laboratories with Los Alamos National Labs and Sandia National
Labs, in addition to the Air Force Research Laboratory, Air
Force Nuclear Weapons Center and Satellite Office, in addition
to NASA with White Sands down in the southern part of the
State; whether it can help with what material to use or how
best to analyze a complex business problem, small businesses
throughout the State have made good use of the program in New
Mexico as well as some outside of New Mexico. Is there
something that can be done on a federal level to facilitate
federally funded scientists providing technical assistance to
small businesses, taking into consideration this notion of the
anticompetitive clause or things of that nature that exist with
some of our national labs?
Mr. Mann. I certainly think there could be benefit to that
kind of collaboration. I am slightly speechless because I
haven't really given that significant thought in the past. I do
know, for example, one thing that I have been in conversations
about is making the facilities available and our national labs
available to small businesses because we have--you know, the
taxpayers have put substantial investment in building out these
facilities that often go underutilized and small businesses are
particularly the ones that don't have access to sufficient
capital to build up those facilities themselves. So that I can
certainly see as being something.
As far as more direct research collaboration, again, you
know, in my testimony I address the idea of government not
acting as a venture capitalist. That was, I realize now, a
nuanced point in that venture capitalists take technologies
that have been substantially validated and target them at
markets. The government should be investing in technologies,
bringing them up to that level of being ready for venture
capitalists to move forward with, not picking the technologies
that will actually be financial success.
Mr. Lujan. So just for clarification there, so almost a
true partnership with what the government is doing with VC
helping to get through that valley of death?
Mr. Mann. Yeah, exactly.
Mr. Lujan. Mr. Rothrock, same question. Any thoughts or
perspectives associated with how VC looks at the benefits
associated with getting more of our physicists, scientists,
engineers more involved with business and with projects,
research, or even helping as that technology comes out to a
commercialized perspective?
Mr. Rothrock. One specific idea I have is I know a number
of universities allow their professors--in fact some require
it--to spend a day a week or some portion of their working time
affiliated with commercial enterprises. It does two things:
one, it makes them aware of what commercial enterprises are
looking for and what is marketable and so forth; but it also
brings a little bit of that market to the laboratory so the
professor, when he is writing a grant or proposal to receive
funding, he can sort of target it that way. That relationship
is a very good one.
The other is about using the assets. We actually have a
company that has now found its way to North Carolina as a
result of finding facilities that were available. Actually,
they found equipment that was for sale and it was too hard to
move it across the country, so the company relocated itself to
the equipment rather than bringing the equipment to the
company.
So those kinds of things and having that available, NASA
was very good for awhile publishing NASA tech briefs which
allowed entrepreneurs to thumb through what was current, what
papers were published. That sort of--with the Internet and
what--all the communications facilities, that sort of transfer
of information is good.
You know, a research professor is a really good research
professor, not necessarily a great entrepreneur. But
facilitating those people getting in the same room and talking
about things is essential.
Mr. Lujan. I appreciate that very much. And one of the
questions that I will be submitting to our panel--and I
appreciate all of you being here today--is last Friday, the
President issued a memorandum to the heads of executive
agencies directing them to improve the results of its
technology transfer and commercialization activities, and I am
going to be very curious from your vantage point what
suggestions would you give to those agency heads and maybe to
this committee so that way we can work on that collectively.
But Mr. Rothrock, I was intrigued by--in your testimony,
first, America's dependence on foreign fossil fuels cannot
continue at its current rate. Second, the nation that grows its
economy with clean energy will lead the global economy of the
21st century and talking about ARPA-E specifically and the
importance of the competitiveness of the country. Can you just
talk about that a little bit more? I really appreciate that
being in there.
Mr. Rothrock. Sure, happy to, sir. The--you know, the 20th
century was built on the back of fossil fuel, and if you
subscribe to the theory that we are going to run out of it,
then we have to come up with something else. And the industry
of energy is the largest industry on the planet, whether it is
electricity or petroleum. And so transforming to that new
industry, whatever form it is, whether it is solar, nuclear,
wind, or just alternatives in general, is going to be
essential. Otherwise, your existing society will not be able to
function; it has to have energy. So whoever gets there first
will probably--may dictate some standards, will certainly be
further down the cost curves because commodities, it is all
about cost in a commodity world of energy whether it is
petroleum or electricity. So whoever gets there first, I think,
will have a distinct advantage.
You know, in the example here is a semiconductor
relationship. Intel found itself quite competitive with Japan
back in the '70s with the DRAM business. Well, they said we
will let Japan have that and we will go after the CPUs, which
is the brains of all these microprocessors. And look at the
results. DRAMs are clearly a commodity and they are bought
everywhere for practically no margin and no profit, whereas
Intel is a huge successful company. So the ability to pivot, as
they say in today's language, to these new industries, getting
the energy industry to recognize the alternatives, investing
taxpayer dollars into these programs whether they are in the
universities or in the national labs and then bringing that out
to the entrepreneurs, I think, is really, really essential. And
who is there first probably wins.
Mr. Lujan. Thank you, Mr. Chairman. I appreciate the time
and I hope that collectively we might be able to be supportive
of programs like that going forward, see what we can do to make
sure we ensure the competitiveness of the country.
Mr. Rothrock. Thank you.
Chairman Quayle. Thank you, Mr. Lujan.
I now recognize Mrs. Biggert for five minutes.
Mrs. Biggert. Thank you, Mr. Chairman.
Thank you all for being here. This is a very important
issue and I think you are very helpful to us.
My first question would be for Mr. Lindsey. In your
testimony, you argue in favor of allowing university faculty
members to choose their own technology licensing agents. Can
you explain in more detail how the current system inhibits
innovation, and how might a change in licensing rules affect
universities that fund a portion of the faculty research?
Mr. Lindsey. Sure. There is a huge asymmetry at present
between the freedom allowed to academics in their research
capacity and the freedom allowed to them in their
commercialization capacity. So no professor has to go and get
permission or go through a queue and get clearance before he or
she collaborates with academics in other institutions on a
research project or on writing a paper. They are free agents in
their academic research lives. They are not free agents,
however, in their commercialization lives because to take any
kind of--to get any kind of licensing of new ideas that they
develop in their research, they have to go through their own
university technology licensing office.
Those licensing offices act effectively as venture
capitalists, picking winners of all of the promising research
ideas that are coming out of their university, focusing on
particular ones, and devoting time and energy to helping those
ideas get licensed. They aren't necessarily the best qualified
people to be doing that job. There is always a backlog problem.
They don't necessarily have the acumen to pick--to prioritize.
They may be looking for home runs and leaving good singles and
doubles moldering in a queue, and so as a result, we don't have
competition amongst agents for helping academics commercialize
their ideas.
What we propose is moving towards a free agency model where
an academic who has developed some promising new research
finding and sees commercial possibilities with it could go to a
private agent, could go to other universities' technology
licensing offices, and so forth. The best way for the Federal
Government to encourage a move towards a free agency model
would be to condition its research grants on allowing
researchers freedom to choose their own agents.
Mrs. Biggert. Does this apply to the labs as well?
Mr. Lindsey. It could, yes.
Mrs. Biggert. So are these current limitations, then, they
are really due to the university----
Mr. Lindsey. They are university-based, yes, they are.
Mrs. Biggert [continuing]. Not any federal policy?
Mr. Lindsey. Yes.
Mrs. Biggert. Thank you.
And Mr. Rothrock, number one, you--as a venture capitalist
and you are out and you decide to provide an innovative idea--
money, do you ever--some of the things I have heard from some
companies is that the venture capitalists come in and they
actually take over the company and start running it and kind of
the innovators kind of, you know, lose out. I mean, they feel
like it is not their company anymore and it is taken over. Does
that happen very often or is it----
Mr. Rothrock. I don't believe it happens very often. I have
heard of some of those stories, too, but I think it is very
rare.
Mrs. Biggert. Okay. And then you talk about ARPA-E and what
are the--are there--have you had anything to do with ARPA-E as
far as this venture capitalist or the companies that have
gotten money from ARPA-E?
Mr. Rothrock. Yes, ma'am. In my firm, one company did
receive ARPA-E funding, but it was after we and another venture
firm had already invested $1 million in the project and had
proven that what we were working on had some merit. And then
they applied for the ARPA-E grant and received it.
Mrs. Biggert. Have you done anything with the Office of
Science in the Department of Energy?
Mr. Rothrock. Nothing specifically. I do know Dr. Koonin,
but that is just through the business.
Mrs. Biggert. Um-hum. So you think that there is more
innovation for ARPA-E?
Mr. Rothrock. Yes, ma'am, I do think there is a lot more
innovation opportunity for ARPA-E, electric vehicles, all the
places that are presently not receiving what I think is
sufficient amount of R&D capital. I think ARPA-E should be
focusing much like DARPA did.
Mrs. Biggert. Well, something like the SBIR, you know,
phases in monies but ARPA-E is just one time that they would
commit to a project?
Mr. Rothrock. That is my understanding but it is over
multiple years, for example. So it would be an amount of money
over a period of time.
Mrs. Biggert. All right. Thank you. I yield back.
Chairman Quayle. Thank you, Mrs. Biggert.
I now recognize Mr. Lipinski for five minutes.
Mr. Lipinski. Thank you, Chairman Quayle.
I would like to start by congratulating Ranking Member
Edwards here for--congratulating her for stepping up to this
position. I have enjoyed working with you on this Committee and
our other committee in the past, and I know that--looking
forward to your leadership here on the Subcommittee.
I firmly believe that along with education, the most
important issue that our Committee can consider is how to turn
our advantages in research and development into jobs and new
businesses, and it is something that I have really focused on
since I started serving in Congress and serving on this
Committee.
I want to talk about getting to proof-of-concept programs
and talking about I-Corps because when the SBIR/STTR
reauthorization bill was passed by this Committee in the
spring, I offered an amendment that was adopted with bipartisan
support to create a proof-of-concept center pilot program
within the STTR program at NIH. The proof-of-concept centers
that I want to create would share many of the goals and
strategies seen in the I-Corps program that the NSF has since
announced.
Both my initiative and their program were modeled after
success at the Coulter Foundation, the European Research
Council, and MIT's Deshpande Center. At its core, this is a
simple idea--give researchers with an invention the tools they
need to conceptualize and plan a new business. But it is a
critical problem since academic researchers often don't know
anything about developing and improving their small business
idea--proving that it can work. I know that the Kauffman
Foundation, along with Stanford Technology Ventures Program and
MIT's Deshpande Center, has partnered with the NSF in creating
I-Corps and I heard, as I was home on Monday mowing my lawn
listening to NPR, I heard the story about I-Corps at Stanford.
So I would like to ask Mr. Lindsey about his involvement in
and perspectives on his program. Can you explain how--first of
all, how I-Corps is working and what role--what the role of
each organization has and any thoughts on how this can be
expanded or replicated, especially to reach schools and
researchers who haven't historically had success in
commercializing their innovations? Mr. Lindsey.
Mr. Lindsey. Thank you for the question.
The Kauffman Foundation is a big and diverse place doing
all kinds of wonderful things, including working on the I-Corps
issue. That is not in my portfolio, so what I will do is talk
to my colleagues who are involved to give you the most
knowledgeable answer and get back to you.
Mr. Lipinski. Okay. And I know Mr. Mann had spoken about--
you were at Stanford, correct? Were there courses that you took
at Stanford that were helpful in terms of entrepreneurship?
Mr. Mann. Oh, absolutely. In fact the original business
plan for Skybox was created within an STVP course. So Stanford
absolutely has an educational pipeline designed to help
innovators understand what they need to do and then, as I have
previously mentioned, also show them the door with the
perspective of if you want to commercialize it, take it outside
the university.
Mr. Lipinski. You think this is something that can be done
elsewhere? Is there something unique to--at Stanford with this
location and its connections or how do--do you think this can
be replicated?
Mr. Mann. I absolutely think it can be replicated. MIT has
done a phenomenal job of building up a similar type of base.
Stanford is currently in a bid to build the Stanford New York
City campus, which would similarly create a center for
innovation, but I don't think it is just limited to those
schools. I think really any university that has really active
research and development capabilities should be investigating
ways to create educational opportunities that facilitate that
kind of external transition.
Mr. Lipinski. Well, one other question before I run out of
time or--maybe lead into a question I will put in for the
record. I am currently developing legislation to improve the
Bayh-Dole Act. One of my goals is to make sure whenever
possible that taxpayer-funded R&D turns into American-made
products and American jobs, and so since my time is expiring, I
will put that in for a QFR to ask about what can be done and
what Congress can do to better incentivize domestic production
of inventions that began with federal R&D investments because,
as I said, I think that is one of the critical things we need
to do here. As people are asking where are the jobs going to
come from, what is the future of American jobs? I think the R&D
that we are doing here, a lot of it is funded by the Federal
Government can better be turned into American jobs.
With that, I will yield back.
Chairman Quayle. Thank you, Mr. Lipinski.
I now recognize the third member in a row from Illinois,
Mr. Hultgren, for five minutes.
Mr. Hultgren. Thank you very much. Thank you all for being
here. I really appreciate it. I have a couple quick questions
for you. First of all, as you I think are aware, for the last
30 months, 28 of those months we have had unemployment here in
America above nine percent. I mean these are brutal times. I am
absolutely convinced that a big part of getting this turned
around again is getting innovation and entrepreneurship growing
again.
One question I want to start with for each of you, if you
could just give a brief answer on this, is really a question
for us as policymakers, what our focus should be. And I know
both of these things are important, but I am asking you which
is more important. Is it more important for us to target
policies designed to provide an immediate boost to our economy,
or is it more important to have economic policies designed to
create conditions for long-term economic growth? And if I can
just get a thought. Again, I know you would say both, but which
is more important?
Mr. Lindsey. I would say that Congress doesn't have a lot
of leverage or a lot of money right now to do short-term
stimulus, so I think that is more in the hands of the Federal
Reserve at this point than it is in the hands of Congress. So I
think Congress' focus ought to be on the long-term growth
issue.
Mr. Mann. I, too, agree that it should be focused on long
term, especially with regard to the fact that venture
capitalists are looking at longer time horizons for return on
investment. They are looking for scenarios in which that kind
of investment will generate return.
Mr. Rothrock. Yes, I would echo that. In fact, as a venture
capitalist, I always like to say that entrepreneurs don't read
the newspaper, they don't watch television. They are always
optimistic about thinking very long-term and my style has to
match that. So I am very much for that.
I would emphasize in your thinking about that to make it
stable and constant over time and predictable.
Mr. Hultgren. Thank you.
Mr. Dubin. I agree for the entrepreneurial economy, longer
term is better. For our industry, long term is all there is and
I think--I don't think there is any magic bullet. It is a
matter of creating an environment and a culture and a support
system that attacks the issue from many different angles and
that--you can't do that overnight.
Mr. Hultgren. I totally agree with you. Thank you. It got
hot all of a sudden.
But any suggestions you have on this of how we can bring
more certainty to this over the long term? I absolutely agree.
You know, that is what we have got to be focused on, especially
in these times of very low resources.
I do want to shift a little bit. And Mr. Mann, I appreciate
your testimony. And really the experiences you had at Stanford
that really led to the creation of your business, I wondered if
each of you could just give me kind of a thought you might have
of your current--the feel for current undergraduate and
graduate students as how they are continuing to view
opportunities for entrepreneurship. Do you see any recent
trends in the way potential entrepreneurs view opportunities to
create their own companies? And are there cost-effective ways
that we can promote the benefits of entrepreneurship to
undergraduate and graduate students?
Mr. Mann. So I haven't actually seen a significant change
in the way--that may just be because Silicon Valley tends to be
a bubble. Stanford is a bubble within a bubble and I have had
my head in the sand for the last three years trying to build a
company. But ultimately, there is always a subset of undergrad
and graduate researchers who are more interested in taking what
they invent and going out and commercializing it than they are
in sort of the pure pursuit of academic research. And I don't
think that is something that has been changing in any large
way.
Mr. Rothrock. I would add that the sort of great man theory
or great woman theory that--to the extent that important people
that have an impact on an entrepreneurial ecosystem can be
highlighted and emphasized I think makes people rise to the
occasion. I think also a part--I participate as a mentor in a
second-year program at the GSB at Stanford, team of people with
ideas and I help them form it into a business plan. I think
either formalizing or recognizing those kinds of programs may
be--you don't need financial support but just acknowledging it
and pushing it.
Mr. Hultgren. Thank you. Let me jump in here. My time is
winding down but one more question for Mr. Lindsey. I wonder if
you could elaborate. In your statement you had said, `` . . .
as countries get richer, they become more dependent on
homegrown innovation to keep the growth machine humming.'' I
wonder to you what that means for the United States in
particular?
Mr. Lindsey. First of all, let me just go back to your
question on the university side. One of the great strengths of
our system is bringing brilliant kids from all over the world
and educating them and then shoving them back to their own
countries. So I think a vital way to cash in on the strength of
our system is to staple green cards to diplomas for people with
STEM degrees or particularly to give visas to people who
actually have plans to start their own businesses. Those would
be enormous gains.
Just to focus on one issue of how the sources of growth are
changing in the United States and pushing more and more of the
burden for keeping our economy growing onto innovation are
demographic changes that haven't gotten a lot of notice but
they are hugely important. Over the whole course of the 20th
century, we got a big tailwind from the growing participation
of women in the labor force. So one of the easiest ways to get
higher GDP per capita is just to get a higher and higher
percentage of people making GDP, getting them out of the home
and into the workplace.
But that has stopped, so women's labor force participation
peaked in the late '90s, started trailing downward before the
recession. Men's labor force participation has been going down
gently for decades because of later entry into the workforce
and because of early retirement, and so, as a result, our
employment-to-population ratio is--even before the recession
was lower--was going downward and as a result--according to
McKinsey Global Institute research--labor force growth in the
'70s contributed 2.0 percentage points to GDP growth--annual
GDP growth. It is projected to contribute only 0.5 percent in
the decade between 2010 and 2020. So that is a point and a half
of GDP growth gone and we have got to make it up somewhere.
According to McKinsey, we need an increase in productivity
growth of 25 percent to just maintain historical growth rates.
We have had great difficulty over the years in matching old
productivity growth rates, so that just, I think, illustrates
that we are now facing a big headwind on the demographic front
and the only way we can make it up is through innovation.
Mr. Hultgren. My time has expired. I yield back. Thank you
very much.
Chairman Quayle. Thank you, Mr. Hultgren.
I now recognize Mr. Cravaack for five minutes.
Mr. Cravaack. Not from Illinois so--hi. Thanks for being
here today. I think this is really the crux of what we are
seeing in colleges today. You know, some of the college
students we have seen overseas, you know, they are crammed full
of knowledge and they are encyclopedias basically, but what is
different here in the United States is we are innovators, we
are creators, we are--want to see what is on the next edge of
the envelope. And that is what makes this country so great and
that is what we need to keep on focusing on in the future.
Mr. Mann, I have a question for you. You know,
stereotypical--you know, expect the next great thing to be from
some college student that is skipping class in a garage
somewhere, you know, developing, you know, something. And would
you consider that the same? Would you consider that a
stereotype that is what we are seeing today? Are they--you
know, are they in the college system? Are they out of the
college system? Are they just using their own innovation to get
this done? What do you think?
Mr. Mann. I would definitely say that still exists today. I
mean that is exactly my story. You know, we were at Stanford
doing the research and ultimately left the university. You
know, I dropped out of school in the long history of
entrepreneurs chasing their vision because I believed we had
the opportunity to fundamentally change the world.
Mr. Cravaack. Well, kudos to you. You know, one of the
things I--in your company I was reading about your company as
well. You had a little bit of trouble trying to get some
venture capitalists, drop out from Stanford, you know,
basically come and believe in us, right? And here you are with
this great idea, this fantastic idea that you know is going to
work but yet you are finding trouble to get venture capital.
How can we help young people like yourself to be able to get
the capital that they need to follow that dream and ambition?
Mr. Mann. Well, again, the biggest thing came down--came
back to the education piece. You know, ultimately for Skybox in
the summer of 2009 we were trying to convince investors used to
investing in Internet companies to invest in a satellite
company. That was not a particularly easy task, so through the
activities of the STVP programs we came to understand how to
position an opportunity in a way that it was ultimately
fundable, you know, and ultimately it meant finding the node
and enabling the node to see that we were doing to the
satellite industry the exact same thing that he and his
computers at Sun did to the mainframe.
Mr. Cravaack. Mr. Rothrock, what do you think? You know,
how do you see guys like Mr. Mann and how do you seek him out
and say, wow, this guy has got a great idea. You know, how do
we do this?
Mr. Rothrock. We see--the funnel of entrepreneurs that walk
in our front door or give us a call or send us an email ranges
from all walks of life, all corners of the country, educated,
college degrees, dropouts, you name it. It comes in all forms
and we don't necessarily hold that against them or for them as
an advantage in some cases. So I think it is a little bit of a
myth about--it is really about the person, the thinking.
Einstein said imagination was more important than knowledge and
we seek that. In the presentation, is it really creative? Have
they thought through contingencies? How do they deal with the
competitive question? We call it leg drive at my firm. Does
this person really, you know, get up in the morning and before
they have their shower they have already got three ideas in how
they are going to win? You look for that spark, and that comes
whether you have got a college education or not. That is a
human characteristic.
Mr. Cravaack. Yeah, I understand that one.
Mr. Lindsey, what do you think about all this from your
perspective?
Mr. Lindsey. I will just add that, of course, the college
kid with a great idea is a part of the entrepreneurial reality
but it isn't the only part. According to Kauffman Foundation
research, the average entrepreneur or the average new business
founder is 40 years old. He has been--he or she has been
working her business and has a new idea and figures out that he
can't get it done in his company and sets out on his own. So it
takes all kinds.
Mr. Cravaack. Yeah, it does. I had the fortune to go to the
Naval Academy and fortunately those guys are kind of locked in,
but you know, some of the great ideas that I saw from some of
the guys working through there made their way up through the
ranks and so it is great to see. So I had the pleasure of
rooming with an electrical engineer so--but anyway, well, thank
you very much. I appreciate it.
And with that I will yield back, Mr. Chairman.
Chairman Quayle. Thank you, Mr. Cravaack.
And I would like to thank the witnesses for their valuable
testimony and the Members for their questions. 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. This
hearing is now adjourned.
[Whereupon, at 11:25 a.m., the Subcommittee was adjourned.]

Appendix

----------

Answers to Post-Hearing Questions

Responses by Mr. Brink Lindsey,
Senior Scholar in Research and Policy,
Ewing Marion Kauffman Foundation
for Space-Based Positioning, Navigation, and Timing

Questions Submitted by Subcommittee Chairman Ben Quayle

Q1. It often seems that the Federal Government promotes ever-higher
regulatory standards among States. In the Startup Act, the Kauffman
Foundation calls for an assessment of the legal environment toward
businesses in different States and major cities. How would you
recommend developing the criteria for this assessment?

A1. We recommend using criteria similar to those employed in the World
Bank's ``Doing Business'' reports. For more information about the
methodology used in those reports, see here: http://
www.doingbusiness.org/methodology.

Q2. Your testimony detailed how changes in licensing rules might
improve university technology transfer. Has Kauffman explored any other
possible changes to the Bayh-Dole or Stevenson-Wydler Acts that might
support more university or federal lab-generated innovation?

A2. We have explored options for changing the Bayh-Dole Act but have
come to the conclusion that it is not necessary to amend the Act to
encourage or mandate ``free agency'' for researchers or, alternatively,
a 90-day right of first refusal by the technology transfer office at
the researcher's own university. The appropriate incentives--namely,
conditioning federal grants on the university's allowing greater
freedom for its researchers--could be embodied in appropriations for
science research. Furthermore, appropriations language could authorize
or direct funding agencies to allocate up to 1% of science grant awards
to commercialization education for the principal investigators, where
relevant. In addition, in the age of Web 2.0, universities are not
taking advantage of the technology available today for online
licensing. Kauffman Foundation funded the development of infrastructure
to allow online licensing, and currently only seven universities in the
U.S. are using it in a very limited fashion. Incentives for
universities to be evaluated based upon science that quickly moves to
the market should be put in place and utilized as a criterion for
federal funding.

Questions Submitted by Ranking Subcommittee Member Donna Edwards

Q1. Some have proposed creating public-private research consortia--
consisting of small and large businesses, universities, and government
entities--to work together on precompetitive research challenges that
are driven by industry need. The successful Semiconductor Research
Corporation initiative is an example of such a consortium. In your
opinion, do you believe there is value to these sorts of industry-
defined research collaborations, and should the Federal Government be
doing more to encourage them?

A1. Whether Sematech was really that successful is open to dispute. In
any event, given the shortage of federal dollars, funding additional
consortia does not seem like an especially promising idea. It should be
noted that the Kauffman Foundation was the seed funder of a large
business/university collaborative model called the University Industry
Demonstration Partnership. While this initiative has aided in
collaborations, there have not been any outcomes focused on
precompetitive research challenges.

Q2. In his testimony, Mr. Mann mentioned the courses available to him
as a student at Stanford to help educate and foster entrepreneurship.
While Stanford is undoubtedly a leader in this area, there are many
universities throughout the country that do not currently offer this
type of education or these opportunities to their students. Do you
believe this sort of entrepreneurial education should be made available
to students throughout the country? If so, in you opinion, what are the
key components of a successful entrepreneurial education program? What
barriers exist to instituting these sorts of programs throughout the
country?

A2. Our experience has increasingly led us to the conclusion that
entrepreneurship is best taught in real time, as students are actually
undertaking a new business. Here, the Launchpad program, begun at the
University of Miami and now being replicated at Wayne State and
potentially other universities, shows great promise. The key to this
program is that it is run out of the university's career counseling
office, which provides mentorship and networks for finding money,
employees, and customers. No policy barriers exist here, and so any and
all universities, and community colleges as well, are capable of
starting Launchpad-type programs. There is no need for federal funding
here, as alumni and local businesses are likely supporters. In
addition, Kauffman FastTrac has provided education and peer networks
for over 300,000 individuals across the U.S. with no federal funding.
Furthermore, universities like Stanford are now offering their more
popular courses on starting your own venture online for free. There are
many avenues for education, none of which should require federal
funding.

Question Submitted by Representative Randy Neugebauer

Q1. Have you observed any small startup businesses having difficulties
obtaining loans or accessing capital? Have you observed any changes in
banks' underwriting standards or compliance costs affecting startups'
abilities to obtain loans?

A1. At present, there is only anecdotal evidence that banks have
tightened underwriting standards for lending to all small business,
including startups as well as existing enterprises. This is potentially
important because Kauffman research shows that contrary to conventional
wisdom, bank financing is quite important to startups. For the relevant
Kauffman study, see here: http://www.kauffman.org/uploadedFiles/
Capital-Structure-Decisions-New-
Firms.pdf.

Questions Submitted by Representative Daniel Lipinski

Q1. Describe your experiences with federal R&D funding mechanisms,
whether your companies do their manufacturing here in the U.S., and if
there is anything Congress can do to better incentivize domestic
production of inventions that began with federal R&D investments.

A1. The Kauffman Foundation is not a manufacturing company, so the
first part of this question is not applicable. One possible way for
Congress to incentivize more domestic production would be to redirect
some existing education funding toward matching grants to states to
support community college training programs for manufacturing jobs,
since a major reason U.S. companies move production offshore is a
shortage of qualified personnel here.

Q2. Please explain how the NSF Innovation Corps (I-Corps) program is
working and the role of each of the participating organizations--NSF,
Kauffman Foundation, the Stanford Technology Ventures Program, and
MIT's Desphande Center. How will you decide if I-Corps is successful?
Do you have any thoughts as to how it can be expanded or replicated,
especially to better reach schools and researchers who haven't
historically had success commercializing their innovations?

A2. The Kauffman Foundation published a report by Christine
Gulbrandsen that was a five-year evaluation of both the Desphande and
Von Liebig Centers--both university-based proof-of-concept centers
intended to accelerate science to market. Kauffman and Desphande
Foundation leadership have worked together over the last three years to
aid universities in understanding and replicating these programs. To
date the only actual replications are QB3 at UCSF and the Institute for
Advancing Medical Innovation at the University of Kansas. Desphande and
Kauffman leadership have also worked with the NSF leadership to
determine the potential to scale this model in a virtual manner, an
effort that resulted in the I-Corps. While it is too early to report
the results of the I-Corps program, we should look to scale the program
not only within NSF but also within NIH as we are able to use the
University of Kansas and UCSF models as examples. The only true metric
for success for these programs should be the increase in volume of
licensed technology from the university to the marketplace. Again, it
will be imperative that the university faculty engaged and funded by
the program be supported through the process to assure that the entire
university is incentivized to move science to market rapidly in support
of the process. It is not necessary for any additional federal dollars
to be allocated in support of this program.

Questions Submitted by Representative Ray Lujan

Q1. Basic research is key to future innovation. But the direct
products of basic research are publicly available, as it should be for
the integrity of the scientific process. This means that entrepreneurs
and innovators all over the world have access to this basic resource of
new knowledge from which new innovative businesses can develop. So how
can we foster the transfer of technology from our labs and universities
to our entrepreneurs and innovators?

A1. Our top recommendation here is to encourage universities to allow
their researchers ``free agency'' in commercializing their research--
i.e., allow them to use any agent they want instead of having to rely,
as at present, on their own university's technology transfer office.
Short of outright free agency, universities could be encouraged to
reserve a 90-day right of first refusal for their TTOs with free agency
after that period.

Q2. Recently, the President issued a memorandum to the heads of
executive agencies directing them to improve the results from its
technology transfer and commercialization activities. From your vantage
point, what suggestions would you give to agency heads to accomplish
this?

A2. Agencies should condition grant funding on universities'
implementing either free agency or a 90-day right of first refusal
policy for their TTOs.

Q3. The technology transfer process is full of difficulties. One of
the most difficult is the gap, or valley of death as it is called,
where the federal agencies funding the basic research don't want to
fund the applied research and prototype development because they
believe it to not be within their mission, and the private sector won't
fund the work because it is too risky with so many ways for the early
stage good idea to turn out to not be a viable business. So how do we
bridge this valley of death?

A3. Direct government funding as a way to bridge the valley of death
is inadvisable, as all the recent problems with Solyndra make clear.
The most constructive path for federal policy in this area is to exempt
long-term (i.e., at least five years) investments in startups from
capital gains taxation.

Q4. Cooperative Research and Development Agreements (CRADAs) are a
common contracting mechanism for federal labs to partner with private
entities to mature technologies to the point where private capital is
willing to invest in the technology. If the government does not pay its
portion of the CRADA work and requires the private entity to pay the
entire cost, will this deter small businesses from entering into CRADAs
with labs and thereby reduce the amount of technologies that are
transferred to the private sector?

A4. We lack sufficient experience with CRADAs to respond to this
question.

Q5. Federally funded scientists could be a tremendous resource for
small and startup businesses. In my State of New Mexico, we have two
national laboratories and the State has a program to pay the time for
personnel at these labs to provide technical assistance to small
businesses. Whether it be help with what material to use or how best to
analyze a complex business problem, small businesses throughout the
State have made good use of this program. Is there something that could
be done on a federal level to facilitate federally funded scientists
providing tehcnical assistance to small businesses?

A5. It is important to recognize that the majority of federal
laboratories have contracted their management and these federal
laboratory management contracts are not evaluated based upon advancing
science in the lab to the marketplace or their collaborations with
small or new businesses. If the government has expectations of
commercial outcomes from the federal laboratories, it should review the
management contracts and align incentives appropriately. Federal
funding could come with a stipulation, at least in some cases, that
technical assistance to small business is part of the scientist's job
description.

Q6. As Chair of the Congressional Hispanic Caucus' Economy and
Workforce Task Force, I recently held a roundtable with representatives
from the technology industry to focus on fostering innovation and
ensuring that young entrepreneurs and startup businesses have the
resources they need to succeed. One participant from the computer
manufacturing industry emphasized that his company sought to ensure
that its supply chain was diversified by partnering with small
business. We can help drive prosperity and jobs in the U.S. by using
small business services. What do you perceive as the major challenges
to partnering with large manufacturers?

A6. A large barrier is that many large companies do not know the
quality of the services provided by smaller, newer companies. An
Angie's List kind of service for smaller businesses would help. We are
not aware of the existence of such a service, but if not it certainly
seems like a great private sector opportunity. One of the key roles of
the private sector-supported Startup America Partnership is the
alignment of big companies with new businesses. While it is too early
to evaluate the outcome of this project, data collected over the next
year will provide insight into answering your question.

Q7. How can large companies better support and mentor small businesses
in order to ensure that small businesses and startups feel supported in
their fields and have opportunity to grow? How do we get large
companies interested in mentoring startups? Can we show these companies
that helping to grow small business is beneficial to them as well?

A7. The Startup America Partnership is encouraging large companies to
offer precisely this kind of mentoring and support. In addition, the
Kauffman Foundation has worked with or supported many mentoring
organizations across the U.S., many of them having direct relationships
with either a university (MIT Venture Mentor Service) or organizations
like Young Presidents' Organization or Entrepreneurs' Organization.
Responses by Mr. Julian Mann,
Co-Founder and Vice President,
Product Development and Research,
Skybox Imaging

Questions Submitted by Subcommittee Chairman Ben Quayle

Q1. Do you have any recommendations on ways that you think would help
a small company like yours utilize federal facilities, including
national laboratories and other user facilities?

A1. First, there is a general lack of publicly available information
regarding the types of facilities and infrastructure available at
national laboratories and other similar facilities. A standard
mechanism for searching for the available infrastructure at local
facilities is a prerequisite for any general program that opens such
facilities and infrastructure to public use.
Secondly, there needs to be a formal mechanism that establishes a
relationship between the federal entity and the company. This process
needs to be far less burdensome than traditional contract
establishment.

Q2. I understand that Skybox is still a privately held company. What
will factor into your decision-making process down the road when
considering whether to go public? Would lower compliance costs and
regulations factor into this decision?

A2. The decision to go public will be informed by a number of factors.
Such factors include capital requirements for corporate growth,
financial status of the business, and regulatory compliance burden. It
is an unarguable fact that the regulatory burdens placed upon
publically traded companies are most burdensome to rapidly growing
companies that are looking to go public. A graduated approach to
compliance that allows a company to adapt over time to the regulatory
environment in which mature publically traded companies operate would
certainly ease such burdens and improve the likelihood that privately
held companies consider trading in the public market.

Questions Submitted by Ranking Subcommittee Member Donna Edwards

Q1. In your testimony, you discuss the challenges that small
businesses have in conducting collaborative research with universities
and large businesses. Do you view these challenges as insurmountable?
Is there anything that can be done to help facilitate more engagement
and collaboration among these various players? If so, what?

A1. I do believe that these challenges are predominantly
insurmountable. The differences in mentality, operational tempo, and
motivation make it extremely difficult for productive collaboration.
This does not mean that universities and large companies do not play an
important role in the overall innovation environment, however.
Universities are an ideal ground for fundamental research to be
conducted, before commercial viability for a given technology exists.
Large companies, through small company acquisition, can significantly
assist in the wide-scale adoption of new technologies by providing
access to capital, sales and distribution networks, or integration with
existing technologies. I believe that ensuring the health of these
transfer mechanisms into and out of small technology companies is
absolutely essential for the continued growth of the entrepreneurial
technology sector. I also believe that a focus on collaborative
research between fundamentally unaligned organizations is a misguided
approach to fostering the desired sector growth.

Q2. Some have proposed creating public-private research consortia--
consisting of small and large businesses, universities, and government
entities--to work together on precompetitive research challenges that
are driven by industry need. The successful Semiconductor Research
Corporation initiative is an example of such a consortium. In your
opinion, do you believe there is value to these sorts of industry-
defined research collaborations and should the Federal Government be
doing more to encourage them?

A2. I am not personally familiar with the work of the Semiconductor
Research Corporation, so I cannot directly comment on their activity as
a representative model for such public-private consortia. I believe
that having forums for the public and private sector to communicate the
areas in which technological innovation would be beneficial is not a
bad idea. I do believe, however, that for such forums to be successful
in their goal, they must strive to ensure that the line is drawn at
identifying the problems that need solving, not the best solution. This
is because large companies are notoriously bad at predicting the
technologies that will ultimately solve the problems that exist. Rather
than focus on how to improve large companies' or the Federal
Government's abilities to develop these new technologies, we need to
recognize that small entrepreneurial companies are best at generating
new technologies. As the ultimate customer of these new technologies,
government and large corporations have a deep understanding of the
needs, but not the transformative solutions that will ultimately meet
these needs. Any increase in the number or activity of such public-
private consortia must keep this in mind if they are to operate
successfully.

Q3. In your testimony, you mentioned the courses available to you as a
student at Stanford to help educate and foster entrepreneurship. While
Stanford is undoubtedly a leader in this area, there are many
universities throughout the country that do not currently offer this
type of education or these opportunities to their students. Do you
believe this sort of entrepreneurial education should be made available
to students throughout the country? If so, in your opinion, what are
the key components of a successful entrepreneurial education program?
What barriers exist to instituting these sorts of programs throughout
the country?

A3. I absolutely believe that replicating this kind of entrepreneurial
education throughout the country is certainly possible, and a number of
such programs have been successfully implemented at universities across
the country to date. I do believe that there are a few key
requirements, however, that need to be considered. First, these
programs cannot be created in isolation from a strong technological
research base within the university. Entrepreneurial education on its
own is not particularly useful without transformative technologies to
focus on commercializing. Additionally, several of the programs that I
have observed fail to transfer the entrepreneurial activity outside the
university. With a desire to realize the upside of this technology,
many university programs end up incubating the entrepreneurial activity
far too long. Ultimately, to ensure the success of such programs,
universities must provide not only the education about
entrepreneurship, but also the resources and guidance to transfer the
concepts outside the university when the true pursuit of a commercial
venture commences.

Question Submitted by Representative Lamar Smith

Q1. At our hearing, you explained that existing government acquisition
models have not kept up with the pace of technological innovation in
the private sector. Would you say the challenge lies in internal
acquisition rules, the culture at acquisition departments, or a
combination of the two? How could the process be altered to allow for
the government to move rapidly to adopt new technology?

A1. I believe that the challenge is certainly a combination of both
antiquated acquisition rules and the culture within acquisition
organizations, though both of these stem from a common problem.
Traditional government acquisition has been designed around the idea
that the government is at the forefront of technological development
and is effectively designing custom solutions to meet heretofore-unmet
needs. The reality today is that in a significant majority of cases,
technology in the private sector has eclipsed the state of technology
within the government.
The acquisition process required to use commercial technologies in
novel ways to meet government needs is certainly different from that of
a custom technology acquisition. This difference has been further
exacerbated by the fact that the private sector has moved from
traditional technology acquisition to service subscriptions. This is
most clearly exemplified in modern software, where Software-As-A-
Service (SAAS) models have effectively replaced traditional approaches
to software delivery. The private sector has adapted to this change by
realizing that there is significant benefit to such a service-oriented
model. The customer does not bear the technological risk of either the
development or the ongoing operations of the solution. Unlike
traditional acquisitions, where an initial development budget is
approved, with little thought to the ongoing operational costs, in
service-oriented models the customer needs to express the value that a
given service provides on some sort of repeated basis (i.e., monthly,
annually, etc.). These models provide better quality of service to
customers, incentivize service providers to continue improving the
systems that they deliver, and provide a more reliable ongoing revenue
stream on which businesses can develop.
Government acquisition is not designed to be able to acquire
subscription services. These subscription models extend beyond the
realm of just software as well; numerous companies are now providing
Platform-As-A-Service (PAAS) or Infrastructure-As-A-Service (IAAS),
providing the same type of quality of service and continuous
improvement benefits as SAAS. The ``we must build it attitude''
prevents asking the question ``what is this worth to me?'' This needs
to be changed if government acquisition of new technologies has a
chance of keeping up with the pace of technological innovation.

Questions Submitted by Representative Randy Neugebauer

Q1. I hear repeatedly from the small businesses in the 19th District
of Texas that regulations and government intrusion are costing them
valuable man hours of compliance and impacting their bottom line. Do
you agree this is a problem? If yes, please provide and example of a
regulation that you have witnessed impact a new business' ability to
grow.

A1. I certainly agree that regulatory compliance has had a direct
impact on Skybox's bottom line. One set of regulations in particular is
the ITAR. I reference a part of my previous written testimony to
further explain:

. . . As a satellite manufacturing company, virtually
everything done by our engineering organization is governed
under the ITAR. Even the most benign mechanical bracket can
only be manufactured by an ITAR-certified machine shop. The
vast majority of local machine shops are not ITAR certified,
and have no interest in becoming certified due to the high
cost, burdensome documentation requirements, and increased
liability. As a result we have an artificially reduced supply
market, which has resulted in our manufacturing costs being
increased by a factor of 10. Furthermore, these machine shops
are typically very busy, which means we have a lead time that
is two to three times longer than if we were operating in a
less regulated industry.

Perhaps even more concerning is the fact that the ITAR
regulations have had the unintended consequence of actually
decreasing domestic competitiveness in the aerospace industry.
As a relative newcomer to the industry, I have not seen the
progression of the regulations over the years. What I have
seen, however, is that when it comes to low-cost,
transformative, satellite technologies, international
developers have significantly surpassed the state of
domestically developed technologies. A number of our high-
performance specialty components are obtained from
international suppliers. Additionally, when we have approached
these suppliers about the possibility of co-development or
manufacturing support, they have declined due to the fact that
their primary customer base is outside the United States.
International developers are rejecting the idea of deeper
collaboration with American companies due to the concern that
they will not be able to export the resulting technology to
their existing customers due to ITAR; this is a real problem
for American innovation.

Q2. I also consistently hear from my constituents that regulatory
uncertainty is making it more difficult for potential entrepreneurs to
take the leap of faith and invest in starting a new business. Some of
you alluded to this in your testimony. Could you please provide a
specific example of this uncertainty, and explain how the Federal
Government could act to relieve this uncertainty?

A2. Regulatory uncertainty has not really been a driving consideration
in our business. While regulatory burden has certainly provided
hardship, we have not really focused on how shifting regulations may or
may not affect our business going forward. We really just focused on
the development of our technology, the cultivation of our customer
base, and the belief that if we did these two things successfully, we
would be able to find ways of navigating any changing regulatory
landscape that we encountered.

Q3. Have you observed any small startup businesses having difficulties
obtaining loans or accessing capital? Have you observed any changes in
banks' underwriting standards or compliance costs affecting startups'
abilities to obtain loans?

A3. I do not have relevant experience from which to develop a response
to this question.

Question Submitted by Representative Daniel Lipinski

Q1. Describe your experience with federal R&D funding mechanisms,
whether your companies do their manufacturing here in the U.S., and if
there is anything Congress can do to better incentivize domestic
production of inventions that began with federal R&D investments.

A1. Prior to my experience with Skybox, I had been somewhat involved
in SBIR funding processes for a few different federal agencies. Skybox
has not had any formal relationship with federal R&D funding to date.
Skybox does conduct all of our manufacturing domestically (due to ITAR
regulations), and ultimately this has made us less competitive with
international competitors because our costs are inflated. Ultimately I
believe that trying to artificially incentivize domestic production
will be of greater long-term detriment than benefit. We as a Nation
need to focus on the areas of technology and innovation where we
maintain a competitive edge on the global market, not use taxpayer
dollars to create artificial incentives that continue to diminish our
global position.

Questions Submitted by Representative Ben Ray Lujan

A1. Ultimately, the knowledge conveyed through publicly available
research is rarely sufficient to effectively commercialize the
pertinent technology. Further, I believe that the concern that
international innovators are going to take our entrepreneurial
opportunity by cannibalizing our public research is misguided. The
proportional amount of scientific innovation that the United States has
been contributing to the global scientific community has been
diminishing over the last 30 years. This is the real problem that we
need to be addressing. As long as the United States continues to be a
scientific powerhouse, we will continue to have a strong and growing
technology entrepreneurship sector. If, instead, we continue to decline
relative to the rest of the world, then our global position when it
comes to entrepreneurship and innovation will certainly suffer.

A2. If executive agency heads want to increase the degree to which the
technologies they develop are effectively commercialized, then they
need to find ways of increasing the public's visibility into the
technologies that they have within their portfolio. From my
perspective, the greatest barrier to commercialization of this
technology is that there is a lack of general knowledge into the
technological developments that have been conducted by our federal
agencies. Furthermore, those entrepreneurs that are best positioned to
realize the full potential of these technologies in the commercial
market are often some of the most removed from the activities going on
within our federal research and development organizations.

Q3. The technology transfer process is full of difficulties. One of
the most difficult is the gap, or valley of death as it's called, where
the federal agencies funding the basic research don't want to fund the
applied research and prototype development because they believe it to
not be within their mission, and the private sector won't fund the work
because it is too risky with so many ways for the early stage good idea
to turn out to not be a viable business. So how do we bridge this
valley of death?

A3. This so called ``valley of death'' is precisely the role that
venture capital plays in spanning the gap between pure R&D funding and
more traditional growth or debt capital sources. Ultimately, it is my
experience that if the market potential of a technology is significant
enough, then venture capital will gladly bear the technology risk
associated with transitioning a technology from research to product.
The issues that I have seen are that oftentimes innovators do a poor
job of effectively determining and communicating the market potential
for their technology. This is why I believe that an increase in
entrepreneurial education in our Nation's leading research institutions
is essential to seeing growth in the innovation sector.

Q4. Cooperative research and Development Agreements (CRADAs) are a
common contracting mechanism for federal labs to partner with private
entities to mature technologies to the point where private capital is
willing to invest in the technology. If the government does not pay its
portion of the CRADA work and requires the private entity to pay the
entire cost, will this deter small businesses from entering into CRADAs
with labs and thereby reduce the amount of technologies that are
transferred to the private sector?

A4. I have very little experience with CRADAs and consequently don't
feel prepared to be able to answer this question effectively.

A5. I can certainly see a program such as this being of some interest;
I do not believe necessarily that it will accomplish the stated goal of
the Committee in increasing the amount of technology entrepreneurship
throughout the Nation. Ultimately, access to scientific talent has not
been one of the major challenges that we have faced in the growth of
Skybox. Furthermore, I have a number of professional contacts that are
researchers in federal labs, and I am unsure that a structure like this
would effectively motivate their support. While financial compensation
for the time that they spend working with companies is certainly
appreciated, many of these researchers that I have talked to believe
that his or her time is the limited resource. The opportunity cost of
working with a small company rather than working on proposals that can
further his or her own research projects simply does not add up for
these researchers. It is my belief that the financial resources that
would be used for a program like this would be better spent directly
funding novel research rather than through a construct such as this.

A6. At Skybox, we do not work with any large manufacturers. As a
result, I cannot comment on the difficulty of partnering with large
manufacturers.

A7. Large companies and startups do not work well together.
Ultimately, when a startup is successful in a given field, it is
typically detrimental to the large companies in that same field. On the
other hand, it is beneficial to consumers, the economy, and the
technological landscape at large. Furthermore, the ways in which large
companies and startups operate is fundamentally different. If startups
were to listen to the ``recommendations'' of large established
companies, then transformative innovation would cease. As a Nation, we
want innovators and their companies to continue to be the renegades
within their respective industries if we are to continue to remain at
the forefront of technological innovation.
Responses by Mr. Ray Rothrock, Partner, Venrock

Question Submitted by Subcommittee Chairman Ben Quayle

Q1. Do you believe the current budget environment offers an
opportunity for smaller, innovative companies to compete for government
contracts because acquisition officers will be increasingly looking for
low-cost, high-efficiency options? How could acquisition officers be
empowered by current systems to identify and pursue these options?

A1. The goal for government acquisitions, whether high tech or low,
goods or services, should be to maximize value for the taxpayer's
dollar. Even absent the critical budget environment of 2012,
acquisition officers should always seek the highest return on
government investment and procurement. I believe smaller, innovative
companies can thrive in such an environment, given smaller startups'
superior ability to be nimble, more responsive to individual customers'
needs and lack of legacy cost burdens and overhead. Further, new small
companies may have better products more suitable to current needs.
Government can best help such small businesses by continuing to drive
demand as it purchases its goods and services in the marketplace,
encouraging private sector competition, holding vendors accountable and
measuring value.

Questions Submitted by Representative Randy Neugebauer

Q1. I hear repeatedly from the small businesses in the 19th District
of Texas that regulation and government intrusion are costing them
valuable man hours of compliance and impacting their bottom line. Do
you agree that this is a problem? If yes, please provide an example of
a regulation that you have witnessed impact a new business' ability to
grow.

A1. In the last decade or so, there has been a series of financial and
accounting rules, regulation, and compliance mandates that while
initially directed at larger companies, were disproportionately and
mostly negatively impacting the bottom line of smaller companies; one
might say an unintended consequence. One of the best examples of new
compliance requirements that impact a small business's bottom line is
compliance with Sarbanes-Oxley (SOX) 404B. There are a number of
challenges that small venture-backed companies face in complying with
SOX 404, but I will focus my response on just a few. First, the cost of
compliance with this regulation forces young companies to expend scarce
resources, people, time, and capital, earlier in the process in order
to be prepared and the ability to go public or be acquired by larger
public companies. This diversion of resources is having an adverse
impact on innovation and economic growth since in a capital-constrained
startup, precious capital is taken from the work of innovation and
manufacturing. The end result of these SOX compliance challenges is
that small businesses that once aspired to become public companies are
now questioning the benefits of going public or even merging with a
public company. This is not in the Nation's best interest, given that
90% of a company's growth and job creation comes after that company
goes public.
Studies show that significant job creation occurs when a venture-
backed company goes public. In the last decade, however, the market for
venture-backed initial public offerings (IPOs) has suffered. From
Sarbanes Oxley (SOX) to the Global Settlement for Reg FD, regulations
intended for larger multinational corporations have raised burdensome
obstacles and compliance costs for startups trying to enter the pulic
markets. The venture industry strongly supports regulation that
protects investors where necessary, but that regulatory approach must
account for the unique challenges faced by young venture-backed
companies and their investors. There are opportunities within existing
regulations to tier compliance so as not to overburden emerging growth,
pre-public and public companies at at time when they need support from
the government, ther auditors, and the markets. In addition, the
venture capital industry supports regulatory and tax policies that seek
to encourage small, emerging growth companies to go public on U.S.
exchanges. Such policies promise to bolster the economic recovery, spur
job growth, and maintain our global comppetitiveness.
I would direct your attention to a report that was recently
presented to the Deparment of Treasury entitled, ``Rebuilding the IPO
On-Ramp.'' This report discusses many of the challenges faced by
emerging growth companies and offers tangible solutions to those
challenges. The report can be found on the NVCA Website, www.nvca.org.

A2. One of the most impactful things the Federal Government can do to
help the bottom line for small businesses is to create a regulatory and
tax policy environment with as much certainty and predictability as
possible. Entrepreneurs and investors are willing to take risks if we
have a sense of the ``rules of the road'' and that those rules will not
be subject to abrupt changes or lapses. One of the best examples of
this uncertainty is around tax credits that are often allowed to expire
and then are reauthorized retroactively. This uncertainty makes it very
difficult to strategically plan and budget growth for small businesses.
It is hard to plan for the long term if changes substantial and
fundamental changes occur in the short term.

A3. Loans into venure capital startups become available when a comany
starts to produce revenues and cash flow. This cash flow is required to
service the loan as equity capital and is far too expensive to be used
for such uses. Generally, when startups are backed by strong venture
firms, deals with commercial banks can be had, but at additional costs.
Banks knowledgeable of the risks in startups and with the ability to
complete due diligence have nonetheless pulled back from commercial
loans to startups or added terms to the deals that basically increase
the cost of debt to the company. These increased costs consume
resources otherwise dedicated to innovation and other critical elements
of the company and in general hamper growth as much as they contribute
to it. Even further, banks are looking to the venture capital backers
for guarantees, something they never asked for even three years ago.
Personal guarantees are extraordinarily expensive but yet the banks are
requiring it. it is sometimes easier to obtain equity capital rather
than loan capital in the current environment.

Questions Submitted by Ranking Subcommittee Chairman Donna Edwards

Q1. Some have proposed creating public-private research consortia--
consisting of small and large businesses, universities, and government
entities--to work together on precompetitive research challenges that
are driven by industry need. The successful Semiconductor Research
Corporation initiative is an example of such an consortium. In your
opinion, do you believe there is value to these sorts of industry-
defined research collaborations and should the Federal Government be
doing more to encourage them?

A1. Public-private partnerships or consortia have much to commend them
and often receive lots of public support and outpouring of praise, but
they are too often seen as a panacea or Holy Grail for federal research
investments. In our experience, public-private consortia are
constructive but hardly game changing. Private sector players rarely
share their ``best'' proprietary technologies or deploy their most
productive researchers in such collaborations, nor would we expect them
to. I believe federal research initiatives should prioritize research
outcomes over process inputs. Taxpayers benefit most when such research
initiatives yield desired innovations leading to companies being
formed, rather than collaboration without consequences of any economic
meaning.

Q2. In his testimony, Mr. Mann mentioned the courses available to him
as a student at Stanford to help educate and foster entrepreneurship.
While Stanford is undoubtedly a leader in this area, there are many
universities throughout the country that do not currently offer this
type of education or these opportunities to their students. Do you
believe this sort of entrepreneurial education should be made available
to students throughout the country? If so, in your opinion. what are
the key components of a successful entrepreneurial education program?
What barriers exist to instituting these sorts of programs throughout
the country?

A2. Entrepreneurship education is important, impactful, and in every
business school in the country. The subject is ``red hot'' and
ubiquitous, enjoying tremendous attention and scholarship. I am
privileged to frequently guest lecture on topics including ``what VCs
look for,'' ``how to best position companies seeking funding,'' and
``growing businesses from concept to commerce.'' In fact, educating
entrepreneurs is a core responsibility for all venture capitalists, as
entrepreneurs are the lifeblood of the venture business, and the best
VCs tend to be the best teachers, hand holders, and advisers. In
general, all this activity is good if for nothing more than to provide
alternatives and to make people seeking economic growth aware of this
path.
The only obvious barriers to further proliferation of
entrepreneurship education programs are high tuition rates, the
inherent ``busy-ness'' of those best able to teach from experience, and
the fact that entrepreneurship, like ``innovation,'' is a subjective
and inexact science. For what it's worth, in my experience, the
entrepreneurship education that is most impactful occurs outside the
classroom, in networks that connect real-time entrepreneurs with peers,
veteran company builders, and funders. It occurs when people
participate in entrepreneurial companies with fast growth and observe
first hand the challenges, opportunities, and thrill of participating
in one. Entrepreneurs are largely born, but there are many skills and
lessons that can be shared in the classroom to lessen the failure rate.

Question Submitted by Representative Daniel Lipinski

A1. The United States has led in the creation of the best and most
successful and recognizable companies, and in some cases creating whole
industries, in nearly every major industrial segment since World War
II. United States R&D, public and private, has been the bedrock of
those sectors--whether it is the aerospace industry, the
telecommunications industry, the semiconductor industry, the personal
computing industry, the biotechnology industry, the Internet, and now
the clean energy sector. Federal Government support for early-stage R&D
has been the key determinant that has led to inventions in all of these
areas.
Different sectors and technologies require different tools to best
incentivize domestic production of inventions that were incubated with
federal R&D investments, but there are some actions that can be taken
that will lead to improvements across all sectors.
First, high-tech companies that leverage federal R&D into
commercial enterprises often require human capital that is skilled in
science, mathematics, and engineering. Too often the U.S. workforce
alone cannot fill those positions. Allowing high-skilled immigrants who
perform jobs that cannot be filled by U.S. workers to remain in the
country is a good first step. Foreign-born entrepreneurs contribute a
great deal to the U.S. economy and should be allowed to remain in the
U.S. after their schooling rather than going back to their home country
to start up their new business there. The new Start-Up Visa Act,
introduced by Reps. Lofgren and Polis, is an excellent piece of
legislation that will go a long way toward creating jobs and keeping
jobs here in the U.S. We can improve U.S. competitiveness and
innovation when we embrace foreign-born entrepreneurs that want to
create U.S. companies with manufacturing jobs. I don't have statistics
for the venture industry, but a full 40% of the entrepreneurs in my
firm's portfolio were foreign born.
The job creation potential in the clean energy sector is enormous.
Energy is the largest market in the world, and the United States
represents 25% of the world's energy. The U.S. can and should take a
leadership position in a worldwide clean energy technology marketplace,
but it will take significant and sustained federal commitment to make
this happen. Initial R&D innovation in technologies like hydro power
(Hoover Dam), nuclear power (USS Nautilus), solar (NASA), and wind
(DARPA) were derived out of our national labs and government-sponsored
projects. The resulting industries represent the best means for
leveraging this federal R&D into domestic manufacturing jobs. In the
past, the U.S. has been an exporter of critical energy technologies.
This can and should continue but requires sustained investment by the
Federal Government.
The biggest challenge in getting to scale on emerging clean energy
technologies is getting through the ``valley of death''--that period of
time and investment between a successful new energy product and fist
commercial deployment. The cost of commercial deployment in the
capital-intensive energy sector is simply too high for, and the public
equity markets do not have the risk appetite for, these projects
either. Debt financing is the only way to bridge this gap. The federal
balance sheet with financing allows for the highest possible chance of
success. Congress should look at enacting a Clean Energy Deployment
Administration (CEDA), similar to what Senators Bingaman and Murkowski
have introduced. CEDA would provide a government-backed lending
authority for high-risk, capital-intensive, and first-of-a-kind
manufacturing facilities. After the first or second facility is built
and the risks are reduced, traditional lending will kick in as banks
see and understand better the technology and benefits. Enacting CEDA
would be the most important thing in the short run that Congress can do
to incentivize domestic manufacturing.

Questions Submitted by Representative Ben Ray Lujan

Q1. Basic research is key to future innovation. But the direct
products of basic research are pulicly available, as it should be for
the integrity of the scientific process. This means that entrepreneurs
and innovators all over the world have access to this basic resource of
new knowlege from which new innovative businesses can develop. So how
can we foster the transfer of technology from our labs and universities
to our entrepreneurs and innovators?

A1. The great technology companies of the late 20th Century were all
started by teams of people--Intel, Apple, Microsoft, Google, Cisco,
Genentech, Gilead, and on and on. In all cases, there were a
technologist and a business person. A national lab or university
laboratory naturally attracts the technologist who spends all their
time on innovation. In my experiences, there are no natural business
persons at a national lab. Coupling the technologist with a potential
business entrepreneur is what is required. Professional researchers
need access to the business side, and the business people need access
to the researchers and their innovations. It cannot be forced or willed
by policy.
I could see a series of conferences, e.g., adult science fairs,
which expose both sides of the equation to each other. There they could
learn to communicate with each other, explain their ideas, get other
ideas, and take those to the lab or start the process of exiting the
lab to a commercial setting. ARPA-E with its annual conference does an
excellent job of bringing all the companies it has discovered (most are
not ARPA-E investments) to one place for a week. Professional
investors, engineers, managers, and many other walks of life all
interact and the magic of startups continues as relationships are
consummated.

A2. I applaud the President's directive to federal agency executives
to improve technology transfer and commercialization activities.
Incentives should be used to encourage those agency leaders in this
regard. Maximizing on the Federal Government's ``crown jewels'' will be
a boon to innovation and job creation in the near term. Each agency
should asssemble a commericalization team that includes a network of
experienced entrepreneurial managers, investors (VCs), and researchers
to share best practices and experience. The agencies should publish
often and broadly on their work and projects. NASA Tech Briefs is one
such publication that is circulated at my firm.
As described in #1 above, investors and entrepreneurs should have
the ability to ``walk the halls'' of federal research institutions,
meet and comingle with scientists, build relationships, and discuss
ideas and opportunities with researchers, Steve Jobs is famous for
having walked the halls of Xerox PARC and saw the mouse and windows
that inspired the Macintosh computer. Doing all we can to build bridges
between the federal researchers and the outside community will help the
commercialization process and maximize the taxpayer investment.

Q3. The technology transfer process is full of difficulties. One of
the most difficult is the gap, or valley of death, as it is called,
where the federal agencies funding the basic research don't want to
fund the applied research and prototype development because they
believe it to not be within their mission, and the private sector won't
fund the work because it is too risky with so many ways for the early
stage good idea to turn out to not be a viable business. So how do we
bridge this valley of death?

A3. Licensing challenges are critical to new company formation when
taking from federally funded institutions. The license process must be
streamlined and shortened to no more than 90 days. Standardization will
help a lot in shortening the process and making it understandable for
all. Small businesses are harmed by cumbersome, custom and lengthy
licensing processing. Also, license agreements need exclusivity in
order to attract private, outside investment.

A4. I have not had any experience with Cooperative Research and
Development Agreements (CRADAs) so I am not well positioned to offer
opinions on how that program will be impacted by changes to the federal
payment portion.

Q5. Federally funded scientists could be a tremendous resource for
small and startup businesses. In my State of New Mexico, we have two
national laboratories, and the State has a program to pay the time for
personnel at these labs to provide technical assistance to small
businesses. Whether it be help with what material to use or how best to
analyze a complex business problem, small businesses throughout the
State have made good use of this program. Is there something that could
be done on a federal level to facilitate federally funded scientists
providing technical assistance to small businesses?

A5. Getting federal scientists out of the labs and integrated into the
private sector can potentially yield significant benefits. A small
percentage of leading scientists is generally responsible for most of
the significant breakthroughs that occur. So it makes good sense to
focus entrepreneurial services, funding, and support on the top
scientists with breakthrough ideas.
Top scientists should be given time, perhaps one day per week, to
consult with startups. Leading universities offer this opportunity and
it is beneficial to both sides. Lab scientists should be able to fully
participate in entrepreneurial activities without fear of losing their
federal benefits (i.e., pension, health insurance coverage) and without
fear of conflict of interest. The standard of conflict of interest for
scientists involved in entrepreneurial activity should be ``actual
conflict'' as opposed to the ``appearance of conflict'' standard. The
appearance standard allows program managers the ability to curtail
entrepreneurial activities by pointing to unrealistic or imagined
conflicts. In general, conflicts of interest exist at every layer of
society. It is the lack of transparency of conflicts that causes
trouble, not the tranparency or admission of relationships or
conflicts.

A6. Large manufacturers are essential to small startup companies as
customers, suppliers, and sources of talent. Large manufacturers
likewise recognize and appreciate the benefits of small and medium
customers, suppliers, and targets for strategic acquisition. Last year,
the Business Roundtable produced an analysis of the symbiotic
relationship between small and large businesses in the United States,
quantifying many of the mutual benefits: http://businessroundtable.org/
studies-and-reports/mutual-benefits-shared-growth-small-and-large-
companies-working-togeth/.
Venture capitalists do not generally see a market failure here for
which government action is needed or warranted. Our competitive economy
enables and encourages partnering driven by economics. Likewise the
risks of unintended consequences are always high when policy makers
attempt to influence market behaviors to assist indiviual classes of
businesses. Small businesses tend to suffer along with big businesses
when government limits access to capital, increases operation costs
through regulation, or alters the cost-benefit equation to advance
social policy goals. Public officials looking to help small businesses
might best serve the marketplace through use of their bully pulpit, to
highlight entrepreneurial role models and success stories.

A7. Many large technology companies whose roots were entrepreneurial
or were venture backed have their own venture programs in place. The
NVCA encourages this and has an entire program supporting corporate
venture capital. Large companies provide not just capital but often
technical expertise that may be very hard to acquire for the startup,
infrastructure in the case of labs or special equipment and,
importantly, demand for the products produced by the smaller startups.
The vast resources of, for example, an Intel, are truly unique and
often sought by startups. Rarely do corporates invest with the
assistance of pure venture capital groups. Invariably, when a
corporation engages in the process of small company formation, there is
an advocate within that company's senior management ranks. Corporations
are driven by economics and results for their customers and
shareholders. It would be helpful if federal policy were explicit in
the treatment of certain tax policies, investment credits, and other
accounting elements as they may be applied to company formation and
startup company support.
Responses by Mr. Steve Dubin, Former CEO, Martek Biosciences,
and Senior Advisor to DSM Nutritional Products

Questions Submitted by Representative Neugebauer

Q1. I hear repeatedly from the small businesses in the 19th District
of Texas that regulations and government intrusion are costing them
valuable man hours of compliance and impacting their bottom line. Do
you agree that this is a problem? If yes, please provide an example of
a regulation that you have witnessed impact a new business' ability to
grow.

A1. I do not think there is any one thing that creates the problem. I
think it is the totality of federal, State, and local regulations that
creates a sense of being overwhelmed when trying to start a new
business. There are withholding issues, licensing and permitting
requirements, health care issues, and overly complex taxation issues,
among others. It is hard to start a one- or two-person business (which
will hopefully grow to hire many employees) when you have so many
issues to face.

Q2. I also consistently hear from my constituents that regulatory
uncertainty is making it more difficult for potential entrepreneurs to
take the leap of faith and invest in starting a new business. Some of
you alluded to this in your testimony. Could you please provide a
specific example of this uncertainty and explain how the Federal
Government could act to relieve the uncertainty?

A2. Aside from the current tax and economic uncertainties, in DSM/
Martek's nutrition field, for example, there are many uncertainties
relating to health claims and regulatory procedures at the FDA that
make it extremely costly for large companies, let alone small
companies, to do business in the space. Why invest all of the time and
money that goes into inventing a new nutritional product if the
regulatory path is unclear and if a nutritional product will be held to
unreasonable drug-type standards before you can say anything about your
product? In addition, this uncertainty opens the door for plaintiff's
attorneys to bring suits related to claims.

A3. I have not dealt with bank debt in awhile, but equity capital is
less abundant for long-term bioscience-related deals than I have seen
in some time.

Questions Submitted by Representative Edwards

Q1. Some have proposed creating public-private research consortia--
consisting of small and large businesses, universities, and government
entities--to work together on precompetitive research challenges that
are driven by industry need. The successful Semiconductor Research
Corporation initiative is an example of such an consortium. In your
opinion, do you believe there is value to these sorts of industry-
defined research collaborations and should the Federal Government be
doing more to encourage them?

A1. I think the concept of public-private research consortia is an
excellent one. This is especially true where there is a big problem to
be solved and the early work may be too risky or too complex to be
performed by any one entity.

Q2. In his testimony, Mr. Mann mentioned the courses available to him
as a student at Stanford to help educate and foster entrepreneurship.
While Stanford is undoubtedly a leader in this area, there are many
universities throughout the country that do not currently offer this
type of education or these opportunities to their students. Do you
believe this sort of entrepreneurial education should be made available
to students throughout the country? If so, in your opinion. what are
the key components of a successful entrepreneurial education program?
What barriers exist to instituting these sorts of programs throughout
the country?

A2. I am not an expert on this one, but I do know that more and more
universities are emphasizing entrepreneurial education. The University
of Maryland, for instance, is one such university. I think that the
cultural aspects that foster entrepreneurs are as important as any
specific curriculum. Such a culture can be fostered by such things as
celebrating successes, rewarding professors that engage in
entrepreneurial activities and bringing in notable entrepreneurs to
speak to students.

Question Submitted by Representative Lipinski

A1. My experience was excellent with the SBIR program. Martek would
not have been successful without it. Most of Martek's production was
done in the U.S., in Kentucky, South Carolina, and New Jersey.

Questions Submitted by Representative Lujan

A1. The fact that research is publically available may not always be a
good thing. Companies will not invest in expensive commercialization
efforts without being able to have intellectual property protection or
other rights that protect their investments.

A2. The first step would be to incentivize government employees for
their inventions. The second would be to publicize and catalogue any
available technology. The third would be to have a licensing process
that is fair to both sides and easy to use.

A3. I think this one is impossible to answer on a global basis. It is
more of a case-by-case thing, but if the incentives are properly
aligned, it believe that the risk can also be properly aligned.

A4. I believe that businesses will be skeptical if the government does
not share in the costs.

A5. The New Mexico program sounds like a great one. Why not copy that
on a national basis?

A6. In my experience, there are two main problems. First is convincing
large manufacturers that the smaller company is financially viable and
stable enough to be relied upon, and second, it takes so much time for
a large company to make a decision. Both are related to the larger
companies' aversion to risk.

A7. I think everyone benefits when more small companies benefit.
Larger companies look at the matter more narrowly most of the time,
however. Most procurement departments are narrowly focused on cost and
quality and generally do not take the bigger picture into account. I
think it is a matter of raising the awareness at the top of companies
that this is important to everyone and gaining an understanding of what
larger companies require in order to be more responsive to smaller
companies.
Appendix 2

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Additional Material for the Record

Rebuilding the IPO On-Ramp:

Putting Emerging Companies and the Job Market Back on the Road to
Growth