[Senate Hearing 111-1091]
[From the U.S. Government Publishing Office]
S. Hrg. 111-1091
SBIR AND STTR REAUTHORIZATION: ENSURING A STRONG FUTURE FOR SMALL
BUSINESS IN FEDERAL RESEARCH AND DEVELOPMENT
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ROUNDTABLE
BEFORE THE
COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
JUNE 4, 2009
__________
Printed for the Committee on Small Business and Entrepreneurship
Available via the World Wide Web: http://www.access.gpo.gov/congress/
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COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
ONE HUNDRED ELEVENTH CONGRESS
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MARY L. LANDRIEU, Louisiana, Chair
OLYMPIA J. SNOWE, Maine, Ranking Member
JOHN F. KERRY, Massachusetts CHRISTOPHER S. BOND, Missouri
CARL LEVIN, Michigan DAVID VITTER, Louisiana
TOM HARKIN, Iowa JOHN THUNE, South Dakota
JOSEPH I. LIEBERMAN, Connecticut MICHAEL B. ENZI, Wyoming
MARIA CANTWELL, Washington JOHNNY ISAKSON, Georgia
EVAN BAYH, Indiana ROGER WICKER, Mississippi
MARK L. PRYOR, Arkansas JAMES E. RISCH, Idaho
BENJAMIN L. CARDIN, Maryland
JEANNE SHAHEEN, New Hampshire
KAY HAGAN, North Carolina
Donald R. Cravins, Jr., Democratic Staff Director
Wallace K. Hsueh, Republican Staff Director
C O N T E N T S
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Opening Statements
Page
Landrieu, Hon. Mary L., Chairman, a United States Senator from
Louisiana...................................................... 1
Shaheen, Hon. Jeanne, a United States Senator from New Hampshire. 4
Witnesses
Wheeler, Kevin, Director, Committee on Small Business and
Entrepreneurship............................................... 5
Barry, Jim, Creare, Incorporated, Hanover, NH.................... 5
Crandell, Keith, ARCH Venture Partners........................... 5
Eyester, Laura, SBA, Office of General Counsel................... 5
Iyer, Subash, SBA, Office of the Administrator................... 6
Glover, Jere, Small Business Technology Council.................. 6
McGarrity, Gary, VIRxSYS, Gaithersburg, MD....................... 6
Mehra, Kunal, Scientific Systems, Woburn, MA..................... 6
Oliver, Linda, Acting Director, Small Business Programs,
Department of Defense.......................................... 6
Fedorkova, Lenka, Representative from the NIH SBIR program....... 6
Wessner, Charles, National Academy's Program on Innovation....... 6
Williams, Cheryl, Government Accountability Office............... 6
Wyatt, Kathy, Louisiana Tech University.......................... 6
Necciai, Erik, Staffer, Office of Senator Olympia J. Snowe....... 10
SBIR AND STTR REAUTHORIZATION: ENSURING A STRONG FUTURE FOR SMALL
BUSINESS IN FEDERAL RESEARCH AND DEVELOPMENT
----------
THURSDAY, JUNE 4, 2009
United States Senate,
Committee on Small Business
and Entrepreneurship,
Washington, DC.
The Committee met, pursuant to notice, at 9:39 a.m., in
Room 428-A, Russell Senate Office Building, Hon. Mary L.
Landrieu (chairman of the committee) presiding.
Present: Senators Landrieu and Shaheen.
OPENING STATEMENT OF THE HONORABLE MARY L. LANDRIEU, CHAIRMAN,
AND A UNITED STATES SENATOR FROM LOUISIANA
Chairman Landrieu. Let me begin by calling this roundtable
to order and thank all of you all for coming this morning. I am
really very grateful that you have given your time to join us
for this roundtable. I am hoping that Senator Snowe, who like
me has many other hearings today--unfortunately, we are usually
double-scheduled--but hopefully, she will be able to stop by
sometime during the roundtable, and we are expecting some of
our other members to come in, as well.
I am going to be spending some time with you all this
morning and then turn it over to my staff that will be
conducting the bulk of the roundtable. But these roundtables
are very, very important opportunities as Congress attempts,
particularly this committee, to reshape and reauthorize two
very important programs in the SBA administration, which I am
sure you are all familiar with and have strong opinions and are
expert in and we are looking forward to hearing your views
today.
As I said, the purpose of this roundtable is to discuss the
reauthorization of the Small Business Innovation Research,
SBIR, program and the Small Business Technology Transfer, STTR,
programs, two of the most important and tech-focused programs
in the SBA. We have several reauthorizations for SBA programs
on the horizon, but these two continue to be our committee's
top priority. In the coming weeks, we will also be discussing
the reauthorization of the SBA's entrepreneurial development
programs.
As you all know, these two programs--one was authorized in
1982 and the STTR program in 1992--among other things, it helps
to meet the government's research and development needs through
small business. The last comprehensive reauthorization of the
SBIR program occurred in 2000. The program was reauthorized for
eight years. It was scheduled to sunset September 30, 2008.
This program has received two temporary extensions. We must do
a, in my view, a final reauthorization, hopefully for another
eight-year extension, and that is my goal. I have made it a
priority of this committee to get the comprehensive
reauthorization bill to the President's desk before July 31.
So let me just briefly explain for those of you who have
participated in roundtables before. When you would like to
speak, just stand your card up like that and you will be
recognized. Kevin Wheeler, who is the Director of this effort,
Don Cravins, my Staff Director, and Thad Inge will be leading
this discussion. They will be reporting back to me, as I said,
and to Senator Snowe, and together, we will try to take the
best of your ideas and submit them with our reauthorization.
We have a good foundation for this year's bill based on the
committee work of the last two Congresses, but if anyone has an
idea about changing a direction or adding, this would be your
day to make specific comments about how you think our base
reauthorization effort should be changed.
Unfortunately, sometimes with these programs particularly,
we have had some difficulty actually keeping people focused on
the facts and on specifics and not just spectacular statements
about their points of view, so the staff has been instructed by
me to keep everybody very focused on facts and statistics as we
seek to reauthorize these two very important programs.
We have many policy goals and interests to balance.
Obviously, we want these programs to stay focused as a bridge,
help, and support for true small business, Main Street
business, hometown businesses in America. That is what the SBA
is focused on, entrepreneurship, growing small businesses to
large business. It is not a hand-holder for larger businesses
that have other options because of their size and ability to
reach.
We want to encourage the exploration of high-risk, high-
reward, cutting-edge research. That is what these programs are
designed to do. We want a fair playing field so that Main
Street and hometown businesses can compete for this very small
percentage of the overall Federal R&D budget. We want
commercialization, but not at the expense of turning programs
into an acquisition program. We realize there are different
ways to get to these goals. States with low SBIR activity and
high SBIR activity, differences among small business, research
universities, agencies, differences within States with little
venture capital and those with more, but this committee wants
to balance those interests.
As all of you know, these two programs have been enormously
successful over the years since their inception. Both programs
have played an unprecedented goal in stimulating technological
innovation and allowing small business to meet Federal research
and development needs and providing seed capital for small
business to develop ideas until they are able to attract
outside investment.
The SBIR program has awarded more than $24 billion to
100,000 projects since it started. Recipients have produced
more than 85,000 patents, generated millions of well-paying
jobs across all 50 States. Both programs have garnered high
praise from well-respected sources, and governments around the
world are increasingly adopting SBIR-type programs to encourage
innovation in their own countries.
Small businesses continue to receive only about four
percent of research and development dollars, despite the fact
that they employ nearly 40 percent of American scientists and
engineers and produced 14 times more patents than large
businesses and universities and produced patents that are of
higher quality and are more than twice as likely to be cited.
The SBIR and STTR programs are two of the very few Federal
programs that tap into the scientific and technical communities
found in America's small business. These programs foster
government-industry partnerships by making competitive awards
to firms with the best scientific proposals, regardless of
size, and apply them to the research needs of our agencies, by
helping to move technologies from the lab, from our
universities to the marketplaces, or from the lab to insertion
in government programs or systems.
I am just going to mention two success programs that we
wanted to highlight. One of the technologies pioneered by an
SBIR-funded small business is a machine that uses lasers and
computer cameras to sort and inspect bullets at a much finer
level than the human eye can manage. The technology created the
invisible condensation trail of the B-2 bomber, a therapeutic
drug to create chronic inflammatory disease, and a nerve gas
protection system. We think that was a very good investment for
the money that we spent.
With regard to the bullet-sorting technology developed by
Cybernet Systems, a small woman-owned business located in Ann
Arbor, Michigan, and currently in use in Iraq and Afghanistan,
the SBIR technology is estimated to have saved taxpayers more
than $300 million. These are real cost savings and tangible
technological improvement.
I am very familiar with one of our own Louisiana companies
that has had great success in recent years, Network Foundation
Technologies, known as NiFTy. I visited the company in Ruston,
Louisiana, a relatively rural part of our State, but is home to
one of our great universities, Louisiana Tech University, and
right down the road, another well-known university, Grambling
State University. NiFTy has worked closely with our guest,
Kathy Wyatt from Louisiana Tech. Kathy, welcome. They used an
SBIR grant from the National Science Foundation to develop
technology that permits live streaming video over the Internet
without the use of large amounts of bandwidth. They have been
particularly successful in bringing sporting events live over
the Internet.
NiFTy has grown to more than 40 employees, many drawn from
the ranks of our own scientists there at Louisiana Tech. These
are high-paying new jobs, high-paying jobs in Louisiana. Kathy
will testify today that when they started this process, they
were told that they could not build this business in Louisiana.
It just didn't have the gravidas or the atmosphere or the
possibilities because it was in a State that was not known for
technology. But I beg to differ, as the Senator from Louisiana.
We have some very exciting high-tech corridors being developed
outside of the well-known Silicon Valley and Triangle of North
Carolina and places here in Northern Virginia.
There are pockets of extraordinary and exciting
technologies and entrepreneurships from east to west, from
north to south, in small places that people can hardly find on
the maps, and it is the intention of this Chairman to make sure
that these programs reach those small communities, particularly
in rural areas outside of the well-known areas, to bring the
great brains and talent of American citizens wherever they
might choose to live for any number of reasons to give benefit
to the taxpayer and to build the jobs in the next century.
So again, I encourage you all to make very constructive
discussion. I know many of you flew in from parts of the
country and the weather isn't terrific, so I thank you for your
efforts.
I would especially like to, of course, recognize Kathy
Wyatt, who I mentioned earlier. Kathy serves as Director of
Louisiana Tech Technology Business Development Center, has long
been active in small business. I thank Kathy for being here.
Dr. Kevin Kelly from Meso Technologies in Baton Rouge was
also going to be invited, but unfortunately because of the
weather had to be rerouted.
So I am pleased to have both of these great spokespersons
from my own State and I look forward to being introduced to the
rest of you all and look forward to your testimony today. Thank
you very much.
We have been joined by one of my great leaders on this
committee and a fierce advocate for small business, a woman who
has done a lot of it in her career as Governor before she got
here as a Senator, so Senator Shaheen, we are very grateful for
you attending this morning, and please.
OPENING STATEMENT OF THE HONORABLE JEANNE SHAHEEN, A UNITED
STATES SENATOR FROM NEW HAMPSHIRE
Senator Shaheen. Thank you, Madam Chair, and thank you for
your leadership of this committee before putting together this
innovative discussion this morning to talk about reauthorizing
SBIR.
I also want to thank all of the panelists for coming today.
As Senator Landrieu said, we especially appreciate your
challenges getting here given the weather. For those of you who
made it yesterday and got to be here through that awful
rainstorm, we especially appreciate that effort.
I am sorry that, unfortunately, I am not going to be able
to stay for the entire discussion this morning. We have a mark-
up in the Energy Committee, another very important issue for
all of us, so I will miss much of your discussion but will have
the transcript that we can all review, and, of course, the
staff will report the discussion this morning to all of us.
As a Senator from New Hampshire, I take particular pride in
the SBIR program. As you will hear from Jim Barry, who is from
New Hampshire, it was New Hampshire Senator Warren Rudman who
in 1982 sponsored the Small Business Innovation Development
Act, which established the SBIR program. I think Jim will tell
you that Creare, which he represents, was very instrumental in
helping to develop the original Act. Many New Hampshire small
businesses have successfully competed for SBIR funding over
these past 27 years, including Creare. Thank you, Jim, for
coming to share your experiences with the committee.
All across New Hampshire, from Applied Geo Solutions in
Durham to Mikros Manufacturing in Claremont, small businesses
that otherwise would not be able to compete for Federal
research and development funding have won competitive SBIR
grants that advance technology and science and create good
jobs. Over 794 Phase One awards and over 385 Phase Two awards
have been won by New Hampshire small businesses. And as
Chairman Landrieu has noted already, small businesses employ
about one-third of America's scientists and engineers and
produce more patents than large businesses and universities,
and yet small business receives only about four percent of
Federal research and development dollars.
I believe that our future economic prosperity depends on
whether this country continues to be a leader in science and
innovation, and that means, in my opinion, that we need to
reauthorize and strengthen SBIR. So I am going to take what
little time I have this morning to sit back and listen as you
all begin this discussion about how we can reauthorize this
legislation and hopefully create something that is going to be
better for the future. Thank you.
Chairman Landrieu. Thank you, Senator Shaheen.
I am going to now turn over the program to Kevin Wheeler,
our Director. She is going to lead us in an open discussion, as
you all have been briefed, with some specific questions. And
again, when you want to speak, just stand your name card up and
we will call on you and try to have as much interaction as
possible. Again, we want you to be, of course, very
forthcoming. That is what the purpose of this roundtable is.
But please try to keep your answers to the point and present as
many facts or supportive documentation as you can.
Of course, the record of our committee will stay open for
one week, so anything that you can't get in today but you feel
like you want to back up a point, of course, we would love to
receive your material.
So I am going to turn it over to Ms. Wheeler.
Ms. Wheeler. Good morning. Thank you. Before we get
started, did you want to just go around the table and say your
name and tell us your company or who you are representing so
that the Senators have a sense of who you are? Do you want to
start, Jim?
Mr. Barry. Jim Barry, Creare, Incorporated in Hanover, New
Hampshire.
Chairman Landrieu. If you all could pull the microphones a
little bit closer. You have to really get them close to you,
and, of course, because this is being recorded, it is
important. Some of you are going to have to share them, but
just pull them as close as possible. So Jim, could you restate
that?
Mr. Barry. Jim Barry, Creare, Incorporated, Hanover, New
Hampshire.
Mr. Crandell. Keith Crandell, ARCH Venture Partners, which
is a seed and early stage venture capital company in Chicago.
Ms. Eyester. Laura Eyester. I am with SBA's Office of
General Counsel.
Mr. Iyer. I am Subash Iyer with the SBA, Office of the
Administrator.
Mr. Glover. Jere Glover, Small Business Technology Council.
Good to see you.
Dr. McGarrity. I am Gary McGarrity from VIRxSYS in
Gaithersburg, Maryland, and I am also representing the
Biotechnology Industry Organization.
Mr. Mehra. I am Kunal Mehra with Scientific Systems in
Woburn, Massachusetts. We are a small minority-owned business,
very active in both the NASA and Department of Defense SBIR
programs.
Ms. Oliver. I am Linda Oliver. I am the Acting Director of
Small Business Programs for the Department of Defense.
Dr. Fedorkova. Good morning. I am Lenka Fedorkova,
representing the NIH SBIR program.
Chairman Landrieu. I have to stop you all. I can see people
in the back of the room cannot hear you at all, so I am going
to ask you again, when you speak, you have to speak like this,
okay, close to the microphone so that people can hear you.
These microphones are sensitive only if you are close. Try it
again.
Dr. Fedorkova. This is Lenka Fedorkova representing the NIH
SBIR/STTR program. Good morning.
Chairman Landrieu. Was that better in the back? Okay.
Somebody back there be in charge, up or down.
Dr. Wessner. My name is Charles Wessner. I am with the
National Academy's Program on Innovation.
Chairman Landrieu. Thank you, Charles.
Ms. Williams. I am Cheryl Williams. I am with the
Government Accountability Office.
Ms. Wyatt. Kathy Wyatt with Louisiana Tech University.
Chairman Landrieu. Okay. Kevin.
Ms. Wheeler. Thank you. And then, also, I would just like
to recognize Erik Necciai, who works for Senator Snowe, and he
will represent their side.
So the first topic of discussion is length of
reauthorization. As some of you may know, the last two
reauthorizations for the SBIR program were eight years. The
last reauthorization period for the STTR program was also eight
years. In the 109th Congress, this committee voted to make the
programs permanent. Then in the last Congress, we voted to
reauthorize them for 14 years as a balance between the eight
and the permanent.
Right now, we are operating under--the SBIR program, at
least, is operating under a temporary extension and they have
been six and eight months. We would like to establish on the
record today from the small businesses, the agencies, how do
the shorter or longer periods affect you so that it would guide
us in going for the longer or shorter periods.
I would like to start with the businesses, if we could go
around the table, and tell us, are shorter or longer periods
better for your business?
Mr. Barry. A longer period is preferred for us. It allows
us to plan better, have some consistency as we go forward.
Ms. Wheeler. And are you worried at all about these
temporary extensions?
Mr. Barry. They are a little unsettling because one never
knows whether the program is going to halt unexpectedly or be
put on hiatus for a while, which would be very disruptive for
the small companies that are involved.
Ms. Wheeler. Okay. Mr. Crandell.
Mr. Crandell. We are supportive of longer periods. I think
the time line that the National Venture Capital Association
also is supportive of is five years, and that way to allow the
Phase One, Phase Two, Phase Three process to complete a full
cycle and then be able to collect data and sort of understand
the implications of actions and policies that have been taken.
Ms. Wheeler. So NVCA is in favor of a shorter period?
Mr. Crandell. Of five years, which is certainly longer than
what we have--
Ms. Wheeler. But shorter than all the precedents of eight
years?
Mr. Crandell. Five is shorter than eight, yes.
Ms. Wheeler. We will just go ahead and go through the
agencies. Do you want to represent SBA, Subash?
Mr. Iyer. Sure.
Senator Shaheen. Can I just ask a question, Kevin? Would
you be opposed to an eight-year? It wasn't clear to me from
what you were saying. Eight or ten years? Is there a reason why
you think five is better?
Mr. Crandell. Well, I mean, the last couple of years, there
has been--I have only been on the NVCA or involved in it for
about three years as a board member. I have been involved in
the SBIR issue for that entire period of time. It seems like
there are some questions that are open to getting data to
resolve. The National Academy has done a great job of starting,
but they didn't have all the data available to be able to track
some of the critical parameters. It seems like you would want
to choose a period of time where you could get a full cycle of
people applying, of awards being made, of programs being
completed, and then results being developed so that you could
then look at that result and know whether you had indeed
achieved the ends that you were interested in.
Senator Shaheen. I understand that, and certainly what I
have heard from businesses, and Jim can attest to this, is that
a longer period is important so that people can plan. But what
I am trying to figure out is are you saying that you think
eight or ten years is too long and that five years is a
preferred time period, or--
Mr. Crandell. Well, it to some degree depends on what is
actually in the bills. From the venture capital-backed company
standpoint, there are still issues about whether they can
participate and how. Obviously, if they are excluded and it is
an infinite authorization, that is something that disadvantages
what we think are important participants who are prospective
participants, who would like to participate but would be
precluded.
Senator Shaheen. Thank you.
Ms. Wheeler. Just to clarify for the record, the committee
was aware of concerns of regular reviews of the program,
allowing you to go back in, and we did not see them as
inconsistent with long periods of permanency or 14 years.
And for that reason, the foundation of the bill has the
National Academies or National Research Council go back and at
regular intervals, every four years, to update the
comprehensive studies that they had done so we didn't lose that
base of research. And then also your concern that firms would
be excluded and therefore you would want to not have a longer
window, one, VC firms are not excluded even today, and two, the
foundation for the bill had a compromise to allow firms that
are majority-owned and controlled by multiple VCs. So they
wouldn't have been excluded in either scenario, not today and
not even if last year's bill had passed, to address your
concern.
Mr. Crandell. I appreciate that, and I appreciate you
pointing out all those points. I think from our perspective, a
majority of important firms that are venture capital-backed
actually would have been excluded under what we have now, or at
least their participation capped. Second, many firms have been
excluded since 2003, and even though there are these review
mechanisms that you have identified, and I am certainly a fan
of review, in point of fact, it hasn't--the program was
materially changed in 2003 from our perspective and the review
process, even though there is, I think, significant relevant
arguments to go back to the system that existed prior to 2003,
it, in point of fact, hasn't. So I don't share the same level
of confidence that you do in the program review.
Ms. Wheeler. Well, we will go into the VC issues further.
For SBA, what is the administration's position on, say, a
14-year authorization?
Mr. Iyer. Well, the SBA believes firmly that this
reauthorization needs to be a long-term reauthorization and
there are two reasons for that. The first is that at a program
and agency level, it is important for program managers for
planning purposes as well as broader considerations of how they
develop their program and outreach, have a definitive long-term
time frame for the program. In terms of the small business
side, perhaps more importantly, small businesses need to also
know that this program is there to exist for a long time.
As for the specific length of reauthorization, there is no
firm position on that and I think that there needs to be a
dialogue like the one that we are having right now to get all
of the views on the matter before we can definitively suggest a
length. But we do believe firmly in a long-term
reauthorization.
Ms. Wheeler. Thank you.
Jere, your members from the Small Business Technology
Coalition?
Mr. Glover. The stopping and starting uncertainty creates
real problems in terms of recruiting and retaining the best
scientists in the world to work for these companies. A long-
term reauthorization, certainly the 14 years, the longer the
better, and I think our folks really do think that the short-
term doesn't serve any real purposes.
There is flexibility within the Small Business
Administration. Hopefully, they are going to take a strong
position and have a strong Office of Innovation, as the bill
provides some strength. To the extent it needs to be tuned and
tweaked, there are provisions within the policy directives that
allow SBA to do that. So a short-term reauthorization doesn't
make sense, even for those who would like to change it from
time to time.
Ms. Wheeler. Thank you.
Dr. McGarrity for BIO.
Dr. McGarrity. As a member of a small emerging
biotechnology company, I think we could live with a 14-year
reauthorization plan as long as, as previous speakers and you
have mentioned, there is constancy there, because I think the
big problem and the big hurdle is the changing rules going on.
I would also emphasize what Mr. Crandell said in response to
the eligibility requirements, and I think my approval or
support for a 14-year reauthorization plan would be contingent
on the proper eligibility requirements. I think you are partway
there, but it is not fully where I think the biotechnology
industry would like to see the playing field.
Ms. Wheeler. Thank you.
Kunal.
Mr. Mehra. Yes. I strongly favor a lengthy reauthorization
and for three very practical reasons. The first is I think we
have seen in the past that whenever you get within four to six
months of sunset, the process really pauses within the
agencies. The agencies have to stop making decisions around
awards. Contracts get stopped. As a consequence, it causes an
incredible amount of stress and planning challenges for small
businesses. We don't know whether we should recruit. We don't
know whether we can actually rely on this revenue coming in.
And I think as everybody would agree, planning is critical for
all businesses, particularly for small businesses. So that is
the first reason.
The second reason is when the bill finally does get
reauthorized, there is an incredible backlog of awards of
contracts, again, that the agencies have to grapple with, and
that creates a lot of stress both for the agencies and for the
small business concerns. So when you add up the impact, both on
the stop of decision making and then the backlog of contracts,
it is almost a year that you lose as a consequence of these
short reauthorization cycles.
What do I do for a year? I have got the staff. I know that
the award is potentially coming in and I could put some
probability against it, but now I have to find other projects
to put them onto. It impacts my ability to make hiring
decisions. So from a planning perspective, it is very, very
disruptive.
The third reason is, in terms of customers, we are, as a
company, extremely focused on transitioning our programs to
acquisition programs. So we will go out two to three years in
advance and start engaging with customers and develop a
transition plan. I mean, we are really doing what I think the
SBIR program was intended to do. When we lay out that
transition plan for them, we talk about various funding sources
from Phase Two SBIRs, Phase Two enhancements, but I think as
everybody knows, acquisition program managers are extremely
risk averse and they look at that funding cycle and say, well,
if SBIR is coming up for reauthorization, we can't rely on that
funding. That introduces an incredible amount of risk. That
therefore makes it even more difficult, compounding the problem
for a small business to overcome that risk-averse culture and
be successful with the transition of a technology.
Ms. Wheeler. Thank you. Very good.
Mr. Necciai. Kevin, if you don't mind, I wanted to see if
we could touch on something you mentioned. I think a key issue
is job creation, and before the Department of Defense has an
opportunity to discuss that, if there is ever an issue where
discussing job creation as it relates to SBIR, I would like you
to emphasize that, if you could. You mentioned forecasting
through reauthorization, how that may have an effect on, my
decision to hire more people, or I had to lay off people
because I wasn't able to obtain new contracts or new grants and
such things. Were there any specific examples that your company
had in having to reduce staff or where you couldn't hire?
Mr. Mehra. Yes. I am glad you asked for clarification. My
company, we are very fortunate. We have been on a growth
trajectory. We actually grew about 40 percent in the last year.
However, there have certainly been times where we have looked
at our business forecast and we have said, okay, if
reauthorization happens, we have space to hire another five or
six people. In the worst case, if reauthorization doesn't
happen, we are overstaffed by five people. And therefore, we
say, all right, we are going to have to take a risk-adjusted
view of this and probably not hire for at least six or seven
months until there is clarity on whether these awards are going
to come in.
That is a very disruptive process. It means that if the
awards come in, we end up having to request no cost extensions,
because we are understaffed. We have less investment capital to
put into growth, going after new business. So it has this very
deleterious effect that kind of tends to roll over for a long
time and I think is not in the program's interest, it is not in
our customers' interest, and it is certainly not in our own
business interest or in the State's in terms of a hiring--
Mr. Necciai. What type of time frame would provide your
company and companies like yours with the security of knowing
that the program will be there and that there isn't this job
fluctuation? Say you don't have to make those decisions every
two years, every three years, every five years?
Mr. Mehra. Well, I would say ten years would be great.
Eight years would be a minimum. Ten years would be great.
Upwards of 12, 14 years would be wonderful. But equally as
important, I think, is to make sure that when reauthorization
does come up, that that actually happens a year in advance of
the sunset of the bill, and I know that that is a very
difficult thing to have happen, but no matter how long the
reauthorization is, at some point, the bill will sunset, and if
we could clarify that, get the reauthorization done within a
year of that sunset as opposed to waiting until the last
minute, again, from a planning perspective, it makes it much
easier and I think this is in the interest of overall economic
growth.
Ms. Wheeler. Ms. Oliver.
Ms. Oliver. That was such a nice, clear explanation that I
have little to add except to say that from the Department of
Defense standpoint, what we have to do in anticipation of
possibly shutting down a program is labor intensive and
wasteful, so we don't see--and we don't really see any benefit
from it. We just see a lot of wasted resources.
Mr. Necciai. Ms. Oliver, as you know, the SBIR Program was
supposed to terminate at last September, at the end of the last
fiscal year last year. We reauthorized it until March. We
reauthorized it again until July. Could you please estimate
what type of costs is this incurring to your agency or similar
agencies on having to do that type of fluctuation?
Ms. Oliver. We have to--if I had to, I probably could
translate it to dollars, but the sorts of wastefulness are we
have to go out to vast numbers of people to explain to them
what may happen. The communication process--in some ways, it is
like jamming up the airwaves. It would be better if we didn't
have to go through that drill at all because we need to be able
to use their attention for things more useful than in a sort of
a drill about we may not go on, and if we are not going to go
on, here is what we are going to do. So even the communication
part of not being sure whether something will be reauthorized
is burdensome to--wasteful to an organization.
Mr. Necciai. So the Department of Defense would be more
comfortable having a longer reauthorization?
Ms. Oliver. Yes. Yes, we surely would.
Ms. Wheeler. Thank you.
Lenka.
Dr. Fedorkova. From the NIH perspective, I think key points
were touched on. The timeliness of the authorization is
definitely something that would also allow us not to have to
spend sufficient time and effort to allay nervousness and
anxiety in the community who is asking us how not reauthorized
programs would affect the funding flow, even if we have the
appropriations and the agency de facto is functioning normally.
We feel, in general, too short of a reauthorization would be
difficult for planning purposes, as was already alluded to. Too
long of a reauthorization might pose other challenges where we
would have fewer opportunities to do necessary checking in as
to how the programs are doing and opportunity to perhaps adjust
things as necessary.
So I think, in general, the eight-year interval has worked
well. Again, as I think Mr. Mehra has mentioned, the key is
when the authorization happens so that those involved don't
have to spend that time managing the risks involved. So that
would be our perspective on that.
Ms. Wheeler. Thank you.
Dr. Wessner.
Dr. Wessner. Well, thank you. Our research on the SBIR
program but also on other innovation programs, both in this
country and around the world, would strongly argue that the
advantages of this program are its scale, its stability, the
continuity that allows for ongoing planning. So we would very
strongly favor a long reauthorization.
I would like to stress the point that I think was touched
on by both my colleagues from the agencies. If you want to have
this small business and this program integrated into the
procurement process, you do not want even three years out to be
wondering whether or not this program is going to be
reauthorized. I can think of nothing more disruptive to the
credibility of the program than these tiny extensions that we
have had in this period.
So without picking a particular time, the longest times
that you have mentioned here would be fully justified with a
very important condition, and that is that evaluation is
ongoing, both internally and externally. If the evaluation is
there, then I think you have the opportunity to revisit. I
don't think a program that is extended over a long period of
time, say 15 years, need not be looked at periodically, and I
think it can be.
And I would like, with respect, to take very strong issue
with my colleague, Mr. Crandell. The idea of holding the
program hostage because we are not happy with one particular
provision, I think understates the contributions that small
companies are making to national defense and to energy. We need
this program. We need their involvement. We are not
unsympathetic to the point of view that Mr. Crandell might
represent, but we very strongly think that it is putting--that
it is having the tip of the tail wag the dog and we would like
that not to happen. So with evaluation, we would argue for the
longest possible extension.
I would also just like to venture, it is not here that----
Ms. Wheeler. Chuck, could you just pull your microphone a
little bit closer?
Dr. Wessner. I beg your pardon.
Ms. Wheeler. You are such a good speaker. I would hate for
people in the back not to hear you.
Dr. Wessner. You are very kind. You are very kind, and if I
weren't so dumb, I couldn't use the mike and it would be
better.
[Laughter.]
Dr. Wessner. Anyhow, I will stop there. Scale, stability,
continuity, integration, as long as possible, with evaluation.
And I think we also need to look at a broader question about
the need for obligation. The fundamental premise of the program
is that we have to oblige the agencies to use the primary
source of innovation in the economy, and that is small
business. There is something fundamentally wrong about that.
Thank you.
Ms. Wheeler. Thank you.
Cheryl, would you like to add? Does GAO have--
Ms. Williams. GAO's work has generally found the program to
be very successful, but we have no position on the length of
time for reauthorization.
Ms. Wheeler. Thank you.
Kathy, is there any perspective for the businesses that you
help?
Ms. Wyatt. Well, basically, I agree with the fact that it
is very helpful to planning for small businesses. I can
recognize where it would be very important for the agencies to
have continuity. But what I would also like to point out is
that in the small businesses that I deal with, I think there is
a lot of wasted energy every time reauthorization emerges as a
question because these businesses stop doing their research and
focusing on the things that they are doing to bring innovation
to the marketplace and they begin focusing on communicating the
value and importance of the program to those who have the power
or authority to keep it in operation. So I think there is a
tremendous amount of wasted energy there.
And then I just think that it is extremely important for
the Federal Government to do this in a manner that demonstrates
their continuing commitment to innovation and small business
throughout the country.
Ms. Wheeler. And I think that is why we did--the committee
voted for permanency in 2006, to address that issue, to take
that away. But the compromise is now at 14 years.
Is there anything that anyone else would like to add before
we move on to the next topic?
[No response.]
Ms. Wheeler. The next topic that we have on the agenda is
the discussion of increasing the size of awards, and if you
want to touch upon it, increases in the allocations of 2.5 and
0.3 percent. As you may know, the committee voted in the last
two Congresses to raise the Phase One awards from $100,000 to
$150,000, and the Phase Two awards from $750,000 to $1 million.
There was also a 50 percent cap put on increases above those
guidelines, which for Phase One would be about $225,000 and
Phase Two would be $1.5 million, to address complaints,
particularly from rural States, about jumbo awards.
So I would just like to--would anyone like to weigh in on
those award sizes? Are they sufficient, et cetera?
Linda.
Ms. Oliver. It makes sense to raise the award--the sort of
recommended award value is really what it is--because there
hasn't been any adjustment for a long time. The Department of
Defense really does not favor caps, however. I think there are
all sorts of mechanisms that help remind agencies that they
need to be conscious of not using too much money in one place,
but there are differences. There are times when you do need to
go over the cap, or the suggested amount as it is right now,
and SBA has consistently been reasonable about that.
Now, if there were, under the present system, if one of the
agencies was acting a little crazy, I think SBA would step in
and say, knock that off. But the system with no cap I think has
worked well. I don't know of any actual excesses. I can make
out the scenario in which there could be one, but I don't know
of any actual excesses.
Ms. Wheeler. Two questions. Would the ability to go 50
percent above the guidelines be a problem for DOD, because
GAO's report found that you were not--DOD did not have a
particular problem with the guidelines. There were other
agencies that had problems with this, but DOD complied with
reporting, with justifications, and this is kind of getting at
some of those other problems. So would $225,000 and $1.5
million not be enough, particularly since you also have the
CPP, which goes up to $5 million? I mean, to get at those other
companies who you said at times need more money?
Ms. Oliver. The--let me see. It is hard to understand why
we should put a--we should have less flexibility when there
isn't really a need for less flexibility. If there had been
excesses, that would make sense.
In answer to your question, I don't think it is very likely
that the Department of Defense will suddenly need to go--maybe
ever need to go above the suggested guidelines. It is that one
case that I worry about. It is that one case or two cases where
if we had the flexibility, it would make a big difference. So
it is the flexibility I am in favor of, I guess is the way to
explain what I am trying to say.
Ms. Wheeler. And what if there were the ability to apply to
SBA for the exception when you needed to go above the 50
percent cap of $225,000 or $1.5 million? Would that address
your concerns? Because we don't really see this problem at DOD.
We didn't see this as being a problem. There were other
agencies that had this problem, and to answer your question,
what the small businesses came to us and said was, and the
balance we were trying to get at is, if you make a Phase One
award for $2 million, you have eaten 20 Phase Ones. And so in
some States where you have one or two awards, there is a
possibility that those awards could go away.
And so for about eight years, we have been hearing concerns
from Wyoming and, you know, Louisiana and other smaller States
that have low participation that there is only so much money.
And so we were trying to strike a balance. Yes, the agencies
get flexibility, but there would be a limit for the abuses that
had been identified. So would that exception get to what you
are concerned about?
Ms. Oliver. Not completely, probably. But, of course, it is
surely a step in the right direction. I think the only thing--
it seems to me that the weight between having SBA be able to
step in when SBA needs to or having to go to SBA to ask if we
can is--it seems like an unnecessary set of paperwork systems
that would need to be set up, certainly from the Department of
Defense standpoint, with no particular benefit. I mean, if we
have a question----
Ms. Wheeler. If agencies are reporting, as DOD is, it was
not a problem. Our problem was that some agencies were not
reporting as required when they exceeded the guidelines and
that is why the oversight wasn't there.
Ms. Oliver. I see. I understand. I did not understand what
you were saying.
Ms. Wheeler. That is why we had to work backwards to
address that problem, to force the compliance with the
reporting. But we will take that----
Mr. Necciai. I guess, Linda, what I am hearing from you is
flexibility is very, very important----
Ms. Oliver. Yes.
Mr. Necciai [continuing]. And I think that was something
that was echoed in the National Academy of Sciences report.
Though this may not have occurred in the past, you are saying
there is one chance that it may, and having the ability to do
that for a unique situation provides you with greater
flexibility. Kevin was highlighting--and I appreciate Lenka
bringing it up, that might be a direction that we would like to
go with you as far as it seems like NIH was the agency that
had, on occasion, gone over the limit. What would a cap for
your agency do?
Dr. Fedorkova. Thank you. Yes. Our agency also feels like
the DOD, and I think many others, that the flexibility is very
much needed to ensure that we have the right kinds of
incentives to encourage companies with high-risk, high-reward
projects, depending on what field of biomedical research they
are proposing these projects in, that they can submit realistic
projects and budgets.
We do feel that some of our gap funding programs which we
have instituted might be affected by some of the caps, but
that, I think, would depend specifically on how things are
phrased. I think the idea there is--and I know that you have a
great appreciation for the diversity of the agencies and their
missions within the program--as we are moving into some of the
new fields, like nanotechnology and the well-understood costs
that come with clinical trials. So I am referring to some of
our programs like the continuing renewal programs, which are
for our Phase Two applicants to do specific additional clinical
work and prototype development which really incrementally rises
in cost might be affected by the caps.
We do appreciate the recognition that the award levels need
to be adjusted, as they haven't been for a long time, and in
cases where projects do come to us with a higher proposal, they
are automatically, so to speak, I guess, if you will, flagged
and brought to the attention of the program officers at the
Institutes. In those cases, those budgets have to be defended
and justified. They have to really match what the company is
proposing to do in their business plan. And at the same time,
of course, we have companies who receive less than what the
guidelines are now. So it really is judged on individual cases
and that is, I think, especially why flexibility has been
helpful.
Mr. Necciai. How often do you think that occurs?
Dr. Fedorkova. Which case?
Mr. Necciai. In which they are flagged and they go over?
Dr. Fedorkova. I don't have the numbers in terms of the
frequency. I am sure that varies greatly from year to year
depending on emerging technologies and new research areas. You
know, we do sometimes see clusters of applications coming in in
the hot topic areas, so that is hard to say. But I would be
happy to look into that and provide anything for the record.
Mr. Necciai. Do you think it is unreasonable, to hear what
Kevin was saying, in order to not reduce the amount of awards
that would be issued if there are those type of ``jumbo'' type
of awards, to have a review process through SBA or a review
process through NIH?
Dr. Fedorkova. Well, and I think that that does happen to
some extent already, really. If there are any extraneous
circumstances, we do go to the SBA and that is where the
process, I think, is already in place to address those kinds of
scenarios already. So again, I think it would have to be
carefully considered, what additional checkpoints we need to
reduce flexibility or where the need arises to reduce
flexibility.
Ms. Wheeler. Before we go on to Dr. Wessner, Cheryl, your
GAO study looked at DOD and NIH for awards that exceed the
guidelines.
Ms. Williams. Yes.
Ms. Wheeler. And so I don't know if I am on the right page
33. Do you want to tell us how often NIH exceeds the
guidelines?
Ms. Williams. I don't have the specific numbers in front of
me as you do, but we did find that awards exceeding the
guidelines were more frequent at NIH and they accounted for a
larger proportion of the SBIR dollars than was the case at DOD.
Ms. Wheeler. If I am looking at this top thing, it says in
2004, they exceeded it 19 percent of the time----
Ms. Williams. That sounds right.
Ms. Wheeler. And then at DOD, if I look at this, it was two
and one percent, basically. So there was a difference.
Ms. Williams. Yes.
Ms. Wheeler. Okay. Thank you.
Dr. Wessner.
Dr. Wessner. Well, thank you. I think there are several
issues here that are worth looking at. Just on your last point,
my understanding is that NIH exceeds the awards almost all the
time, and that is because they have adjusted the awards for
inflation. Their average awards, I think, are 150K in the Phase
One, and that is good. It should be. So we would strongly
endorse, as we do on the record, in raising the ceiling. We
recommend $150,000 and the $1 million caps.
I think if I could suggest, Ms. Wheeler, an alternative, I
think the awards--the legislation should call for the awards to
be readjusted with inflation. The SBA has the power to do this
and has been derelict in not readjusting the awards. So the
problem is not to blame the agencies for adjusting to the
realities of the marketplace but to insist that the SBA do this
and we not do this on an eight-year or a ten-year cycle. I
mean, that makes no sense at all if you want to fund current
research.
So first, we strongly endorse raising the ceiling and we
strongly endorse having this as a regular nearly automatic
process, at least a regular report accounting for inflation,
and it might be even more important, because in medical
science, inflation has far outstripped the inflation across the
country.
The second point that we would like to stress is the
flexibility. One of the key findings of the National Academy
study was that the virtue--and I would like to respectfully
point out that the two largest agencies in the program are
asking that that flexibility be retained. We are on record as
arguing that if the scientists at NIH feel that there is an
award that would help address cervical cancer, that they should
be allowed to put the money in that that they need to do so.
The current process calls for SBA approval of those larger
awards. They have to get permission, and that should be given
more meaning with perhaps a more robust SBA looking at it.
The Academy report also called for these large awards. We
did not condemn the awards. We welcome them. But they should be
defined and defended and evaluated. What are you trying to do?
Why do you need to make more money available? And have some
metrics for what you are seeking to achieve. So letting them do
what they think they need to do is the hallmark of--and this
gets back also to integrating the program in the acquisition
process or taking advantage of scientific opportunity.
With respect to the disadvantaged regions--forgive me, but
these are separate issues--the GAO report in 1999, which I have
always found is both accurate and funny, is that the best ways
to achieve success in a basketball game is to shoot and the
best way of getting accepted in the SBIR program is to apply,
and that the regions that are not applying don't get many
awards. There is some logic there, I would respectfully say.
Ms. Wheeler. Which we--we address that correlation that GAO
found.
Ms. Williams. And lastly, to close, if we are looking for
more money in areas that are not having a high success rate,
then I think the outreach programs, the possibility of State
levels and perhaps matching Federal funds to facilitate
applications makes more sense than trying to freeze the top of
the quantity of any particular award.
Ms. Wheeler. Okay. And just so everyone is clear, that
right now, SBA has the authority to adjust the awards for
inflation every five years. The foundation for our bill moves
that from five years to three years, which is what the
committee voted for last year. So I think--would that address
what you are talking about, to keep up with the pace and the
cost and the size of awards? You were saying, let them
regularly update it, and we have now made it more often.
Dr. Wessner. Well, that is a very positive step. The key
thing, I think, is to get some data on the costs of research,
and that is available. That doesn't require a major study. And
then evaluate that on a regular basis.
I think this type of flexibility and regular updating is
particularly important if you accept our first intervention,
which is that the program should be extended for a long period
of time. So if you are going to extend, then you have got to
build in lots of flexibility and regular updating.
Ms. Wheeler. Okay. Cheryl, did you want to add to that?
Ms. Williams. No. I just--we did hear from the agencies
that there needed to be some increases to keep pace with
inflation. But also, as you pointed out, for the awards in
excess of the guidelines, at NIH, they consume 70 percent of
the SBIR dollars compared to 23 percent for Department of
Defense. Those do need to be evaluated individually.
Ms. Wheeler. And where were they concentrated? Weren't they
concentrated in certain States?
Ms. Williams. We found that ten States accounted for the
bulk of the awards made by both agencies, although there were
slightly different States for each of the agencies. We found
that the ten States accounted for about 75 percent of NIH
awards that went to firms that had received venture capital
investment and about 70 percent of the DOD awards that went to
firms that had received venture capital. And California and
Massachusetts together accounted for about a third of all of
the applications, as well as all of the awards.
Ms. Wheeler. Okay. Thank you.
Kathy, did you want to make a comment on the size of the
awards?
Ms. Wyatt. The main thing I was going to ask about is that
when we are talking about the size of the award, I do think it
is very valuable to be making this adjustment that is--or an
indication of the need to increase award amounts because of
inflation, but then the total set-aside to me is something that
is very important in this question, also, because I know from
our perspective, we would like to see that the number of
opportunities remain large and that many people have the
opportunity to submit applications and compete in this highly
competitive program.
So from a small rural State's perspective that is
developing this sort of opportunity, we would like to see the
amount of award increased, but we would like to see a
corresponding increase in the set-asides so that the number of
opportunities is not diminished when the size of those awards
go up.
Ms. Wheeler. Thank you. I am glad you mentioned that. For
those who want to be reminded, the committee voted last year to
increase the allocation for SBIR from 2.5 percent to five
percent incrementally over ten years and to double STTR from
0.3 to 0.6 incrementally over years. And at DOD and Department
of Energy, those were dedicated to only furthering tech
transition, not for Phase One and Phase Two, and the exception
was that NIH would not get any increase. So we appreciate your
saying that that is important to your State.
Dr. McGarrity, did you want to make a statement?
Dr. McGarrity. Yes. I spent a significant part of my career
in academic research. In fact, I had to generate my salary and
my laboratory's operation through NIH grants. I also
participated in a number of committees at NIH, including study
sections which actually evaluate grant applications that are
coming in, both from academic scientists and SBIRs, and first,
I would say, that is an outstanding system of peer review. In
fact, it may be unmatched, or I would challenge anyone to match
it around the world.
So these people who are reviewing the grants, these are,
for the most part, academic scientists from across the country.
They are top-tier scientists. And NIH, I would assume, has
literally hundreds of these scientists doing the peer review. I
think they do an outstanding job, and if you look at their
qualifications, these are scientists who conduct research as a
major part of their livelihood. They know the cost of doing
research. They know what it costs to buy a machine or employ a
young Ph.D. or M.D.
So when I look at the possibilities of saying, well, should
we put that authorization in the hands of NIH or do it from a
much higher level, I would say I think NIH does an outstanding
job of administering competitive grants and competitive grant
reviews, and I would think that it is much better to empower an
agency like NIH to look at these on a case-by-case basis by
scientists who do everyday research and say, all right, this is
justified that we are going over two percent, five percent, ten
percent. And I would feel much more comfortable, and I think
the system is better served by having an empowerment of the
agency rather than saying, we are going to dictate this to you
from Capitol Hill or the Small Business authorization. Let the
people who do this on a full-time basis empower them to do
their job and I think the public will be rewarded and I think
the SBIR dollars will be wisely spent.
Ms. Wheeler. Thank you.
Kunal, did you want to add to that?
Mr. Mehra. Yes. I just want to--first of all, I strongly
agree with both Ms. Oliver and Dr. Wessner. I think that the
award size should be increased to the proposed 150K and $1
million limit for Phase Twos. Just to provide some data, in the
last five years alone, my company has seen about a 30 percent
increase in salaries, pretty much across the board, for
existing employees when you look at the cost of hiring a fresh
Ph.D. out of MIT or some of the other universities where we
recruit heavily. I have actually had one or two very passionate
employees come and offer to take salary cuts so that they could
finish the work underneath the size of a small Phase One. So I
hope we could avoid that.
But the second point that I really do want to touch upon is
I believe that it is integral to increase the size of the set-
aside----
Ms. Wheeler. Which we call the allocation. We think set-
aside is a dirty word in the small business community.
[Laughter.]
Mr. Mehra. I agree. Increase----
Ms. Wheeler. We think that is a cultural issue at the
agencies who refer to this as a tax, a set-aside. So we say
allocation. These are competed things. They are not handouts.
Mr. Mehra. I will put soap in my mouth for using a dirty
word. I do apologize.
[Laughter.]
I strongly support increasing the allocation of the
program, both as a taxpayer and as a small business owner, and
let me describe why. I mean, right now, the program is
tremendous at fostering innovation, and there are many
successes of transitions of technology out of the SBIR program
into the acquisition cycle. But it is fundamentally
undercapitalized. When you look at the pharmaceutical industry,
which I think is probably the most successful in terms of
fostering innovation all the way from true experimentation
through to product development, when you look at the way they
manage their pipeline, there is a continuous steady increase in
funding as products reach more maturity.
I can speak to the Department of Defense, where I have the
most experience. It is very well recognized that there exists
this valley of death. So as a taxpayer, I look at it and say we
are investing an incredible amount of money in the SBIR
program. We are fostering a lot of innovation. But then we are
failing to put the investment after the Phase Two to actually
really develop the technology, turn it into a prototype that
can then transition over to the acquisition system.
The commercialization pilot programs that have been
enacted, I think are probably one of the best pieces of
legislation to happen to the SBIR program in the last ten
years. My company is participating in both the Air Force and
the Navy programs and I think that they have both been
tremendous in terms of helping us increase our chances for
success to actually turn our research business into a viable
business selling product to the government and truly creating
value for the taxpayer and for the military.
Ms. Wheeler. Wonderful. Thank you for that.
Any other comments before we move on to the next? Erik, did
you have any? Oh, I am sorry. Go ahead, Jim.
Mr. Barry. I just wanted to share that we are also very
supportive of increasing the recommended award amounts to the
levels that have been mentioned, 150 and one million, and the
allocation adjustment, as well. I think the program is very,
very important and deserves more funding, and our experience
with the CPP program has also been very valuable in helping us
to transition several different technologies towards
commercialization.
Ms. Wheeler. Wonderful. Thank you for that feedback.
I am sorry, Subash? Oh, okay. We are running over time.
Subash, do you want to make one more comment? No, no, go ahead
and then we will go to Jere. Go ahead.
Mr. Iyer. Great. I think there are three issues in this
that we wanted to just quickly weigh in on. The first is around
the size of the allocation. In the National Academy study, it
was very clear, and they made it clear, that the SBIR program
could handle more funding and still do it effectively. Whether
that is through an increase in overall Federal R&D budgets or
through other means, we believe that it is an important program
that has had a long history of success that should have
increased funding associated with it.
The second point is around the actual award size, and that
is something that the SBA is actually actively looking into, as
well, to figure out what the best option is on the award size.
The third issue was the issue around the caps, and I think
that here, there are two principles that we need to make sure
that we are balancing. One is the flexibility afforded to the
program agencies. This has been a hallmark of the SBIR program
and it is something that we would like to see continued in
reauthorization.
The second principle is that any SBIR program or agency
needs to have adequate oversight, and that is something that
the SBA is committed to and the administration is committed to.
So I just wanted to weigh in on those three areas.
Ms. Wheeler. Thank you. Just FYI on that oversight, part of
the reason we put that in the bill is because they weren't
reporting to the SBA, which is why we found a data
insufficiency on these awards. There was nothing to say what
the increases had gone for. They weren't reporting them. And so
we agree with you. But it was to help SBA that that provision
was in there.
Mr. Iyer. We believe in oversight, and I think it is a
priority for the new Administrator as well as the SBA across
the board, so that is something that we are looking into, as
well.
Ms. Wheeler. Thank you.
Jere.
Mr. Glover. Yes. Large awards, and NIH has made some in the
$8 million range, a million a year for seven or eight years,
those do crowd out significantly other technologies. There has
not been an evaluation as to whether these large awards
actually result in more commercialization, more success, better
science. That clearly needs to be monitored. There needs to be
a gated process for larger awards in excess of the amount so
that somebody outside the immediate chain reviews that. I think
SBA has done a good job of that when asked to do so. My
understanding is they have never turned one down. But the
process of preparing the application, looking at it and
justifying it, is a very important process.
Crowding out is a real concern. This program was always
designed to fund the earliest stage research. It has been
remarkably successful. Allowing agencies discretion to change
that to where a few companies get a lot of money and lots of
States don't get any money is a real problem. I like SBA's
involvement and I think SBTC is in support of that.
Ms. Wheeler. Thank you.
Okay, now we will move on to the next topic, which is
maintaining the flexibility, which has been mentioned many
times, of the program and preserving the basic program
structure. This was a recommendation of the National Academies,
National Research Council. There have been requests to change
the basic structure and bypass Phase One.
NRC, I think, has recommended against this, and so I would
like to first ask the NRC why they concluded that Congress
should not allow agencies to bypass Phase One. And if you want
to have a little time to think about it, since you have moved
on to studies----
Dr. Wessner. Oh, no. Trust me, I have had to think about
it----
Ms. Wheeler [continuing]. We can ask the next question and
come back. Okay.
Ms. Williams. The study has occupied us, as you know, for a
number of years. The great virtue of this program, as the
celebrated venture capitalist Burt McMurtry, who helped fund a
start-up called Microsoft--some of you may know the company--
argues that the great virtue of the program is it is letting
100 flowers bloom. So we think that the Phase One gate where
you offer the prospect of proof of principle, as Jere Glover
was just arguing, to a large number of companies is a great
virtue.
The fact that it is also highly competitive, however, that
this is not an automatic process and that 15 to 20 percent of
the companies are those that succeed in Phase One is equally
important.
We also felt--the committee felt that the fact that there
was flexibility for NIH, that if you want to make a larger
Phase One award, you can do so--one of the arguments for
dropping Phase One is, well, if you know how to do this, you
should be able to just proceed quickly. Well, if they have that
flexibility, then they can make a larger Phase One and push
that research process on fast. We very much associate ourselves
with this requirement that this be justified and defended to
the SBA. And we also in our report pushed, again to repeat, NIH
should be able to document what they are trying to achieve and
what appropriate metrics should be there.
So we see no--we have a 25-year history now of a program
with remarkable success based on a double-gated innovation
awards system and we see no reason to drop that, particularly
if there is flexibility when they want to move quickly to pull
something across, something forward faster. There is no
compelling reason to make--you know, there is an irony. Some of
the things that we have heard talked about, which involve one-
time, very large awards to single companies, we support that
type of program. We used to call it the ATP program and we
think it is an excellent program. It is just not the SBIR
program.
Ms. Wheeler. Would anybody else like to weigh in on
bypassing the Phase One? Kunal.
Mr. Mehra. Yes. I just want to say I also think that
bypassing Phase One is not a good idea. I think the hallmark of
the program is competition. That is what gives it so much
credibility. That, I think, is also crucial to providing the
sole source authority for Phase Three and beyond, because it
has already been competed twice. So I see going straight to a
Phase Two as being detrimental to the integrity of the program.
However, I do think we should make attempts to accelerate
the process of going from Phase One to Phase Two, and I think
in order to enable that, the agencies need more administrative
support from the program, and I would certainly favor that as
a--if it is linked to increasing the size of the allocation
funding for the program. I think that is also critical.
Ms. Wheeler. Thank you.
Mr. Necciai. So in theory, by skipping Phase One,
government would be funding potentially poorer science because
it hasn't had that extra hurdle of peer review?
Mr. Mehra. That is exactly right. That is exactly right.
That is exactly the way I view it.
Mr. Necciai. Thank you.
Ms. Wheeler. Lenka.
Dr. Fedorkova. Yes, just wanted to comment on the fact that
there are certainly circumstances where we have heard from
companies who are first time applying to the SBIR, at either
agency, but in our case, companies that feel they have
generated certain preliminary data, which is not necessarily
required for Phase One applicants. But let us assume they do
have that kind of data. Right now, under the mechanism, they
can't jump into Phase Two.
While that is not happening and we don't have the ability
to do that, I think our agency has in a creative way responded
by creating the Fast Track program, which is a one-time
application for a company that can demonstrate. Their data will
be judged and scored. So if they are going to submit any data,
it has to hold water. If they do that, they can then just apply
an application and proceed through Phase One and directly into
Phase Two once they meet certain milestones, and that has
proved to be valuable for those who need to move in an
expedited time line.
The fact that they don't have to reapply for Phase Two--
again, there is no guarantee they will be able to move there.
But if they meet the milestones and can, they don't have to
wait or waste six to nine months applying, waiting for review,
and hearing back from the agency. So saving six to nine months
can sometimes mean a difference between sustaining a project or
keeping staff on board or not.
So that has been one way that we have dealt with that. But
I think certainly--I am not familiar with all the discussion
surrounding skipping Phase One, but I think we are not in
support of that and that will certainly be in a minority of
cases, and in those cases, we suggest to companies, maybe you
should think about the fast track.
Ms. Wheeler. But again, it is not automatic that they get a
Phase Two.
Dr. Fedorkova. No.
Ms. Wheeler. It is just that they have the potential.
Dr. Fedorkova. The only elimination is of the second
application to a Phase Two, which otherwise happened for
someone just applying for Phase Two. It is just a one-time
application for the entire program. The Phase One and Phase Two
are subject to the same criteria, same requirements, same award
levels, and everything else applies. It is just a shortened
review period.
Mr. Necciai. Is there just one review, or is it still two?
Dr. Fedorkova. No. There is one review. There is one
review. A final report at the completion of Phase One has to be
compiled and specific milestones have to be met. So again, it
is reviewed by the council which has on its review board
members from the small business community or from the for-
profit sector, and then they get a go or no go decision.
Ms. Wheeler. Thank you.
Do you want to go ahead, Jim?
Mr. Barry. I don't want to repeat what everyone else has
said, but Creare is certainly in favor of maintaining the Phase
One competition going forward. I think the program as
constituted works very well.
Ms. Wheeler. Thank you. Anyone else?
[No response.]
Ms. Wheeler. So the next--there is a subset of that topic
and that is the idea of preferences. In last year's bill, there
was a section that encouraged applications for nanotechnology-
related projects, and in the NRC's comprehensive report--Dr.
Wessner, I hope I have this right--it directed agencies to give
high priority to firms that do energy efficiency and renewal
energy. And so there has been a lot of concern whether there
should be preferences at all, and so my first question would
be, are preferences consistent with the NRC's recommendations
to preserve the flexibility of the programs for agencies
instead of dictating priorities? Chuck, do you want to weigh in
on that?
Dr. Wessner. Yes, thank you. No, they are not. The risk
that we describe in the report that is just coming out on the
venture issue is the--and I think this is a serious risk to the
program--is the Balkanization. You can--if you set up a program
that--we encourage work with women and minorities, but if you
start to set up a quota system, either implicit or direct, for
minorities, for veterans, for disadvantaged regions, you can
count the ways you can divide the program up and cripple it. It
is successful because it is a highly competitive program based
on scientific and technological and commercial merit and we
need to maintain that open, competitive system.
I would just add, we do need to facilitate applications to
the program. We do need to encourage States who are not active
in the program to become more active. But this would be the
wrong way to go.
Ms. Wheeler. In preferences. And so do the agencies--I know
sometimes the agencies are opposed to these preferences. So for
the agencies here, are there ways for you to focus on something
that is a priority for the nation without having to do it
legislatively? I mean, would you----
Dr. Fedorkova. The short answer is yes.
Ms. Wheeler. Would you come to us and say that you could
not give a preference or a priority to a topic such as energy
efficiency or renewable energy or nanotechnology or orphan
diseases because it would be preferential? Is there a way for
you to focus on that?
Dr. Fedorkova. No, and I guess it may be a choice of words.
We speak in terms of research priority areas, and I think that
those involved on review boards and those who are really
involved with the research community and know what the emerging
trends are and emerging areas are are very much aware, and we
do have the flexibility in issuing requests for applications.
We have many different kinds of mechanisms. So there are
specific ways where we can issue more tailored, topically
focused requests for applications to the research community,
although the traditional way of funding at NIH is such that the
community responds and submits ideas to us. So they are not
looking for a match, which is different to some of the other
agency missions. I think the core difference is that we are not
a procurement-focused agency but are research-based, and so the
way of science being so nimble and unpredictable.
But yes, we have mechanisms where if we feel we need to
invest in a particular area, we can prioritize that, and
depending on the institute, or broadly speaking across the NIH,
if it is an interdisciplinary research area, multiple
institutes can support a particular funding program. So I think
at the moment energy, nanotechnology, those areas, we already
do fund and everyone is really very excited about those areas.
It is kind of the hot topic of the day, of the year. And we do
correspond when we respond to the research community.
Chairman Landrieu. Okay. Thank you. Jere.
Mr. Glover. I think it is difficult for the Congress to
predict what is going to be needed down the road. This is a
multi-year process. Hot select topics, like energy efficiency
now, that is great, nanotechnology. I think it is certainly
nice to give guidance and suggestions.
What I remember doing when I was at SBA is we brought the
Office of Science and Technology Policy in to meet with the
Tibbetts Award winners and the program managers and tell us
what they saw ten years out, 15 years out, and I remember them
bringing up nanotechnology, which is something nobody knew
anything about and nobody talked about, and now it is a huge
topic. But they basically said, these are some areas we think
are good. The agencies then took them back and worked on them.
I don't think that picking those ideas today will be the right
ones in four or five, eight years.
But the flexibility of--I think SBA should provide that
role of bringing in the best scientists and then sharing that
with the agencies and looking out, because if the program ever
looks--and does what science and technology is today, they are
missing the bet. The hot issue is going to be something that we
don't think about in five years. So we need that flexibility to
go down the road, but we certainly--locking the program into an
area that may become less important in four or five years is
the wrong thing for Congress to do.
Ms. Wheeler. So even if it were not in perpetuity and it
were, say, three years or five years as a preference or a high
priority or encouraging applications, SBTC would take the
position that it is better not to legislate special topics?
Mr. Glover. I think that is correct.
Ms. Wheeler. Okay. Chuck, did you want to weigh in on that?
Dr. Wessner. If I may, in two ways. One is we perhaps could
get together on a sidebar conversation, but to the best of my
knowledge and belief, in a very substantial number of volumes,
we did not--we talked about the way the program can do these
things. We did not recommend--unless I am mistaken, and I may
be--that it be a specific----
Ms. Wheeler. I am probably wrong, so----
Dr. Wessner. Well, no, not wrong. There are many things
there and I just would like to----
Ms. Wheeler. I have this page 95, but we will talk about it
afterward.
Dr. Wessner. On which report?
Ms. Wheeler. Good point.
Dr. Wessner. But more broadly, and that is why I took the
mike and I appreciate the opportunity to reintervene, very
quickly, in order to do things like in renewable energy, which
we do think are important--I fully associate myself, by the
way, with the flexibility and ability of agencies to identify
these things.
Funding more research involving the National Laboratories
and with the program, we have ARPA-E, which involves a
substantial sum. If we want to do more work on renewable, then
let us make sure that where we are putting new research funds,
that this program is included.
It is also possible to think about--at least I hope it is
possible to think about agencies increasing the funding of the
program on a voluntary basis when you are trying to bring
things forward quickly. I think the case of NIAID at the
National Institutes after the 2001 attacks where they had a
very open-ended question on bioterrorism and very positive
response, very large numbers of responses from companies, is
illustrative of how it can quickly adapt to a pressing national
need without legislating.
Ms. Wheeler. Thank you.
Let us take a quick break. Let us take a five-minute break
and then let us come back and we will just finish the rest of
the agenda. Does that sound good?
[Recess.]
Ms. Wheeler. Hi. Could we get everyone to sit down and we
will continue with the roundtable. Thank you.
Mr. Inge. I have been asked by some people in the back to
remind everyone to speak into the microphones.
Ms. Wheeler. Okay. So our next topic is outreach and
technical and commercialization assistance. Part of the
discussion today is the GAO report that was referenced earlier
in the late 1980s or early 1990s that looked at geographic
distribution of SBIR projects around the country and found that
there was a correlation between awards to applications. In
States where there were more applications, they had higher
awards. And so to increase participation in low-activity
States, Senator Bond in 1990 created the Federal and State
Technology Program to give matching grants to States to raise
awareness of the programs and increase those that apply and
improve the quality of their applications to win awards.
Part of the foundation for this year's bill will be to
reauthorize the Fast and Rural Outreach programs and to
increase the authorization amounts that go to those programs,
and I wanted to ask if participants could speak to these
programs and how they help their States or their businesses
better compete. Kathy, did you want to go ahead and speak to
this?
Ms. Wyatt. Yes, I will be glad to do that. First of all, I
would like to say that I really appreciate the fact that this
legislation is recognizing the difficulties that those small
and emerging firms in more rural and isolated or underserved
areas have in trying to compete in this program. For people who
come from metropolitan areas and very resource-rich
environments, they may not realize how limited the types of
management expertise and even access to capital, or things that
you take for granted like having a patent attorney within your
community that you can work with in order to advance these
types of technology discoveries and businesses that we are
working with.
So it is very critically important that we have this
program to help people overcome those types of obstacles and I
can give some examples of the ways that we have used these
programs effectively in doing training events and even bringing
in outside resources to help our businesses develop their
capacity. And just by virtue of having this event, sometimes
the networking that takes place and the communication and
connections that are made can be very helpful.
For instance, we hosted a forum to provide--help increase
awareness and provide information about the SBIR and STTR
programs and one of our researchers actually met up with a
business interest that was there to learn more about the
program and found that they shared a common interest and a
license agreement actually occurred as a result of that
particular event taking place.
When you look at the fact that we have used these programs
to the best of our ability, although we have had limited
funding through this program to offer events around the entire
State, we have seen tremendous growth. Within a five-year
period, we have gone from having no SBIR participation to
currently having 19--or having received 19 awards in the last
five years and eight different entities participating in the
program. And of those achievements, we do have one company that
is a viable start-up that you spoke about, which is NiFTy
Television that has grown in the last few years to employ 40
individuals, and not only do they employ a good number of
people, they are employing them in higher wage-earning jobs
than what we would typically see in our community and we are
seeing them also grow in the number of customers that they have
and strengthen as a business.
We also are seeing that we are not only increasing the
number of awards, but these kinds of initiatives partnered with
some of the State programs that are coming forward, and just
the very solid research capabilities that are available at our
university, are helping us to attract companies from outside
locations, not so much that they are coming and relocating in
our community, but they are looking at and actually opening
satellite offices in a small community that has a population of
only 20,000 people, and without this kind of incentive or the
opportunity to attract them to this area, they would never have
even considered us as an option for a business location.
So I just cannot--I mean, I could go on forever about the
things that I consider to be valuable about this program and I
consider it to be a very important component of the SBIR-STTR
program and an extremely important component of this currently
proposed legislation.
Ms. Wheeler. Part of what the legislation does is reduce
the matching requirement for States that are rural and States
that are in the lowest 18 or 19--of the 18 or 19 lowest-
participation States. Has the matching requirement ever been a
problem? Should there be a matching requirement? I just don't
know what Louisiana--if they have had a hard time making their
match.
Ms. Wyatt. It would be very--I think it would be extremely
difficult for us to make a one-to-one match. I think it is very
helpful that there is a reduced matching requirement. I do
think that the State is committed to innovation and that they
are willing to put forward some money to try and help advance
these types of programs, but it would be very hard for us to be
able to provide that one-to-one match. So the reduced
opportunity of a 35 to 50 percent match is extremely important
for us to be able to take full advantage of this program.
Ms. Wheeler. Great. Thank you.
Jere, did you want to weigh in on that?
Mr. Glover. I think one of the most disturbing trends is
the number of new firms applying for SBIR first the time is
going down, and that happens concurrently with the lost of Fast
and Rural Outreach funds and the diminished importance and role
of the national conferences that have been held. In the old
days, meaning two or three years ago, the Department of Defense
and NSF funded the national conferences. They have gotten out
of that program.
But Rural Outreach, and I think you may need to waive any
match the first year to get them back in place very quickly
because there is a funding cycle in the States. Often, the
legislatures don't often meet a year or two. If you require
matching, you may not have people coming in quickly, and those
programs seem to do so well and be so good in the States that
you may need to do something very quickly for one year or two
years until you get into the State funding cycle.
But I would encourage that some administrative expenses be
allocated. I think the National Academy study recommended that
the percentage be increased by 0.3 percent or something like
that. So if it is 2.5, make it 2.53. If it is 3.5, make it
3.53. That is the best way to do that. But some of that money
clearly should go to not only administer the program within the
agencies, but also for outreach, and the agencies should be
required to use some of that money to help get the message out
and get new companies and keep new companies applying.
Ms. Wheeler. And I think you are referencing what Kunal did
earlier and saying that right now, agencies are not allowed to
use any portion of their allocation for administering the
program, such as you said, outreach, training, et cetera. That
is not true outreach. And so they should be able to use a
portion of it, but only if it is tied to an increase in the----
Mr. Glover. No, I think it is so important that I would
prefer it be tied to an increase. But if it can't be, this
program is successful because it covers all 50 States and we
have winners everywhere. But without the reach and without Fast
and Rural Outreach and our partners in the various States, we
are not going to continue that good success. It was a good idea
when it was put in. Maybe you can come up with a better way to
do it, but I would clearly at any cost make sure that we do
Fast and Rural Outreach and we do provide some additional funds
for that, obviously monitoring it and making sure that the
agencies don't just simply replace work they are doing already
and do new things is important.
But I would encourage the committee to go forward and I
think our membership certainly supports that. We didn't at
first, but after we thought about it and talked to the agency
people, we are comfortable that that should happen. But we also
think it needs to be focused to getting new companies into the
program.
Ms. Wheeler. So if there was not an increase in the
allocation but the agencies were allowed to use three percent
of their funds, at DOD, your annual SBIR budget is about $600
million, is that right?
Mr. Glover. No----
Ms. Wheeler. I am sorry.
Ms. Oliver. One-point-six.
Ms. Wheeler. One-point-six. Sorry.
Ms. Oliver. That is correct, 1.6.
Ms. Wheeler. Okay. So you would advocate using three
percent of those dollars, even without an increase?
Mr. Glover. I think somewhere between one and three
percent. If it is an increase, then I think the three percent
number works. If it is no increase, then maybe something less
than that. But it is too important to have the agency programs
administered properly and for there to be outreach. We really
do have to change that, and the committee authorizing it but it
not being appropriated funds for Rural Outreach and the Fast
programs would be a mistake. We can't not get new companies all
over the whole country educated about the program and
participating in the program. The beauty of it is 25, 30
percent of companies applying for these awards every year are
brand new to the program and we have got to keep generating the
next generation of new technology companies.
Ms. Wheeler. Well, the Fast appropriation would be separate
than taking it--it wouldn't come out of the allocation. I guess
the concern would be taking so much money away from awards
without an increase in the allocation.
Mr. Glover. I think we did support that in the CPP program,
and as long as it is used wisely and it is monitored by SBA and
the Congress, I think we have to be able to realize this
program has grown from--grown significantly, fourfold over the
last ten or 15 years. SBA has virtually no personnel assigned
to this task. While the program has quadrupled, the personnel
have gone down by two-thirds. There needs to be more
administration. The same thing goes for the agencies. I think
you are going to have to administer the program and have enough
people in it and add enough people to make it work well.
Ms. Wheeler. Okay. Thank you.
I am sorry, go ahead.
Mr. Necciai. I just wanted just to clarify real quickly,
and just a yes or no answer from DOD and NIH. I am presuming
that administrative fees for you would be favorable, correct?
Ms. Oliver. Yes.
Dr. Fedorkova. Yes.
Mr. Necciai. Okay. I think--and Jere was mentioning--what
we are trying to clarify is out of the 2.5 percent, if it came
out of the 2.5 percent without increasing that, is there anyone
here that would be in favor of keeping it, as Jere had
mentioned, keeping it within the 2.5 percent, which has the
potential to decrease the opportunities or the awards that are
going out otherwise? In other words, you are taking a chunk out
of the 2.5 percent versus increasing it, which is something
that we were advocating in the past. If you increase 2.5
percent to a higher percentage and then take it out of that
percent, because you are increasing the pie, which, as we were
talking about before, increasing the pie total, there would be
less of an effect. Is there anyone here that would be in favor
of that?
Ms. Oliver. The Department of Defense would be.
Mr. Necciai. Okay.
Ms. Oliver. Let me make sure I am clear about this. The
Department of Defense believes that the program could be so
much improved if we had--if we weren't an afterthought for most
of the work that is done in connection with the SBIR program.
If when we had reviews, when we find scientists and persuade
them to look at the submissions, if it weren't an ``other duty
as assigned,'' if we were able to be moved up in their
priority, which that is just what money does, we think the
program could be--the quality of the program could be improved
so much with--outreach is a good example.
You know, the Department of Defense quit doing those
outreach programs, not because we didn't think they were a good
idea, but we have to have the program run or there is no point
at all in doing outreach. So yes, the Department of Defense
would be in favor of using up to three percent of the current
allocation--if the allocation doesn't change at all, we would
still be in favor. We think it, for the long run, would benefit
the program.
Ms. Wheeler. Why would DOD oppose increasing the allocation
by an equivalent amount to give you the funds that you are
saying would be so helpful?
Ms. Oliver. Now you understand that----
Ms. Wheeler. You can't say it.
Ms. Oliver. What I think--well, no. What I--the Department
of Defense has to work out its positions and come to one answer
instead of this piece of the Department of Defense thinks this
and the other one thinks something else. We are surely not
there. In fact, it has not been a question asked. In this
administration, that question has not been asked. That hasn't
gone through any of that clearance process. The last time that
question went through the clearance process, although it was a
prior administration, Department of Defense as a whole did not
favor increasing the allocation.
Basically, the--I mean, one way to look at it, at least, is
the program managers felt that what they were intending to do
with those program funds moved their projects forward more
fully than using--than adding that money to the existing SBIR
program. And this goes right back to the difficult
communication problem.
Ms. Wheeler. Well, I guess that I will just send this out
there, and I know it has been said many times, but we will put
it on the record again. The problem is, as was mentioned at the
roundtable in 2007--Mike Skolanti [ph.] brought this up--we
have all these ideas to increase the grant sizes, to possibly
let other businesses in, but we are not increasing the
allocation. The agencies want administrative funds. And so at
some point, there has to be a compromise to say, how are we
doing all of this without undermining the whole mission of this
program, which is to promote innovation? And so it seems it
would be a very small task for the administration to increase
the allocation by an amount to give the agencies what they
think would be so powerful to get these innovations.
So I know you can't comment and I appreciate that you said
as much as you did, but I guess that would be the message, and
for Subash, too, who I know is involved in these, and Lenka.
Okay, Kunal, you go ahead, and then we will turn to Lenka.
Mr. Mehra. Well, actually, I think you very eloquently
stated the point that I was going to make, which is just I
think all these points are extremely valid and it just
underscores the importance of increasing the size of the
allocation. I support increasing the award sizes. I support
using part of the budget for administrative fees. I support
CBP. I support the commercialization assistance programs. But
when you add all these things up, the net effect, just when you
do the math, is you are going to decrease the volume of awards
by 40 or 50 percent at a time where the country is in the worst
recession since the 1920s.
It is a well-documented fact--I am sure Dr. Wessner could
speak to this more eloquently than I can--that small business
is always the growth of innovation that helps the country
recover from these types of crises. It would just seem
counterintuitive to me to not increase the allocation, and I
just think we are at a turning point here. We have the
opportunity with a small increase in the size of the allocation
to have a disproportionate effect on the value of the program
and the effectiveness of the program because we understand so
well where the weak points are.
Ms. Wheeler. Thank you.
Lenka, did you want to follow on?
Dr. Fedorkova. Yes. I just wanted to--back to the question
of the Fast. We also feel it is a very valuable program where
you would have the States come to the SBA and be able to
support, you know, whether it is an application where it can
cost $5,000, $10,000 for a company, they may not have those
kinds of administrative funds available. So I think that is a
very good effort, to try to revive that program. We would
definitely like to see that happen again and I think it has
affected some start-ups that haven't been able to receive that
kind of support.
On the size of the allocations, I would similarly, like
DOD, say that that has to be carefully revisited. I know you
are already familiar with some of the reasons from the previous
administration from the NIH's perspective related to the
agency's flat budget as part of the concerns about some of the
proposals to increase. We do, however, feel that some of the
National Academy's recommendation to, I think, 0.3 percent
allocation from the allocation would be of great help.
We are very committed as an agency to doing outreach,
really, since I joined the office. Just a few months ago, I
have myself been on the road really every few weeks and we
have--at least 50 percent of those have been to minority,
women-owned business types of conferences in New Jersey, or we
will have some local events. We will try to partner also with
States' Business Development Departments, see how we can reach
out to the local communities, make sure we can do some local
things where travel costs are not entailed. That seems to be a
big barrier for companies to come out to some of our events.
I wanted to also mention that we are going to be holding in
Omaha, Nebraska, at the end of this month the NIH Annual SBIR-
STTR Conference, so we are going out to the middle land and we
will try to reach out to the area small businesses.
But also to the point of not having certainty from year to
year about what kinds of funds we have available from our
agency to do the outreach, whether it is generating materials
to support the outreach and communicate necessary information
to the community, it has been really uncertain from year to
year and I think we need to address that accordingly. So the
Academy's recommendation, I think, is welcomed.
Ms. Wheeler. Okay. Thank you.
Dr. Wessner, did you want to comment?
Dr. Wessner. Yes. I would like to associate myself with Mr.
Glover's remarks about the importance of the outreach
activities. We did not, I would like to stress, in this
particular capacity with respect to the Fast program, we did
not examine that, but our view is--our unofficial view is that
it is a positive program that needs--I am just concerned,
though, that we not go back to the size that it was. Federal
programs of $2 million strike me as inherently----
Ms. Wheeler. I think we take it up to five.
Dr. Wessner. Could I hear ten?
[Laughter.]
Ms. Wheeler. I am sure you could get support for that.
Dr. Wessner. We have----
Ms. Wheeler. It may be ten, actually. It may be ten.
Dr. Wessner. Remember ``Charlie Wilson's War''?
[Laughter.]
Dr. Wessner. But there is an important point there. The
critical mass in these programs matters, and if we are actually
going to do outreach, we don't want it to be an appearance of
outreach but actually something that can fund an ongoing effort
and draw on the ingenuity of our nation's entrepreneurs in
these disadvantaged States.
A second point which is equally important, and this is
within the program, I would almost plead with you, we really
need to find some way--you find the way of getting management
funds. At $300 million, it may not have mattered, or 1.2, but
at 2.5 going towards three billion, not providing funds--if you
can, working with the Armed Services Committee, convince them
to instruct the departments to make available funding on the
level of the Navy--I mean, it is almost mind boggling. We have
an example of best practice, but without quoting any particular
service, when we say that the Navy does it well, the reaction
seems to be, what is your point? It works well if you provide
these additional funds and the effective management that is
characterized in that program. So how can we emulate that? And
I would count on your ingenuity to find some way of doing that.
We came up with the 0.3 simply because we didn't think it
should come from the program or would come from the program,
and we have been waiting 25 years for the agencies to step
forward and be helpful, so that was the compromise we came
with. But the best way would be for the agencies to make the
money available to run an important program effectively. Thank
you.
Ms. Wheeler. Thank you. Any other comments on that one? No?
[No response.]
Ms. Wheeler. Okay. Now we will turn to the next topic,
which is the venture capital issue. As some of you may know, in
last year's bill, there was a compromise to allow up to 18
percent of the SBIR dollars to go to firms that are majority
owned and controlled by multiple venture capital firms, and at
the other agencies, eight percent of the SBIR dollars could go
to these entities. To give us some data to go on to come up
with compromise, we relied on the GAO. They had a study that
looked at the two years before a clarification and the two
years after, and I know that some people don't use the word
``clarification.'' Some use the word ``change.''
So what we will do is we will turn to GAO to lay out what
we see--the facts of the ownership eligibility and then to talk
about what the mission was of their study and their
conclusions. I know you couldn't really make recommendations,
but you had findings. And then we will do that for the National
Research Council, too. Do you want to go ahead, Cheryl?
Ms. Williams. Certainly. We were asked by this committee to
look at the extent to which SBIR awards at DOD and NIH were
going to firms that had received venture capital funding, and
more to the extent of what changes, if any, had occurred before
and after the 2002 clarification by the Small Business
Administration. We talked to agency officials and we reviewed
documentation from the agencies--NIH, DOD, and SBA--regarding
the eligibility criterion of ownership.
In our view, we believe that it was not a change but it was
a clarification. Part of the documentation that we reviewed was
also decisions from the SBA's Office of Hearings and Appeals.
Typically, when SBA has made a change, it is subjected to the
rulemaking process in which there is public comment and
notification. So we believe that it was a clarification, not a
change.
In terms of what we found, we found that since 2002 when
SBA made the clarification, that a larger number of awards went
to firms that had received venture capital funding, that the
awards were larger at NIH, and that in the aggregate, firms
that had received venture capital funding received a larger
share of the SBIR dollars at both agencies.
We found that over the time period--and we selected for our
study the time period that was evenly divided by that
clarification because we felt that awards made in fiscal years
2003 and 2004 could reflect changes from awards made in fiscal
year 2001 and 2002 that could be related to the clarification
and to the agency's efforts to inform potential applicants
about that clarification.
And we found that since--over the four years that we looked
at, that an increasing share of the SBIR dollars at each agency
was devoted to firms that had received venture capital funding.
More specifically, at NIH, in fiscal year 2001 and 2002, firms
that had received venture capital funding accounted for 14
percent of the SBIR dollars. That increased to 20 percent in
fiscal year 2003 and 22 percent in fiscal year 2004.
We found the same trend at the Department of Defense, but
to a lesser extent. There were five awards to firms that had
received venture capital, accounting for five percent of the
funds that DOD awarded in fiscal year 2001 and increased to
seven percent for fiscal years 2002, 2003, and 2004.
Ms. Wheeler. And we had asked GAO to also look at the
geography of these, the distribution. Were they concentrated in
certain places?
Ms. Williams. Yes, they were concentrated and ten States
accounted for the bulk of the awards made to firms with venture
capital funding. Specifically, California and Massachusetts
were responsible for overall about a third of both the funds
and the--the applications and the awards. Most all of the other
States accounted for a very small percent. I think
approximately maybe only four States for NIH awards had more
than five percent and maybe six States at DOD had more than
five percent.
Ms. Wheeler. And why did GAO conclude that it was a change
versus--I mean, why did they conclude it was a clarification
versus a change?
Ms. Williams. Well, largely, this is what the agency
officials told us. I mean, for example, at NIH, as the process
unfolds and as NIH is making decisions regarding awarding,
making awards, they attempt to verify the information that
applicants provide to them, and as part of that process, they
were focusing prior to 2002 on the number of employees as an
ownership criterion, or as an eligibility criterion. After the
SBA clarification, they focused more on ownership. So the
agencies were telling us there hadn't been a change. We looked
at the Office of Hearing and Appeals Records. Their conclusion
was that there hasn't been a change. And the SBA officials told
us there hadn't been a change.
About this same time, there was a change in eligibility
criterion related to whether or not you could be owned by
another company and that was subjected to the rulemaking
process and they did receive comments on that before making a
decision, and we felt that that would have been--had there been
a change, they would have subjected that change to the similar
process.
Ms. Wheeler. That was the subsidiary rule?
Ms. Williams. Subsidiary, precisely.
Ms. Wheeler. Okay.
Mr. Necciai. Ms. Williams, is it GAO's opinion that
majority-owned venture capital firms were not permitted in
prior to the ruling as well as obviously after the ruling?
Ms. Williams. Based on the SBA criterion, that is exactly
our position, that they should not have been participating in
the program before and they should not have been afterwards.
Mr. Necciai. Hence the term clarification, not change?
Ms. Williams. Precisely.
Ms. Wheeler. And again, that came from interviews also with
the NIH officials----
Ms. Williams. NIH, DOD, and SBA.
Ms. Wheeler. Okay.
Mr. Inge. Is there a chance some firms were participating
before 2002 or 2003?
Ms. Williams. Certainly.
Mr. Inge. And why would that be the case?
Ms. Williams. Either information did not appear to--was not
made available to the agency officials. Perhaps firms
misinterpreted the information about eligibility criteria. It
could be for any reason. We didn't conduct any interviews with
people. And at the time that we did our review, the agencies
weren't collecting centralized data on applicants that they had
found to be ineligible for any reason so that we didn't have
any pool of people that we could have gone to for more
clarification.
Mr. Necciai. Two questions. You mentioned the study and you
mentioned the 14 percent and then the 20 percent. So that is
obviously an increase. Is it correct, 14, 14, 20, 22?
Ms. Williams. Yes.
Mr. Necciai. So the investment did not change and, in fact,
increased following 2003?
Ms. Williams. Based on the information we had.
Mr. Necciai. You had mentioned that National Institutes of
Health had in its own evaluation requested if it is an
individual or citizen. So you are saying that the Institutes
themselves had been fully aware that it is a requirement that
they were not allowed to have majority-owned venture capital?
Ms. Williams. That was our understanding based on the
interviews we conducted.
Mr. Necciai. Thank you.
Ms. Wheeler. Chuck, did you want to turn to the NRC study
to tell us what you were charged with reviewing and what your
findings were?
Dr. Wessner. Well, yes. We were asked to look at the impact
of the change in the eligibility rules that occurred as a
result of the ruling, and I think to take a step back here, a
key issue of difference is that we did not find the same levels
of participation that our friends at GAO seem to have found
with venture-backed firms.
But there is a broader issue. Our study, as you all know,
found that this is a highly effective program that has been
performing well for 20 years, and during that 20-year period
and during our study of that period, at no time was this issue
raised as a problem. When we--the committee could not find ill
effects on the program from the participation of venture-backed
firms or majority venture-backed firms.
Our specific findings, and I am happy to go over those, but
our--one of the key things that we found is that the impact of
the SBIR--first, there wasn't a problem. We have with that
inimitable American way managed to now identify a problem which
we are now seeking to address.
I think it is important to keep in mind the limitations of
the data in all these areas. Ownership is a very complex
process. What constitutes control is not always self-evident.
Our research showed that the impact of the SBA ruling was quite
limited in the number of affected firms. Again, keep the data
caveats in mind. But our estimate was that it is between four
and--roughly between four and 12 percent. However, the
committee and our own research suggested that the impact on
program commercialization--can you hear me in the back?
The impact on commercialization is nonetheless significant.
That is because some of the most promising firms now appear to
be excluded from participation in the SBIR program. This was a
point that Dr. Zerhouni identified early on. The evidence
suggests that the impact of the ruling falls most heavily on
the limited number of firms--limited number of firms--that have
been selected both by the NIH for their promising technologies
and commercial potential and by venture investors for their
commercial potential.
I would simply stress that venture capitalists, although I
am sure they are nice people, don't invest in companies because
they think they can advance the science. They do that because
they think they can make very substantial gains.
One of the things that we found is that non-venture-backed
firms actually reached the market more frequently in the period
we studied than do venture-backed firms. We don't think that
that makes one more virtuous than the other. We think that is
good for the program.
The firms that do reach the market that are venture-funded,
however, are more likely to generate more significant sales.
The figures are about 55 percent of the non-venture reach the
market. About 38 percent of the majority venture-owned firms
reach the market. But the smaller number of venture companies--
think about this, it is actually logical--when they do reach
the market, they have substantially larger sales.
So given that restricting access of SBIR funding to firms
that benefit from venture investments, we believe would risk--
not certainly--we believe it would risk, disproportionately
affecting some of the most promising small, innovative firms.
And to that extent, the SBA ruling has the potential--the
potential, not the certainty--to diminish the positive impact
of the nation's investments and research and development and
particularly in the biomedical area.
Do you want me to go on to the recommendations?
Ms. Wheeler. If you would like to, sure.
Mr. Necciai. I think that is important.
Dr. Wessner. All right. Well, the key--we suggested that
the consideration should be given either to restoring the de
facto status quo eligibility requirements, and by de facto
status quo what we meant was what was going on for 20 years,
where there were companies with majority-backed ventures that
participated with no harm apparent.
Failing that, we recommend making some other adjustment
that will permit the limited number of majority venture-funded
firms with significant commercial potential to compete for SBIR
funding.
We also add that SBA should maintain the commendable
program flexibility that it has exercised in the past. We
suggest--we assert that the SBA and the agencies should
maintain the open competition that is based on scientific
quality and commercial potential, and note that we do not talk
about financial structure.
And we assert further that they should continue to rely on
agency managers' judgment, experience, and understanding of
mission needs to effectively administer the program. Our belief
is that if there is a problem, that the agency managers will be
the very first ones to detect that problem and be able to
address it in an expeditious manner. We are fearful of
legislative efforts to manage a program. Thank you.
Ms. Wheeler. Thank you.
Question: You said, Chuck, that there was a difference
between NRC and GAO on the levels of VC participation, but I
thought you were both around 14 or 15 percent overall, not
majority owned but VC participation overall.
Dr. Wessner. We are under that. I would have to take a
closer look at the GAO report. But what I would like to stress
here is the uncertainty on some of these numbers. These are
self-reported. There are various forms of investment. Everybody
who doesn't know about small companies and doesn't know about
venture investments has greater clarity on this than the
companies that actually participate in the venture communities.
Venture funding is by no means a homogeneous entity. We had
vigorous debates in our committee about what kind of control
are you talking about. What do you mean by control? And, of
course, debates on why does it matter?
So we think the numbers are--I think, if I may use the
analogy rather than the specific numbers, we think what we are
talking about here is a very small number, but it is a little
bit like the top five percent of the West Point class. That is
where the stars are most likely to fall. So we don't think the
overall numbers are large, but we think the potential for
commercialization from those companies are large.
Keep in mind, if we thought----
Ms. Wheeler. Based on money, not based on proportion, but
just on dollars that they bring back in. I think that is what--
--
Dr. Wessner. Yes, and the potential that both the NIH has
made in its judgment and the venture capitalists have then
validated. As I mentioned before, they are not in this to be
nice. They are in this because they think there is a
substantial market. Remember, they are shooting for very large
returns and this often would involve things like important
drugs or other medical devices that would potentially--and why
do they have that return? It is because they have very
significant social and medical benefits. That is why people
will pay for them. That is the hope. So that is where we are on
it.
But I have talked with our Chairman--well, not since
yesterday--and one of the things that he mentioned was the
really important thing about the venture issue is to
reauthorize the program. Please, just reauthorize the program.
He asked me to say that.
Ms. Wheeler. We agree with that.
I want to go back to the point on venture capital firms
validating. VC in a firm indicates that they are the most
promising, but it doesn't mean that they are the most likely to
commercialize the SBIR project----
Dr. Wessner. Reach the market.
Ms. Wheeler [continuing]. Because as even your study found,
of all the firms identified as being majority-owned and
controlled, only six received their venture capital investment
after their SBIR award. And so we tried to be very careful in
creating a war between these two sides to say one side's
research isn't as promising because they haven't attracted any
venture capital. Oftentimes, they have attracted venture
capital for another lead project, which I suppose Mr. Crandell
could speak to more clearly.
Mr. Necciai. Actually, before we move to Mr. Crandell, I
just wanted to ask one quick question. How long did it take to
do the study?
Dr. Wessner. Uh, it depends--I don't want to--it depends
what you mean by do the study. Do you mean----
Mr. Necciai. Not the term of the study. How long did it
take to do----
Dr. Wessner. Well, we worked on it about----
Mr. Necciai [continuing]. It from the beginning----
Dr. Wessner. Yes, but we worked on it--I am not quibbling
to be facetious. We worked on it for about two years.
Mr. Necciai. Okay.
Dr. Wessner. We had an extremely rigorous review process.
Our study from our perspective was completed last September. We
spent six months in review and we had a doubling of the number
of reviewers assigned to it and there were great discussions.
And I appreciate the question. So calendar, roughly about two
years, but how many hours----
Mr. Necciai. What was the return----
Dr. Wessner. Keep in mind, we were producing a substantial
number of other reports during the same----
Mr. Necciai. Absolutely. What was the return rate on the
questionnaires that you had out?
Ms. Wheeler. Response rate?
Dr. Wessner. I would have to get back to you on that, Erik.
I don't recall that number.
Mr. Necciai. Was it roughly 20 percent, if that was----
Dr. Wessner. It was, yes, roughly--actually, I think it was
18 percent, 18 and change.
Mr. Necciai. And for GAO, how long did it take to--
roughly--do your study?
Ms. Williams. Typically, our studies take between nine and
12 months. I don't remember for this one specifically.
Mr. Necciai. And what was the return rate for yours?
Ms. Williams. Well, in this case, we didn't do a survey,
but generally speaking, we shoot for 75 percent response rate.
But we will report results out, depending on the circumstances,
with a response rate of more than 60 percent.
Mr. Necciai. Thank you.
Dr. Wessner. Could I just add, Erik, that you can have
higher standards if you don't do the surveys.
Mr. Necciai. Okay. Thank you.
Mr. Crandell. Thank you very much. I think the question
was, what are the parameters that venture capital firms are
typically looking to see in an effort in order to invest
capital and how might that compare with opportunities that
present perfectly good science but may not meet those criteria,
and correct me if I am--I mean, I am repeating your question,
Kevin, so----
Ms. Wheeler. Well, I just wanted to give you a chance to
respond. When I said that the VC dollars that were already in
the firm--were often already in the firm before they ever
applied to the SBIR program, so there was not necessarily a
correlation between VCs existing and their promise to
commercialize, so----
Mr. Crandell. Okay. Well, I am probably best speaking from
my own personal experience, which my partners and I started as
graduate students at the University of Chicago in the mid-1980s
following the Bayh-Dole Act. We were chartered with spinning
out new companies from the University of Chicago and Argonne
National Labs. There were no previous spin-outs or commercial
activity at those institutions before we started our effort.
We raised a small venture capital fund at that time, which
was about $9 million. It took us about 15 months and we
presented to about 100 institutional investors to raise that
capital. And we set about starting companies and running them
ourselves. We did 12 companies during that period of time and
looked at probably several hundred different invention
disclosures that were turned in by the University or by Argonne
National Laboratory researchers.
Of those 12 companies, some of the ones that we chose was
an elementary school math curriculum that is called Everyday
Mathematics. Those of you that have children and help them with
their homework will probably have suffered through some of
that, but that is now the largest market share math curriculum
in the U.S. with 18 percent market share and it has generated
hundreds of millions of dollars in revenue and I think employs
a lot of people----
Ms. Wheeler. And that was an SBIR project?
Mr. Crandell. That was not an SBIR project, but it did have
the attributes of a potentially larger market and we were able
to invest our capital toward productization of some raw
research and did the work.
The second project that we--or another one that is worth
mentioning is the company that became Averon. This is the
company that did the cold-adapted flu vaccine. It is the
FluMist that kids spray in their noses so they don't get
injectable vaccines. That was a 13-year project. It took
ultimately hundreds of millions of dollars to commercialize.
But again, the vision was that if the technology worked and we
could get additional funding, and it came from a lot of
different sources over that time, ultimately, there would be a
payoff.
We also worked on what the Economist has called the very
first nanotechnology company, which was spun out of Argonne in
the late 1980s, and worked on a host of others in the
chemicals, materials, instrumentation space.
So in the intervening 22 years, our company has done about
122 of these companies. We are now focused nationally on the
leading academic institutions and national labs. So in large
part, our firm has grown over time. We now have about 15
professionals that do this work. We have offices in Seattle, in
Austin, one on the West Coast, and our headquarters and
administrative functions in Chicago. We have funded companies
in the fly-over States because the science in many cases is
extremely good, but it is much more difficult to gain financing
in those locations and it is much more difficult to attract
managers that have experience because you have got a bit of a
chicken-and-egg issue there.
So part of our process, and I think most of the groups that
do what we do, and there aren't a huge number of them--if there
were more, we probably wouldn't be having this discussion, in a
way, because there would be much more capital available to fill
that gap--is we bear more technology risk--it is in a sense we
have a concept that we hope would have large commercial
potential, but we have to do the investigation to validate that
there is a commercial opportunity and we also have to establish
that the invention is consistent with the laws or physics or at
least the best judgments that are available.
So part of our process of determining how to get there is
to develop plans along those lines to get the answers to those
questions, and this gets back to where the SBIR program fits
in, and I apologize for the long intro there but the context is
sometimes helpful. And that is we set a strategy to try and
find a way to build the things that we think are commercially
important and we then look to overlay those with the results
and the interests of these major funding agencies and we scan
the literature and the proposals to see if there are things
that match. And often there are because the things, as Dr.
Wessner pointed out, the things that create the most value are
usually socially important, and they certainly are in the life
sciences and the physical sciences.
So our process is to evaluate the commercial viability, and
we need large markets. People will not give you capital to
invest if you cannot generate a return because they can put
their money in Treasury bills or whatever denominated security
that is much safer.
Also, our process is imperfect. Even though we feel like we
have armed ourselves with every possible advantage and we have
people that have experience, which is extremely important to
making the right business decisions, we still crater or fail in
about a third of our efforts.
I think as we--one of the hallmarks----
Ms. Wheeler. I am sorry. Are any of your investments
ineligible for SBIR right now?
Mr. Crandell. Yes, under what I will call the change, they
are not eligible, and I think----
Ms. Wheeler. And they were before? Your companies were
before?
Mr. Crandell. Well, we view ourselves as small businesses.
As I said, we have 15 professionals on our support staff. Our
companies typically have a dozen or two dozen people in them.
They are small, focused, entrepreneurial groups that are at
risk that are going after big challenges. And right now, there
is a cooling both because of the notion of potential caps,
because if you are not sure that you are going to--if you have
the potential of being the one that gets cut, you have to make
a second judgment beyond just the SBIR program as to whether or
not you are going to be able to make it into the program, even
if everything else lines up perfectly. So there is an issue
there.
And then second, most technologies that are what I will
call core technologies based on the physical and life sciences
are extremely capital-intensive projects. You know, the notion
of people developing a new drug in their garage is just not
happening. I haven't seen it. Maybe it could be done.
But the point is that these funding sources basically
interweave and are complimentary and I think the exclusion, the
damage that is done in a situation where there is essentially
an arbitrary cap that is set or discrimination against a
certain group is that it limits the options of the
entrepreneurs that are running the business because it makes it
less attractive for them to take capital. It makes it less
interesting for the venture capital people to participate in
those start-ups and fund them because they know that their
companies are not going to be able to garner additional capital
which is necessary for them to succeed.
And then finally, from the standpoint of a venture
capitalist who has operated for 22 years in a fly-over State,
we are fighting every way we possibly can to get our companies
the capital so they can have the planning horizon and be able
to make the plans and execute on them to succeed, and that is--
you know, I have a receipt for my five-year comment earlier and
I would like to say that I support longer planning horizons for
all the reasons that people had outlined. But it is basically
the same issue that we suffer from here.
Ms. Wheeler. May I just ask a question? What was it before
2002 that made your firm think that your companies were
eligible? With the terms majority-owned by individuals, 51
percent owned by individuals or U.S. citizens, by what standard
would your companies have felt that they were eligible?
Mr. Crandell. Well, let me say that we started in 1986, and
I think it was the SBIR program predates our involvement. I
think that we viewed ourselves as small businesses and we
applied for those, or our companies did, answering the
questions that were asked of them, and there were other peer
groups that had it. You know, all this differentiation about 51
percent ownership is not something that was discussed or
control. I mean, I think we have heard earlier that this whole
notion of control at the operating level of the company or at
the board of directors is something that is not super clear-cut
and I think there wasn't a lot of attention spent, frankly.
Ms. Wheeler. But the self-certification form from NIH has a
box which they must check which says 51 percent by U.S.
citizens, right?
Dr. Fedorkova. Correct.
Ms. Wheeler. So I am just so curious, because I know you
all are just really upset about this and feel that before, you
could self-certify that such firms were eligible. So I am
curious just how a company looks at that and says, I am just
going to take the example, there are three venture capital
firms that together make up the majority of the ownership and
control of this SBIR applicant. So when they checked it, what
in it was making them--by what standard did they think that
they could check that box?
Mr. Crandell. Well, maybe two important points there. One
is I don't think there is a visceral reaction, and if I have in
any way----
Ms. Wheeler. No, I mean that you are----
Mr. Crandell [continuing]. Conveyed that--I am passionate
about it----
Ms. Wheeler. You feel--yes--I am sorry----
Mr. Crandell [continuing]. Because I live it every day.
Ms. Wheeler. I mean that you feel strongly about it.
Mr. Crandell. Right.
Ms. Wheeler. I didn't mean that as negative at all.
Mr. Crandell. Yes.
Ms. Wheeler. I am just trying to understand how somebody
checks that box, and NIH's self-certification form has that.
Mr. Crandell. I think--first off, you would have to ask
them, okay, and I am sure there are as many different answers
for that question as there are people that are out there doing
it.
I will say that in your description, I believe there is a
misunderstanding of language that is possibly at the root of
all this----
Ms. Wheeler. Okay.
Mr. Crandell [continuing]. And one is the notion that if
you have a syndicate of venture capital funds--each of those,
by the way, is an independent manager that has capital from
different sources that is focused in different areas that may
never co-invest with the other investors at all--so the notion
that three--in your example, I think it was three venture
capital groups exert control over it. In each round of
financing, those venture capital funds may decide not to
continue to invest. They may sell their position if they want
to to some other group. It is not a tightly aligned group of
anything, and I have served on enough venture capital-backed
boards to know that if you get three or four people in a room
from different venture capital funds, the only thing you know
for certain is they are all going to have different
perspectives on it.
So I guess if, in your example, there were three groups
that had control, it was clear-cut control, and if they all
were colluding in some fashion, then I imagine they would have
a hard time checking the box. If, on the other hand, they are
small businesses themselves, they operate independently, their
capital structures are absolutely independent, then the whole
notion that there is some double-secret handshake that makes
these folks collude against or organize themselves, I just
haven't--I haven't seen that. So I think that is probably the
point where the cognitive dissonance sets in is that there is a
preconceived notion perhaps that these--that venture
capitalists organize themselves the way large corporations do
and I don't--I haven't found that in my experience.
I also would say that we are better off as a country here
if we get more money focused on commercializing the things that
are going to have impact and make a difference, and----
Ms. Wheeler. But that would be an argument for not making a
change because the NRC identified that the majority of the
applicants who commercialize, 55 percent are non--don't have
VC.
Mr. Crandell. Well, I mean, again, this is----
Ms. Wheeler. But you know what? Aside from that, there is a
compromise that is out there of 18 and eight percent. Those
would get your companies in.
Mr. Crandell. Well, I mean, again, I don't want to
monopolize the time here, so you have got to use this type of
symbol----
Ms. Wheeler. Well, we will let everybody comment on it. So
18 and eight percent, that addresses the issue that you are
concerned about, that now some of your investment firms would
not be eligible. Now, they would be.
Mr. Crandell. And Kevin, I----
Ms. Wheeler. Is that sufficient?
Mr. Crandell [continuing]. I appreciate that fact, and if
you are in Washington and you are making a gesture or putting
this type of thing together, it is splitting the baby. I am
sure that happens here all the time. I only come once in a
while so I am a little more sensitive to it.
So I think there are two things that to me I think are
problematic there. One is, from a policy level, the country
faces huge challenges in clean tech, in energy independence, in
the biological area with things like pandemics, and if you are
arbitrarily capping this, what you are basically doing is
telling those groups you don't want their ideas, okay. So do we
want to be the group that tells the agencies that they
shouldn't get the very best ideas in, especially if one or two
of those may make all the difference, and I think we are
hearing from Dr. Wessner that these are some very high-powered
ideas.
I am absolutely a fan of competition in these things. Let
them be peer reviewed. I think that is a great process for our
groups and for the agencies and I think they do a great job.
But from a policy standpoint, what you are essentially
doing by putting a cap in, that you are saying, don't send in
your ideas because we are going to add one more level of
uncertainty, so that even if you do everything right and even
if it takes the nine months, even if you file all the forms,
you still may not get it because you are somehow the last one
through the door, and that is----
Ms. Wheeler. Well, actually, right now, they can't
participate at all. So actually, we would be saying the door is
open for you to come. And furthermore, the 18 percent is far
above what the GAO found was the participation for all firms
with VC before the clarification. And, in fact, if it were
enacted, based on the data we have from 2006--let me see, you
would be getting proportionately and dollar-wise more than they
were getting before SBA qualified. So before the clarification
in 2001, GAO found that the firms with venture capital received
14 percent, or $57 million, of all SBIR dollars at NIH. And in
2002, they received 14 percent, or $72 million.
If we were to put in this 18 percent and they were to use
it all--would they get to that? Some have argued that they
wouldn't because these amounts are smaller than that. It would
be an increase of 84 percent over the amount of funds firms
with venture capital were sharing--sharing. Now, this would be
all for this class of firms that you are advocating for, and a
possible increase of 45 percent over what they were sharing in
2002.
And at DOD, it would be an increase of 47 percent over the
funds they were sharing in 2002 and 65 percent of what they
were sharing over 2001.
So they weren't arbitrary. We understand what you are
saying. But we don't see that this is in any way limiting.
Right now, these firms you are talking about don't have access.
And based on the information we have here and these self-
certification forms, they were never--I mean, they might have
been in there, but they weren't supposed to. And so now they
would actually really explicitly have access.
Mr. Crandell. Well, I mean, again, I have been working this
project, I guess you could say, on the SBIR side because it
affects the commercialization gap and the interplay between
venture capital entrepreneurs and technologists and I view it
as an important one. So I appreciate your assurances that
things will be good, and in this room, it sounds reasonable.
But I think in point of fact, from a ground-level person,
what it is going to do is add in uncertainty about whether or
not they are going to be the last--whether their good ideas are
going to be the last ones through the door, and that is going
to chill the effect of people applying, number one.
And number two, from a policy standpoint, we need the best
ideas coming in to the country and to the research agencies,
and that is what they want, and it is a contest of ideas in
meritocracy. The agencies choose the topics. They peer review
them separately. And I don't think that it makes sense, both
from the National Venture Capital Association, from me as a
taxpaying person, too, to arbitrarily discriminate against a
high-performance group of idea people when the country is in
the throes of some serious challenges and forcing them to have
to think through the idea that they are making it more
uncertain.
So if you are saying the caps are generous, I have a
receipt for that point. I would say there were no caps before
2002 or 2003. In hindsight, you are saying these folks perhaps
shouldn't have been participating, or not all of them. Nobody
is quite sure who would have been in, who wouldn't have been
in. I think we are looking to take this back where it worked
for 20-some years, where we know it worked, and just make that
modification, and I don't--if the caps are--if the numbers are
so good and we should feel so strong about them, I kind of
wonder, why are people so interested in putting them in and
doing this sort of set-aside-like discrimination. Again, from
my narrow perspective, I don't get it. It is the top scientists
with peer-reviewed ideas. It is what America is about, is
competing for meritocracy on that and let them be where they
are----
Ms. Wheeler. Because it is a small business program and we
have to define small business. Right now, these firms are not
considered a small business----
Mr. Crandell. Right now.
Ms. Wheeler [continuing]. And so----
Mr. Inge. Let us--do you want to open it up for comment,
just because we have got to be out of here at one. The court
reporter has another appointment. It would be good to get--I
know Dr. McGarrity will probably want to say some stuff, and
then some of the small businesses.
Ms. Wheeler. Kathy, did you want to make a comment?
Ms. Wyatt. Yes. I would just make a brief comment. One
thing I would like to say is that I particularly appreciate
your comment that this is not intended to be something that
pits VCs against small businesses, because I think the truth of
the matter is that we are both playing a vitally important role
in sustaining and improving our quality.
I just would like to throw in from the small business more
than anything that I think a small business perspective is to
want some assurances that those diamonds in the rough that are
out there that this program will help us to identify by the way
that it has been operating in the past continue to have access
to this program in a way that will be effective for them and it
will help us grow some of those potential rising stars of
tomorrow that will be good candidates for venture funding.
And the other thing that I do think is important is to
remember that it is a small business program, and I think that
there is importance in having the definition of small business
be consistent across programs that the Small Business
Administration is actually in charge of overseeing and
operating.
Ms. Wheeler. Thank you, Kathy.
Kunal.
Mr. Mehra. Thanks. I guess I want to share a few
observations, just taking a step back for a second, and then
raise just what I think are a couple practical issues in terms
of how you would even implement a policy like this.
So just by way of background, I think I have a little bit
of a unique perspective on this because I spent quite a bit of
time as a manager consultant advising venture capital firms. I
was in on the management team of a VC-backed company that was
acquired by IBM for four years and now I am part of a privately
held company competing with firms that have VC capital. So I
have sort of looked at it from three different sides.
So let us just take a step back for a second and make some
general observations. When you look at the SBIR program, I
think two major motivations and two major goals of the program
have remained consistent for the last 25 years and I think are
never really in dispute. The first is a recognition that small
businesses, by and large, are the hotbeds of innovation in
America and in the world and that the Federal Government
historically has had a very hard time tapping that innovation
for whatever reason. So one of the major objectives of SBIR was
to provide a mechanism for the Federal Government to benefit
from that innovative mindset and creativity in small
businesses.
The second major recognition was that small businesses,
particularly minority-owned small businesses or small
businesses in rural areas like Louisiana or other States, are
inherently disadvantaged. They lack the same access to capital
that large businesses have. They lack the access to advisors
and other forms of distribution to actually get into the
Federal Government and be able to support such an incredible
sales process.
And I think when you hold up companies that have
significant venture capital investment, and whether it is
majority-controlled or not, I don't see how they pass those two
tests. How can a company that has raised $10, $15, $20 million
be considered disadvantaged? It just doesn't make any sense.
And I am not worried about the entrepreneur that has got a
really successful technology that could raise $10 million. I am
worried about the entrepreneur in Louisiana or some other State
that has no access to capital and has to compete with that
person. Suddenly, this program that was very egalitarian where
the best ideas won becomes much more competitive and starts to
lock out those two people.
And on the first test, again, the focus of the program is
on spurring innovation. There is a great place for venture
capital in the SBIR program. That comes in what we call Phase
Three, the commercialization process. And Mr. Crandell's
comments, all of which I think were fantastic, one of the
things he talked about was the first thing that they do when
they come in is to evaluate the commercial potential of the
technology that has been developed, not evaluate the merit of a
crazy idea that a scientist has to create a revolutionary
technology. That is what SBIR Phase One and Phase Two is for.
So I think on those two tests, it fails.
And then let me now just talk about some really practical
issues in terms of--even if there was an allocation for
venture-backed companies or majority controlled venture-backed
companies, I think there are some really practical questions
you have to ask.
The first is, how are you going to determine if a company
is majority-controlled or majority-owned by a venture capital
firm? It is not as simple as just looking at who owns the
shares of the company because in most instances that I have
seen or that I have been involved in, when an outside investor
comes in investing capital, they will take preferred equity
shares or they will invest with debt instruments that are
convertible to equity over time. So they might not look as if
they own two-thirds or 75 percent of the equity of the company,
but in effect, they control that amount, or they can have a
disproportionate number of board seats.
So I think just answering that simple question to figure
out what category they fit in and whether they fall under that
eight percent cap or that 18 percent cap or not is incredibly
difficult.
The second point I would raise is, again, right now to
participate in SBIR, the firm has to be majority-controlled by
an individual who is a U.S. citizen. How do you apply that test
to a company when it has got a substantial number of private
investors? Do you look at the citizenship of the sponsors in
the venture capital firm? Do you then go back to the investors
in the VC firm and look at their citizenship? I mean, I think
that--and then does that create a double standard? If you are
going to penalize an entrepreneur for not being a U.S. citizen
but you don't penalize a company that has got VC-backed
investment from foreign investors and other folks, it seems to
me like that is a double standard.
And I think that is even further compounded when you look
at DOD, where there are some real national security concerns. I
mean, in my company, the vast majority of projects that we work
on are ITAR restricted. We can't have non-U.S. citizens even be
in the same room when somebody is working on a project like
that.
So again, how do you deal with that issue when you have got
an institutional investor that may or may not have foreign
ties? And I am not ruling one way or the other. I am just
saying it is a very vague thing and I think it becomes
extremely difficult to legislate for.
So those are two, I think, important considerations. The
other observation I would make is I think there are also some
fairly big differences between the NIH program and the DOD
program. In DOD, the marketplace for the eventual technology is
the Department of Defense itself. So a lot of the
commercialization that needs to occur happens through the
natural mechanisms in the DOD to acquire technology, and again,
I think we have talked about--I certainly feel like that could
be improved.
In the NIH, the situation is different. In the NIH, there
is no--the marketplace for technology developed by the NIH is
the commercial sector. And so I wonder if it makes more sense
to think about VC participation more in the NIH sector than it
does in the DOD sector.
And then finally, just to provide one thought process for
how I think everybody can sort of have their cake and eat it,
too, there are companies that recognize the importance of
getting VC funding to commercialize their technologies. PSI,
Physical Sciences, Inc., in Andover is a fantastic example. So
what they do is they take that technology, they spin it out
into a separate entity, and then they invite venture
capitalists to invest in that entity. That entity is focused on
commercializing the technology and therefore that is what the
VC dollars are directed at. Meanwhile, PSI, the parent company,
can continue to be majority controlled by individuals and can
continue to compete for SBIR funding. And I think that that is
a very fair compromise that exists within that kind of
framework.
Mr. Necciai. Have you found in your experience that this is
a successful process and one which many firms use in order to
both get the advantage of VC and SBIR?
Mr. Mehra. I think, one, it is a very successful model. And
secondly, given all the points I just tried to raise, the
practical points, I don't even know how the SBA would
legislate, would be able to manage the process. We would have
to have forensic accountants going in and assessing the capital
structure and doing all these other things to figure out, is it
majority-controlled? Is it not majority-controlled? Is there a
national security risk or is there not?
This mechanism that I just described, I think if we were to
publicize it and just make more people aware of it, is just a
really simple practical solution to, I think, a very clear set
of issues.
Ms. Wheeler. Thank you, Kunal.
Dr. McGarrity.
Dr. McGarrity. Thank you. What I would like to do is add my
personal experience and tell you about two companies that I
have been involved with, VIRxSYS, where I am presently, and
another company called Intron, where I was CEO.
Intron started in 1996 when a very young innovative
physician who had just completed his training at NIH was
looking for a job and he invented some technology literally in
his living room and actually using his children's crayon and
construction paper to sketch out the scope of the invention. He
was able to get some seed funding from the Cystic Fibrosis
Foundation because they had an application for a possible
treatment, and then later, Intron received a Phase One SBIR
grant from the NIH. In fact, in a rarity, and as I said to you,
I have been a reviewer for hundreds of applications, grant
applications, at NIH, including SBIRs, the grant review
committee actually doubled the budget of the requested budget
and I have never heard of that happening before.
We completed that Phase One study. We applied for a Phase
Two study. A separate group of experts, 18 to 20 of them, said
this is one of the most innovative, thoughtful, and exciting
applications they ever read, and we got fully funded.
On the basis of that, we went out and we acquired VC
funding, small, modest amounts, and so our lead program was
Cystic Fibrosis. The VCs, I mean, to what Keith has said, said,
well, it is the same amount of work, it is the same amount of
time, the same amount of money to develop a product for a major
market like cardiovascular than it is for cystic fibrosis, so
let us focus on cardiovascular disease and then we will
continue to get grants to support the cystic fibrosis program.
We went out and we did that. We got another Phase Two from
Cystic Fibrosis at the NIH which would have taken us into
clinical trials. Now, that is when the change in rules occurred
and NIH came to us and said, we question your eligibility
requirements for this. Let us go through the paces.
Because of the VC funding, that grant was actually
rescinded and we actually had to terminate people that were
working on that program. Also, our collaborator at the Cystic
Fibrosis Center at the University of Iowa had to stop funding
two graduate students who were working on the project.
So that is fairly typical, and I think the experiences we
have are representative of a large number of small and emerging
biotech companies.
Eventually, Intron was acquired by VIRxSYS, my present
company. VIRxSYS was founded in 1998, so we are 11 years old.
We still have no revenues. We are in clinical trials for HIV/
AIDS, and those trials are going well. We are also developing
an HIV vaccine, and the technology at VIRxSYS came out of Johns
Hopkins.
Now, VIRxSYS is unusual, if not unique, in that we have no
major VC funding. We have literally several hundred private
investors that put in their money and have supported us over
the past ten years. So actually, I am sitting here representing
VIRxSYS, a company who is eligible for SBIR grants. So you
might say, well, if you are eligible for NIH grants, what is
your position on this? It is in my best interest to say, keep
those VC-funded companies out of the mix. It is better for me.
I have a better chance of competing for the limited amount of
research dollars.
And, in fact, that is not my position. I don't think the
purpose of the SBIR program is best served by excluding young,
innovative technologies, and I think what Keith said is
absolutely true. The purpose of the SBIR program is, as its
title has said, it is looking for innovative research. And I
sit here and say I have absolutely no hesitation in competing
for research grants with every other biotechnology company in
the country. If I go and I get my grant funded, that is good
for me. If I fail to get a grant award, I have to go back and
work harder and retool and get that.
We are going to put in an SBIR application this September
for some work that developed out of our clinical trials with
AIDS. It is some new findings we have got and it is basic
science which we think would have commercial application. But
it is a long-term process. And I can't justify going to my
investors, who have been funding the company for 11 years, and
say, also give me money to fund this new avenue of research. So
as we are eligible, we will apply to NIH for an SBIR grant.
I also think if the rules go back to the way they were, and
I support what the National Academy report said, that worked
very, very well. And also, I refer to Table 5.2 in your program
where it said, what are the major reasons why these various
companies are not presently applying for SBIR funds, and among
the reasons given, there was the likelihood of getting an award
is too small. That was 13.6 percent of the respondents. There
was another one that there are significant delays in the
funding. If I put an application in for an SBIR grant right now
at NIH, it is going to be nine months before I get word back.
And then also the size of the award is too small. So those
three groups represent 30 percent of the respondents. Thirty
percent of the respondents said, I am not going to apply.
So you are not going to have a run on SBIR grants if you
change this rule. I think you will get a small number of
applications like you had before for early stage projects, for
highly innovative projects, and also, as our experience showed,
it is also an application that are in orphan diseases where the
common marketplace doesn't address those needs. And I know just
last year, I think there were 50 patient advocacy groups came
and said, we are getting shut out of this kind of a market.
We have had--when I was at Intron, we had requests from
several organizations and from several scientists for, for
example, wanted us to work on a disease called spinal muscular
atrophy, a terrible disease, very, very small number of
patients, very small market, and we said we can't do it with
the basic capital markets. At that time, we were not eligible
for SBIR. So those people are being shut out of eligibility for
many of these kinds of--yes?
Ms. Wheeler. Dr. McGarrity, I wanted to ask you a question.
On your first company, what was it that made you all self-
certify that you were 51 percent owned by U.S. citizens?
Dr. McGarrity. Well, I think it was the--first of all, we
didn't have any legal department to say, go check this out. And
also, I think it was the common experience in the community
that it didn't make a difference whether you had venture
capital or not. Now, that doesn't excuse that, and in fact,
that was rescinded at a very early stage. But also, at the same
time--
Ms. Wheeler. But just logically.
Dr. McGarrity. Yes.
Ms. Wheeler. I am just trying to get why the companies are
going about it, because they are so upset that they are now
excluded and I am just curious, if they had this self-
certification form----
Dr. McGarrity. As I said----
Ms. Wheeler. Explain to me what you say that you look at
and you say, so I own--I don't know how much you owned, but I
am just going to say you owned--did you own 52 percent of the
company so you said, I checked that box?
Dr. McGarrity. Well, first of all, I think there is an SBIR
program at NIH, and I no longer have the slides, but every
year, they would have a communication and a show, a meeting, to
say here is what the SBIR program at the NIH is all about. Now,
I went through those slides and I kept them for a couple of
years. But if I went back to the 2003 show and went through
every slide there, there was no check-box on if you have VC
funding, you are no longer eligible. It was the size--it was
judged by the size and the percent American ownership, and they
were the two big headlines that companies like myself would
look at and say, all right, we are a U.S. organization. We have
far fewer and we have--you know, here we are. We have 20
employees----
Ms. Wheeler. Plus affiliates, 500 including affiliates.
Dr. McGarrity. Well, that--yes, but in the organizations
that we had, that was with the VC----
Ms. Wheeler. That is true. Okay. So you could check that
box----
Dr. McGarrity. Yes.
Ms. Wheeler. Okay.
Dr. McGarrity. And so, as I say, I think it--and I am not
necessarily excusing it, but I am saying that was the common
experience in my neighborhood or my community of small and
emerging biotech companies, and you saw the companies that were
getting it. We didn't hear otherwise from NIH. So we applied in
good faith, thinking it was the same old eligibility
requirements that we had in the first couple of awards that we
received.
Ms. Wheeler. I see. Okay.
And I just want to clarify for everybody the facts. Firms
with venture capital are not excluded. They are not. They never
have been and they aren't excluded now. It is the ones that are
majority-owned and controlled by, as the Cognetics case points
out, non-individuals, right? So they found pension funds,
corporate entities, and venture capital funds. I think it is
very important that we stick to the facts.
Under this compromise, your firm would be eligible to
compete.
Dr. McGarrity. My firm is eligible right now.
Ms. Wheeler. I know, but the first one that you
mentioned----
Dr. McGarrity. Yes. Yes.
Ms. Wheeler [continuing]. That you decided to focus on
cardiovascular----
Dr. McGarrity. Yes.
Ms. Wheeler [continuing]. And then you wanted to pursue
government grants for the cystic fibrosis. So you would now be
eligible to compete.
Dr. McGarrity. Mm-hmm.
Ms. Wheeler. Are you in support of this compromise?
Dr. McGarrity. Well, I would--first, I am a scientist, so I
have to start asking--and don't take it personally. I mean, we
are----
Ms. Wheeler. We just want to get this program reauthorized.
So we are trying to get to compromise, so----
Dr. McGarrity. Yes, but my question back to you, if you
were saying that at NIH, you had 14 percent were going to firms
with VC funding, and then you are saying, let us put 18 percent
on the table, I would say, well, then that sounds to me very
artificial. Why do you need 18 percent if we are coming in at
14 percent or all of the VC-backed firms would be eligible and
the number is under that percentage?
Ms. Wheeler. Well, first of all, if you want it to be 14, I
am sure there is a lot of support to match the number.
Dr. McGarrity. No, no, but I wasn't trying to be a smart
aleck----
Ms. Wheeler. No, I know you weren't, but I am just saying,
you understand that we based it on data that we had, and again,
I want to be very careful with terminology. The 18 percent in
the compromise is not only for firms with VC. It is for firms
that are majority-owned and controlled by multiple VC firms. So
they would now not be sharing this pot of money. They would be
able to get up to that entirely for themselves. That is why
they are doing better dollar-wise and percent-wise than what
they were doing before.
So we went above 18 percent because there were people on
the committee that felt very strongly that--above 14 percent
because they felt very strongly that NIH was the one place
where this was really needed and that it was focused on
biomedical. So the compromise was that we would go up beyond
the data that we had. So it wasn't arbitrary. It was based on
data.
So if you have data that tells us that you need more than
18 percent and there is a justification for it, you know, we
are going to mark up this bill very soon, so as Senator
Landrieu said, today is the day to make the case that the
compromise that this committee voted on is not sufficient.
Dr. McGarrity. Yes. Well, I would say, looking at the
alternatives, where we are zero right now and you are saying 18
percent, 18 percent is obviously better than zero.
Ms. Wheeler. Right.
Dr. McGarrity. But I still think--I have trouble
understanding the rationale of saying why we want to go to 18
percent, which theoretically would accommodate all of you
people or all of the companies that have VC backing. When we
were talking earlier about the length of reauthorization, we
said we wanted to keep it simple. We wanted to keep it constant
over time so it is predictable.
And so if that percentage were to increase--let us say it
is highly successful and it is highly successful, but let us
say the percentage of NIH in, if you are talking about a long-
term authorization program, let us say in seven or eight years,
you hit the ceiling of 18 percent. Then what do you do? Do you
have to then start saying, well, I am sorry. We are going to
have to have quotas here to say that some of these companies
are going to get turned down because we are over the 18
percent----
Ms. Wheeler. If you have 501 employees, are you turned
down? I think the point that Senator Kennedy's staff made on
Health and Human Services was we have to draw the line. We have
to define a small business. And unfortunately, there might be
that firm that has 501 employees or that comes in at that 18
percent. Right now, we have no data that says that there is a
need.
And just from a policy perspective, it is the totality. It
is not just the fact that you are saying they can't compete. We
have heard data here that of the awards that go to firms with
VC, they account for, was it 70 percent of the awards in SBIR?
So let us look at this in totality.
So we are saying that up to 18 percent of awards, SBIR
dollars at NIH, can go for firms that are majority-owned and
controlled by multiple VC firms. Then we look at the GAO study
and we look at extra data we have that says that any firm--I
mean, firms that have VC, but we are assuming they are not
majority-owned because it was in 2004, after the clarification,
it is very clear they can't apply anymore--we assume they
aren't. That is 22 percent. So we add 22 percent to 18 percent
and we are now moving the program of getting to--we are moving
towards half of the program going to firms with venture
capital.
Then we take the data that we have from the NRC study which
says that a larger per share--the majority of commercialization
comes from firms that don't have VC, 55 percent versus 38
percent. Then we add on top of it that where is the
concentration of the awards that go to firms with VCs? They go
to mostly California and Massachusetts and then somewhat in ten
States, that they get the larger awards. So we have it
geographically imbalanced and one of the goals of the program
is to do economic development.
So we look at the totality of circumstances and we say,
what is the balance we can get here for innovation of this
country? And then on top of it, we look at this and we say,
what are the types of research that VCs go after versus those
that are non-VC, and it is our experience, and Keith can weigh
in and you can weigh in, they are different. They look
different. And we want this program to still go after those
projects that are really high-risk. We want them to not turn
this into an acquisition program.
And so we look at the totality and we say, we see the case
that you are making. We see the case that you are making and
here is the compromise. And you know what? We are going to base
this compromise on actual data that we have. That seems pretty
fair.
Dr. McGarrity. Right.
Ms. Wheeler. So what is not fair about 18 and eight percent
and what data does BIO have to give us that there is a
different compromise?
Dr. McGarrity. Well, I think----
Ms. Wheeler. And we are willing to listen to it, but today
is the day to make the case.
Dr. McGarrity. Okay.
Ms. Wheeler. I mean, we want this program reauthorized.
This has gone on for years. And so, please, if you have a
better idea, let us know, because we struggled with nine months
over this.
Mr. Necciai. And before you respond, I am sorry, we are
coming down shortly here----
Ms. Wheeler. Yes. Sorry.
Mr. Necciai [continuing]. If you could make your response
quickly, we want to get to a share of the people and we want to
head to affiliation rule before we wrap up.
Dr. McGarrity. Okay. Well, I think one is that--I would say
that biotech companies are different than some of the companies
that you are talking to and about at the Department of Defense.
When you are saying that the non-VC-backed companies are
getting to market and generating revenues quicker, that is
absolutely true, because I think in Department of Defense or if
you are in IT, you are going to generate revenues very quickly.
As I said, we have been around 11 years and we still do not
have a penny of revenue. So that is a hallmark of biotechnology
companies. I mean, to the response----
Ms. Wheeler. And the compromise recognizes that.
Dr. McGarrity. I appreciate that. I appreciate that. So
what I said to you is saying that from looking at zero percent
now and 18 percent, obviously, I picked the 18 percent, but I
still question as to the wisdom and the rationale, why there
has to be a limit, because you are saying, all right, you are
eligible but you are only eligible up to a certain point and
you are putting a ceiling and what I see as an artificial
boundary around the kind of percentage that you have.
Ms. Wheeler. It goes back to partly--and I will finish
this--what Kunal referenced. If you go back and you read all
these thick legislative records on the creation of the program,
it was to get seed capital to firms that had not yet attracted
outside funding, private sector funding, and the government had
recognized that small businesses were the biggest innovators.
They did it faster, it was more cost effective, and they were
saying, for the best use of our Federal R&D dollars, we should
be trying to incorporate small businesses more to meet our
research needs.
And therefore, because we want a level playing field, the
majority of these dollars are going to huge corporations and
universities, we are going to create this allocation to make
sure that there is a level playing field and this is part of
it. And so typically, one would say these firms have attracted
the outside capital and they have graduated. At some point, you
would say they have graduated. Eighty million dollars. We have
had witnesses who have come here and participants who have $80
million in VC, $140 million in VC. Kunal mentioned levels of $5
and $10 million, smaller, but still they have proven. They have
attracted the outside funding.
So this is a compromise. So I guess what I am saying,
instead of just saying no or you don't--what is the compromise?
Are you saying that it is 100 percent?
Dr. McGarrity. I would prefer to have VC-backed firms be
equal partners and being able to apply. I mean, I heard Mr.
Glover say there is a crisis because the number of SBIR
applications are going down. I have heard the former Director
of NIH say the quality----
Ms. Wheeler. I think he said first-time applicants, because
that is a measure that we look at for growing economic
development.
Dr. McGarrity. Okay. Then my notes----
Ms. Wheeler. Sorry.
Dr. McGarrity [continuing]. My notes are wrong. But the
number was going down. I heard from NIH that the quality is
going down. And when I look at the overall objectives of this
program, it is for innovation to provide job opportunities and
generate revenues, and I think, well, if everyone can fit under
the 18 percent cap, why have the 18 percent cap? I don't mean
to be antagonistic and I am saying 18 percent is much better
than zero percent, but I think let the system, and for biotech,
let NIH--empower them to bring this forward with no artificial
caps or just artificial boundaries.
Ms. Wheeler. Okay. Jere, do you want to----
Mr. Inge. Dr. Wessner, I think, had it up first.
Ms. Wheeler. Oh, sorry.
Mr. Inge. Do you want to go quickly, and then Jere?
Dr. Wessner. Just very briefly, I think there are two key
points. One is that the program, to the best of our knowledge
and understanding, is not trying to help disadvantaged
companies. The program is trying to draw on the ingenuity of
the very best small companies wherever they may be located. And
those States that have had trouble getting in the program are
also States who have levels of education which are not as high
as the successful States. They have underfunded universities.
They often have unfriendly business environments. And they
don't have the infrastructure that is required, putting the
onus for a whole systematic set of failures on the outcomes of
the SBIR program. They also don't apply to the program. So I
really think that the shining quality of this program is that
it is open to competition from all concerned.
I have a simple point here. I would hope that whatever
compromise you reach, that you would require some monitoring of
this by the agencies. As we state in our report, we found--you
know, we don't have a dog in the fight. We found no evidence
that these companies were being excluded. We found no damage to
the program from their previous inclusion. We believe that the
program managers could surely correct, if there is a tilt in
the program where there are inappropriate companies--as they
do, by the way, for some of the contract research companies who
feel so strongly about not having them in who are relatively
large, well-functioning, well-funded companies. They correct
for them when they think that they are overwhelming the program
with applications. That goes back to the flexibility. It goes
back to the judgment of the people on the ground.
So I would hope you would have some monitoring in there----
Ms. Wheeler. We do put in--we have tried, and, of course,
you can weigh in on that. We did put in the foundation has much
more detailed data collection so if you went back in, if GAO
went back in, that you would have an easier time of identifying
these firms and giving us the characteristics that we need, not
relying on proxies, et cetera, so that we could revisit it and
see whether the amounts are appropriate, whether it works or
doesn't----
Dr. Wessner. And let me refer you just to one. There is on
page 28 of our report, box two, we honestly believe--we stated
lower figures than GAO, but our best survey people argue that
we are underestimating the impact of the program, the impact of
the--that the numbers of venture-backed firms in biotech have
risen very substantially and we are not able to capture that
completely.
Ms. Wheeler. Well, you only went through 2002----
Dr. Wessner. Right.
Ms. Wheeler [continuing]. And GAO went through 2004, and--
--
Dr. Wessner. Well, there is, as biotech----
Ms. Wheeler [continuing]. I guess NIH wants you to look
beyond that.
Dr. Wessner [continuing]. Industry is maturing--yes, we
would. Keep in mind, in addition to the monitoring, we do ask
for a second snapshot. We don't know--I mean, ironically here,
and I say this very constructively, we are talking about having
all this hard data and we know how thin the data is and we
would very much like to get a second snapshot of where we were
in 2002, where we were in, say, 2008.
Ms. Wheeler. I understand, but this is where we are and
this is the information we have.
Dr. Wessner. Right.
Mr. Necciai. Chuck, I appreciate your comments on that and
I think we agree and emphasize the importance for reporting and
oversight and making sure that the numbers are right and, in
fact, what the numbers are. And I know that you encouraged the
reporting of minorities and women and such in past reports and
that is something that we are pushing for in our current
legislation.
Would you say that the 18 percent and eight percent
provides a large enough--as Dr. McGarrity eloquently said, zero
to 18 is certainly better than zero to zero, but would 18
percent provide a large enough umbrella or window for those
participating before and after to continue to participate?
Dr. Wessner. Well, based on two years of study and very
careful examination of the data, I can tell you that we don't
know.
[Laughter.]
So it is, therefore, important for you to keep in mind that
perhaps--I am not arguing about the percentages, but 18 percent
implies we know that this is--so do 20 percent or something and
then have a reassessment. Have a reporting requirement, some--
--
Ms. Wheeler. That makes no sense. I mean, we based it on 14
percent, so that is the best data we have, we know. And yours
says, what, 61 firms were excluded over ten years, or 4.9
percent, although I realize that is not share of dollars, that
is 4.9 percent of companies. But we feel like there is the room
there to take that into consideration.
Dr. Wessner. Well, I read--I am not disputing the two
percent with you. I am simply suggesting that 18 suggests that
we are hitting a target on the head and I just am cautioning
you, as I have been asked by the Academies, that the data is
quite uncertain, that I think we need to rely on management,
and that you should set up something that can be reassessed as
you go. I am addressing your concerns that we reassess this as
we go forward and have them report.
And I would point out that both the advocates from BIO
have, in our view, in the Academy's view, overstated the
damage, and the opponents of participation of venture-backed
firms, in our view, have overstated the problem altogether and
that we have basically a good program.
Ms. Wheeler. Thank you.
Mr. Necciai. Do you want to go, Jere?
Mr. Glover. Yes. First, I believe Intron, the folks in
cystic fibrosis left the company, went out and did the same
research and got funded elsewhere and completed it, isn't that
correct? They actually----
Dr. McGarrity. Absolutely not. Absolutely not.
Mr. Glover. They didn't leave the company? They didn't fund
it?
Dr. McGarrity. No.
Mr. Glover. It never got done?
Dr. McGarrity. No, never got done.
Mr. Glover. Okay. You know, 25 percent of the key
innovations in America come from this program. Thirty to 50
percent are commercialized. This program is working very well.
If you are going to remove any restrictions, if you allow VCs
in, don't restrict them. Change the name of the program. Make
it the Venture Capital Innovation Research Program, because if
over half of them who are going to participate are going to be
VCs, change the name of the program.
A couple of things that are pretty clear to me. When I look
at this, 80 percent of the firms in Dr. Wessner's study lost
money. Of VC-funded, controlled firms, 80 percent lost money.
Three-hundred million dollars, they lost. The nine that made
money only made $52 million. I am not sure the VC-controlled
firms have such a sterling record they can brag about. And the
fact that the majority of companies in the NIH program that
were not VC-funded were able to get in the marketplace for
commercial sales.
If somebody can find another R&D program in the world that
does a better job of getting the commercial technology, getting
to the marketplace than this program, say so right now because
I don't think there is one anywhere and I have never heard of
one. So it is a great program. Congress has a wonderful chance
to screw it up, and they may well do it. But for 27 years, it
has worked very, very well, and minor tweaks, that is
acceptable. But somebody finds out in five years we have
screwed up the best innovation program the United States ever
had, we are going to be back crying and wondering what
happened.
But if you are not going to restrict the amount of VC
participation, change the name of the program. It is no longer
a small business program.
Ms. Wheeler. And even though you have arguments against
changing the eligibility rules, could your organization's
members live with a compromise of 18 and eight?
Mr. Glover. We did when this bill was brought up before the
Senate. We recognized that. We agreed with BIO and NVCA at the
time. That was acceptable. We obviously recognize reality. But
clearly, there needs to be a number of things in this to make
sure that there are controls and balances on that. We need to
make sure that, monitoring it, we control it, we know what is
there, we know it is U.S.-owned venture capital companies, not
foreign venture capital companies. We need some clear
safeguards and protection within that 18 percent. The Senate
bill went towards that goal, but I think more protections and
certainly more monitoring so we don't find out we have done
something we didn't mean to do.
Ms. Wheeler. Thank you.
We are about to lose our court reporter. Jim, did you want
to comment?
Mr. Barry. I won't repeat many of the things. One of the
things that was most troubling to us, particularly in not the
legislation produced here but the House, was the combination of
changing the eligibility, increasing the award sizes, and
allowing companies to skip Phase One. And I think that
combination is particularly terrifying to a lot of the
companies that have been involved in the program. So I think
that your bill certainly addresses that and we are supportive
on that basis.
Ms. Wheeler. And for Creare, would it be acceptable for
there to be a compromise of 18 and eight, or do you want zero,
or is it acceptable?
Mr. Barry. Well, I guess I would prefer zero, but the
compromise, we supported that last fall and we continue to
support that.
Ms. Wheeler. Okay. Lenka.
Dr. Fedorkova. Yes. I just want to say we really appreciate
you trying to reach a compromise. It is a very difficult issue
and I think we need to look forward into how to maintain the
quality of the program.
I am not going to comment about what percentage is
appropriate. I think that is always a very difficult situation
to enter into that discussion. But I would just say that from
an NIH SBIR survey which was OMB-approved, we know that about
65 percent of our Phase Two awardees will require FDA approval.
Federal dollars are not able to go that far. The Federal
requirements, the FDA requirements for clinical studies and
milestones are extremely expensive, so I think the question
should be who will support that kind of a gap funding?
We talk about the valley of death and there is only so far
the government can support small businesses, and to help them
get close or across the valley of death, our competing renewal
programs are not going to be sufficient, either. I think there
is a logical synergy that exists and has always existed between
small businesses and other types of investors. The VC firms are
also a very diverse group of investors, very small, very large
to very high-risk averse. That is where the government steps in
to support the start-up companies.
I don't believe that companies that have in the past
participated and had VC funding claimed to be disadvantaged. I
think we are talking about something very else. We are talking
about the geographically disadvantaged groups, minority, women-
owned, and those who don't have access to capital. As we all
know, that is very much concentrated on the coasts, as the data
supports that. You obviously will have a lot of California and
East Coast-based companies that successfully compete for very
good reasons, that they have access to those resources.
So I think the number is an arbitrary number in terms of
not allowing sufficient room for instances where companies feel
they can come back into the program----
Ms. Wheeler. Based on what?
Dr. Fedorkova. Based on the need of what the biomedical
enterprise requires in terms of costs and what the Federal
dollars----
Ms. Wheeler. What data do you have that says that 18
percent would not be sufficient and why do you use the word
``arbitrary'' when we have said it is based on the GAO report
data? And if you all didn't think that data was so good, why
did you pay $300,000 or $400,000 for a study that looked ten
years back instead of going forward?
Dr. Fedorkova. I don't have an answer to that, but I would
say----
Ms. Wheeler. Right, so----
Dr. Fedorkova [continuing]. I also question--I haven't seen
the----
Ms. Wheeler. They used proxies. They identified----
Dr. Fedorkova. I wanted to actually ask a question of the
GAO to clarify the 70 percent of awards from all NIH awardees
being VC-backed.
Ms. Williams. I was just getting ready to correct that. The
70 percent was awards above the guidelines, and of the--70
percent of all awards, NIH awards above the guideline. I am
sorry. Seventy percent of NIH's dollars went to awards above
the guidelines, which supports the notion that biomedical does
take a lot of money, and NIH operated under a blanket waiver so
they were not reporting to SBA, at least at the time of our
report, each individual instance. And it was of those awards
above the guidelines, 18 percent of those went to firms that
had VC investment. I think both the NRC study and our study
showed that the majority of awards went to firms that did not
have VC investment.
Dr. Fedorkova. Thank you. I really was concerned that maybe
the perception was going to be there that 70 percent of our
companies had VC backing, which really did not sound correct.
Ms. Williams. Right. No. It was----
Dr. Fedorkova. We have so many Phase One companies that are
nowhere near being ready for that kind of investment.
Ms. Wheeler. If NIH has data to show us that this amount is
not sufficient, please give it to us. As we said, today is the
day to make the case, okay?
Dr. Fedorkova. That is, unfortunately, challenging. OMB
doesn't allow us to survey and ask particular questions. That,
in fact, may be helpful to maybe consider how companies, I
mean, agencies could be empowered to ask some questions. That
is the large unknown we are not able to, unfortunately, really
get a handle on.
Mr. Necciai. Okay. Any data that anyone is able to provide,
I think Kevin might have mentioned it or Chair Landrieu might
have mentioned it before, but the record will be open for one
week starting today until next Thursday, the 11th, COB.
Ms. Wheeler. Kunal.
Mr. Mehra. Thanks. Just a very quick, two points or
observations. One is all of the arguments that have been
presented in the last hour about whether to allow VC
participation in the program or not have all been based on
examples from the biomedical space. So my question is, since
that is where all the examples are coming from, since that is
really where the interest is coming from to allow
participation, why don't we be a little careful here, to Jere's
point, not to risk killing something that is working so well
and instead pilot this in the NIH and wait longer and then
reassess whether it makes sense for the DOD, because I am
really not hearing anybody from the DOD side, industry, the
agencies themselves, or any lobbies stating that this is
integral for DOD. So that is the first point I would like to
make.
The second thing is, again, black or whites don't apply
here. I think there are shades of gray. What makes a
disadvantage? What doesn't make a disadvantage? But I think
there needs to be a cap on how much venture capital investment
is allowable or not. Clearly, a company that has raised $100
million is not disadvantaged. Now, I know there is no data to
support this, so is the number $5 million, $10 million, $12.5
million, $12.6 million? I don't know. I would suggest maybe
seven or eight or ten as the max, as a cap. But I think that
there has to be that kind of cap in the legislation.
And I also think that individual agencies should have
discretion to disqualify certain companies if when they look at
them they just don't think that they are a small business. It
would be very difficult to do that right now.
Ms. Wheeler. Thank you. Thank you, Kunal, for those
recommendations.
Keith, did you want to go quickly?
Mr. Necciai. I am sorry. Just to be fair, there is very,
very small, but there is some existing--they might not be
sitting at the table today, but we have had in the past
representation for VC majority-owned firms at the Department of
Defense and at other agencies. But you are right. They are very
small.
Mr. Crandell. I guess I would say that, no question, the
focus of this is sort of geared toward the NIH and the life
science-related programs. I do believe, however, there is a
major investment that the Federal Government is making in labs
and universities for new technology that isn't physical
science-based and it is called things like nanotechnology. It
is called clean tech. It is called energy tech. So the notion
that there aren't groups, and from the NVCA's standpoint, we
believe those should be equal. In fact, we don't understand why
they would be different unless there is some notion that
somehow we are trying to stop innovation or not fund it as well
in those particular areas. So I would like to just make that
point.
And then just one little other one is just that, again, for
the purposes of sitting in a room like this, it is much cleaner
and easier to say, well, there is a Phase One, then there is a
Phase Two, then there is a Phase Three, then there is venture
capital, then there is private equity, then there is public
markets. The world is much more complicated than that and I
think actually we are all better for that, because if we had
more experienced people that were doing investing at the early
stages, there would be more choice and advantage for the
entrepreneurs that were starting companies in that space. So
while it might seem attractive here to exclude people, in point
of fact, I think we really want to be inclusive and try to
bring capital to that gap. And the people that have that
capital are venture capital people or wealthy private
individuals in many cases.
So I don't want to burn much more of your time. Thank you.
Mr. Necciai. I know. We are really, really coming down to
the last minute here and I really wanted to at least see if we
can get, just for a moment, if SBA wouldn't mind, briefly
describing the affiliation rule, as this is kind of a dove tail
to the VC issue, and then perhaps open it very, very briefly to
any comments.
Ms. Eyester. Sure. In SBA's regulations in Part 121, we set
forth the two eligibility criteria for businesses to receive an
SBIR Phase One or Phase Two award, and there are size
eligibility criteria. There are other criteria or requirements
in our policy directive, but these are for size.
The first one everyone knows is the 51 percent owned and
controlled requirement.
The second part is that they have to meet the 500-employee
size standard. When SBA looks at size, okay, in 121 we have
size standards for all of our programs, not just SBIR, we have
either revenues or employee-based size standards. This one is
employee-based. We always look at the business concern and its
affiliates. So this is a concept that has been in SBA's
regulations since, I believe, the first time we ever issued
regulations on size.
Affiliation has been around for a very long time. There are
some exceptions to affiliation. Most of them are done
legislatively. There are some that are done by regulation. Our
size regulations are done on notice and comment rulemaking, so
everyone has had a chance to comment on this or see what SBA
has proposed.
The basic--I guess the way I can sum up affiliation is we
are looking at control. So we are looking at if a business
concern is applying to the program, we are trying to see who
controls that business concern, and it may be that they are 51
percent owned by another company or it may be that the stock is
so widely held that you would have to look at the board or
directors or the president to determine who controls the
concern. But that is what we would look at, and then we would
see who controls the concern, and if it is a person or a
business, we would look to see who that person--what other
businesses they control, and then we affiliate them for size
purposes.
I am not sure if anyone has questions on it or----
Mr. Necciai. I guess one of the main concerns is that
majority-owned venture capital firms have been excluded. Have
there been, or in what instance would you say as far as number-
wise--I don't know if you report this, but have come to you
that don't know? I think there is a lot of confusion whether
firms just don't know if they qualify or not.
Ms. Eyester. Sure. We get--I mean, SBA gets calls every
day. I know I get calls at least once a week from businesses
trying to either--even when they are trying to set up, they are
trying to figure out how would they be eligible for a certain
program, not just SBIR, but all of our small business programs.
We have our district offices that get calls all the time and
our size offices and we talk them through our affiliation
regulations and the ownership and control requirements, and
every business is different. There are different nuances.
But yes, if you are 51 percent owned and controlled by a
business and that business owns several other businesses that
they control, not just own, but they control them, again, we
would call them affiliates and we would count all the employees
from those other businesses if it is an employee-based size
standard and count them towards the employees of that business
applying for, for example, the SBIR program for Phase One and
Phase Two awards, not Phase Three.
Ms. Wheeler. And would SBA be in favor of exempting the
employees of portfolio companies of VCs that have majority
ownership and control of an SBIR applicant?
Ms. Eyester. I am going to----
Mr. Iyer. That is an issue that we would be interested in
hearing different people's perspectives on. I think it is a
complicated issue. But at the moment, the SBA does not have a
position on that particular rule, but we can get back to you.
Ms. Wheeler. And just for clarification, does SBA consider
that it changed its eligibility standards in 2002 or does it
consider it a clarification?
Ms. Eyester. What I did was I looked back through the
regulations, and our regulations--I will start with the OHA
decisions. The OHA is an administrative tribunal and they are
composed of the administrative judges and administrative law
judges, and what they did in both of their decisions, the CBRL
and the Cognetics, is they looked at their regulations and the
wording in the regulations, and the regulations at the time
specifically talked about 51 percent owned and controlled by
individuals who are U.S. citizens or permanent resident aliens.
I went back to the first time we ever used it in the
regulations, those exact terms, the individuals owned by U.S.
citizens. It was 1989, and that was put into our 13 CFR 121,
and according to the preamble in that regulation, we were
mimicking what was in the policy directive which had been
issued way back then. So I don't see that there was any change
in the plain language of our regulation starting from at least
1989 until we issued the change to basically broaden the
eligibility requirements of the program.
Ms. Wheeler. And was there a change in interpretation?
Ms. Eyester. Again, I can tell you that the plain language
of the regulation did not change and that is what OHA looked
at.
Ms. Wheeler. Does NIH believe there was a change? Just yes
or no. I mean, sorry, we are running out of time.
Dr. Fedorkova. No.
Ms. Wheeler. Does DOD believe there is a change?
Ms. Oliver. I don't know.
Ms. Wheeler. Okay, fair enough. Okay.
Thank you. If anybody has changes to the base legislation,
as we said, would you please get it to us. You have one week.
And thank you very much, and particularly those who came
through this very bad weather.
Mr. Necciai. Yes. Thank you.
[Whereupon, at 1:13 p.m., the committee was adjourned.]