Panel I
The SBIR Program: Different Needs, Common Challenges

Moderator:Bill GreenwaltSenate Committee on Armed Services

Mr. Greenwalt congratulated the National Academies for hosting the program and for gathering such a broad range of participants. He introduced the topic of his panel by emphasizing the diversity of opinions about the SBIR program, urging the committee to talk to the widest possible variety of people. There is no single “right answer” to the question of how well the program works or should work, he said, so that this diversity of opinion will be necessary in making improvements.

He described his committee’s long interest in the SBIR program. In particular, Senate members wanted to know what kinds of return could be expected on the initial billion-dollar investment, especially in the form of activities stimulated in the entrepreneurial sector of the U.S. economy by defense projects. In focusing on that question, the committee worked closely with the Small Business Committee and tried to help with legislation, focusing primarily on ways to move the best technologies into the hands of warfighters. This challenge is not unique to SBIR, and he suggested that SBIR procedures could provide insights into other kinds of R&D programs seeking to bridge the so-called “Valley of Death” between technological research and commercialization.21 He said that the Senate Committee on Armed Services fully supported the SBIR program, and looked forward to seeing more companies move into the defense marketplace to become either stand-alone prime contractors or subcontractors to existing prime contractors.

21

“Commercialization” was acknowledged by several participants to include the transition of new technologies either into applications within the DoD and/or into the public marketplace. This process, especially when the DoD is the primary or only customer, is also referred to as “insertion” and “transition.”



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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium Panel I The SBIR Program: Different Needs, Common Challenges Moderator:Bill GreenwaltSenate Committee on Armed Services Mr. Greenwalt congratulated the National Academies for hosting the program and for gathering such a broad range of participants. He introduced the topic of his panel by emphasizing the diversity of opinions about the SBIR program, urging the committee to talk to the widest possible variety of people. There is no single “right answer” to the question of how well the program works or should work, he said, so that this diversity of opinion will be necessary in making improvements. He described his committee’s long interest in the SBIR program. In particular, Senate members wanted to know what kinds of return could be expected on the initial billion-dollar investment, especially in the form of activities stimulated in the entrepreneurial sector of the U.S. economy by defense projects. In focusing on that question, the committee worked closely with the Small Business Committee and tried to help with legislation, focusing primarily on ways to move the best technologies into the hands of warfighters. This challenge is not unique to SBIR, and he suggested that SBIR procedures could provide insights into other kinds of R&D programs seeking to bridge the so-called “Valley of Death” between technological research and commercialization.21 He said that the Senate Committee on Armed Services fully supported the SBIR program, and looked forward to seeing more companies move into the defense marketplace to become either stand-alone prime contractors or subcontractors to existing prime contractors. 21 “Commercialization” was acknowledged by several participants to include the transition of new technologies either into applications within the DoD and/or into the public marketplace. This process, especially when the DoD is the primary or only customer, is also referred to as “insertion” and “transition.”

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium Michael CaccuittoDepartment of Defense Mr. Caccuitto thanked the organizers and said that he worked for Mr. Frank Ramos, the Director of Small and Disadvantaged Business Utilization, Office of the Secretary of Defense (OSD). This office reports to the Under Secretary of Defense for Acquisition, Technology, and Logistics. Prior to becoming program administrator for SBIR/STTR, Mr. Caccuitto spent five years in the Office of Industrial Policy (formerly the Office of Industrial Affairs).22 A Non-linear Technology Commercialization Process He began with an overview of the commercialization process, which is one of the four main objectives of the SBIR program. This objective had been receiving more attention than any other aspect of the SBIR program since the 1992 reauthorization. He noted that this represents an interest that had steadily increased. The SBIR is a three-phase program that appears quite linear. That is, a technology is assumed to move more or less sequentially through three phases, from Phase I (feasibility) to Phase II (prototype) to Phase III (commercialization). In fact, he noted, the process is seldom linear in practice, responding to many overlaps and feedback loops and changing direction according to new capabilities and needs. Funding sources differ for the three phases, with Phase I and II supported by the SBIR set-asides; Phase III must, by definition, be funded by other sources. As of the FY 2005 budget, 11 federal agencies were participating in the SBIR program, with the budget of the DoD accounting for over 50 percent of all SBIR money. He joined many participants in noting the diversity of SBIR programs, implemented by different agencies in different ways in order to meet agency-specific missions. Leveraging Small Business Innovation to Benefit the Warfighter The general objective of the SBIR program in the DoD, he said, was to harness and leverage small business innovation for the benefit of the warfighter and the nation. The program directly supported two current goals: technology dominance and a stronger industrial base. He reminded the audience that a new Under Secretary, Mr. Kenneth Krieg had just been sworn in, with the possibility of fresh input. During testimony before Congress, Mr. Krieg cited the importance of pro- 22 Mr. Caccuitto also thanked the Office of the Assistant Secretary of the Air Force for Acquisition for allowing him to participate in this event. As a reserve officer attached to that office, he added, he was serving his annual tour of duty on the day of the conference.

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium viding small-businesses access to the industrial base. He also highlighted the importance of acquisitions from small business to enhance the capabilities of the warfighter. Mr. Caccuitto also cited a comprehensive set of studies by the DoD’s Office of Industrial Policy which had dramatically highlighted the importance of small business in providing future warfighter capabilities.23 Methodologically, these studies were designed to address Joint Staff functional capability concepts: Battlespace Awareness, Command and Control, Force Application, Protection and, most recently, Focused Logistics. The studies divided these warfighting functional architectures into their hundreds of composite capabilities and identified the technologies that enable those capabilities. A survey of the industrial base was then used to determine which firms could best produce those technologies. Early results from the five major functional architectures revealed that, in aggregate, 36 percent of firms that could supply the technologies were small businesses employing fewer than 100 people.24 This, he said, indicated a need for quick and timely access to small firms of the most appropriate capabilities. Within DoD were 10 participating SBIR agencies, 6 of which had STTR programs. (See Figure 9.) The three military departments comprised about three-quarters of the SBIR budget. Some agencies had centralized topic generation processes and some had decentralized processes. Some had procurement activities, some did not; these gained importance in Phase III. Some provided “gap funding,” to help small firms move from Phase I to Phase II, and some did not. Most offer a Phase II Enhancement program whereby SBIR funds are employed to match external (Phase III) investment to advance technology toward full commercialization. In all, Mr. Caccuitto said he had counted 155 separate functional activities involved in the DoD SBIR program, making it a “highly decentralized and geographically dispersed program.” Imperfect Quantitative Metrics To date, the department had used “success stories,” examples of what the program had contributed to the efforts of warfighters, as a qualitative measurement of success. These stories, he said, were not hard to find. Only two quantitative metrics were available, however—both used to measure business-generated Phase III dollars—and both were imperfect, he said. One was the DoD SBIR/STTR Company Commercialization report (CCR), which requires firms 23 See, for example, Deputy Under Secretary of Defense (Industrial Policy), “Transforming the Defense Industrial Base: A Roadmap,” February 2003. This report highlights the importance of small businesses for building future war-fighting capacity. Access at <http://www.acq.osd.mil/ip/docs/transforming_the_defense_ind_base-full_report_with_appendices.pdf>. 24 This is an even more stringent definition of “small business” than used by SBIR, which specifies firms of fewer than 500 employees.

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium FIGURE 9 Participating DoD components.

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium that submit bids for Phase I or Phase II SBIR/STTR contracts to report commercialization for all previously awarded Phase II contracts. This collection of commercialization data was becoming, over time, a robust database, measuring both sales and investment derived from extending or logically concluding work conducted during the Phase II and associated Phase I efforts. A principal strength of this dataset is that it contains sales and investment from government and nongovernment sources, and captures both prime contract and subcontract activity. A principal disadvantage is that data revealing further growth by SBIR/STTR “graduates” (i.e., former SBIR award-winning firms that have become ineligible either by organic growth or acquisition) is not generally captured because these firms are not competing for new awards. The second data source was the DD 350 Form and accompanying database. This is a rather elaborate record of individual contract actions that is required for all direct contracts with the government. A field in this form is dedicated to SBIR, and it is possible to indicate Phase I, Phase II, or Phase III, though it is questionable, he said, based on input from veteran contracting officials within the Department, whether contracting officers in the field pay attention to this discriminator or are necessarily aware when a contract action qualifies as an SBIR/STTR Phase III award. There is currently no way to capture Phase III activity via subcontract reporting mechanisms. In summary, he said, measuring commercialization remains a considerable challenge. He discussed the progress of commercialization of SBIR firms over time, based on the DoD SBIR/STTR commercialization database for firms participating between 2000 and the present. A chart (Figure 10) showed that revenues FIGURE 10 SBIR Phase III commercialization. NOTE: Reported by firms submitting to DoD in 2000-2005, DoD projects only.

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium FIGURE 11 Phase III composition: Total sales and investment of DoD Phase II Awards. SOURCE: Department of Defense CCR, 2005. NOTE: Sixty three percent of projects are DoD Phase II awards, and 37 percent are other Federal Phase II awards, indicating a high degree of capture of non-DoD Phase II commercialization data. generated by commercialization had, over a 20-year period, outpaced the size of the SBIR budget. He noted a four-year lag, but said this could be expected because of the time required to commercialize. Another chart (Figure 11), plotting sales against investment, showed that from about eight years after a Phase II award, sales begin to outpace investment. This graph was “a bit cautionary,” he said, showing the need for patience in developing and realizing commercialization. Mr. Caccuitto went on to show that DoD was also investing in and buying the products of non-DoD Phase II projects. The dataset showed that 37 percent of the DoD’s Phase II commercialization records were generated by contracts awarded outside the DoD. These observations together meant, he said, that “we’re leveraging work that’s being done by other agencies. And we’re beginning to capture in this database a significant percentage of the non-DoD SBIR projects.”

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium The Advantage of Requirements “Pull” He said that he did not want to sound simplistic in confusing technology “push” versus mission “pull,” but he had found, from working in both a program office and in a laboratory environment, that it is more difficult to push technology than to pull it, even with a “good requirement.” He used an example from when he was an advanced technology project manager in the Air Force’s E-3 Airborne Warning and Control Systems (AWACS) system program office. He described the competition for resources that takes place in a program office environment, where advanced technologies are weighed against other system needs when determining how limited funds are spent. This competition for resources is driven by warfighter priorities, which may not favor the capability provided by the advanced technology over other needs. In other words, a requirement alone does not guarantee funding. Bridging that gap can be difficult because of this resource limitation, and also because R&D, by SBIR definition, does not explicitly include T&E (test and evaluation). This means that the SBIR program tends to only develop a technology to a readiness level of about four or perhaps five, whereas a program office may not be willing to consider it until level seven or eight. This effect is further explained by observing that later-stage technology maturation (T&E) tends to be quite resource intensive. Thus, tapping the limited pool of funds set-aside for SBIR/STTR alone may not be the most effective way to address this issue. Indeed, bridging this gap was the challenge, he said, that the symposium was trying to address.25 Technology Insertion as a Team Effort Mr. Caccuitto turned to a broader look at the overall S&T portion of the defense budget, which he called “bleak.” Looking ahead, he said, he saw only increasing competition for defense budget dollars, which would make his job and the job of technology development and transition generally more challenging. Based on his experiences, he suggested that a successful technology is the product of a complicated equation involving many different stakeholders in the acquisition community, the government S&T community and large and small businesses. “Each has a part to play,” he said, “and it takes champions in each of those places to actually make it work.” He described measures the DoD had taken to improve the program, highlighting the fast-track program, which was intended to speed up Phase II for companies that could demonstrate matching dollars from a third party. He also pointed 25 The analogous challenge in a civilian environment would be to develop the commercial value of a technology to the point that it is ready for commercial sale. Unlike development for a government customer, this requires a host of business skills, such as marketing.

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium to the sponsorship of topics by acquisition programs, initiated in 1999. Currently, DoD had a majority of topics with sponsorship or endorsement from acquisition programs. His office established a commercialization achievement index in 2000 to measure how successful the proposing firms were at commercializing their SBIR investments, and has been using this information in their source selection process. Among his office’s current efforts was a study being conducted with the RAND Corporation on Phase III, focused on Major Defense Acquisition Programs (MDAPs). The study used a comprehensive questionnaire and follow-up interviews with the Department’s MDAPs. Its purpose was to characterize and benchmark best practices relative to technology transition in the SBIR program, with an eye to improving the program and informing policy development. Mr. Caccuitto concluded by saying that his office and the National Research Council were beginning follow-up review of the fast-track program. Several years earlier, the DoD SBIR/STTR program received a fairly low grade from the Office of Management and Budget’s Program Assessment Rating Tool (PART). This assessment focused on commercialization, and the program had taken some steps that had been recommended to modify commercialization achievement index utilization and improve capture of commercialization data for program administration. Michael McGrathU.S. Navy Dr. McGrath said that his job as Deputy Assistant Secretary of the Navy was to help acquire technologies developed by small firms and to help those firms advance their technologies across the Valley of Death. Thus, he had a strong interest in Phase III and saw, like other panelists, considerable variations in the SBIR program even within the DoD, despite a general set of overarching rules shared by all programs. SBIR as a Source of Innovation He began with the point that the Navy views SBIR as an important source of innovation across the whole RDT&E, or research, development, testing and evaluation spectrum. Second, the Navy emphasized the “D” more strongly than the “R,” like most agencies, and accordingly his office had implemented a process to aid the transition of SBIR technologies into full application. This development emphasis led to SBIR products that were well positioned to respond to “pull” from the program office. A third point was that SBIR gave him an unusual degree of execution-year flexibility. For most RDT&E accounts, the Department had to include in the President’s budget a description of how the money would be spent, with little deviation possible. With SBIR, they had flexibility right up to the year

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium FIGURE 12 Where do the SBIR funds come from? Across the RDT&E spectrum. SOURCE: Data from Navy FY03 SBIR Assessment. of execution to select topics and emphasis. In addition, most R&D programs in the Department had to be planned years in advance in the budget cycle. The SBIR projects did not, and as a result they brought the critical ability to move technologies more quickly to transition. The Navy has found that its average cycle time, from nominating a topic to getting a Phase I award, was about 14 months. The Navy was working with Dr. Holland’s Office of Science and Technology to shorten that time. Dr. McGrath noted that most SBIR funds came from the 2.5 percent assessment on extramural RDT&E accounts, supplemented by funds taken from the general RDT&E account for program management and execution. (See Figure 12.) In the DoD, research and development activities are classified in 6.1, 6.2, and 6.3 accounts, as described by Dr. Holland, with the most “basic” research funded in 6.1, and the most “developmental” work in 6.3. These accounts paid for 16 percent of SBIR program money, with the other 84 percent coming out of accounts that fund testing and acquisitions (6.4 and 6.5) and upgrade of fielded systems (6.7). He repeated an earlier observation that research and development was not a linear process, but that the classification process was approximate and left many opportunities for innovation and revision at all stages. An Effective Technology Assistance Program As a routine, the Navy participated in every DoD SBIR topic solicitation— three per year for SBIR and one per year for STTR. Some of the topics included in those solicitations came from the S&T community, but 84 percent come from the acquisition community, systems commands, and program executive officers.

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium FIGURE 13 Navy Phase III success is growing. NOTE: Phase III funding is from OSD DD 350 reports, and may be under-reported. FY04 Navy Phase III ($346 M) comprises 114 separate contracts to 81 individual firms. The program executive officers in the systems commands participated in selecting the proposals and managing them through Phase I and Phase II, always with a view toward the Phase III transition. By this method of asking systems commands for topics, a “pull” had been created from the programs in a position to fund Phase III. He had concluded that small businesses often have a difficult time dealing with DoD and with prime contractors in transitioning the SBIR results. To ease this problem the Navy had implemented a program called the Technology Assistance Program (TAP); every Phase II SBIR contractor had the opportunity to participate in that, and most of them did. The Navy also holds an annual opportunity forum, which in May 2005 was attended by nearly a thousand people and about 150 companies. Attendees included not only PEOs (Program Executive Offices) and program offices, but also prime contractors and outside investors looking for commercializable results. He showed a chart showing the growth of Phase III funding (Figure 13). The chart was based on DD 350 data beginning in 2000. Although these data did not include contracts issued by prime contractors to small firms, but they did use a form that allowed contracting officers to report government contract awards. The chart shows a persistent and rapid growth of Phase III contract amounts for five years, outpacing Phase I and II awards. He said that because these Phase IIIs are probably under-reported in the Navy, the trend result is probably conservative.

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium Role of the Prime Contractors He then discussed the prime contractors, emphasizing their essential role in the SBIR program. In most cases, he said, a small firm would not be able to win a Navy contract unless a prime contractor was involved at some point. About five years ago, the Navy had started a “Primes Initiative,” an active outreach effort to connect program executive officers with prime contractors in a more formal way. They had found that the prime contractors see great value in partnering with SBIR companies, partly because the prime contractors want to leverage the work of small firms, influence SBIR topics, and join the SBIR in other small and disadvantaged business programs. The prime contractors also wanted better insight into SBIR data, including places where awards are made and information about the SBIR Phase I and Phase II projects. He noted that the prime contractors deal with all the services, and would benefit from a pattern of uniform procedures across the services. This will require closer consultation among the services about ways to standardize their requirements and systems. He summarized by saying that SBIR provides a unique source of execution-year funding that was proving adaptable to extraordinary demands. For example, during the previous year the Program Executive Offices had made a concerted effort to respond to the urgent problem of Improvised Explosive Devices (IEDs) in Iraq by creating a “quick response topic.” In five months they had managed to make 38 Phase I awards, and 18 of the firms had already progressed to Phase II proposals. Some of those had been awarded, and Phase II prototypes would be tested in theatre over the next six months. He offered that example of using SBIR “in a somewhat unusual fashion” to obtain quick results in the form of prototypes in the field. “To the extent that those prototypes meet the military needs,” he said, “I would expect a number of them to move on to Phase III.” He concluded by saying that from the Navy’s standpoint, “SBIR is all about Phase III.” Mark D. StephenU.S. Air Force Mark Stephen, Chief of the Air Force’s Science and Technology Division at the time of the conference,* said he would not talk about Air Force priorities or show statistics, many of which had already been reviewed, or even relate success stories, though there were many. Instead he said he would address the issues in the Air Force SBIR program that could be improved to make the program more effective. He began by saying that from a mission perspective, the purposes of the SBIR program were (1) to stimulate innovation today that would help the warfighter of tomorrow, and (2) to make sure the program and the acquisition * Now with Coleman Aerospace.

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium Improving Topic Generation Col. Stephen said his office could improve topic generation by initiating planning farther in advance, but this would decrease the timeliness of topics and reduce the chance that technologies would be state-of-the-art when ready for insertion. His office, after a study of execution, had discovered that one of the greatest needs was to shorten the topic generation time. They, like the Navy, also found the advantage of awarding amounts to some Phase II projects larger than the traditional $750,000. That figure, he said, was not always enough to develop a technology far enough “to excite the program officers,” and the Air Force would be offering larger amounts. He also said the Air Force needed to re-organize and restructure its SBIR office by adding staff, increasing effectiveness and efficiency, and increasing its obligation rates. They were adding emphasis on the product centers and the prime contractor involvement, which was needed to ensure transition within Phase III. He said that it was the responsibility of his office, rather than the laboratories or product centers, to improve the transition process. He also addressed the issue of success stories, a qualitative measure of program effectiveness. The Air Force program had no funds to document or track its successes. Some stories were relayed to them by participants—in some cases by contracting officers who checked a box on the DD 350 form—but to date these stories had been “captured mostly by coincidence.” One recent success story had been a project on which the Air Force worked quickly with the Army and the Navy to produce a new kind of body armor and move it quickly to the field to support the warfighter. He said that the Air Force needed and wanted to improve its SBIR program, and asked for help from the participants. He concluded that the ideas described in the conference would all be useful to educate the product centers, generate better topics, and sharpen the selection process. John A. ParmentolaU.S. Army Dr. Parmentola began with a brief sketch of his background. At one time, he performed basic research at a university, building a research program at an institution that did not have one. He then moved to teaching science and technology policy at the John F. Kennedy School of Government at Harvard University, and later worked for a private sector corporation as an inventor. He said that he has developed technologies all the way from basic concept to application in the field. “That in itself is an experience,” he said, “in terms of understanding all the difficulties it involves.” He had spent the last several years as Director for Research and Laboratory Management, managing all of the Army’s basic research and about half of its applied research. Trying to promote change from his current

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium position within government, he said, was one of his greatest challenges—especially since he was also a small business owner who understood the problems faced by small businesses in gaining a foothold with government customers. As Director for Research, he reported to the Chief Scientist for the Army, who worked for the Assistant Secretary of the Army for Acquisition, Logistics, and Technology. He worked closely with the Director of Technology and a Director for S&T Integration. He was responsible for basic and applied research, as well as for the laboratory infrastructure over several major commands: Research, Development and Engineering, of which the largest was the Army Corps of Engineers; Army Research Institute; Medical Research and Materiel Command; and Space and Missile Defense Command. The small business program manager worked within the Army Research Office, located in Washington, D.C. He said that his diverse background placed him in a good position to help all parties with the problem of transition. The Army had taken several experimental steps that “may have some promise for moving the small business innovation and transitioning.” In terms of process, he said that successful Phase II projects could pass directly into the military as components for Army technology objectives, which themselves are under the control of project managers, or they might go directly to Program Executive Offices or to other services’ depots. Others would move to Phase III for additional development. He mentioned examples where SBIR projects have actually gone to support a need at a military depot. The projects might be paired off with prime contractors, or they might be commercialized directly, preferably offering some benefit to the military. The Function of OnPoint He described a recent Army venture capital initiative called OnPoint, whose mission was to invest in small, entrepreneurial companies, including those that would otherwise not do business with the Army. OnPoint, which focused on mobile power and energy for the soldier, had the dual objectives of (1) helping the transition of technology and (2) earning a return on investment. In effect, it served to triangulate between small companies and potential customers, which were usually prime contractors that already had a contract with a program manager to supply a product. Dr. Parmentola’s office sought to take successful Phase II projects and provide OnPoint with descriptions of those concerning power and energy. The projects are placed in a pool, along with the other proposals, from which OnPoint selects some for funding. The Army does not influence this process other than to supply OnPoint with information. Another important role of OnPoint is to manage the often conflicting expectations of the small firm within the confusion of the acquisition process. The small entrepreneurial company usually seeks either to provide a component technology or move directly and quickly into an acquisition program. He character-

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium ized small businesses as speedy Ferraris which expect to move fast and earn revenue, but which often find themselves blocked on a narrow road by a hay truck—the acquisition mechanism. OnPoint attempts to foresee and resolve such blockages and conflicts. Barriers to Success He said that the system does have inherent barriers that threaten the success of Phase III. First is the inherent risk in dealing with programs that are new and have not yet done business with government. There is a steep learning curve for these firms, some of which may be as small as two or three partners working on an idea. A second barrier is that small firms seldom have sufficient resources in people or money to do the market analysis needed to catch the interest of a venture capital firm. OnPoint tries to help with this, although the process was still experimental and still faced challenges of planning, programming and budgeting. Another challenge is that the DoD planning, programming, and budgeting system works on a two-year cycle, and it is difficult for program managers to calculate whether a small entrepreneurial start-up company will be able to produce a product fast enough to fulfill a need. The program also faces funding constraints, with a maximum of $850,000 allowed for SBIR Phase II awards. This may not be enough to produce a prototype of sufficient maturity to move into a program manager’s ongoing program. Program managers are notorious for avoiding risk, he said, and if a technology is not ready, they are reluctant to accept it. Finally, he noted a paradox in that the system needs both rapid commercialization and long-term research to provide the revolutionary but unforeseeable capabilities that fulfill future needs. The department must try to strike a balance between these conflicting strategies, which it attempts to implement through the pilot program with the Program Executive Offices and through maintaining an emphasis on long-term innovation in DoD laboratories. In summary, he said that the Army was providing multiple paths to increase the chances that innovations produced by small businesses will be able to move into military systems in support of U.S. soldiers. Carl G. RayNational Aeronautics and Space Administration Mr. Ray observed that, based on the evidence of the talks so far, all the agencies faced some of the same challenges. He said he would not repeat these challenges, but try to present a more abstract description of the NASA program. He said he would give a perspective on what NASA views as the ultimate outcome of the SBIR process, vis-à-vis the intent of the SBIR legislation. That is,

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium if the agency can use government funding to produce good technologies of value to agencies, many of those technologies can then move toward the commercial marketplace where they grow into something larger and contribute to the national good. He also said that from NASA’s strategic perspective, it is difficult to move a small firm to Phase III from the inside of government. Even though the agency provides awards and tries to facilitate the direction and activities of a firm’s development, these actions tend to remain heavily focused on agency, rather then firm, needs. As new products move toward technological maturity, from discovery through development and commercialization, the process is not linear, even though it may be depicted in that way. In reality, it is complicated by many gaps and challenges between stages. He also described the impacts of an innovation in terms of its position in a “technology life cycle.” (See Figure 14.) He noted that an innovation can occur at any point on that life cycle. The point where an innovation occurs creates a “disruptive” technology, where the innovation can essentially create a development path of its own. Farther along the path toward application, one finds that new pathways may be created when new products spin off from the basic technology under development. Innovation may come at an even later stage, constituting an extension of the technology to produce a base technology in the marketplace. Even though these dynamics are difficult to manage or even understand, he said, they are useful to be aware of because they showed why a product’s utility is related to its technological maturity. Also, he said, the SBIR can be mapped by using a business approach. Where technical points of innovation occur, business opportunities may also occur, depending on when that innovation occurs. From a business or financial standpoint, one may look at partnerships or the SBIR program itself as an opportunity. Farther along, one may consider licensing and then patents, which may assist in moving a technology product forward. The challenge, he said, is to manage all of these technical, financial, and commercial realms. The Three Phases of the SBIR Program In terms of the program itself, the SBIR program at NASA, as in other agencies, is a three-phase program. (See Figure 15.) NASA begins by aligning the SBIR program with the needs of its own mission directorates. The topics and sub-topics that flow from the directorates to the SBIR program start with a basis of traditional NASA strategic planning and annual mission planning. The needs of the missions are then described in the topic solicitation, which is smoothed and expanded so they can more easily be understood by small business applicants. Once a solicitation takes place and the small businesses move through Phases I and II, the agency starts, through contracts and other mechanisms, trying to educate the companies to think about not only the technology itself but also about

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium FIGURE 14 Paths for new technology products.

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium FIGURE 15 SBIR/STTR strategic program flow. the commercialization aspects. This process begins by examining sub-topics for the best possible quality—looking internally at the customer base, which, for NASA, is its four mission directorates: the exploration systems, space operations, aeronautics, and pure science. As Phase III begins the agency tries to facilitate a firm’s movement toward the commercial arena. This consists of helping companies find ways to advance themselves in the marketplace by creating assistant programs or finding organizations and assistant areas that already exist. One of the differences between NASA and DoD is that DoD, in Phase III, might buy hundreds or even thousands of a product from a small firm. Because NASA does not build fleets of Space Shuttles, say, or other complex products, it cannot sustain a small business with such bulk purchases. So NASA must use other measures for partnering with organizations that assist small businesses, such as the SBIR/STTR 2005 National Conferences that link SBIR firms to business opportunities and the investment community. Helping Small Businesses Understand Agency Needs Some NASA initiatives are designed to help companies understand agency needs and NASA nomenclature, which differs from that commonly used in the marketplace. The agency has built a “taxonomy table” to translate “NASA-ese” to more widely known terminology. It has also produced “hallmarks of success”

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium videos and success stories by visiting SBIR companies on a regular basis. Initiated about two years ago, this program invites companies to discuss their relationship with NASA and the outcomes of their R&D efforts. This lets the agency learn what can be done better and gives the companies an opportunity to advise other companies on how to be successful in the program.26 NASA also holds national conferences, in collaboration with the other agencies, that have drawn interest from the investment community, and they have created a NASA Alliance for Small Business Opportunity (NASBO). Although NASA does not have a “fast-track” program like that of DoD, NASBO is a new program that seeks to create some fast-track elements. Its main objective is to find investment facilities or other capabilities and form partnerships with them. These might be a state entity, an angel investor, or a venture capital firm. In addition to traditional commercialization, NASA tries to find other opportunities to leverage their companies’ products by helping form partnerships with the mission directorates. The agency calls this process infusion, or “spin-in”: using the internal mechanisms of the mission programs to help move technology into the mission directorates. To expedite this process, the agency uses a variety of virtual program aids, including tools for project presentation, demonstration development, risk analysis, and infusion planning. The program is able to achieve closer communication and more support from the directorates, especially in finding the right kind of sub-topics. It is still working to educate both the companies and the mission directorates about how to move SBIR-developed technologies and their companies into a position where the directorates can utilize them. A difficulty in the infusion concept is that program managers still have to be convinced that an SBIR technology can be integrated into their programs, both programmatically and technically. They have to be shown that this can be done in a timely fashion, and in a way that will minimize the risk of using that technology. They must also believe that the SBIR firm understands the directorate’s technical challenge and that this challenge will not reduce the performance of the technology. As illustrations of success, Mr. Ray showed slides of several SBIR technologies adopted for use on the Mars Exploration Rovers, including an ASCII chip from Maxwell Technologies, of San Diego, California; lithium ion batteries from Yardney Technical Products, of Pawtucket, Connecticut; and heat switches from Starsys Research, of Boulder, Colorado. He closed by saying that a NASA commercial metrics survey published in 2002, covering the program period from 1983 to 1996 and 75 to 80 percent of the NASA SBIR firms, showed that a minimum of 38 percent of the NASA Phase II awards demonstrated strong commercial intent in nongovernment markets. 26 See <http://sbir.gsfc.nasa.gov/SBIR/success.htm>.

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium DISCUSSION Mr. Greenwalt offered a summary of the main point discussed thus far—that a small SBIR business, after completing award-funded Phase I and Phase II work, faced a large financial barrier before it could accomplish the developmental work necessary to complete Phase III, or commercialization, successfully. For a company doing long-term research, gaining access to venture capital could require a wait of a year or a year and a half. A company ready to do rapid innovation would seldom find Phase III money without the participation of a prime contractor. There seemed to be no specific mechanism within or related to the SBIR program to help with this transition. Few Small Businesses Cross Phase III He said he was forced to conclude that even though Phase I and Phase II of the SBIR program are generally successful, and some firms have been able to cross the Phase III barrier, the vast majority of SBIR programs have not. He reported that Congress receives many inquiries from frustrated small businesses who say, “‘I have a great idea, and I won a Phase I award and a Phase II award, and everyone agrees that my technology is a great thing, but there’s no support for me.’ And they fall into the Valley of Death.” He said he was left with the question, What can be done about that? Is the SBIR program funding too many small firms, or is there a need for transition funding at the agencies to take better advantage of the products of an otherwise sound program? He asked the panelists and others to respond to these questions: What can be done to help these companies, and to help the country gain access in the best way to new technologies? Options for Small Business Dr. McGrath, referring to the earlier characterization of the acquisitions process, said that a small business has two options: drawing on Dr. Parmentola image of the small business Ferrari and the agency procurement hay wagon, he noted that one option is to get around the “hay wagon” blocking the road and move ahead quickly. The other, more common option is to jump aboard the hay wagon, which is the program of record. He suggested that from the small business standpoint, some improvements might remove the barriers and allow small firms to move quickly to real commercialization, which would be a good thing. But a more feasible goal for the agencies would be to help firms join existing programs. He recalled earlier discussions of technology readiness, and the fact that federal programs tend to be risk-averse. He advocated more latitude in the interpretation of RDT&E and being able to qualify items for use. An important part of a

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium solution would be to qualify SBIR activities as part of development, thereby qualifying them for some amount of developmental testing. In placing a boundary on legitimate targets for SBIR, he proposed a broader definition of technological readiness. Col. Stephen agreed, and said he had seen the same problem in the Air Force program. He suggested that rather than providing a separate pool of funds for Phase III, the program should (1) increase the amount of the Phase II award, (2) increase the emphasis on development, (3) educate the program offices to make sure they are aware that a particular technology is being developed, and (4) teach program offices to view the SBIR program as an integral part of their research and development effort, not something “extra.” Incentives for Program Managers Mr. Greenwalt asked what type of incentives might be used for program executive officers and program managers. He recalled that six or seven years earlier he was hearing the complaint from program management that the SBIR program was essentially a program “tax” that brought them no benefit. He asked what type of incentives would generate buy-in from these program managers. Col. Stephen suggested that in order to gain buy-in, the program should be sure to focus not only on research, but also on the results that program managers need—outputs that directly support agency objectives. Dr. Parmentola agreed, saying that program managers want technologies that have been operationally tested and require little, if any, modification. The reluctance to work with the SBIR program, he said, is the same reluctance expressed about S&T in general: Managers are concerned primarily with technology readiness levels, not with long-term research. They have schedule and cost constraints and have to be convinced that these will not be disrupted if they adopt a technology that is not proven. They also have to believe that they will be able to coordinate the S&T with manufacturing the product in the quantity needed, with reliability and quality control. Research is Seldom Efficient He said that everybody wants greater efficiency, but he had not convinced himself that the R&D process could be made much more efficient. His own background was in the basic research community, where he had experienced a high degree of inefficiency. He explained that a typical researcher can imagine more ways that the world doesn’t work than ways it actually does work. So for a typical research program, the odds are inherently against finding a valuable new product or process. Anyone who has tried to take a concept from “cradle to grave,” from discovery to commercialization, he said, understands how many things can derail a development project and even cause it to fail.

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium He said he had not learned how to make R&D much more efficient, but that it was probably possible to provide some help and some new pathways to increase the likelihood that a technology will add to a transition. One way is to enter a small firm into S&T programs that a program manager is already engaged in. This can ensure that the laboratory understands what the program manager wants, can work closely with the program manager and have a better idea of how to package its technology. Mr. Ramos referred to Mr. Caccuitto’s discussion, saying he was studying such systems as the joint strike fighter, the Virginia-class submarines, and future combat systems in search of ideas that could improve and extend the life cycle of the platform. He said that Mr. McNamara of the Navy had an excellent example of inserting technology for SBIR into Virginia-class submarines, using some incentives. He urged the group to think about Mr. Caccuitto’s discussion of technology dominance and supplier base, and find ways for small businesses to fit into that stream. He predicted opportunities for some “ad hoc R&D” if people took a broader view of where to make this transition and better manage topic selection. Dr. Wessner said he had heard five points that might be useful to list for comment: What is the prevailing attitude of program managers towards the SBIR program—is it an opportunity or is it a tax? Regarding the alignment issue Dr. Parmentola raised, how can R&D in the SBIR program be better aligned with the expectations of program managers? How can we raise additional funds for testing? If the award amounts are too low, as several participants had said, should there be [a] fewer awards, [b] larger awards, or [c] an increased set-aside? There is presently no funding for SBIR management—how should that be handled? Dr. McGrath commented that the SBIR program was indeed viewed negatively as a tax in the Navy, and probably elsewhere in DoD. He said that John Williams of the Navy had played a large role in changing that attitude over the past six years or so by delivering the following message to the Navy’s program offices: “The SBIR program provides money and opportunity to fill R&D gaps in your program. Apply that money and innovation to your most urgent needs.” He said that this approach had placed the SBIR program in a different light for many people. He also commented on the last question, regarding management. The lack of funding for management was a limiting factor in the Navy because most of the systems command effort is funded on a reimbursable basis. It requires managers

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium to take dollars out of other programs to pay the people who manage the SBIR program, which is “painful.” Changing Negative Attitudes about the Set-aside Col. Stephen said that Air Force program officers had also felt that SBIR money was money “taken out of their hides.” The normal routine is for the program office to submit a budget that is based on an independent cost estimate of program needs. They must then take 2.5 percent out of this budget with the mandate of doing something else with it. He said that a better approach would be to make the program officers feel that the set-aside is their money, and is part of their R&D program. They can use the money to write topics they are interested in. Rather than increasing the whole pot of funding, he suggested raising the grant limits. This might reduce the number of SBIR awards, but it would make each project more viable and give more value to the program officers, who could then expect a higher level of technology readiness for their program. They could even use some of those dollars—their dollars—to hire people to help manage the SBIR projects and to advocate for the SBIR program within the program office. Those steps could be taken, he said, without changing the current set-aside rate of 2.5 percent. Streamlining the Acquisition Process Mr. Carroll returned to the issue of the “hay wagon,” the complex acquisitions process. Fitting SBIR into that acquisition framework, he said, is very complicated, but he said he thought it could be done in a way that might even streamline the process itself. He referred to a proposal to Congress by Dr. Gansler six or seven years previously, which recommended that at least half of SBIR projects should be tied directly to acquisition programs. He said that this goal made sense, along with educating the program management personnel on how to use and benefit from SBIR. This had been part of the training curriculum for a year, but had been deleted. He suggested re-examining the objectives recommended in that earlier proposal which “still make a lot of sense.” He said that the Navy had followed a number of those recommendations with good results. Mr. Caccuitto responded that he had just reviewed the SBIR numbers for 2002 through the end of 2004 and found that over 65 percent of the topics had endorsement or sponsorship from acquisition activities. He said that this was a result of Dr. Gansler’s directives in the late 1990s. Even with that result, he said, it was still difficult to integrate SBIR into acquisitions activities, which underlined the importance of taking steps to enhance the process.